Soft conditions in the dental and animal health markets led to a poor quarter that missed expectations for Patterson Cos.
The Mendota Heights-based company on Tuesday also lowered earnings guidance for the rest of the year.
Investors responded with the company's shares dropping more than 16 percent to close at $39.56 on Tuesday.
Patterson earned $45.8 million, or 48 cents per share, in its second quarter ended Oct. 29.
But the company's adjusted net income from continuing operations, which excludes some nonrecurring and deal amortization costs, was $53.5 million. The adjusted earnings of 56 cents per share were unchanged from the same quarter last year and below analyst expectations.
According to Thomson Reuters, analysts covering the distributor of dental and animal health products were expecting adjusted earnings of 60 cents a share.
The company now expects non-GAAP earnings of $2.25 to $2.35 per diluted share for the fiscal year, down from the $2.60 to $2.70 per share it said it expected earlier this year.
"When we entered fiscal 2017, our guidance was predicated on end markets similar to those experienced in fiscal 2016," Scott Anderson, chairman, president and CEO of Patterson Cos., said in a statement. "But we, along with others in our industry, have seen softness in the U.S. dental market and challenges with branded pharmaceutical companies in our animal health business."
Second-quarter sales for Patterson rose 2.1 percent to $1.4 billion. Adjusted for currency translation, sales rose 4.1 percent compared to the same period a year ago.
In the company's largest segment, animal health, sales rose 4.2 percent to $807.1 million, or 7.8 percent after currency adjustments. Sales in the dental segment were $601.6 million, approximately the same as its second quarter last year.
After the end of the quarter, Patterson elected not to extend an exclusive distribution agreement with Sirona, a maker of dental imaging, restoration and other products. As a result of that decision, Patterson expects to record a pretax noncash impairment charge of about $36 million, or about $22 million after taxes or 23 cents per diluted share in the fiscal 2017 third quarter, related to distributions fees to Sirona.
"This decision is consistent with our strategy of serving the evolving needs of all our customers and will allow us to better serve the full range of practice models in the future," Anderson said.
While the decision contributed to Patterson's move to lower earnings guidance for the year, Anderson reiterated that Patterson will continue to have a long-standing partnership with Sirona.
In a conference call with analysts, Anderson said the Sirona decision was part of a methodical, multiyear effort to better approach their dental business in the years ahead. Those moves included optimizing the dental sales force in June and a new relationship with Heartland Dental, one of the largest dental support organizations in the U.S., that they announced in October.
Joshua Hill, senior portfolio manager and director of equities for Minneapolis-based investment adviser Windsor Financial Group, which follows Patterson and whose clients own Patterson shares, said the Sirona announcement might be disruptive in the short run but should be good for the longer-term health of Patterson. "It's a good decision," he said. "It provides more opportunities to the salespeople and to grow revenues," Hill said.
Patrick Kennedy • 612-673-7926
