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Annual Report 2013
65%
Patterson Dental
• One of North America’s largest, full-service dental distributors
• Estimated 33% market share of approximately $7 billion
North American market
• Virtually complete range of consumable supplies
• Top distributor of dental equipment with nearly 50% market share
• 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
• Over 100 sales locations throughout U.S. and Canada
• Sales increase of 4% from previous year
• Provider of innovative technologies that meet increasing demand
for dental care
21%
Patterson Veterinary
14%
Patterson Medical
• Leading national distributor of companion-pet veterinary
pharmaceuticals, supplies, equipment and software
• Estimated 21% share of $3.3 billion U.S. companion animal market
• Single-source, full-service capabilities
• Approximately 210 sales representatives in 19 branches nationwide
• Offers widest selection of consumables in industry
• Equipment, technical service and other value-added services
• Growing range of technology solutions, including Intravet, ePetHealth,
DIA, EquiHealth and VetSource
• Highest customer service rating in independent survey
• Sales growth of 8% from previous year excluding the impact from the
change in a nutritional distribution agreement in the spring of 2012
• Strong growth opportunities as both pet ownership and expenditures
for pet population increase
• World’s #1 distributor of rehabilitation supplies, equipment
and assisted living products
• Estimated 15% share of the addressable and highly fragmented
$3.4 billion global market
• 3x–4x larger than nearest competitor
• Industry’s largest single-source of supply and technical service
in rehabilitation industry
• Global sales in 90 countries through 150 dealers
• Owns or manufacturers many leadings brands
• Nearly 280 sales representatives in 18 branches
• Industry consolidator
• Strong operating margins of 13% for fiscal 2013
• Delivers quality service and innovative products as all demographics
live more active lifestyles
$3.6B
Total revenue generated in 2013,
including the dental, veterinary and
medical businesses. Patterson has
achieved a more than 13 percent
compounded annual growth rate
since 1992.
$223M
Cash returned to shareholders
in 2013. This is a combination
of dividends and share
repurchases, part of Patterson’s
ongoing strategy to maximize
shareholder value.
To Our Shareholders:
Fiscal 2013 was a dynamic year for
Patterson’s information systems over the
Patterson Companies. Our accomplishments
next five years for competitive advantage.
provide a springboard for fiscal 2014 and
Combined with key acquisitions across our
our future. Though we continued to face
businesses, these steps better position us
domestic headwinds and a challenging
for success going forward.
worldwide economic environment, we were
pleased with Patterson’s performance
in the second half of the year, and are
confident in the plans we are implementing
to ensure our success and to extend our
market leadership position.
Financial Review
Consolidated sales for fiscal 2013 totaled
$3.6 billion, up 4 percent from the prior
year, excluding the impact from a change
in a nutritional distribution agreement in
our veterinary business in the spring of
Last year was marked by several key
2012. Despite the challenging economic
milestones, including again being named
environment, which began in late 2008,
one of Forbes’ most trustworthy companies
we have continued to see sales growth over
and celebrating our 20th year as a public
that period. However, the operating margin
company. Also, in March we announced
contribution from modest top line growth
that Pete Frechette, one of the major
has not been enough to offset the continued
driving forces in the history of Patterson
investments in our business we believed
Companies, would retire as Chairman of
necessary to maintain our long-term
the Board. Pete’s leadership and guidance
competitive position. The near-term impact
spans four decades at Patterson. His
has been a contraction in operating margin.
accomplishments were many, but his legacy
For fiscal 2013, operating income totaled
is the entrepreneurial spirit and customer-
$354 million. We fully expect our operating
centric culture he instilled in this company.
income to expand in fiscal 2014.
These are key to the success of Patterson.
In fiscal 2013, Patterson Companies
Fiscal 2013 was also an important year for
generated $300 million from operations
us in other respects. Earlier in the year we
and returned more than $200 million to
announced that our veterinary business
our shareholders through a combination of
would be renamed Patterson Veterinary
share repurchases and dividends, reflecting
— the final step in consolidating all of our
our ongoing commitment to generate
businesses under one brand. We also
value for our owners. We repurchased
extended our distribution agreement with
approximately 5.2 million common shares
a key strategic dental partner, and late in
during fiscal 2013. Late in the year,
the year we outlined our path to the future,
Patterson’s Board of Directors authorized a
which includes a significant investment in
new repurchase program for an additional
Scott P. anderson
Chairman and Chief Executive Officer
1
2013 Annual Report Connection Starts with
the Customer
The success of Patterson Companies relies on the satisfaction of our
customers. Customer service is the core of our business, and it is where we
are committed to excellence. Along with our expert team of local advisors
and technicians, the Patterson Technology Center is central to this mission.
Located in Effingham, Ill., the Patterson Technology Center is home to
hundreds of dedicated Patterson employees who support over 85,000
customers nationwide.
Patterson’s customers have made significant investments in technology.
In order to maximize these investments, the experts at the Patterson
Technology Center provide direct and accurate responses to over one million
calls received in an average year.
Being the market leader starts with an
industry-leading technology offering that is
wrapped in an unrivaled after-sales support
model. Early in fiscal 2013, we were excited
to announce the expansion of Patterson’s
exclusive distribution agreement with
Sirona. We believe that through this
powerful relationship, in tandem with our
other equipment partners, we will be able to
take full advantage of the pent-up demand
from the past five years, as dentists again
begin to invest in their practices. Patterson
delivers this value proposition through our
skilled field sales organization, and it is
Questions range from hardware, software, computer networking and digital
supported by state-of-the-art customer
technology, and the goal is to resolve any situation in the first call. With brief
service and other value-added services.
hold times and swift problem resolution, the Patterson Technology Center
Patterson is truly an extension of our dental
provides support to our customers on their schedule and in a short timeframe.
customers’ practices and a valued partner
Guaranteeing customers’ satisfaction long after the sale of the product — to
Patterson, this is essential to how we do business. The Patterson Technology
Center delivers on this principle.
25 million shares. At the same time, the board
PaTTeRSOn DenTal
also approved a 14 percent increase in the
Sales of Patterson Dental, our largest
quarterly cash dividend, raising the annual
business, increased by 4 percent, to
dividend rate to $0.64 per diluted share.
$2.4 billion in fiscal 2013. The key driver
for them.
PaTTeRSOn veTeRinaRY
We were very pleased by our performance
in Patterson Veterinary in fiscal 2013.
Consolidated sales rose 8 percent from
the prior fiscal year, net of the impact of
the change in a nutritional distribution
agreement, to $755 million. Our veterinary
business is taking advantage of strong
marketplace dynamics, as pet ownership
and veterinary spending climb.
Additionally, we repaid $125 million of our
was growth in our equipment lines.
We have spent the last year building our
debt as it matured. We believe that these
Within our technology categories, which
equipment, technology and service
metrics point to a company with strong
underlying fundamentals, and we will
are benefiting from the ongoing trend to
infrastructure, and by the end of fiscal 2013,
digitization of dentistry, sales of digital
we achieved our goal to become a national
continue to generate long-term shareholder
radiography products led the performance.
technical service provider. However, a key
value by growing the operations of the
Sales of Sirona’s industry-leading CEREC
milestone for this business was when we
business combined with a capital deployment
Omnicam system — an innovative 3D CAD/
renamed the unit to Patterson Veterinary,
strategy of targeted investments, dividend
CAM camera for dentists — were robust in
from Webster Veterinary. While we continue
growth and share repurchases.
the second half of fiscal 2013.
the legacy and growth trajectory
2
Patterson Companies, Inc. established by Webster, this was an
important move as we are now able to
POSiTiOninG FOR
THe FUTURe
The economic headwinds of the past five
years have constrained consumer spending,
leverage the Patterson brand across all of
We believe that the formula for
as well as capital investments by our
our businesses. We are strengthening our
Patterson’s success is very simple —
customers. This has led to pent-up demand.
visibility and positioning in the companion-
Invest. Innovate. Connect.
Coupled with this is the demographic shift
pet veterinary market, which facilitates our
marketing initiatives and future expansion.
While many have chosen to take a more
defensive posture over the economic cycle
PaTTeRSOn MeDical
of the past five years, we have invested in
that we continue to see, as well as the
emergence of new technologies. We are
ready to capitalize on these opportunities.
While fiscal 2013 sales of $502 million for
our infrastructure and continued to position
Patterson’s key competitive strength is
Patterson Medical, our rehabilitation supply
the company for the future. We used
our market-leading product and service
and equipment unit, contracted modestly
$100 million to enhance the Patterson
offering, backed by our state-of-the-art
from the prior fiscal year, it enjoys the
Technology Center, as well as to expand
Technology Center. Patterson’s complete,
highest operating margins within the
our distribution capacity.
end-to-end solution differentiates us and
Patterson portfolio and continues to
outperform our competition. For the
full fiscal year, operating income totaled
$65 million, or 13 percent of revenue.
Two years ago, we identified and began
strategic investments in our IT infrastructure
and will continue to augment our best-in-
class platform. At the end of fiscal 2013,
The equipment business continues to be
we announced plans to invest an additional
provides the company the opportunity to
extend our leadership position. Supporting
this compelling value proposition is a solid
financial base and significant cash
generation capabilities.
adversely impacted by the uncertainty
$55 million to $65 million in our systems
In short, there are many reasons to be
surrounding healthcare reform and sluggish
over the next five years to allow our people
excited about Patterson Companies and
global economic and market conditions.
and our customers to deliver innovative
our future success. In fiscal 2014 we intend
While we expect these macroeconomic
solutions and services. We believe these
to implement strategies across all of our
factors to persist in the short-term, we are
investments will provide Patterson with the
businesses to drive revenue growth and
confident in our growth potential due to
flexibility and agility to adjust to changing
increase operating income. I look forward
the compelling underlying demographic
market conditions while enhancing our
to updating you on our efforts throughout
trends and our industry-leading product
customers’ delivery of relevant and
the year. I want to take this opportunity
offering. The most profound market shift
memorable experiences to their patients.
to thank all of our customers, associates,
we see is the rapid growth of the over-65
population, which is expected to increase
to more than 1 billion people over the next
20 years. Further, all demographics are
leading more active lifestyles; there is no
doubt that rehabilitation services and
products are strategically attractive markets
to be in. As the industry’s only full-service
value-added distributor, we are optimistic
about Patterson Medical’s long-term future.
employees and you, our shareholders, for
your continued support. I look forward to
sharing Patterson’s success with you.
Through sustained investments we will
implement innovations across all of our
businesses. This allows us to even better
connect with all our customers and
partners. By maintaining a best-in-class
customer experience, we are poised to
capture market share as the economy
Scott P. Anderson
starts to reach pre-2008 levels.
Chairman and Chief Executive Officer
3
2013 Annual Report Financial Highlights
(Dollars in thousands, except per share amounts)
net sales
Gross profit
Operating income
net income*
working capital
Total assets
Total long-term debt
Stockholders’ equity
Fiscal Years
2013
2012
2011
2010
2009
$ 3,637,212
$ 3,535,661
$ 3,415,670
$ 3,237,376
$ 3,094,227
1,190,769
1,162,514
1,144,225
1,089,401
1,043,524
354,455
210,272
358,009
212,815
376,008
225,385
355,291
212,254
346,226
199,635
1.69
158,065
603,295
$
$
912,817
873,865
863,278
785,407
2,681,778
2,739,368
2,564,968
2,422,969
2,133,620
725,000
725,000
525,000
525,000
525,000
1,394,455
1,375,202
1,560,540
1,441,511
1,186,320
earnings per share-diluted*
$
2.03
$
1.92
$
1.89
$
1.78
cash and cash equivalents
$ 505,228
573,781
$ 388,665
$ 340,591
* includes after-tax incremental expense of $12 million and $14 million, or $0.11 and $0.13 per diluted share in fiscal 2013 and 2012, respectively,
related to the company’s employee Stock Ownership Plan (eSOP). See item 7, Management’s Discussion and analysis of Financial condition
and Results of Operations, in fiscal 2013 Form 10-K.
Fiscal 2013
Sales Mix
Free cash Flow
(Dollars in millions)
cash Returned
to Shareholders
(Dollars in millions)
65%
21%
14%
• $2.4 Billion Patterson Dental
• $755 Million Patterson veterinary
• $502 Million Patterson Medical
4
Patterson Companies, Inc.
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
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended April 27, 2013
OR
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
Smaller reporting company
Non-accelerated filer
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 27, 2012, was approximately $3,464,000,000 (For purposes of this
calculation all of the registrant’s officers, directors and presidents of operating units are deemed affiliates of the registrant.)
As of June 20, 2013, there were 105,152,077 shares of Common Stock of the registrant issued and outstanding.
Accelerated filer
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 27, 2013 are incorporated by reference into Part III.
Documents Incorporated By Reference
FORM 10-K INDEX
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
25
26
Page
PART II ...............................................................................................................................................................................................
27
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES ...................................................................................................
Item 6. SELECTED FINANCIAL DATA ................................................................................................................................
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS .............................................................................................................................................................
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK .............................................
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA .............................................................................
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE ..............................................................................................................................................................
Item 9A. CONTROLS AND PROCEDURES .............................................................................................................................
Item 9B. OTHER INFORMATION ............................................................................................................................................
PART III ..............................................................................................................................................................................................
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 ...............................................................................................
PART IV ............................................................................................................................................................................................
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES ............................................................................................
27
29
30
37
39
65
65
66
67
67
67
67
67
67
68
68
SIGNATURES.....................................................................................................................................................................................
71
SCHEDULE II .....................................................................................................................................................................................
72
INDEX TO EXHIBITS........................................................................................................................................................................
73
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, PattersonVeterinary 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 99,000 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 $2.4 billion in fiscal 2013 and profitability has
increased from an operating loss in fiscal 1986 to operating income of $247.7 million in fiscal 2013.
We estimate the dental supply market we serve to be approximately $7 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 77% of our consumable dental product volume or $968 million in fiscal year 2013. 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 intra-oral digital radiography. This technology,
which we expect to be installed in most dental offices, has a current installation base of over 25,000 users. Among our many
specialized capabilities, the PTC, in conjunction with specialists from the sales branch, provides system configuration, as well as the
seamless integration of all digital operatory components with clinical software, including our EAGLESOFT ® products. This
integration creates an electronic patient database that combines the patient’s front office record, clinical x-ray, intra-oral camera
images, CEREC® and other digital equipment records. 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
record system throughout the entire office, offers all required custom computer hardware for the system, and provides ongoing
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 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 2013, 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, which is 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 website. 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 ............................................................................................................
53%
36
11
100%
2013
2012
55%
34
11
100%
2011
56%
33
11
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 gross 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 handpieces, dental chairs, dental handpiece 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 our 24-hour handpiece 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 staff at the PTC, is to assist customers to conveniently
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 2013, we originated approximately $373.2 million of
equipment finance contracts in the United States. Patterson Dental, or our third party vendor, financed approximately 49% of the
equipment purchased by our customers during fiscal 2013.
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. Wells Fargo Practice Finance, a division of Wells Fargo Bank
N.A., provides this service currently. Patterson receives referral fees under this agreement, and Wells Fargo extends credit and
services the accounts.
To fund the financing that is originated by us, Patterson has created a special purpose entity (“SPE”), PDC Funding Company,
LLC, a wholly-owned and fully consolidated subsidiary, and entered into a Receivables Purchase Agreement in order to participate in
a commercial paper conduit. We transfer finance contracts we originate to the SPE. In turn, the SPE sells the contracts to the
commercial paper conduit. As of April 27, 2013, 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.
The SPE’s do not issue debt. There is no recourse to Patterson for contracts purchased by either the commercial paper conduit or
the bank, but there is a deferred purchase price equal to approximately 15% 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 2013, 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 2013, 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 100 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 49,000 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 ADVANTAGE® 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 ensure 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 100 dental sales offices are generally configured with display areas where the latest dental
equipment can be demonstrated. Dental equipment is generally custom ordered and is staged at our sales branches before delivery to
dental offices for installation.
Sources of Supply
Effective purchasing is a key strategy Patterson Dental has adopted in order to achieve our objective of continuing to improve
profitability. Utilizing 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 the only national dealer for A-dec equipment,
including chairs, units and cabinetry. A-dec is the largest manufacturer of dental equipment in the U.S.
While Patterson Dental makes purchases from many suppliers, and there is generally more than one source of supply for most of
the categories of products we sell, the concentration of business with key suppliers is considerable. Our top ten supply vendors
accounted for approximately 48% of the cost of dental products sold in both fiscal 2013 and 2012. Of these ten, the top two vendors
accounted for 16% and 8% of both fiscal 2013 and fiscal 2012 cost of sales, respectively.
8
Competition
The highly competitive U.S. dental products distribution industry consists principally of national, regional and local full-service
and mail-order companies. The dental supply market is extremely fragmented. In addition to Patterson Dental and one other national,
full-service firm, Henry Schein Dental, a unit of Henry Schein, Inc., there are at least 15 full-service distributors that operate on a
regional level, and hundreds of small local distributors. Also, 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 with multiple value-added components, a highly qualified
and motivated sales force, highly-trained and experienced service technicians, an extensive breadth and mix of products and services,
technology solutions allowing customers to easily access our inventory, accurate and timely delivery of product, strategic location of
sales offices and 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 Dental, 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
Effective January 1, 2013, Webster Veterinary Supply, Inc. changed its name to Patterson Veterinary Supply, Inc. Patterson
Veterinary 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. Patterson Veterinary 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, Patterson Veterinary has developed a strong brand identity as a value-added, full-service distributor with a
comprehensive offering of pharmaceuticals, vaccines, parasiticides, diagnostics, prescription diets, nutritionals, consumable supplies,
equipment, and software. Patterson Veterinary’s product offering, totaling more than 36,000 items, is sold by approximately 209 field
sales representatives.
Net sales by Patterson Veterinary in fiscal 2013 were $755.2 million and operating income totaled $41.7 million. In addition to
our core business of distributing veterinary products, Patterson Veterinary has a significant agency commission business with several
pharmaceutical manufacturers. Under the agency relationships, Patterson Veterinary 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. Patterson Veterinary receives a commission payment for soliciting the order and for providing other customer service
activities. The agency commissions that Patterson Veterinary earns range from 3% to 6%, a portion of which is shared with the field
sales and customer service representatives. Patterson Veterinary’s agency commissions accounted for less than 1% of our net sales in
fiscal 2013.
We estimate the market for pharmaceuticals and supplies sold to companion animal and equine veterinarians through
distribution is approximately $3.3 billion on an annual basis. Based upon the estimated $3.3 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, 2012, according to the American Veterinary Medical Association, or AVMA, there were more than
64,000 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
veterinarians both administer and dispense.
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 or horses are 46%, 39%, and 2%, 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 $55 billion in
2013 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
Patterson Veterinary’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 Patterson Veterinary is well positioned to take advantage of expected continued consolidation in the veterinary
distribution market. Over the past 10 years Patterson Veterinary has made a number of acquisitions, including the following:
Veterinary distribution acquisitions
•
•
•
Since 2004, Patterson Veterinary has acquired several veterinary distributors in the United States. These acquisitions
include two regional distributors, ProVet, which was the companion animal veterinary supply division of Lextron, Inc.,
and Columbus Serum Company, as well as Milburn Distributions, Inc., the largest distributor specializing in the U.S.
equine veterinary supply market, and selected local and specialty distributors. Most recently, in August 2011, Patterson
Veterinary acquired American Veterinary Supply Corporation, a full service distributor on Long Island, New York with
annualized sales of approximately $25 million that served approximately 2,000 veterinary practices and hospitals in the
New York metropolitan area.
In April 2010, Patterson Veterinary made a minority equity investment in Strategic Pharmaceutical Solutions, Inc. dba
VetSource, a leading North American provider of integrated specialty pharmacy distribution, including home delivery
capabilities.
In December 2012, Patterson Veterinary acquired the assets of Univeral Vaporizer Support (UVS) based in Foster City,
California with annual sales of approximately $3 million. UVS provides cleaning and calibration services for a variety of
anesthetic vaporizers used in veterinary medicine.
Software Acquisitions
•
•
•
In December 2005, Patterson Veterinary acquired Intra Corp., one of the nation’s leading developers of veterinary practice
management software that is marketed under the INTRAVET® brand name. INTRAVET® had more than 1,600 software
installations nationwide.
In October 2008, Patterson Veterinary acquired Odyssey Veterinary Software, LLC, a developer and marketer of
DIAGNOSTIC IMAGING ATLAS® (“DIA®”) software. At that time, DIA encompassed over 2,000 3D clinical
animations and images, which enable the veterinarian to more fully explain and illustrate the pet’s diagnosis and
recommend treatment to their clients.
In January 2011, Patterson Veterinary 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 pet’s
medical information plus descriptive, easy-to-understand resources and educational materials with 3D graphics. Through
ePETHEALTH™, veterinarians can also send their clients automated electronic health service and appointment reminders,
eNewsletters and health education articles and videos.
Emphasizing Value-Added, Full-Service Capabilities. Patterson Veterinary believes that veterinary customers value full service
and responsive delivery of product, in addition to competitive prices. Customers also increasingly expect suppliers to be
knowledgeable about products and services, and, generally, a superior sales representative can create a special relationship with the
practitioner by providing an informational link to the overall industry. Patterson Veterinary’s knowledgeable sales representatives
assist customers in the selection and purchasing of supplies. Most veterinarians are independent, or small unit based, practitioners who
are unable to store and manage large volumes of supplies in their offices. We meet our customers’ 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 Patterson Veterinary.
10
Continuing to Improve Operating Efficiencies. Patterson Veterinary 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.
In January 2013, Patterson Veterinary launched its’ newly designed website pattersonvet.com with upgraded features from the
depth of information available to the ease and efficiency of navigating the site as well as enhanced search capabilities including
descriptions with multiple images and product details to assist with product research and purchasing decisions.
In June 2011, Patterson Veterinary implemented a centralized return processing center located in Columbus, Ohio. This
initiative has allowed us to more efficiently handle customer product returns, improve the customer’s experience as well as meet
vendor return requirements. As a result of implementing the centralized return processing center, approximately 87% of returns are
credited back to the customer within 24 hours of receipt. Centralizing this process has also lead to both operational efficiencies as well
as a reduction in shipping costs associated with product returns.
Expanding our Services. Patterson Veterinary continuously seeks to broaden our service offerings to maximize sales
opportunities within our existing customer base while strengthening and enhancing practice economics and pet health.
Technical Service. Patterson Veterinary offers onsite preventative maintenance and repair services in most major markets across
the United States covering a wide range of equipment. Our experienced service technicians perform equipment installation,
maintenance and repair services including services on products not purchased through Patterson Veterinary.
ePetHealth. A leading suite of communication and educational tools designed to help the clinic increase compliance and pet-
owner loyalty to the practice through: clinic eMarketing tools, health service reminders, online medical records, drug home delivery
and award winning DIA videos and content.
DIA. A premier client education software for companion animal and equine practices, provides over 3,000 illustrations,
animations, clinical images, radiographs and other diagnostic images that cover a wide range of medical conditions. Additionally, DIA
Reception provides high definition footage and animations to better explain common pet health issues and conditions to pet owners.
VetSource. A leading professional pharmacy providing home delivery service of medications to pet owners that improves client
compliance, retains drug revenues within the veterinary practice, and optimizes inventory investments.
Patterson Veterinary University. Patterson Veterinary University (PVU) offers exclusive business courses for veterinarians,
hospital managers, technicians, receptionists, and veterinary students. Veterinary students can take advantage of the two credit course
Entrepreneurship for Veterinarians during their senior year in veterinary school. Patterson Veterinary University – Management offers
4 in-depth courses on human resources, inventory management, marketing and finance. The PVU – Communication and Customer
Service course for receptionists and technicians helps create a unified health care team within a veterinary hospital. The newest
course, PVU – Executive: Next Level Practice Ownership, is designed to help guide veterinary practice owners from where they are
today to where they want to be in the future by providing practice owners with information that helps expand their current hospital
performance and fulfill their practice dreams. To date, there have been over 3,000 students, receptionists, technicians, hospital
managers and veterinarians trained through Patterson Veterinary University programs.
Dental Wet Labs. Patterson Veterinary 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 Patterson Veterinary’s 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%
2013
2012
93%
5
2
100%
2011
94%
5
1
100%
11
Consumable and Printed Products
Patterson Veterinary 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.
Equipment and Software
Veterinary Equipment. Patterson Veterinary sells equipment for hospital, laboratory and general surgical use within the
veterinary practice. We also offer innovative, quality equipment that differentiates Patterson Veterinary from the competition
including anesthesia machines, surgical monitors, diagnostic equipment, ultrasound, dental power units, cages, lights, digital x-ray
systems and x-ray machines.
Practice Management Software. Patterson Veterinary develops and markets our own proprietary 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. Patterson Veterinary also develops and markets our own proprietary client education software,
DIA®, for veterinary professionals. DIA encompasses over 3,000 3D clinical animations and images, enabling veterinarians to more
fully explain and illustrate a pet’s diagnosis and treatment recommendations to their clients.
Client Communication Portal. Patterson Veterinary develops and markets our own innovative web-based client communication
platform, ePetHealth, providing practitioners a suite of client offerings such as online medical records, eMarketing tools, client
education resources, and a home delivery portal.
Other
Other products and services include commissions earned on agency sales, equipment repair revenues, software maintenance
contract revenue and freight recovery on shipments to customers.
Sales and Marketing
During fiscal 2013, Patterson Veterinary sold products or services to over 21,000 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 2013, and Patterson Veterinary 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.
Patterson Veterinary currently has 19 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 Patterson Veterinary’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 Patterson Veterinary’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 Patterson Veterinary
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 nine call centers covering the United States. As of April 27, 2013, we had 134 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
12
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, Patterson Veterinary publishes a catalog containing product and service
information. Patterson Veterinary 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, eNewsletters, social media, and other promotional
materials. In order to extend our customer reach and enhance customer interaction, we also participate in national, regional and local
trade shows.
E-Commerce Platform. Patterson Veterinary’s newly redesigned 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
Patterson Veterinary 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 Patterson Veterinary’s consumable orders are received by
the customer the next business day.
In order to ensure the availability of Patterson Veterinary’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
Patterson Veterinary obtains products from nearly 600 vendors. While Patterson Veterinary makes purchases from many
vendors and there is generally more than one source of supply for most of the categories of products, the concentration of business
with key vendors is considerable. In fiscal 2013 and 2012, Patterson Veterinary’s top 10 veterinary supply manufacturers comprised
70% and 67%, and the single largest supplier comprised 18% and 13%, of the total cost of veterinary supply sales, respectively.
There are two major types of arrangements that account for the flow of transactions between us and our customers. Traditional
“buy/sell” transactions, which account for the vast majority of our business, involve direct purchases of products by us from vendors,
which we manage and store in our distribution centers. A customer then places an order with us, and the orders are then picked,
packed, shipped and billed by us to our customer.
We also process orders from our customers under “agency agreements” 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, Henry Schein Animal Health, Inc. and MWI Veterinary Supply, Inc., Patterson Veterinary 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. Patterson Veterinary also competes directly with pharmaceutical companies who sell certain products
directly to the customer.
13
Patterson Veterinary approaches its markets by emphasizing and delivering a value-added model to the practitioner. To
differentiate ourself from our competition, we deploy a strategy of premium customer service, a highly qualified and motivated sales
force, an extensive breadth and mix of products and services, accurate and timely delivery of product, strategic location of sales
offices and competitive pricing.
Rehabilitation Supply
Overview
Patterson Medical is headquartered in Warrenville, 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 people’s lives by helping them to attain their highest achievable level of
independence, safety and comfort. We operate as Patterson Medical globally, and are transitioning our acquired catalog brands such as
Sammons Preston, Homecraft, and Ausmedic into product brands. Patterson Medical still operates as Medco Sports Medicine in the
North American sports medicine market.
Patterson Medical serves as the gateway through which over 30,000 rehabilitation products originating from more than 1,500
suppliers and manufacturers are sold to a diverse customer base with an emphasis on physical therapists (“PTs”) and occupational
therapists (“OTs”). We offer our customers a “one-stop shop” through what we believe to be the most comprehensive catalogs in the
industry, the largest direct sales force and 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, Australia and New Zealand. Patterson Medical also uses a robust international dealer network to service customers in
countries where we do not have an established direct presence. Approximately 70% 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, is expected to contribute to increased demand for
products distributed by Patterson Medical. Specifically, the aging baby-boomer population, together with their increased
disposable income and desire for independence, will fuel product purchases to assist with the frailties associated with old
age and provide sustained sales growth.
The U.S. Census Bureau has projected the 85 and older population in the U.S. to increase significantly, from less than
6 million in 2011 to 14 million by 2040 and 19 million by 2050. The 65 to 84 year old population is expected to more than
double between 2011 and 2040. Current trends indicate that these age groups represent the majority of home and
community-based health care patients.
14
•
•
•
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 were employed in home health agencies, outpatient rehabilitation clinics, physician offices and nursing
homes. The majority of OTs work in hospitals, including many in rehabilitation and psychiatric hospitals. The remaining
OTs work in outpatient occupational therapy offices and clinics, schools, home health agencies, nursing homes,
community mental health centers, adult day care programs, job training services and residential care facilities. The
demand for PTs and OTs is expected to remain strong. The BLS estimates a growth of 33.5% for OTs between 2010 and
2020, and a growth of 39% for PTs in that same time period. Both professions are expected to grow much faster than
average.
Increasing Frequency of Reconstructive and Implant Surgery. Another important driver of the growth in the PT market is
the growing need for rehabilitation products resulting from the increasing frequency of reconstructive implant procedures,
including hip and knee replacements. The worldwide reconstructive implant market is currently in excess of $5.0 billion
and expected to grow between 7% and 8% annually. This growth trajectory is largely driven by favorable demographics,
as patient populations are expanding at both ends of the age spectrum. Among seniors, more active lifestyles and longer
life expectancies are responsible for the increasing frequency of reconstructive implants. We believe Patterson Medical is
well positioned to benefit from the growth in reconstructive implants, by providing physical therapy and exercise products
that help 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 (PMI) are based in the United Kingdom (“U.K.”) and are made up of Patterson
Medical Limited in the U.K., Patterson Medical France 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,
Australia and New Zealand, 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, Patterson Medical acquired the rehabilitation business of Empi Therapy Solutions, with sales of approximately
$30 million.
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.
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Patterson Medical France consists of two operations, the manufacturing and distribution of continuous passive motion machines
(“CPMs”) for sale on a worldwide basis under the Kinetec brand name 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.
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 2013, 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 2013, 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.
16
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 ..............................................................................................................
72%
23
5
100%
2013
2012
71%
24
5
100%
2011
69%
26
5
100%
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.
17
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 2013,
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.
To enhance the total value we bring to our customers, Patterson Medical created a value-added benefit program for its preferred
customers. The Patterson Advantage® program entitles our best customers to discount pricing and cash rebates, priority service
scheduling, supply management summary reports and continuing education course discounts.
Distribution
Patterson Medical’s distribution process centers on our ability to efficiently fill small dollar amount orders. In the U.S., over
6,000 packages ship daily from six locations. A majority of products are shipped out of three full service, shared Patterson distribution
centers, one in Mt. Joy, Pennsylvania, one in Dinuba, California, and another in South Bend, Indiana. Approximately 95% of the small
packages in the U.S. ship via UPS.
Patterson Medical 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 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 7% 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.
18
Shared Services Initiative
We have continued to consolidate our distribution infrastructure and business systems over the past several years. As of
April 27, 2013, 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 27, 2013, we have 14 shared locations, and we plan to leverage additional branch sharing between two
or three business units in select markets in fiscal 2014 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 business unit’s sales
branches, which provide network installation and customer training.
Patterson Companies, Inc.
Trademarks and Patents
Our products and services are sold under numerous trademarks including “PATTERSON®,” “EAGLESOFT®,” “CAESY®,”
“SAMMONS PRESTON®,” “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 27, 2013, we had approximately 7,000 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 us to be registered with the Federal Food and Drug Administration; the Safe Medical
Devices Act, which imposes certain reporting requirements on us in the event of an incident involving serious illness, injury or death
caused by a medical device we have distributed; and the Controlled Substance Act, which regulates the recordkeeping, handling,
storage and sale of certain drugs sold by us and requires us to be 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 us to be licensed in their state for the sale of animal health products within their
jurisdiction. Our Company is also subject to the requirements of foreign laws and regulations, which impact our operations in those
foreign countries where we conduct business.
19
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.
Executive Officers of the Registrant
Set forth below is the name, age and position of the executive officers of Patterson as of June 26, 2013.
Scott P. Anderson
R. Stephen Armstrong
Ranell M. Hamm
Jerome E. Thygesen
Ann B. Gugino
Sean M. Muniz
Paul A. Guggenheim
George L. Henriques
46 President, Chief Executive Officer, Chairman of the Board – Patterson Companies, Inc and
President – Patterson Medical Supply, Inc.
62 Executive Vice President, Chief Financial Officer and Treasurer – Patterson Companies, Inc.
51 Chief Information Officer – Patterson Companies, Inc.
55 Vice President, Human Resources – Patterson Companies, Inc.
40 Vice President, Strategy and Planning – Patterson Companies, Inc.
45 Vice President, Operations – Patterson Companies, Inc.
53 President – Patterson Dental Supply, Inc.
52 President – Patterson Veterinary 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 as Chair to our Board of Directors
beginning on April 28, 2013. 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.
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.
Ann B. Gugino became Vice President, Strategy & Planning, in April 2012. She previously served as Vice President of Finance
and Operations – Patterson Dental from 2008 until April 2012. She joined Patterson in 2000 as an assistant controller and became
Controller-Patterson Dental in 2004. Prior to her career with Patterson, Ann worked for Ernst & Young, LLP and achieved her
Certified Public Accountant designation.
Sean M. Muniz became the Vice President of Operations in November 2012. Mr. Muniz held the position of Director of
Facilities and Risk Management since 2007 and, prior to that Mr. Muniz relocated to the Corporate Office where he became the
Director of Operations for Patterson Logistics Services, Inc. in 2001. Mr. Muniz began his career with Patterson in 1990.
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 Patterson Veterinary Supply, Inc. in August 2006. Mr. Henriques previously
served as chief information officer of Webster since 2000 and is former chairman and board member of the American Veterinary
Distributors Association.
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.
General economic conditions and volatility in the financial markets could adversely affect our operating results and financial
condition.
Uncertain weak economic conditions in the U.S. or global economy, or an uncertain economic outlook, could materially
adversely affect our operating results and financial condition. Current economic conditions may continue to cause customers to
reduce, modify, delay, or cancel purchasing our products and services, and a prolonged period of economic instability could reduce
their ability to make payments. Furthermore, such conditions could cause our suppliers to reduce their production, decrease their
number of product offerings, or change their terms of sale to us. Increasing commodity prices would also increase our cost of
operations, either directly through increased energy costs or indirectly through what we are charged by our suppliers. The current
economic conditions could also cause changes in our product mix as our customers prioritize established, low-margin products rather
than innovative, high-margin products, which could reduce our profit margin.
In addition, volatility and other disruptions in the financial markets could adversely affect the cost and availability of credit to
us, as well as the cost of, and ability to sell finance contracts we receive from customers to outside financial institutions. Reduced
access to capital for our customers limits the amount of investment that they can make in their practices, and with limited investment
by the customer our 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 2013 and 2012, Patterson
Veterinary’s top 10 veterinary supply manufacturers comprised 70% and 67%, respectively, and the single largest supplier comprised
18% and 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, which are considered hazardous materials, is subject to regulation by the U.S. Department of
Transportation.
We are also required to be licensed as a distributor of drugs and medical devices by each state in which we conduct business. In
addition, several state Boards of Pharmacy require us to be licensed for the sale of animal health products within their jurisdiction. We
are also subject to the requirements of foreign laws and regulations, which impact our operations in those foreign countries where we
conduct business.
In the course of our business, particularly in providing installation and support relating to our practice management software, we
frequently have access to personal financial and health information of our customers and their patients. Because of this access, we are
also subject to additional federal and state laws and regulations, such as the Health Insurance Portability and Accounting Act
(HIPAA), which, through regulations and rulemaking, impose on us certain requirements to protect the privacy and security of
personal health information.
Furthermore, as discussed above, the industries in which we operate have recently experienced an increase in new regulations,
which makes compliance increasingly difficult. Costs and resources associated with complying with these increasing 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:
•
facilitate the purchase and distribution of thousands of inventory items through numerous distribution centers;
receive, process and ship orders on a timely basis;
accurately bill and collect from thousands of customers;
process payments to suppliers; and
provide technical support to our customers.
•
•
•
•
A cyber-attack that bypasses our IS security causing an IS security breach may lead to a material disruption of our IS and/or the
loss of business information, which could adversely affect our business. These risks may include, among others, the following:
•
•
•
•
future results could be adversely affected due to the theft, destruction, loss, misappropriation or release of confidential
data or intellectual property;
operational or business delays resulting from the disruption of IS and subsequent clean-up and mitigation activities;
negative publicity resulting in reputation or brand damage with our customers, suppliers or industry peers; and
liability for a breach of personal financial and health information belonging to our customers and their patients.
Our results of operations could be adversely affected if our IS are interrupted, damaged by unforeseen events, incur cyber-
attacks or fail for any extended period of time.
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. (Our bylaws were amended at the 2012 annual meeting of shareholders
that phase out the three classes of directors by 2015.) 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 2013 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 in the United States. PLSI also advises on the operations of our distribution centers outside of the U.S. but these properties
are not owned by PLSI.
As of April 27, 2013, PLSI operates 15 distribution centers (8 primary 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 (2).
2 rehabilitation distribution centers are located in New York State and Indiana.
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 88 locations in over 40 states and at 10 locations in
Canada. The majority of these locations are leased.
Veterinary Supply
Veterinary Supply headquarters is a leased facility in Devens, Massachusetts. Our veterinary sales personnel generally reside
within branch locations.
Rehabilitation Supply
Patterson Medical is headquartered in a leased facility in Warrenville, Illinois. Domestically, the rehabilitation supply segment
maintains manufacturing facilities in Wisconsin and New York. This segment’s eighteen branch office locations include eleven 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.
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.
25
As of April 27, 2013, 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
Not Applicable.
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 2013
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal 2012
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
Low
Dividends
per share
$
$
$
$
$
$
$
$
35.66
36.42
36.96
38.25
High
36.93
32.66
32.36
34.03
$
$
$
$
$
$
$
$
30.82
32.68
31.36
35.01
Low
30.43
26.19
27.48
30.45
$
$
$
$
$
$
$
$
0.14
0.14
0.14
0.16
0.12
0.12
0.12
0.14
On June 20, 2013, the number of holders on record of common stock was 2,365. The transfer agent for Patterson’s common
stock is Wells Fargo Bank, N.A., 161 North Concord Exchange, South St. Paul, Minnesota, 55075-0738, telephone: (651) 450-4064.
We had not paid any cash dividends on our common stock 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 2013 a quarterly cash dividend of $0.14 per share was
paid throughout the year, except in the fourth quarter when the dividend was increased to $0.16 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.
On March 19, 2013, Patterson’s Board of Directors approved a new share repurchase plan that replaced the existing share
repurchase plan. Under the new plan, up to 25 million shares may be purchased in open market transactions through March 19, 2018.
There were approximately 6.5 million shares available to be purchased under the previous plan at the time it was replaced. As of
April 27, 2013, 24,400,000 shares remain available under the current repurchase authorization.
The following table presents activity under the stock repurchase program during the fourth quarter of fiscal 2013 ended
April 27, 2013.
January 27, 2013 to February 23, 2013
February 24, 2013 to March 23, 2013
March 24, 2013 to April 27, 2013
Total
Number of
Shares
Purchased
456,000
24,000
576,000
1,056,000
Average
Price
Paid
per
Share
36.84
36.12
37.24
36.73
$
$
$
$
Total
Number of
Shares
Purchased
as Part of
Publicly
Announced
Plans or
Programs
456,000
24,000
576,000
1,056,000
Maximum
Number of
Shares That
May Be
Purchased
Under the
Plan
6,512,745
24,976,000
24,400,000
27
The graph below compares the cumulative total shareholder return on $100 invested at the market close on April 26, 2008, the
last trading day before the beginning of our 2009 fiscal year, through April 26, 2013, the last trading day of our fiscal year 2013, with
the cumulative return over the same time period on the same amount invested in the S&P 500 Index and a Peer Group Index,
consisting of six companies (including our Company) based on the same Standard Industrial Classification Code.* The chart below
the graph sets forth the actual numbers depicted on the graph.
Patterson Companies Inc.
S&P 500
Peer Group
4/26/2008
100.00
100.00
100.00
4/25/2009
59.39
63.63
67.63
Fiscal Year Ending
4/24/2010
98.13
91.91
106.73
4/30/2011
105.36
104.37
123.52
4/28/2012
104.84
109.76
124.46
4/27/2013
117.51
126.57
143.35
* The current composition of SIC Code 5047 – Medical, Dental & Hospital Equipment & Supplies – is as follows:
Chindex International, Inc., Henry Schein, Inc., MWI Veterinary Supply, Inc., Owens & Minor, Inc., Patterson Companies, Inc. and
Vertical Health Solutions, Inc.
28
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands, except per share amounts)
April 27,
2013
April 28,
2012
Fiscal Year Ended
April 30,
2011
April 24,
2010
April 25,
2009
Statement of Operations Data:
Net sales
Cost of sales
Gross margin
Operating expenses
Operating income
Other expense – 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
$ 3,637,212 $ 3,535,661 $ 3,415,670 $ 3,237,376 $ 3,094,227
2,050,703
1,043,524
697,298
346,226
(26,575)
319,651
120,016
199,635
1.69
2,147,975
1,089,401
734,110
355,291
(16,250)
339,041
126,787
212,254 $
1.78 $
2,271,445
1,144,225
768,217
376,008
(20,121)
355,887
130,502
225,385 $
1.89 $
2,446,443
1,190,769
836,314
354,455
(33,338)
321,117
110,845
210,272 $
2.03 $
2,373,147
1,162,514
804,505
358,009
(28,197)
329,812
116,997
212,815 $
1.92 $
$
$
$
$
103,807
0.58 $
110,846
0.50 $
119,066
0.42 $
119,202
0.10
118,355
0
912,817 $
2,681,778
725,000
1,394,455
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
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 2013 financial information is summarized in this Management’s Discussion and Analysis, the Consolidated Financial
Statements, and related Notes. The following background is provided to readers 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. July 9, 2001, which we operated as
Webster Veterinary Supply (Webster) until January 1, 2013. Webster is now known as Patterson Veterinary. Patterson added a third
component to our business platform in fiscal 2004 when we entered the rehabilitation supply market 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 due generally to the low
margins on the pharmaceutical products that are distributed.
We operate with a 52-53 week accounting convention with our fiscal year ending on the last Saturday in April. Fiscal 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 include thirteen weeks of activity compared to the prior year period.
It is difficult to quantify precisely the impact of the extra week, but we have provided estimates 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.
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.
One matter that has an overriding impact on our financial results for periods beginning after fiscal 2011 involves the level of
expense associated with our Employee Stock Ownership Plan (“ESOP”). For the twenty years up to and including fiscal 2011,
allocations of shares to employees participating in the ESOP 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 for allocation to be based on fair value of the shares at the time
they are committed to be released. The shares acquired by the ESOP since the revision of the accounting standards, totaling
approximately 3.6 million shares, will be released in annual amounts as determined by the Board of Directors. In fiscal 2012, we
recognized incremental expense related to the ESOP of approximately $24 million. In fiscal 2013, we recognized expense of
approximately $21 million. This estimated expense was recognized equally over the fiscal period and was a non-cash expense in the
period since the shares were purchased in earlier periods.
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:
Net Income
Incremental ESOP expense
Adjusted Net Income (non-GAAP)
Diluted Earnings Per Share
Incremental ESOP expense
Adjusted Earnings Per Share (non-GAAP)
Three Months Ended
Twelve Months Ended
April 28,
2012
62,143
3,496
65,639
0.58
0.03
0.61
April 30,
2011
62,707
—
62,707
0.53
—
0.53
$
$
$
$
April 28,
2012
212,815
13,867
226,682
1.92
0.13
2.05
$
$
$
$
April 30,
2011
225,385
—
225,385
1.89
—
1.89
$
$
$
$
$
$
$
$
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 2013, we repurchased approximately 5 million shares of our common stock at a cost of approximately $180
million. Through these repurchases and cash dividends, we returned more than $200 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
2013
100.0%
67.3%
32.7%
23.0%
9.7%
0.1%
1.0%
8.8%
3.0%
5.8%
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%
Fiscal 2013 Compared to Fiscal 2012
Net Sales. Consolidated net sales in fiscal 2013 were $3,637.2 million, an increase of 2.9%, from $3,535.7 million in fiscal
2012. The growth in sales includes a 0.6% contribution from acquisitions and a 0.2% unfavorable impact of changes in foreign
currency translation rates.
Dental segment sales in fiscal 2013 rose 4.0% to $2,380.0 million from $2,287.9 million in fiscal 2012. The growth included a
0.2% contribution from acquisitions and a 0.1% unfavorable impact form changes in foreign currency translation rates. Consumable
sales increased 1.3%. Dental equipment and software sales increased 9.8% in fiscal 2013 to $843.9 million due to strong CEREC
sales, as well as an increase in sales of digital radiography products. Other dental sales, consisting primarily of technical service parts
and labor, software support services and artificial teeth, increased 2.8% in fiscal 2013.
Veterinary segment sales grew 2.8% to $755.2 million despite the change in a nutritional distribution arrangement that reduced
sales by 5.8%. Sales of consumables were 3.4% higher in fiscal 2013, or over 9% after adjusting for the impact of the change in the
nutritional agreement. Acquisitions added 0.9% to sales in fiscal 2013. We have been investing in the Veterinary segment’s equipment
and technical service offering to expand this unit’s full-service platform.
Medical segment sales of $502.0 million decreased 2.2% from fiscal 2012. Acquisitions contributed 1.6% of sales growth. The
negative impact from foreign currency translation rates was 0.6% in fiscal 2013. We believe that continued uncertainty surrounding
the U.S. health care system and the overall economy as well as continued austerity efforts in the United Kingdom are adversely
affecting this segment.
Gross Margin. Consolidated gross margin was 32.7% in fiscal 2013 and 32.9% in fiscal 2012. The Dental segment’s gross
margin decreased 30 basis points to 35.9% in fiscal 2013. This decrease is mainly due to sales mix as equipment growth outpaced
consumable growth during the year and as the segment effectuated the change in the CEREC product line, which negatively impacted
margins. Gross margin of the Veterinary segment increased 60 basis points to 18.9% in fiscal 2013 due primarily to the change in the
nutritional distribution arrangement, which carried a lower than average margin. The Medical segment’s gross margin declined 30
basis points to 38.7%, as a result of product mix.
Operating Expenses. The consolidated operating expense ratio in fiscal 2013 was 23.0%, or 20 basis points higher than fiscal
2012. The Dental segment’s operating expense ratio increased 10 basis points. The Medical segment’s operating expenses as a percent
of sales were 80 basis points higher in the current fiscal year, due to the integration expense in the Australian operations of the
Surgical Synergies acquisition. The Veterinary segment’s operating expense ratio increased 40 basis points, mainly due to the reduced
revenue from the nutritional agreement change and the addition of service technicians during the period.
31
Operating Income. Operating income totaled $354.5 million, or 9.7% of sales, compared to prior fiscal year operating income of
$358.0 million, or 10.1% of net sales for the reasons discussed above.
Interest Expense. Interest expense was $36.4 million in fiscal 2013 compared to $30.3 million in fiscal 2012. This increase is
due to the issuance of $325 million of debt in the third quarter of the prior year offset slightly by the repayment of $125 million of
debt that matured late in fiscal 2013.
Other Income, net. Other income, net of other expenses, was $3.1 million in fiscal 2013 compared to $2.1 million in fiscal 2012.
Interest income totaled $4.5 million in fiscal 2013, compared to $4.9 million in fiscal 2012.
Income Taxes. The effective income tax rate was 34.5% in fiscal 2013 as compared to 35.5% in fiscal 2012. The effective tax
rate decreased in fiscal 2013 primarily due to an increase in the deductible dividends paid on shares held by our Employee Stock
Ownership Plan and deductions claimed for domestic manufacturing activities.
Net Income and Earnings Per Share. Net income decreased 1.2% to $210.3 million in fiscal 2013. Earnings per diluted share
and dilutive shares outstanding were $2.03 and 103.8 million, respectively, in fiscal 2013 and $1.92 and 110.8 million, respectively, in
fiscal 2012.
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. 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.
Veterinary 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, tick and heartworm 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. 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
32
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
ESOP expense negatively impacting 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.
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 $299.2 million in fiscal 2013, compared to $321.2 million in fiscal 2012 and $262.6 million in fiscal 2011. Our operating
activities are primarily driven by net income.
Capital expenditures were $22.0, $29.7 and $36.9 million in fiscal years 2013, 2012 and 2011, 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 and continuing investments in information systems. In fiscal 2012,
a project to build-out a purchased building in Indiana that serves as a distribution facility used by all three business units was
completed. This facility is replacing several smaller distribution facilities. In addition, the Patterson Technology Center 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 $33 million in capital expenditures during fiscal 2014, our main investment is in information
systems. We estimate that we will invest $55 million to $65 million over the next five years to transform our information systems. We
estimate that approximately half of this amount with be capitalized over the project life. We are estimating that in incremental $10
million will be expensed in fiscal 2014.
Cash used for acquisitions and equity investments totaled $14.6 million in fiscal 2013, $22.6 million in fiscal 2012 and $52.2
million in fiscal 2011. The majority of the cash used for acquisitions in fiscal 2013 related to the acquisitions of Iowa Dental Supply
and Universal Vaporizer Support. The majority of the cash used for acquisitions in fiscal 2012 related to the acquisitions of American
Veterinary Supply Corporation and Surgical Synergies.
In fiscal 2013, we retired $125 million of debt. In fiscal 2012, we entered into 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.
Total dividends paid in fiscal 2013, fiscal 2012 and fiscal 2011 were $43.7 million, $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 2013, we
repurchased approximately 5.0 million shares of common stock for approximately $180 million. In fiscal 2012, we repurchased
approximately 12.0 million shares of common stock for approximately $362 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 March 19, 2013, Patterson may repurchase up to 25 million shares of its common stock. This authorization remains in
effect through March 19, 2018.
33
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 $505 million in cash and cash equivalents of which $252 million is in foreign bank accounts. None of
which is 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. In addition, we have a $300 million revolving credit facility which expires in
fiscal 2017.
Patterson sells a significant portion of our finance contracts (see below) to a commercial paper funded conduit managed by a
third party bank, and as a result, commercial paper is indirectly an important source of liquidity for Patterson. Patterson is allowed to
participate in the conduit due to the quality of our finance contracts and our financial strength. Cash flows could be impaired if our
financial strength diminishes to a level that precluded us from taking part in this facility or other similar facilities. Also, market
conditions outside of our control could adversely affect the ability for us to sell the contracts.
Customer Financing Arrangements
Patterson is 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 27, 2013, the total capacity under this agreement is $500 million, which includes $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 27,
2013. Our financing business is described in further detail in Note 6, “Customer Financing.” of the Notes to the Consolidated
Financial Statements in Item 8 of this Form 10-K. Note 6 discusses the nature and business purpose of the arrangements and the
activity under each arrangement during fiscal 2013, including the amount of finance contracts sold and the holdback receivable owed
to us.
Contractual Obligations
A summary of Patterson’s contractual obligations as of April 27, 2013 follows (in thousands):
Contractual Obligations
Long-Term Debt
Interest on Long-Term Debt
Operating Leases
Total
$ 725,000 $
174,047
87,491
Payment due by year
Less than
1 year
1-3 years
3-5 years
0 $ 250,000 150,000
40,117
22,437
53,042
32,343
32,984
18,077
More than
5 years
325,000
47,904
14,634
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 27, 2013, is $21.6 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 the last several years 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 ourselves well positioned to capitalize upon the growth opportunities in the dental, companion animal veterinary
and the worldwide rehabilitation supply markets.
34
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)
2013
42
7.1
2012
45
6.7
2011
48
6.9
(1) Receivables as of April 27, 2013, April 28, 2012 and April 30, 2011 include approximately $9 million, $20 million and $19
million, respectively, of finance contracts received from customers related to certain financing promotions in fiscal 2013, 2012
and 2011. Patterson has sold contracts in fiscal 2013 and expects to sell the contracts held as of April 27, 2013 to outside
institutions under an existing agreement during fiscal 2014. If these finance contracts are excluded from the calculation of DSO,
the pro forma DSO would be 42, 43 and 46 as of April 27, 2013, April 28, 2012 and April 30, 2011, respectively.
(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., France and Australia. Fluctuations in currency exchange rates have not significantly impacted earnings.
However, changes in exchange rates adversely affected net sales in fiscal 2013 and enhanced net sales in fiscal 2012 and 2011.
Without foreign currency effects, net sales would have been $5.6 million higher, $6.1 million lower, and $12.4 million lower in fiscal
years 2013, 2012 and 2011, respectively. Changes in currency exchange rates are a risk accompanying foreign operations, but this risk
is not considered material with respect to our consolidated operations.
Critical Accounting Policies and Estimates
Patterson has adopted various accounting policies to prepare our consolidated financial statements in accordance with
accounting principles generally accepted in the United States. Management believes that our policies are conservative and our
philosophy is to adopt accounting policies that minimize the risk of adverse events having a material impact on recorded assets and
liabilities. However, the preparation of financial statements requires the use of estimates and judgments regarding the realization of
assets and the settlement of liabilities based on the information available to management at the time. Changes subsequent to the
preparation of the financial statements in economic, technological and competitive conditions may materially impact the recorded
values of Patterson’s assets and liabilities. Therefore, the users of the financial statements should read all the notes to the Consolidated
Financial Statements and be aware that conditions currently unknown to management may develop in the future. This may require a
material adjustment to a recorded asset or liability to consistently apply to our significant accounting principles and policies that are
discussed in Note 1 to the Consolidated Financial Statements. The financial performance and condition of Patterson may also be
materially impacted by transactions and events that we have not previously experienced and for which we have not been required to
establish an accounting policy or adopt a generally accepted accounting principle.
Revenue Recognition – Revenues are generated from the sale of consumable products, equipment, software products and
services, technical service parts and labor, freight and delivery charges, and other sources. Revenues are recognized when persuasive
evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable, and there
is reasonable assurance of collection of the sale. Estimates for returns, damaged goods, rebates, loyalty programs and other revenue
allowances are made at the time the revenue is recognized based on the historical experience for such items. In addition to revenues
generated from the distribution of consumable products under conventional arrangements (buy/sell agreements) where the full market
value of the product is recorded as revenue, the veterinary segment may earn a small amount of commission income for services
provided under agency agreements with certain pharmaceutical manufacturers. The services generally consist of detailing the product
and taking the customer’s order. The agency agreement contrasts to a buy/sell agreement in that the veterinary segment does not
purchase and handle the product or bill and collect from the customer in an agency relationship with a vendor.
Consumable product sales are recorded upon delivery, except in those circumstances where terms of the sale are FOB shipping
point. Commissions under agency agreements are recorded when the services are provided.
Equipment and software product revenues are recognized upon delivery and, if necessary, installation. In those circumstances
where terms of the sale are FOB shipping point, revenues are recognized when products are transferred to the shipping carrier.
Revenue derived from post contract customer support for software is deferred and recognized ratably over the period in which the
support is provided. Patterson provides financing for select equipment and software sales. Revenue is recorded at the present value of
the finance contract, with discount, if any, and interest income recognized over the life of the finance contract as “other income”. See
Note 6 to the Consolidated Financial Statements, for more information regarding customer financing.
35
Other revenue, including freight and delivery charges and technical service parts and labor, is recognized when the related
product revenue is recognized or when the product or services are provided to the customer.
The receivables that result from the recognition of revenue are reported net of the related allowances discussed above. Patterson
maintains a valuation allowance based upon the expected collectability of receivables held. Estimates are used to determine the
valuation allowance and are based on several factors, including historical collection data, economic trends and credit worthiness of
customers. Receivables are written off when we determine the amounts to be uncollectible, typically upon customer bankruptcy or
non-response to continuous collection efforts. The portions of receivable amounts that are not expected to be collected during the next
twelve months are classified as long-term.
Patterson has a relatively large, dispersed customer base and no single customer accounts for more than 1% of consolidated net
sales. In addition, the equipment sold to customers under finance contracts generally serves as collateral for the contract and the
customer provides a personal guarantee as well.
Patterson Advantage Loyalty Program – Patterson Dental provides a point-based awards program to qualifying customers
involving the issuance of “Patterson Advantage Dollars” which can be used toward equipment and technology purchases. The
program was initiated 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 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 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.
We evaluate goodwill using a qualitative assessment to determine whether it is more likely than not that the fair value of any
reporting unit is less than its carrying amount. If we determine that the fair value of the reporting unit may be less than its carrying
amount, we evaluate goodwill using a two-step impairment test. Otherwise, we conclude that no impairment is indicated and we do
not perform the two-step impairment test.
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 27, 2013, 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.
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 2013, 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.
The medical reporting unit was evaluated using the a quantitative assessment for impairment testing. This reporting unit has a
higher level of sensitivity to impairment as management currently assesses the various estimates and assumptions used to conduct
these tests. A significant reduction in these assumptions from further softening in medical utilizations in the U.S. or more severe
austerity measures in the United Kingdom could cause us to recognize a material impairment charge on this reporting unit. At
April 27, 2013, the estimated fair value of this reporting unit exceeded its book value by approximately 20%.
36
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, the Company recognizes tax liabilities based on estimates of whether additional taxes and interest will be due.
These tax liabilities are recognized when, despite the Company’s belief that its tax return positions are supportable, the Company
believes that certain positions may not be fully sustained upon review by tax authorities. The Company believes that its accruals for
tax liabilities are adequate for all open audit years based on its 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 $3.2 million in fiscal 2013.
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, which was acquired during Fiscal 2009 and is 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.
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 2013 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 and the
practice of selling fixed rate equipment finance contracts under agreements with both a commercial paper conduit and a bank that
provide for pricing based on variable interest rates.
When considering the exposure under the agreements whereby Patterson sells equipment finance contracts to both a commercial
paper conduit and bank, Patterson has the ability to select pricing based on interest rates ranging from 30 day LIBOR up to twelve
month LIBOR. In addition, the majority of the portfolio of installment contracts generally turns over in less than 48 months, and
Patterson can adjust the rate we charge on new customer contracts at any time. Therefore, in times where the interest rate markets are
37
not rapidly increasing or decreasing, the average interest rate in the portfolio generally moves with the interest rate markets and thus
would parallel the underlying interest rate movement of the pricing built into the sale agreements. In calculating the gain on the
contract sales, we use an interest rate curve that approximates the maturity period of the then-outstanding contracts. If increases in the
interest rate markets occur, the average interest rate in our contract portfolio may not increase at the same rate, resulting in a reduction
of gain on the contracts sales as compared to the gain that would be realized if the average interest rate in our portfolio were to
increase at a more similar rate to the interest rate markets.
Patterson estimates that if interest rates changed by 10% during the year, the annual impact would have been less than $1
million to earnings before income taxes.
38
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Patterson Companies, Inc.
We have audited Patterson Companies, Inc.’s internal control over financial reporting as of April 27, 2013, 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 27, 2013, 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 27, 2013 and April 28, 2012, 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 27, 2013, and our report dated June 26, 2013, expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
June 26, 2013
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 27, 2013 and April 28, 2012,
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 27, 2013. 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 27, 2013 and April 28, 2012, and the consolidated results of its operations and its cash flows for
each of the three fiscal years in the period ended April 27, 2013, 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 27, 2013, 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 26, 2013, expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
June 26, 2013
40
PATTERSON COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
April 27,
2013
April 28,
2012
505,228 $
573,781
ASSETS
Current assets:
Cash and cash equivalents ................................................................................................................... $
Receivables, net of allowance for doubtful accounts of $5,808 and $7,831 at April 27, 2013 and
April 28, 2012, respectively............................................................................................................
Inventory .............................................................................................................................................
Prepaid expenses and other current assets ...........................................................................................
Total current assets ....................................................................................................................
Property and equipment, net .........................................................................................................................
Long-term receivables, net ............................................................................................................................
Goodwill .......................................................................................................................................................
Identifiable intangibles, net ...........................................................................................................................
Other .............................................................................................................................................................
464,869
319,952
44,911
1,403,513
195,465
92,049
810,252
212,557
25,532
Total assets ................................................................................................................................. $ 2,681,778 $ 2,739,368
448,158
360,563
47,387
1,361,336
192,020
85,427
823,740
196,656
22,599
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 ...........................................................................................................................
249,795 $
70,687
128,037
—
448,519
725,000
93,329
20,475
1,287,323
207,915
66,386
130,347
125,000
529,648
725,000
81,856
27,662
1,364,166
Stockholders’ equity:
Common Stock, $.01 par value: Authorized shares – 600,000 Issued and outstanding shares –
1,099
105,570 and 109,920 at April 27, 2013, and April 28, 2012, respectively .....................................
Additional paid-in capital .............................................................................................................................
—
Accumulated other comprehensive income ..................................................................................................
32,455
Retained earnings ..........................................................................................................................................
1,456,233
Unearned ESOP shares .................................................................................................................................
(114,585)
Total stockholders’ equity ...................................................................................................................
1,375,202
Total liabilities and stockholders’ equity ............................................................................................. $ 2,681,778 $ 2,739,368
1,056
—
25,165
1,463,358
(95,124)
1,394,455
See accompanying notes
41
PATTERSON COMPANIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
AND OTHER COMPREHENSIVE INCOME
(In thousands, except per share amounts)
Net sales
Cost of sales
Gross profit
Operating expenses
Operating income
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
April 27,
2013
$ 3,637,212
2,446,443
1,190,769
836,314
354,455
Twelve Months Ended
April 28,
2012
$ 3,535,661
2,373,147
1,162,514
804,505
358,009
April 30,
2011
$ 3,415,670
2,271,445
1,144,225
768,217
376,008
3,059
(36,397)
321,117
110,845
210,272
2.04
2.03
103,030
103,807
0.58
210,272
(7,132)
(158)
202,982
$
$
$
$
$
$
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
$
$
$
$
$
$
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
$
$
$
$
$
$
42
Balance at April 24, 2010
Foreign currency translation
Cash flow hedge
Net income
Comprehensive income
Dividends declared
Common stock issued and related
tax benefits
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
Repurchase of common stock
Stock-based compensation
ESOP activity
Balance at April 28, 2012
Foreign currency translation
Cash flow hedge
Net income
Comprehensive income
Dividends declared
Common stock issued and related
tax benefits
Repurchase of common stock
Stock-based compensation
ESOP activity
Balance at April 27, 2013
PATTERSON COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Dollars in thousands)
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
(Loss) Income
Retained
Earnings
Unearned
ESOP
Shares
Total
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)
—
—
Common Stock
Number
Amount
123,437,066 $ 1,234 $ 41,703 $
—
—
—
— —
— —
— —
— —
—
920,158
(3,257,374)
9
(32)
— —
— —
121,099,850 1,211
— —
— —
— —
9,993
(62,177)
10,481
—
—
—
—
—
—
—
—
—
—
(36,751)
—
—
41,950 1,632,497
—
(9,372)
—
(123)
212,815
—
—
—
—
3,484
10,002
(98,960)
10,481
3,484
(115,118) 1,560,540
(9,372)
(123)
212,815
203,320
(55,319)
—
—
—
—
—
14,560
— (361,047)
12,615
—
533
533
(114,585) 1,375,202
(7,132)
(158)
210,272
—
202,982
(57,384)
—
—
—
—
— —
—
—
(55,319)
778,856
(11,954,257)
8
(120)
— —
— —
109,924,449 1,099
— —
— —
— —
14,552
(27,167)
12,615
—
—
—
—
—
—
—
—
—
—
(333,760)
—
—
32,455 1,456,233
—
(7,132)
—
(158)
210,272
—
— —
—
—
(57,384)
869,580
(5,224,017)
9
(52)
— —
— —
105,570,012 $ 1,056 $
21,316
(35,941)
14,625
—
— $
—
—
—
—
—
(145,763)
—
—
25,165 $ 1,463,358 $
—
21,325
— (181,756)
14,625
—
19,461
19,461
(95,124) $1,394,455
See accompanying notes
43
PATTERSON COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
April 27,
2013
Fiscal Year Ended
April 28,
2012
April 30,
2011
$
210,272 $
212,815 $
225,385
25,720
20,282
1,119
14,625
(2,487)
20,577
7,049
17,226
(39,096)
41,347
(21,767)
27
4,301
299,195
(21,983)
(14,650)
6,595
(30,038)
(43,767)
(179,525)
1,576
13,131
(125,000)
—
2,487
(331,098)
(6,612)
(68,553)
573,781
505,228 $
25,254
16,955
2,445
12,615
(1,371)
756
89
468
16,859
(6,847)
37,948
(1,766)
4,938
321,158
(29,650)
(22,620)
—
(52,270)
(54,741)
(362,379)
931
13,621
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)
(49,992)
(97,153)
707
11,940
(1,862)
325,000
1,371
(78,059)
(5,713)
185,116
388,665
573,781 $
—
1,276
(133,222)
7,693
48,074
340,591
388,665
124,146 $
35,965
2,707
81,959 $
24,868
475
112,840
24,703
1,807
$
$
Operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
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:
Decrease in receivables
Decrease (increase) in inventory
(Decrease) increase in accounts payable
(Decrease) increase in accrued liabilities
Decrease (increase) in long-term receivables
Other changes from operating activities, net
Net cash provided by operating activities
Investing activities:
Additions to property and equipment, net of acquisitions
Acquisitions and equity investments, net of cash
Other investing activities
Net cash used in investing activities
Financing activities:
Dividends paid
Repurchases of common stock
ESOP activity
Common stock issued, net
Retirement of long term debt
Debt issuance cost
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 (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental disclosures:
Income taxes paid
Interest paid
Repurchases of common stock with liability due to broker
See accompanying notes
44
PATTERSON COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 27, 2013
(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 intercompany
transactions and balances have been eliminated in consolidation. The respective assets of PDC Funding Company, LLC and PDC
Funding Company II, LLC, would be available first and foremost to satisfy the claims of their respective creditors. There are no
known creditors of PDC Funding Company, LLC or PDC Funding Company II, LLC.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current year presentation.
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 2013 and 2012 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 83% and 81% of total inventories at April 27, 2013 and
April 28, 2012, respectively.
The accumulated LIFO reserve was $70,415 at April 27, 2013 and $66,808 at April 28, 2012. 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. Depreciation is calculated on the straight-line method over estimated useful lives of
up to 39 years for buildings or the expected remaining life of purchased buildings, the term of the lease for leasehold improvements, 3
years for laptops, 5 years for 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. We have three
reporting units as of April 27, 2013, which are the same as our operating units. Other indefinite-lived intangible assets include
copyrights, trade names and trademarks.
45
We evaluate goodwill using a qualitative assessment to determine whether it is more likely than not that the fair value of any
reporting unit is less than its carrying amount. If we determine that the fair value of the reporting unit may be less than its carrying
amount, we evaluate goodwill using a two-step impairment test. Otherwise, we conclude that no impairment is indicated and we do
not perform the two-step impairment test.
If the qualitative assessment concludes that the two-step impairment test is necessary we first compare 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. 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 evaluate certain indefinite-lived intangibles using a qualitative assessment to determine whether it is more likely than not
that the fair value of the other indefinite-lived intangible assets is less than its carrying amount. If we determine that the fair value may
be less than its carrying amount, we compare the carrying value of the asset with its fair value. If the carrying value exceeds fair value,
an impairment loss is recognized in an amount equal to the excess. Otherwise, we conclude that no impairment is indicated and we do
not perform the quantitative test. 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 2013, 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. See Note 3 for
additional information about goodwill and intangible assets.
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 Accounting Standard Codification 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 or determinable, and there is reasonable assurance of
collection of the sale. Estimates for returns, damaged goods, rebates, loyalty programs and other revenue allowances are made at the
time the revenue is recognized based on the historical experience for such items. In addition to revenues generated from the
distribution of consumable products under conventional arrangements (buy/sell agreements) where the full market value of the product
is recorded as revenue, the veterinary segment may earn a small amount of commission income for services provided under agency
agreements with certain pharmaceutical manufacturers. The services generally consist of detailing the product and taking the
customer’s order. The agency agreement contrasts to a buy/sell agreement in that the veterinary segment does not purchase and handle
the product or bill and collect from the customer in an agency relationship with a vendor.
Consumable product sales are recorded upon delivery, except in those circumstances where terms of the sale are FOB shipping
point. Commissions under agency agreements are recorded when the services are provided.
Equipment and software product revenues are recognized upon delivery and, if necessary, installation. In those circumstances
where terms of the sale are FOB shipping point, revenues are recognized when products are transferred to the shipping carrier.
Revenue derived from post contract customer support for software is deferred and recognized ratably over the period in which the
support is provided. Patterson provides financing for select equipment and software sales. Revenue is recorded at the present value of
the finance contract, with discount, if any, and interest income recognized over the life of the finance contract as “other income”. See
Note 5 to the Consolidated Financial Statements, for more information regarding customer financing.
46
Other revenue, including freight and delivery charges and technical service parts and labor, is recognized when the related
product revenue is recognized or when the product or services are provided to the customer.
The receivables that result from the recognition of revenue are reported net of the related allowances discussed above. Patterson
maintains a valuation allowance based upon the expected collectability of receivables held. Estimates are used to determine the
valuation allowance and are based on several factors, including historical collection data, economic trends and credit worthiness of
customers. Receivables are written off when we determine the amounts to be uncollectible, typically upon customer bankruptcy or
non-response to continuous collection efforts. The portions of receivable amounts that are not expected to be collected during the next
twelve months are classified as long-term.
Patterson has a relatively large, dispersed customer base and no single customer accounts for more than 1% of consolidated net
sales. In addition, the equipment sold to customers under finance contracts generally serves as collateral for the contract and the
customer provides a personal guarantee as well.
Patterson Advantage Loyalty Program
The Dental segment provides a point-based awards program to qualifying customers involving the issuance of “Patterson
Advantage Dollars” which can be used toward equipment and technology purchases. The program was initiated on January 1, 2009
and runs on a calendar year schedule. Patterson Advantage Dollars earned during a program year expire one year after the end of the
program year. The cost and corresponding liability associated with the program are recognized as contra-revenue in accordance with
ASC Topic 605-50, “Revenue Recognition-Customer Payments and Incentives.” As of April 27, 2013, we believe we have sufficient
experience with the program to reasonably estimate the amount of Patterson Advantage Dollars that will not be redeemed and thus
have recorded a liability for 87% of the maximum potential amount that could be redeemed. We use the redemption recognition
method and we recognize the estimated value of unused Advantage Dollars as a percentage of Patterson Advantage Dollars earned.
Breakage recognized was immaterial to all periods presented.
Freight and Delivery Charges
Freight and delivery charges are included in “cost of sales”.
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 $19,721, $18,811 and $20,630 for
fiscal years 2013, 2012 and 2011, respectively. Deferred direct-marketing expenses included in prepaid and other current assets on the
consolidated balance sheet as of April 27, 2013, and April 28, 2012 were $1,845 and $3,312, 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.
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 expense based on the grant-date fair value of awards estimated in accordance with
ASC Topic 718, “Stock Compensation”.
47
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 ...............................................
Effect of dilutive securities – stock options, restricted stock and stock purchase plans .....................
Denominator for diluted earnings per share – adjusted weighted average shares ........................................
103,030 110,121 118,290
776
103,807 110,846 119,066
777
725
2013
Fiscal Year
2012
(in thousands)
2011
Options to purchase 362, 520 and 559 shares of common stock during fiscal years 2013, 2012 and 2011, 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 2013, 2012 and 2011
were 0, 140 and 173, respectively, because the effect would have been anti-dilutive.
Recent Accounting Pronouncements
In February 2013, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2013-02, Reporting of Amounts
Reclassified Out of Accumulated Other Comprehensive Income. Under this standard, entities will be required to disclose additional
information with respect to changes in accumulated other comprehensive income (AOCI) balances by component and significant
items reclassified out of AOCI. Expanded disclosures for presentation of changes in AOCI involve disaggregating the total change of
each component of other comprehensive income as well as presenting separately for each such component the portion of the change in
AOCI related to (1) amounts reclassified into income and (2) current-period other comprehensive income. Additionally, for amounts
reclassified into income, disclosure in one location would be required, based upon each specific AOCI component, of the amounts
impacting individual income statement line items. Disclosure of the income statement line item impacts will be required only for
components of AOCI reclassified into income in their entirety. Therefore, disclosure of the income statement line items affected by
AOCI components such as net periodic benefit costs would not be included. The disclosures required with respect to income statement
line item impacts would be made in either the notes to the consolidated financial statements or parenthetically on the face of the
financial statements. For Patterson, this ASU was effective beginning January 27, 2013. Because this standard only impacts
presentation and disclosure requirements, its adoption did not have a material impact on our consolidated results of operations or
financial condition.
In July 2012, the FASB issued ASU No. 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment. Under this
standard, entities testing long-lived intangible assets for impairment now have an option of performing a qualitative assessment to
determine whether further impairment testing is necessary. If an entity determines, on the basis of qualitative factors, that the fair
value of the indefinite-lived intangible asset is more-likely-than-not less than the carrying amount, the existing quantitative
impairment test is required. Otherwise, no further impairment testing is required. For Patterson, this ASU is effective beginning
April 28, 2013. The adoption of this standard will not have a material impact on Patterson’s consolidated results of operations or
financial condition.
In December 2011, the 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. The adoption of this standard did not have a material
impact on Patterson’s consolidated results of operations or financial condition.
48
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
not required. Otherwise, no further impairment testing is required. This update is effective for fiscal years beginning after
December 15, 2011, with early adoption permitted. The adoption of this standard did not have a material impact on Patterson’s
consolidated results of operations or financial condition.
2. Cash and cash equivalents
At April 27, 2013 and April 28, 2012, cash and cash equivalents consisted of the following:
Cash on hand
Money market funds
Total
Cash on hand is generally in interest earning accounts.
3. Goodwill and Other Intangible Assets
April 27,
2013
222,609
282,619
505,228
$
$
April 28,
2012
251,849
321,932
573,781
$
$
The changes in the carrying value of goodwill for each of our reportable segments for the fiscal year ended April 27, 2013 are as
follows:
Dental supply
Rehabilitation supply
Veterinary supply
Total
Balance at
April 28, 2012
132,677
543,131
134,444
810,252
$
$
$
$
Acquisition
Activity
Other
Activity
5,190
—
2,250
7,440
$
$
— $
5,889
159
6,048 $
Balance at
April 27, 2013
137,867
549,020
136,853
823,740
The increase in the acquisition activity column during the twelve-month period ended April 27, 2013 primarily reflects the
preliminary purchase price allocation for the Dental segment acquisition of Iowa Dental Supply and the Veterinary segment
acquisition of American Veterinary Supply Corporation, which were acquired in fiscal 2013. 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 intangible assets acquired in the acquisitions in fiscal 2013 had a fair value of approximately $4,910 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
Amortized:
Distribution agreement, customer lists and other
Less: Accumulated amortization
Net amortized intangible assets
Total identifiable intangible assets, net
April 27,
2013
April 28,
2012
$
76,464
$
76,464
235,781
(115,589)
120,192
196,656
$
231,739
(95,646)
136,093
212,557
$
In 2006, we extended our exclusive North American distribution agreement with Sirona Dental Systems GmbH (“Sirona”) for
Sirona’s CEREC dental restorative system. We paid a $100,000 distribution fee to extend the agreement for a 10-year period that
began in October 2007, which is included in identifiable intangibles, net in the consolidated balance sheet. The amortization of the
distribution agreement fee is recorded over the 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 dental restorative systems.
49
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. This is
not a “take-or-pay” contract.
With respect to the amortized intangible assets, future amortization expense is expected to approximate $22,847, $23,664,
$24,609, $24,978, $11,460 for fiscal years 2014, 2015, 2016, 2017 and 2018, 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 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 2013, 2012 and 2011. 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. We acquired 100% of all companies listed below:
Entity
Fiscal 2013:
Iowa Dental Supply
Universal Vaporizer Support
Fiscal 2012:
American Veterinarian Supply Corp.
Surgical Synergies Pty Ltd.
Orthoplast
Fiscal 2011:
DCC Healthcare
ePet Records LLC
5. Property and Equipment
Segment
Dental supply
Veterinary supply
Veterinary supply
Rehabilitation supply
Rehabilitation supply
Rehabilitation supply
Veterinary supply
Property and equipment consisted of the following items:
Land
Buildings
Leasehold improvements
Furniture and equipment
Data processing equipment
Construction-in-progress
Accumulated depreciation
Property and equipment, net
April 27,
2013
14,811
127,364
16,751
139,261
98,117
5,594
401,898
(209,878)
192,020
$
$
April 28,
2012
15,578
130,009
15,058
139,506
87,780
3,385
391,316
(195,851)
195,465
$
$
6. Customer Financing
As a convenience to our customers, we offer several different financing alternatives including both our Company-sponsored
program and a third party program. For the third party program, we act as a facilitator between the customer and the third party
financing entity with no on-going involvement in the financing transaction. Under our sponsored program, equipment purchased by
customers with strong credit may be financed up to a maximum of $400 for any one customer. We generally sell the customers’
financing contracts to outside financial institutions in the normal course of our business. Patterson currently has two arrangements
under which we sell these contracts.
Patterson operated under an agreement to sell a portion of our equipment finance contracts to commercial paper conduits with
The Bank of Tokyo-Mitsubishi UFJ, Ltd. serving as the agent. We utilize a special purpose entity (“SPE”), PDC Funding, a
consolidated, wholly owned subsidiary to fulfill a requirement of participating in the commercial paper conduit. We receive
approximately 85% of the principal amounts of the contracts upon sale. The remaining 15% of the proceeds are held by the conduit as
security against the eventual performance of the portfolio. The capacity under the agreement at April 27, 2013 was $500,000.
50
Patterson also maintains an agreement with Fifth Third Bank whereby the bank purchases customers’ financing contracts.
Patterson has established another SPE, PDC Funding II, as a consolidated, wholly owned subsidiary, which sells financing contracts to
the bank. We receive approximately 82% of the principal amounts of the contracts upon sale. The remaining 18% of the proceeds is
held by the conduit as security against the eventual performance of the portfolio. The capacity under the agreement at April 27, 2013
was $75,000.
The portion of the purchase price for the receivables held by the conduits is a deferred purchase price receivable, which is paid
to the SPE as payments on the receivables are collected from customers. The deferred purchase price receivable represents a beneficial
interest in the transferred financial assets and is recognized at fair value as part of the sale transaction. The Company values the
deferred purchase price receivable based on a discounted cash flow analysis using unobservable inputs (i.e. level 3 inputs), which
include a forward yield curve, the estimated timing of payments and the credit quality of the underlying creditor. Significant increases
in any of the significant unobservable inputs in isolation would not result in a materially lower fair value estimate. The
interrelationship between these inputs is insignificant.
These financing arrangements are accounted for as a sale of assets under the provisions of ASC Topic No. 860, Transfers and
Servicing. During fiscal 2013, 2012 and 2011, we sold approximately $283,175, $287,627 and $296,403, 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 27, 2013.
Included in current receivables in the consolidated balance sheets are approximately $64,272, net of unearned income of $1,586,
and $81,822, net of unearned income of $7,396, as of April 27, 2013 and April 28, 2012, respectively, of finance contracts not yet sold
by Patterson. A total of $491,717 of finance contracts receivable sold under the agreements was outstanding at April 27, 2013. The
deferred purchase price under the arrangements was approximately $72,328 and $78,923 as of April 27, 2013 and April 28, 2012,
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: $250,000 in fiscal 2015, $150,000 in
fiscal 2018, $60,000 in fiscal 2019 and $265,000 in years thereafter.
In March 2008, Patterson issued fixed-rate senior notes with an aggregate principal amount of $450,000, consisting of
(i) $50,000 4.63% senior notes, paid in fiscal 2013; (ii) $250,000 5.17% senior notes, due fiscal 2015; and (iii) $150,000 5.75% senior
notes, due fiscal 2018.
Also in March 2008, we entered into a term loan agreement with a group of banks in the principal amount of $75,000, which
was paid in fiscal 2013. The term loan did bear interest at a floating rate based on LIBOR plus a spread that ranged from 0.50% to
1.25% based on our leverage ratio, as defined in the agreement. During the years ended April 27, 2013 and April 28, 2012, the
weighted average interest rate of this term loan was 1.74% and 1.20%, respectively.
In December 2011, we issued fixed-rate senior notes with an aggregate principal amount of $325,000, consisting of (i) $60,000
2.95% senior notes, due fiscal 2019; (ii) $165,000 3.59% senior notes, due fiscal 2022; and (iii) $100,000 3.74% senior notes, due
fiscal 2024.
A portion of the proceeds from the issuance of debt in December 2011 was used to repurchase shares of our common stock and
to repay borrowings under our revolving line of credit. The remaining proceeds are intended to be used for general corporate purposes.
Debt issuance costs associated with the issuance of debt in March 2008 of $1,800 and in December 2011 of $1,800 are being
amortized to interest expense over the 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
$100,000 and accounted for as cash flow hedges, to hedge interest rate fluctuations in anticipation of the issuance of the 5.17% senior
notes due fiscal 2015 and the 5.75% senior notes due fiscal 2018, respectively. Upon issuance of the hedged debt, Patterson settled the
forward starting interest rate swap agreements and recorded a $1,000 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 2013, 2012 and 2011 was $200. The amount expected to be reclassified into earnings during fiscal 2014 is also expected to
be $200.
51
Patterson has available a $300,000 revolving credit facility through December 2016. Interest on borrowings is based on LIBOR
plus a spread which can range from 1.125% to 1.875%. This spread as well as a commitment fee on the unused portion of the facility
are based on our leverage ratio, as defined in the agreement. There were no outstanding borrowings under the facility at April 27, 2013
or April 28, 2012.
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 27, 2013.
Patterson’s debt consists of the following:
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 2019
3.59% senior notes due fiscal 2022
3.74% senior notes due fiscal 2024
Variable rate (LIBOR plus 1.25%) term loan due fiscal 2013
Total debt
Less: current debt obligations
Long-term debt
April 27, 2013
—
250,000
150,000
60,000
165,000
100,000
—
725,000
—
725,000
$
$
April 28, 2012
50,000
250,000
150,000
60,000
165,000
100,000
75,000
850,000
125,000
725,000
$
$
8. Derivative Financial Instruments
Patterson is a party to certain offsetting and identical interest rate cap agreements. These cap agreements are not designated for
hedge accounting treatment and were entered into to fulfill certain covenants of a sale agreement between a commercial paper conduit
managed by The Bank of Tokyo-Mitsubishi UFJ, Ltd. and PDC Funding. On December 2, 2012, 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,
they 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 27, 2013, PDC Funding had
purchased an interest rate cap from a bank with notional amount of $500,000 and maturity date of December 2019. Patterson
Companies, Inc. sold an identical interest rate cap to the same bank.
Similar to the above agreements, PDC Funding II and Patterson Companies, Inc. have entered into offsetting and identical
interest rate swap agreements with a notional amount of $75,000. During the second quarter of 2013, these agreements were
terminated and replaced with offsetting and identical interest rate cap agreements. As of April 27, 2013 these agreements had notional
amounts of $75,000 and maturity dates of July 2020.
In addition to the identical purchased and sold interest rate contracts described above, in May 2012, we entered into two interest
rate swap agreements with banks to economically hedge the interest rate risk associated with our finance contracts.
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
$100.
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 $2,000 that effectively was offset by the gain on the intercompany loan.
52
The following presents the fair value of interest rate contracts included in the consolidated balance sheets:
Derivative type
Interest rate contracts
Assets
Fair Value
Liabilities
Fair Value
Classification
Other noncurrent
assets
April 27,
2013
April 28,
2012
Classification
$
486 $
245 Other noncurrent
liabilities
April 27,
2013
April 28,
2012
$
509 $
245
The following presents the effect of interest rate and foreign currency contracts on the consolidated statements of income:
Derivative type
Interest rate contracts
Foreign currency contracts
9. Fair Value Measurements
Classification of gain (loss)
recognized on derivative
Other income (expense), net $
Other income (expense), net $
Gain (loss)
recognized on derivative
Fiscal Year
2012
2011
2013
78 $
0.0 $
2
0.0 ($
(40)
1.9)
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 27, 2013 is as follows:
Assets:
Cash equivlanets
Derivative instruments
Total assets
Liabilities:
Derivative instruments
Quoted
Prices in
Active
Markets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$
$
$
282,619
—
282,619
—
$
$
$
—
486
486
509
$
$
$
—
—
—
—
Total
282,619
486
283,105
509
$
$
$
Our hierarchy for assets and liabilities measured at fair value on a recurring basis as of April 28, 2012 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)
Significant
Unobservable
Inputs
(Level 3)
$
$
$
321,932
—
321,932
—
$
$
$
—
245
245
245
$
$
$
—
—
—
—
Total
321,932
245
322,177
245
$
$
$
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.
53
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 2013, 2012 and 2011.
Patterson’s debt is not measured at fair value in the consolidated balance sheets. The estimated fair value of our debt as of
April 27, 2013 and April 28, 2012 was $774,606 and $869,700, 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 27, 2013 and April 28, 2012.
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 27, 2013:
2014
2015
2016
2017
2018
Thereafter
Total minimum payments required
$
$
18,077
17,326
15,017
12,767
9,670
14,634
87,491
Rent expense was $22,016, $20,819 and $20,459 for the years ended April 27, 2013, April 28, 2012 and April 30, 2011,
respectively.
11. Income Taxes
Significant components of the provision for income taxes are as follows:
Current:
Federal
Foreign
State
Total current
Deferred:
Federal
Foreign
State
Total deferred
Provision for income taxes
2013
80,290
13,471
10,035
103,796
6,667
(963)
1,345
7,049
110,845
$
$
Fiscal Year
2012
89,612
16,726
10,570
116,908
872
(895)
112
89
116,997
$
$
2011
87,315
14,548
11,469
113,332
14,938
310
1,922
17,170
130,502
$
$
54
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 27, 2013 and April 28, 2012 are
as follows:
Deferred current income tax asset (liability):
Capital accumulation plan
Inventory related items
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
2013
2012
$
$
5,540
8,170
2,092
(15,901)
17,075
16,976
(27,934)
(62,911)
(5,390)
9,603
8,070
(10,290)
(88,852)
(4,477)
(93,329)
(76,353)
$
$
4,045
5,600
2,022
(12,773)
14,068
12,962
(29,142)
(56,026)
(3,901)
7,897
7,656
(3,568)
(77,084)
(4,772)
(81,856)
(68,894)
At April 27, 2013, we had foreign net operating loss carryforwards (“NOLs”) of $33,462, the majority of which are attributable
to companies outside the U.S. that were acquired in prior years. A valuation allowance has been recorded for a portion of the $8,070
of deferred tax asset resulting from these NOLs because we believe that it is more likely than not that the losses will not be fully
utilized due to uncertainties relating to future taxable income from the acquired companies.
No provision has been made for U.S. federal income taxes on certain undistributed earnings of foreign subsidiaries that we
intend to permanently invest or that may be remitted substantially tax-free. The total undistributed earnings that would be subject to
federal income tax if remitted under existing law are approximately $252,261 as of April 27, 2013. Determination of the unrecognized
deferred tax liability related to these earnings is not practicable because of the complexities with its hypothetical calculation. If a
future distribution of these earnings is made, we will be subject to U.S. taxes and withholding taxes payable to various foreign
governments. A credit for foreign taxes already paid 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
2013
112,391
8,322
(4,603)
(5,265)
110,845
$
$
Fiscal Year
2012
115,434
7,277
(3,944)
(1,770)
116,997
$
$
2011
124,561
8,950
(1,742)
(1,267)
130,502
$
$
We have accounted for the uncertainty in income taxes recognized in the financial statements in accordance with ASC Topic
740, “Income Taxes”. This standard clarifies the separate identification and reporting of estimated amounts that could be assessed
upon audit. The potential assessments are considered unrecognized tax benefits, because, if it is ultimately determined they are
unnecessary, the reversal of these previously recorded amounts will result in a beneficial impact to our financial statements.
55
As of April 27, 2013 and April 28 2012, Patterson’s gross unrecognized tax benefits were $19,155 and $18,099, respectively. If
determined to be unnecessary, these amounts (net of deferred tax assets of $4,735 and $5,037, 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 27, 2013 and April 28,
2012 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 ............................................................................ $
2013
18,099
2,568
1,638
(1,135)
(1,907)
(108)
19,155
2012
18,963
2,288
474
(1,778)
(1,618)
(230)
18,099
$
$
We also recognize both interest and penalties with respect to unrecognized tax benefits as a component of income tax expense.
As of April 27, 2013 and April 28, 2012, we had recorded $2,358 and $2,575, 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 27, 2013, we recorded as part of tax
expense $526 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. The
Internal Revenue Service (“IRS”) has either examined or waived examination for all periods up to and including our fiscal year ended
April 24, 2010. Periodically, state, local and foreign income tax returns are examined by various taxing authorities. We do not believe
that the outcome of these various examinations would have a material adverse impact on our financial statements.
12. Segment and Geographic Data
Patterson Companies, Inc. is comprised of three reportable segments: dental supply, veterinary supply, 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.
56
The following table presents information about Patterson’s reportable segments:
Net sales
Dental supply
Rehabilitation supply
Veterinary supply
Consolidated net sales
Operating income
Dental supply
Rehabilitation supply
Veterinary supply
Consolidated operating income
Depreciation and amortization
Dental supply
Rehabilitation supply
Veterinary supply
Consolidated depreciation and amortization
Total assets
Dental supply
Rehabilitation supply
Veterinary supply
Consolidated total assets
2013
2,379,970
501,997
755,245
3,637,212
247,747
65,027
41,681
354,455
34,953
7,683
3,366
46,002
1,442,667
881,323
357,788
2,681,778
$
$
$
$
$
$
$
$
Fiscal Year
2012
2,287,875
513,340
734,446
3,535,661
246,755
72,442
38,812
358,009
31,375
7,472
3,362
42,209
1,502,672
883,287
353,409
2,739,368
$
$
$
$
$
$
$
$
2011
2,236,056
504,734
674,880
3,415,670
272,185
66,809
37,014
376,008
27,410
7,833
6,096
41,339
1,359,659
863,930
341,379
2,564,968
$
$
$
$
$
$
$
$
The following table presents sales information by product for Patterson and its reportable segments:
Consolidated
Consumable and printed products
Equipment and software
Other
Total
Dental supply
Consumable and printed products
Equipment and software
Other
Total
Rehabilitation supply
Consumable and printed products
Equipment and software
Other
Total
Veterinary supply
Consumable and printed products
Equipment and software
Other
Total
2013
2,343,407
993,767
300,038
3,637,212
1,273,222
843,880
262,868
2,379,970
361,164
114,818
26,015
501,997
709,021
35,069
11,155
755,245
Fiscal Year
2012
2,312,309
930,601
292,751
3,535,661
1,263,515
768,633
255,727
2,287,875
363,004
123,649
26,687
513,340
685,790
38,319
10,337
734,446
$
$
$
$
$
$
$
$
2011
2,232,876
900,846
281,948
3,415,670
1,253,224
734,749
248,083
2,236,056
348,641
131,776
24,317
504,734
631,011
34,321
9,548
674,880
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
57
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.
Net sales
United States
International
Total
Income before tax
United States
International
Total
Long-lived assets
United States
International
Total
2013
3,211,979
425,233
3,637,212
273,037
48,080
321,117
1,176,815
143,627
1,320,442
$
$
$
$
$
$
Fiscal Year
2012
3,104,047
431,614
3,535,661
273,314
56,498
329,812
1,192,437
143,418
1,335,855
$
$
$
$
$
$
2011
3,006,984
408,686
3,415,670
304,592
51,295
355,887
1,195,359
138,900
1,334,259
$
$
$
$
$
$
13. Stockholders’ Equity
Dividends
The following table presents our declared and paid cash dividends per share on our common stock for the past three years. The
dividend declared in the fourth quarter of fiscal 2013 was paid early in the subsequent quarter; all other dividends were declared and
paid in the same period. Patterson expects to continue paying a quarterly cash dividend into the foreseeable future.
Fiscal year
2013
2012
2011
Share Repurchases
1
0.14 $
0.12 $
0.10 $
$
$
$
Period
2
0.14 $
0.12 $
0.10 $
3
0.14 $
0.12 $
0.10 $
4
0.16
0.14
0.12
During fiscal 2013, we repurchased and retired 5,224,017 shares of our common stock for $181,756, or an average of $34.79 per
share. 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.
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 share of common stock. This program was due to expire on
March 15, 2016. On March 19, 2013, Patterson’s Board of Directors approved a new share repurchase plan that replaces the existing
share repurchase plan. Under the new plan, up to 25 million shares may be repurchased in open market transactions through March 19,
2018. There were approximately 6.5 million shares available to be repurchased under the previous plan at the time it was replaced. As
of April 27, 2013, 24.4 million shares remain available under the current repurchase authorization, which expires on March 19, 2018.
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 Accounting Practices
for Certain Employee Stock Ownership Plans (“SOP 76-3”) apply. Accordingly, the expense recognized when these shares were
58
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 shares secured by the 1990
note with an aggregate cost of $1,635 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 as interest was paid on the loan. During fiscal 2013, 2012 and 2011, shares secured by the
Thompson note with an aggregate fair value of $363, $298 and $81, respectively, were committed for release and allocated to ESOP
participants.
On September 11, 2006, we entered into a third loan agreement with the ESOP and loaned $105,000 (the “2006 note”) for the
sole purpose of enabling the ESOP to purchase shares of our common stock. The ESOP purchased 3,159,645 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 2013 and 2012, shares secured by the
2006 note with aggregate fair values of $20,214 and $458, respectively, were committed for release and allocated to ESOP
participants. In fiscal 2012, Patterson contributed $23,639 to the ESOP, which then purchased 844,325 shares for allocation to the
participants. No shares secured by the 2006 note were released prior to fiscal 2011.
At April 27, 2013, a total of 14,198,533 shares of common stock that have been allocated to participants remained in the ESOP
and had a fair market value of $532,019. Related to the shares from the Thompson transaction, committed-to-be-released shares were
10,380 and suspense shares were 463,289. Finally, with respect to the 2006 note, committed-to-be-released shares were 578,700 and
suspense shares were 2,552,994.
We anticipate the allocation of the remaining suspense, or unearned, shares to occur over a period of approximately 5 to 10
years. As of April 27, 2013, the fair value of all unearned shares held by the ESOP was approximately $113,000. 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 2013, 2012 and 2011 include pre-tax stock-based compensation expense
of $14,600 ($9,500 after-tax), $12,600 ($8,400 after-tax), and $10,500 ($7,200 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 presents 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
2013, 2012 and 2011, these excess benefits totaled $2,500, $1,400, and $1,300, respectively.
As of April 27, 2013, the total compensation cost, before income taxes, related to non-vested awards yet to be recognized was
$21,600, and it is expected to be recognized over a weighted average period of approximately 2.8 years.
Description of General Methods and Assumptions Used to Estimate Fair Value
The following describes certain methods and assumptions used to estimate the fair value of stock-based compensation awards.
Further information is presented below within this Note that may be unique to a particular award or group of awards.
59
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, vested over one year, and were exercisable for a period of four years commencing one year after the date of grant.
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.
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 2013, 2012 and 2011, expense recognized
related to stock options was $1,200, $1,600, and $1,700, 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 2013, 2012 and 2011:
Expected dividend yield
Expected stock price volatility
Risk-free interest rate
Expected life of options (years)
April 27,
2013
April 28,
2012
April 30,
2011
1.6%
30.6%
1.4%
7.5
1.5%
33.0%
2.5%
7.4
1.2%
38.0%
3.6%
8.8
60
Following is a summary of stock option activity for all plans during fiscal years 2013, 2012 and 2011 (share amounts in thousands):
Balance as of April 24, 2010
Granted
Exercised
Canceled
Balance as of April 30, 2011
Granted
Exercised
Canceled
Balance as of April 28, 2012
Granted
Exercised
Canceled
Balance as of April 27, 2013
Vested or expected to vest as of April 27, 2013
Exercisable as of April 27, 2013
(a) Weighted-average exercise price
Total Outstanding
Number
of
Options
1,648
51
(334)
(92)
1,273
64
(232)
(119)
986
56
(290)
(31)
721
634
434
Exercise
Price (a)
26.94
32.08
17.82
23.02
29.82
33.90
24.11
29.64
31.45
34.10
22.49
33.79
35.03
34.91
34.46
$
$
$
$
$
$
Intrinsic
Value
$
$
$
2,245
1,832
869
The weighted average fair values per share of options granted during fiscal years 2013, 2012 and 2011 were $10.15, $11.47, and
$14.07, respectively. The weighted average remaining contractual lives of options outstanding and options exercisable as of April 27,
2013 were 3.4 and 2.8 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 $3,400, $6,500 and $600,
respectively, in fiscal 2013; $1,700, $5,600 and $400, respectively, in fiscal 2012; $4,400, $6,100 and $1,200, respectively, in fiscal
2011.
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
method based on the outcome that is probable. During fiscal years 2013, 2012 and 2011, expense recognized related to restricted stock
and performance unit awards was $10,300, $8,000 and $5,500, respectively. The total intrinsic value of restricted stock awards that
vested in fiscal 2013, 2012 and 2011 was $6,900, $4,600, and $3,500, respectively. Patterson granted performance units in fiscal 2013
and 2012, that can be earned at the end of fiscal 2014 and 2015, subject to the achievement of certain financial objectives. No
performance units were granted in fiscal 2011.
61
The following tables summarize information concerning non-vested restricted stock awards and performance unit awards for
fiscal years 2013, 2012 and 2011:
Outstanding at April 24, 2010
Granted
Vested
Forfeitures
Outstanding at April 30, 2011
Granted
Vested
Forfeitures
Outstanding at April 28, 2012
Granted
Vested
Forfeitures
Outstanding at April 27, 2013
Outstanding at April 24, 2010
Forfeitures and cancellations
Outstanding at April 30, 2011
Granted
Forfeitures and cancellations
Outstanding at April 28, 2012
Granted
Forfeitures and cancellations
Outstanding at April 27, 2013
$
Restricted Stock Awards
Weighted
Average
Grant-Date
Fair Value
28.42
31.91
(33.07)
(28.81)
29.22
34.60
(25.45)
(29.25)
30.92
34.10
(35.62)
(30.98)
31.82
Shares
919
406
(104)
(110)
1,111
272
(138)
(83)
1,162
314
(192)
(127)
1,157
$
$
$
$
Performance Unit Awards
Weighted
Average
Grant-Date
Fair Value
30.88
(30.88)
0.00
35.41
(35.41)
35.41
34.09
(34.09)
34.09
Shares
27
(27)
0
102
(6)
96
130
(21)
109
$
$
$
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 were reserved for issuance under the Stock Purchase Plan. In June 2012, our Board of Directors approved to increase
the number of shares available to 6,750,000. 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% 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 27, 2013, there were 1,992,535 shares available for purchase under the Stock
Purchase Plan.
62
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 purchase plan was $1,800, $1,800 and $1,600 during fiscal years 2013, 2012 and 2011, respectively. The following table
summarizes the weighted-average assumptions relating to the Stock Purchase Plan for fiscal years 2013, 2012 and 2011:
Expected dividend yield
Expected stock price volatility
Risk-free interest rate
Expected life of options (years)
Capital Accumulation Plan
2013
1.6%
31.0%
0.2%
0.5
2012
1.4%
31.3%
0.2%
0.5
2011
0.4%
31.3%
0.2%
0.5
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’s 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 27, 2013, 2,245,202 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 $1,300, $1,300, and $1,400 during
fiscal years 2013, 2012 and 2011, respectively. The following table summarizes the weighted-average assumptions relating to the CAP
Plan for fiscal years 2013, 2012 and 2011:
Expected dividend yield
Expected stock price volatility
Risk-free interest rate
Expected life of options (years)
15. Litigation
2013
1.6%
31.0%
0.3%
1.0
2012
1.4%
31.3%
0.3%
1.0
2011
0.4%
31.3%
0.4%
1.0
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 27, 2013 and April 28, 2012, 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.
63
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. The following table summarizes results for fiscal
2013 and 2012.
Net sales
Gross profit
Operating income
Net income
Earnings per share – basic
Earnings per share – diluted
Net sales
Gross profit
Operating income
Net income
Earnings per share – basic
Earnings per share – diluted
Apr. 27,
2013
964,933
324,177
104,456
63,562
0.63
0.62
Apr. 28,
2012
936,334
313,721
102,851
62,143
0.59
0.58
$
$
$
$
$
$
$
$
$
$
$
$
Quarter Ended
Jan. 26,
2013
915,861
300,293
89,538
53,630
0.53
0.52
$
$
$
Oct. 27,
2012
867,193
280,599
77,869
45,542
0.44
0.44
Quarter Ended
Jan. 28,
2012
895,030
289,534
89,906
53,108
0.50
0.50
$
$
$
Oct. 29,
2011
856,875
280,983
83,259
48,954
0.43
0.43
July 28,
2012
889,225
285,700
82,592
47,538
0.45
0.45
July 30,
2011
847,422
278,276
81,993
48,610
0.42
0.42
$
$
$
$
$
$
64
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 27, 2013, 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 27, 2013. 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
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 27, 2013, 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.
65
Changes in Internal Control Over Financial Reporting
During the fourth quarter of fiscal year 2013, 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.
66
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 9, 2013 (the “2013 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 2013 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 2013 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 our website at the address and location specified above.
Item 11. EXECUTIVE COMPENSATION
Information regarding executive compensation and director compensation is incorporated herein by reference to the information
set forth under the captions “Non-Employee Director Compensation” and “Executive Compensation” in the 2013 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 2013 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 2013 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. 3 Ratification of Selection of Independent Registered Public Accounting Firm – Principal Accountant Fees and
Services” in the 2013 Proxy Statement and such information is incorporated by reference herein.
67
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)
1. Financial Statements.
PART IV
The following Consolidated Financial Statements and supplementary data of Patterson and its subsidiaries are included in
Part II, Item 8:
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of April 27, 2013 and April 28, 2012
Consolidated Statements of Income for the Years Ended April 27, 2013, April 28, 2012 and April 30, 2011
Consolidated Statement of Changes in Stockholders’ Equity for the Years Ended April 27, 2013, April 28, 2012 and
April 30, 2011
Consolidated Statements of Cash Flows for the Years Ended April 27, 2013, April 28, 2012, and April 30, 2011
Notes to Consolidated Financial Statements
2. Financial Statement Schedules.
The following financial statement schedule is filed herewith: Schedule II – Valuation and Qualifying Accounts for the
Years Ended April 27, 2013, April 28, 2012 and April 30, 2011.
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, 200410
Patterson’s Restated Articles of Incorporation10
Patterson’s Amended and Stated Bylaws, as amended17
Specimen form of Patterson’s Common Stock Certificate10
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 Agents9
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 amended1
Patterson Dental Company 1992 Stock Option Plan1
Patterson Dental Company 1992 Director Stock Option Plan1
Patterson Dental Company Employee Stock Purchase Plan1
Patterson Dental Company Capital Accumulation Plan2
Patterson Companies, Inc. fiscal 2012 Incentive Plan
ESOP Loan Agreement dated June 15, 1990 as amended July 13, 19921
Amended and Restated Term Promissory Note dated July 13, 19921
68
Exhibit
10.9
Second Amended and Restated Contract Purchase Agreement dated April 28, 2000 between Patterson Dental Company
and U.S. Bank National Association3
10.10 Amended and Restated Credit Agreement dated April 28, 2000 between Patterson Dental Company and U.S. Bank
National Association3
10.11 Asset Purchase Agreement by and among Patterson Dental Company and J. A. Webster, Inc.4
10.12
10.13
Third Amended and Restated Contract Purchase Agreement dated June 19, 2002 between Patterson Dental Company and
U. S. Bank National Association5
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 Bank12
10.14 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 Plan5
10.16 Amendments to Restated Employee Stock Purchase Plan5
10.17 Amended and Restated Employee Stock Ownership Plan5
10.18
Stock Option Plan for Canadian Employees6
10.19
Patterson Companies, Inc. Equity Incentive Plan11
10.20
ESOP Loan Agreement dated April 1, 20027
10.21
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 Company7
10.22 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 Agent8
10.23
ESOP Loan Agreement dated September 11, 200613
10.24
ESOP Note dated September 11, 200613
10.25 Receivables Sale Agreement dated April 27, 2007 among PDC Funding Company II, LLC, Patterson Dental Supply, Inc.,
and Webster Veterinary Supply, Inc.14
10.26 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 Company14
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 Agents15
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, LP16
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 Agent16
10.30 Accelerated Share Repurchase Agreement, dated March 19, 2008, by and between Patterson Companies, Inc. and
JPMorgan Chase Bank, National Association16
21
23
Subsidiaries
Consent of Independent Registered Public Accounting Firm
69
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 2013, filed
with the SEC on June 26, 2013, formatted in Extensible Business Reporting Language (XBRL): (i) the consolidated
balance sheets at April 27, 2013 and April 28, 2012, (ii) the consolidated statements of income for the year ended April 27,
2013, April 28, 2012 and April 24, 2011, (iii) the consolidated statements of cash flows for the years ended April 27, 2013,
April 28, 2012 and April 24, 2011, (iv) the consolidated statements of changes in stockholders’ equity for the years ended
April 27, 2013, April 28, 2012 and April 24, 2011 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.
Incorporated by reference to the Registrant’s Registration Statement on Form S-1 (No. 33-51304) filed with the Securities and
Exchange Commission September 14, 2012.
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
(b) See Schedule II.
(c) See Index to Exhibits.
70
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 26, 2013
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
/s/ R. Stephen Armstrong
R. Stephen Armstrong
President and Chief Executive Officer (Principal Executive
Officer & Chairman of the Board of Directors)
Executive Vice President, Treasurer, and Chief Financial
Officer (Principal Financial and Accounting Officer)
/s/ Peter L. Frechette
Peter L. Frechette
/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/ Les C. Vinney
Les C. Vinney
/s/ James W. Wiltz
James W. Wiltz
Director
Director
Director
Director
Director
Director
Director
Director
Director
71
Date
June 26, 2013
June 26, 2013
June 26, 2013
June 26, 2013
June 26, 2013
June 26, 2013
June 26, 2013
June 26, 2013
June 26, 2013
June 26, 2013
June 26, 2013
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
1,119 $ — $
3,607 $ — $
10,863
14,471 $ — $
—
3,142 $
5,808
— $ 70,415
9,986
6,333
9,986 $ 76,748
2,445 $ — $
5,422 $ — $
11,508
16,930 $ — $
—
2,979 $
7,831
— $ 66,807
5,456
11,896
11,896 $ 72,263
3,409 $ — $
4,424 $ — $
10,403
14,827 $ — $
—
8,365
4,155 $
— $ 61,385
12,888
5,844
12,888 $ 67,229
Year ended April 27, 2013:
Deducted from asset accounts:
Allowance for doubtful accounts ................................... $
7,831 $
LIFO inventory adjustment ............................................ $ 66,808 $
Inventory obsolescence reserve .....................................
5,456
Total inventory reserve ......................................... $ 72,263 $
Year ended April 28, 2012:
Deducted from asset accounts:
Allowance for doubtful accounts ................................... $
8,365 $
LIFO inventory adjustment ............................................ $ 61,385 $
Inventory obsolescence reserve .....................................
5,844
Total inventory reserve ......................................... $ 67,229 $
Year ended April 30, 2011:
Deducted from asset accounts:
9,111 $
Allowance for doubtful accounts ................................... $
LIFO inventory adjustment ............................................ $ 56,961 $
Inventory obsolescence reserve .....................................
8,329
Total inventory reserve ......................................... $ 65,290 $
72
Exhibit 10.6 Patterson Companies, Inc. Fiscal 2012 Incentive Compensation Plan
INDEX TO EXHIBITS
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
73
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
Patterson Veterinary Supply, Inc.
Patterson Management LP
Patterson Medical Holdings, Inc.
Patterson Medical Supply, Inc.
Tumble Forms, Inc.
Midland Manufacturing Company, Inc.
Patterson Medical Canada, Inc.
Patterson Global Limited
Patterson Medical France S.A.
Patterson Medical Limited
Ausmedic Australia Pty Limited
Auckbritt International Pty Limited
Surgical Synergies Pty Limited
Metron Holdings Pty Limited
Metron Medical Australia Pty Limited
Metron Medical Co. Limited
Physio Med Services Limited
Days Healthcare Property Investments Limited
Sacedi Sport and Sante
PCI Limited I, LLC
PCI Limited II, LLC
PCI Two Limited Partnership
Patterson Logistics Services, Inc.
Dolphin Imaging Systems, LLC
Dolphin Practice Management, LLC
EXHIBIT 21
SUBSIDIARIES
JURISDICTION OF INCORPORATION
Minnesota
Minnesota
Nevada
Canada
Minnesota
Minnesota
Michigan
Minnesota
Minnesota
Minnesota
Minnesota
Delaware
Minnesota
New York
South Carolina
Ontario
England & Wales
France
United Kingdom
Australia
New Zealand
Australia
Australia
Australia
Thailand
United Kingdom
United Kingdom
France
Delaware
Delaware
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, 333-03583, and 333-183979 ) 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 26, 2013, 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) of Patterson Companies, Inc. for the year ended
April 27, 2013.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
June 26, 2013
Exhibit 31.1
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
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 27, 2013 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 26, 2013
/s/ SCOTT P. ANDERSON
Scott P. Anderson
President and Chief Executive Officer
Exhibit 31.2
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
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 27, 2013 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 26, 2013
/s/ R. STEPHEN ARMSTRONG
R. Stephen Armstrong
Executive Vice President, Chief Financial Officer and Treasurer
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
In connection with the Annual Report on Form 10-K of Patterson Companies, Inc., (the “Company”) for the fiscal year ended
April 27, 2013, 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.
/s/ SCOTT P. ANDERSON
Scott P. Anderson
President and Chief Executive Officer
June 26, 2013
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
In connection with the Annual Report on Form 10-K of Patterson Companies, Inc., (the “Company”) for the fiscal year ended
April 27, 2013, 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.
/s/ R. STEPHEN ARMSTRONG
R. Stephen Armstrong
Executive Vice President, Chief Financial
Officer and Treasurer
June 26, 2013
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Executive Officers
Scott P. Anderson
Chairman, 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
Sean Muniz
Vice President
Operations
Jerome E. Thygesen
Vice President
Human Resources
Paul A. Guggenheim
President
Patterson Dental
George L. Henriques
President
Patterson Veterinary
Corporate Headquarters
Directors
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
Wells Fargo Bank, N.A.
Mendota Heights, MN
Investor Relations Contact
Ann B. Gugino
Vice President
Strategy and Planning
Annual Meeting
The annual meeting of shareholders will
be held at 4:30 p.m. on September 9, 2013,
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: Ann B. Gugino,Vice President,
Strategy and Planning
Scott P. Anderson
Chairman, President and
Chief Executive Officer
Patterson Companies, Inc.
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 Emeritus
Patterson Companies, Inc.
Andre B. Lacy 2, 3, 4
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
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
(4) Lead Director
1031 Mendota Heights Road
St. Paul, MN 55120-1419
651.686.1600
pattersoncompanies.com
Patterson Dental
1031 Mendota Heights Road
St. Paul, MN 55120-1419
651.686.1600
Patterson Veterinary
137 Barnum Road
Devens, MA 01434-3509
978.353.6000
Patterson Medical
28100 Torch Parkway, Suite 700
Warrenville, IL 60555-3938
630.378.6300