Patterson Dental has over 125 years of experience providing quality service to dental professionals. Net sales of this segment have increased from $165.8 million in fiscal 1986 to nearly $2.0 billion in fiscal 2006 and profitability has increased from an operating loss in fiscal 1986 to operating income of $249.8 million in fiscal 2006.
Patterson estimates the dental supply market it serves to be approximately $6.0 billion annually and that its share of this market is approximately 32%. The underlying structure of the dental supply market consists of a sizeable geographically dispersed number of fragmented dental practices and is attractive for the Company’s role as a value-added, full-service distributor. According to the American Dental Association, there are over 160,000 dentists practicing in the United States in approximately 135,000 dental practices. In Canada, there are approximately 18,000 licensed dentists according to the Canadian Dental Association. The average general practitioner generated approximately $560,000 in annual revenue in 2003, while the average specialty practitioner produced about $800,000. The Company believes that a dentist uses between 5% and 7% of annual revenue to purchase consumable supplies used in the daily operations of the practice. This translates into between $28,000 and $39,000 of supplies being purchased by the average practice each year. The Company believes the average dental practitioner purchases about 40% of their supplies from their top supplier.
Total expenditures for dental services in the United States increased from $31 billion in 1990 to $84 billion in 2005. Domestic dental care expenditures are projected by the Centers for Medicare & Medicaid Services to grow 6% annually, reaching $116 billion by the year 2010. The Company believes 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 297 million in 2005, and is expected to reach 309 million by 2010. The median age of the population is also increasing and the Company believes that older dental patients spend more on a per capita basis for dental services.
• Dental products and techniques. Technological developments in dental products have contributed 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 grow. For this reason dentists are showing 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. The Centers for Medicare & Medicaid Services statistics on expenditures for dental services in the United States indicate that private dental insurance paid approximately 50% of the $84 billion in total expenditures for 2005.
Strategy
Patterson’s objective is to remain a leading national distributor of supplies, equipment and related services in the market while continuing to improve its profitability and enhance its value to customers. To achieve this objective, Patterson has adopted a strategy of emphasizing its value-added, full-service capabilities, using technology to enhance customer service, continuing to improve 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. The Company believes that its 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. The Company’s knowledgeable sales representatives assist customers in the selection and purchase of supplies and equipment. In addition, the high quality sales force allows Patterson to offer broader product lines. Since 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.
Patterson meets its customer’s requirements by delivering frequent, small quantity orders rapidly and reliably from its strategically located distribution centers. Equipment specialists, technology representatives, and service technicians also support the Company’s value-added strategy in the dental supply market. Equipment specialists offer consultation on office design, equipment requirements and financing. Technology representatives provide guidance on integrating technology solutions including practice management and clinical software, digital radiography, custom hardware and networking into the dental practice. The Company’s experienced service technicians perform equipment installation, maintenance and repair services including services on products not purchased through Patterson.
Using Technology to Enhance Customer Service. As part of its commitment to providing superior customer service, the Company offers its customers easy order placement. The Company has offered electronic ordering capability to its dental supply segment since 1987 when it first introduced Remote Order Entry (REMO SM ). The Company believes that its computerized order entry systems help to establish relationships with new customers and increase loyalty among existing customers. The remote order entry systems permit customers to place orders from
their offices directly to Patterson 24 hours a day, 7 days a week. Over the years, the Company has continued to introduce new order entry systems designed to meet the varying needs of its customers. Today the Company offers four systems to the dental supply segment, eMAGINE ® , REMO SM , PDXpress ® and www.pattersoncompanies.com. Customers, as well as the Company’s sales force, use these systems. Over the years, the number of orders transmitted electronically has grown steadily to approximately 60% of Patterson’s consumable dental product volume or $655 million in fiscal 2006.
In fiscal 2002, the Company introduced its newest order entry system, eMAGINE ® . eMAGINE ® has become the standard platform for the sales representative and includes many new features and upgrades including: up to three years of order history for the customer’s reference, faster searches for products and reports, order tracking, instant information on monthly product specials, descriptions and photographs of popular products and an electronic custom catalog, including a printable version with scannable bar codes.
For those dental customers not using eMAGINE ® , the Company offers two alternative order entry products. REMO SM gives customers direct and immediate ordering access through a personal computer to a database containing Patterson’s complete inventory. PDXpress ® is a handheld order entry system that eliminates handwritten order forms by permitting a user to scan a product bar code from an inventory tag system or from Patterson’s bar-coded catalog. These systems, including eMAGINE ® , are provided at no additional charge to customers who maintain certain minimum purchase requirements.
The goal of the Company’s Internet strategy is to distribute information and service related products over the Internet to enhance customers’ practices and to increase sales force productivity. The Company’s Internet environment includes order entry, access to “ Patterson Today ” articles and manufacturers’ product information. Additionally, Patterson utilizes a tool, InfoSource, to provide real time customer and Company information to the Company’s sales force, managers and vendors via the Internet.
In addition to enhancing customer service, by offering electronic order entry systems to its customers, the Company enables its sales representatives to spend more time with existing customers and to call on additional customers.
The Company’s proprietary practice management and clinical software, EagleSoft ® , is developed and maintained by the Patterson Technology Center (PTC). The Company believes the PTC differentiates Patterson Dental from the competition by positioning Patterson Dental as the only company providing a single-source solution for the high-growth area of digital radiography. This technology, which we expect to be installed eventually in most dental offices, has a current market penetration of approximately 25%. Among its many specialized capabilities, the PTC provides system configuration, as well as the seamless integration of all digital operatory components with clinical software, including our EagleSoft ® line. This integration creates an electronic patient database that combines the patient’s front office record with digital information from the clinical x-ray, intra-oral camera, CEREC ® and other digital equipment. The PTC also will network the digital x-ray system throughout the entire office and provide all required custom computer hardware for the system. In addition, the PTC provides installation and customer training, as well as a call center for troubleshooting customer problems and arranging for local service.
Software and digital radiography customers also have access to the support capabilities of the PTC. The PTC provides support for our proprietary products as well as select branded product from our manufacturers. In addition to troubleshooting problems through its customer call center, the PTC designs and configures local area networks and assembles custom hardware. The PTC also develops and supports the Company’s order entry systems.
Continuing to Improve Operating Efficiencies. Patterson continues to implement programs designed to improve operating efficiencies and allow for continued sales growth over time. These programs include a wide variety of initiatives from investing in management information systems to consolidating distribution centers. Recent initiatives include upgrading the Company’s communications architecture, developing a new technical service system, and implementation of the shared services concept.
The Company has improved operating efficiencies by converting its communications architecture to faster, higher capacity data lines that combine voice and data transmissions while reducing overall communication costs. The Company has made substantial progress in the development of a new field service management tool for its technical service operations. This new tool will allow the Company to fundamentally change its technical service business processes, improving the Company’s ability to coordinate the actions of its service technicians and enhancing customer service while reducing the overall cost of operations.
An integral part of Company’s shared services concept is the consolidation and leveraging of distribution centers between the segments of the Company. The execution of this strategy is expected to take several years and the first stage is now largely complete. In fiscal 2005, the Company accomplished significant goals that included opening the first new, shared distribution facility in South Carolina. In fiscal 2006, the Company opened a new, shared distribution facility in Washington state that replaced dental and veterinary facilities previously operated in the area. In the first quarter of fiscal 2007, the Company opened a new, shared distribution facility in eastern Pennsylvania. This facility consists of approximately 200,000 square feet of warehouse and office space and will support the distribution of products from all three of the operating units. As a result of these and other efforts, the Company expects to continue to improve its operating leverage and efficiencies going forward.
Growing Through Internal Expansion and Acquisitions. The Company intends to continue to grow by opening additional sales offices, hiring established sales representatives, hiring and training college graduates as territory sales representatives, and acquiring other distributors in order to enter new markets and expand its customer base. The Company believes that it is well positioned to take advantage of expected continued consolidation in the dental distribution market. Over the past 18 years the Company has made a number of acquisitions, including the following:
Dental distribution acquisitions in the United States
• In August 1987, Patterson acquired the D.L. Saslow Co., which at the time was the third largest distributor of dental products in the United States. Between 1989 and 2005, Patterson acquired certain assets of 25 smaller dental dealers throughout the United States. During fiscal 2002, the Company acquired Thompson Dental Company of Columbia, SC, a leading value-added distributor of dental supplies, equipment and services in the mid-Atlantic and southeastern U.S. Thompson ranked among the 10 largest dental distributors in the country. In September 2005, the Company acquired Accu-Bite, Inc., a Michigan-based dental distributor with approximately 60 field sales representatives.
Dental distribution acquisitions in Canada
• In October 1993, Patterson Dental completed the acquisition of Healthco International, Inc.’s Canadian subsidiary, Healthco Canada, Inc. In August 1997, the Company acquired Canadian Dental Supply Ltd., which expanded the Company’s market share in British Columbia, Alberta, Saskatchewan and Ontario. In July 2002, the Company acquired Distribution Quebec Dentaire, Inc., augmenting the Company’s market share in Quebec. As a combined operation known as Patterson Dental Canada Inc., this subsidiary, which the Company believes is one of the two largest full-service dental products distributors in Canada, employs approximately 495 people, 130 of whom are sales representatives.
Printed office products acquisitions
• In October 1996, Patterson acquired the Colwell Systems division of Deluxe Corporation, now known as Patterson Office Supplies. This operation produces and sells a variety of printed office products used in medical, dental and veterinary offices.
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 operation, now known as the Patterson Technology Center, is located in Effingham, Illinois. In September 2000, the Company
acquired eCheck-up.com, a web-based, value-added service that complements and expands the Company’s current product offerings to the front office of the dental practice. eCheck-up.com is an Internet service that provides on-line practice performance and benchmarking services to subscribing dental customers through its website. In December 2001, the Company purchased Modern Practice Technologies, a company that provides custom computing solutions to the dental industry. This acquisition helped Patterson to position itself to provide all of the custom hardware and networking required for interfacing the entire dental office. • 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 influencing patient decisions about dental services and increasing the productivity of the dental professional. Educational materials are communicated through CD/DVD media, computer programs and the dentist’s web site. These materials can be used within the dental waiting room, at chair side and in the patient’s home.
Products and Services
The following table sets forth the sales by principal categories of products and services offered to dental supply customers:
| 2006 | 2005 | 2004 | |||||||
| Consumable and printed products |
55 | % | 54 | % | 57 | % | |||
| Equipment and software |
36 | 37 | 34 | ||||||
| Other (1) |
9 | 9 | 9 | ||||||
| Total |
100 | % | 100 | % | 100 | % | |||
Consumable and Printed Products
Dental Supplies. Patterson offers 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 instruments, burs, and diamonds. Patterson markets its own private label line of dental supplies including anesthetics, instruments, preventive and restorative products, and cotton and paper products. Compared to most name brand supplies, the private label line provides lower prices for the Company’s customers and higher margins for the Company.
Printed Office Products. Patterson Dental 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 and business cards, labels, file folders, appointment books and other stock office supply products. Products are sold through two channels:
• The Company’s dental and veterinary supply sales force
• Direct mail catalogs distributed to over 100,000 customers several times a year
A staff of telemarketing personnel located in Champaign, Illinois supports both channels. Orders are received by telephone, through the mail or electronically from the dental and veterinary distribution order processing system.
Equipment and Software
Dental Equipment. Patterson Dental is the largest supplier of dental equipment in the U.S. and Canada by a factor of more than two times when compared to its next largest competitor. It offers a wide range of dental equipment products including x-ray machines, high-and low-speed handpieces, dental chairs, dental handpiece control units, diagnostic equipment, sterilizers, dental lights and compressors. The Company also distributes newer technology equipment that provides customers with the tools to improve productivity and patient satisfaction. Examples of such innovative and high-productivity products include the CEREC ® family of products, a chair-side restoration system; digital x-rays; and inter-oral cameras.
Software. Patterson develops and markets its own line of practice management and clinical software for dental professionals. Products include software for scheduling, billing, charting and capture/storage/retrieval of digital images. The Company also sells software products developed by third parties including Sidexis by Sirona and Dimax2 by Planmeca. These value-added products are designed to help achieve office productivity improvements, which translate into higher profitability for the customer.
Hardware. Patterson Dental offers custom hardware and networking solutions required for integrating the entire dental office. This product offering is available to all of the Company’s dental customers. This initiative marked another step in Patterson’s overall strategy of providing customers with the convenience and cost-effectiveness of a virtually complete range of products and value-added services and is one of the newest components of Patterson’s single-source solution for dental offices.
Patient Education Services. With the acquisition of CAESY Education Systems, Inc., Patterson Dental expanded its offering of value-added services to include patient education services. These communications tools are designed to influence patient decisions about services in an efficient, cost-effective manner.
Other
Software Services. The Company offers a variety of services to complement its software products such as service agreements, electronic claims processing and billing statement processing. These services provide value to customers by allowing them to keep 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 Patterson’s 90-day labor warranty at no additional charge. Patterson also provides complete repair and maintenance services for all dental equipment, whether or not purchased from Patterson, including 24-hour handpiece repair service. In addition to service technicians who provide installation and repair services on basic dental equipment, the Company has 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 Patterson Technology Center, is to help customers integrate newer technology into their dental practice. The Patterson Technology Center helps the customer minimize costly downtime by offering a single point of contact for post-sale technology related issues. A new technical service tool is being developed that will both enhance customer service as well as reduce costs of the Company’s traditional and technology-specific service personnel.
Dental Office Design. Patterson provides dental office layout and design services through the use of a computer-aided design (CAD) program. Equipment specialists can create original or revised 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 its customers’ financing needs. For qualified purchasers of equipment, the Company will arrange financing for the customer through
Patterson or a third party. For non-equipment related needs, customers are referred to a third party organization. This alternative allows the Company to offer its customers convenience while still meeting their diverse financing needs. In fiscal 2006, the Company originated over $345 million of equipment finance contracts. The Company, or its vendor partner, financed approximately 43% of the equipment purchased by customers during fiscal 2006.
Since November 1998, Patterson has also maintained one or more finance referral agreements with an outside finance company to provide a more extensive selection of finance opportunities to its customers. This might include financing for practice transactions, working capital, leasing, real estate and long-term capital. Currently this service is provided by HPSC Inc. There are no recourse provisions under this agreement. Patterson receives referral fees under this agreement and HPSC Inc. extends credit and services the accounts.
To meet the needs of its customers, Patterson also initiates installment sale contracts that can be sold to either a commercial paper conduit managed by JPMorgan Chase Bank, N.A., or to a group of banks led by U.S. Bank National Association.
Patterson 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 the commercial paper conduit. The Company transfers installment sale contracts to the SPE. In turn, the SPE sells the contracts to the commercial paper conduit. The capacity under this agreement, as amended, is $440 million of contract purchases. There is no recourse to the Company for contracts purchased by the commercial paper conduit, but there is a holdback by the conduit equal to 10% of the principal of these contracts.
The group of banks, led by U.S. Bank, can also purchase the Company’s installment sale contracts that are secured by dental equipment, on a limited recourse basis. The contract purchase agreement with the banks allows for a maximum capacity of $110 million.
Patterson services the customer contracts under both of the preceding arrangements for which it receives a fee.
Sales and Marketing
During fiscal 2006, 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 2006, and Patterson is not dependent on any single customer or geographic group of customers. The Company’s sales and marketing efforts are designed to establish and improve customer relationships through personal interaction with its sales representatives and frequent direct marketing contact, which underscores the Company’s value-added approach.
Patterson Dental has over 90 local offices throughout the U.S. and Canada so that it 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 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. The branches are grouped into seven regions in the U.S. and one in Canada.
A primary component of Patterson’s value-added approach is its sales force. Due to the fragmented nature of the dental supply market, Patterson believes 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 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 its 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 30,000 inventoried items. The catalog includes pictures of products, detailed descriptions and specifications of products and is utilized 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 to the dental supply market. In addition, dental equipment sold by Patterson is featured in Patterson’s tri-yearly publication, Patterson Today, which also includes articles on dental office design, trends in dental practice, products and services offered by Patterson and information on equipment maintenance.
To enhance the total value it brings to its customers, Patterson Dental created a value-added benefit program for its preferred customers. The Patterson Plus SM program entitles its best dental customers to priority technical services, automated supply management systems at no charge, a variety of product discounts and reduced rates on financial products, practice management software and technical services.
Distribution
Patterson Dental believes that responsive delivery of quality supplies and equipment is a key element to providing complete customer satisfaction.
Patterson ships dental consumable supplies from 10 strategically located distribution centers in the U.S. and Canada. Orders for consumable dental supplies can be placed by telephone or electronically 24 hours a day, 7 days a week. Printed office products are shipped from the Company’s manufacturing facility in Illinois.
All orders are routed through Patterson’s centralized computer ordering, shipping and inventory management systems, which are linked to each of the Company’s strategically located distribution centers. If an item is not available in the distribution center nearest to the customer, the computer system automatically directs shipment of the item from another center. Rapid and accurate order fulfillment is another principal component of the Company’s value-added approach. Patterson Dental estimates that 98% of its consumable goods orders are shipped to the customer on time, which is generally within 24 hours.
In order to assure the availability of Patterson Dental’s broad product lines for prompt delivery to customers, Patterson must maintain sufficient inventories at its distribution centers. Purchasing of consumables and standard equipment is centralized and the purchasing department uses a real-time perpetual inventory system to manage inventory levels. The Company’s inventory consists mostly of consumable supply items. By utilizing its computerized inventory management and ordering systems, the Company is able to accurately predict inventory turns in order to minimize inventory levels for each item.
Patterson Dental’s more than 90 dental sales offices are generally configured with display areas where the latest dental equipment can be demonstrated. Dental equipment inventory is generally custom ordered and is staged at the Company’s sales offices before delivery to dental offices for installation.
Sources of Supply
Effective purchasing is a key strategy the Company has adopted in order to achieve its objective of continuing to improve profitability. The Company has a program to effectuate electronic data interchange (EDI) with its major vendor partners. In fiscal 2006, the Company processed over 70% of its invoices from dental vendors using EDI capabilities. In addition, 57% of Patterson’s dental purchase order volume was conducted employing EDI, which represented 61% of dental purchase order dollars placed during the fiscal year. Utilizing EDI allows the Company to improve efficiencies and reduce administrative costs.
Patterson Dental obtains products from approximately 1,100 vendors in the dental segment. Patterson has exclusive distribution agreements with several quality dental equipment manufacturers including Sirona Dental
Systems GmbH for the CEREC ® , and Schick Technologies, Inc. for digital x-rays. In June 2006, Sirona and Schick merged to create Sirona Dental Systems, Inc. This merger did not affect the existing exclusive distribution agreements. The Company is 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 the Company makes purchases from many suppliers and there is generally more than one source of supply for most of the categories of products sold by the Company, the concentration of business with key suppliers is considerable. The Company’s top ten supply vendors accounted for approximately 45% and 52% of the cost of dental products sold in fiscal years 2006 and 2005, respectively. Of these ten, the top two vendors accounted for 9% and 9%, and 12% and 11% of fiscal 2006 and fiscal 2005 cost of sales, respectively.
Competition
The highly competitive U.S. dental products distribution industry consists principally of national, regional and local full-service distributors and mail-order distributors. The dental supply market is extremely fragmented. In addition to Patterson and one other national, full-service firm, Sullivan-Schein Dental, a unit of Henry Schein, Inc., there are at least 17 full-service distributors that operate on a regional level, and hundreds of small local distributors. Also, some manufacturers sell directly to end-users.
The Company approaches its markets by emphasizing and delivering a value-added model to the practitioner. To differentiate itself from its competition it deploys a strategy of premium customer service, a highly qualified and motivated sales force, experienced service technicians, an extensive breadth and mix of products and services, accurate and timely delivery of product, strategic location of sales offices and distribution centers, and competitive pricing.
The Company also experiences competition in Canada in the dental supply market. The principal competitor is a national, full-service dental distributor, Henry Schein Ash Arcona, a unit of Henry Schein, Inc. The Company believes it competes in Canada on essentially the same basis as in the United States.
Veterinary Supply
Overview
Webster Veterinary, or “Webster,” is the leading distributor of veterinary supplies to companion-pet (dogs, cats and other common household pets) veterinary clinics in the eastern United States. Management believes Webster is the second largest distributor of companion-pet veterinary supplies nationally. In addition, through its fiscal 2005 acquisition of Milburn Distributions, Inc., Webster is the leading national equine distributor in the United States. Webster provides products used for the diagnosis, treatment and/or prevention of diseases in companion pets and equine animals. Founded in 1946 and headquartered in Sterling, Massachusetts, Webster has developed a strong brand identity as a value-added, full-service distributor of a virtually complete range of consumable supplies, equipment, diagnostic supplies, biologicals (vaccines) and pharmaceuticals. Webster does not distribute pet foods. Webster’s product offering, totaling more than 11,000 items, is sold by approximately 165 field sales representatives. In addition to its core business of distributing veterinary products, Webster has a significant agency commission business with a few large pharmaceutical manufacturers. Under the agency relationships, Webster typically earns a commission for soliciting orders through its sales force. In the agency relationship, Webster processes the order to the manufacturer but handles none of the product nor does Webster bill and collect from the customer. The agency commissions that Webster earns range from 3% to 10%, a portion of which is shared with the direct sales personnel. Webster’s agency commissions accounted for less than 2% of its net sales in fiscal 2006. Net sales by Webster in fiscal 2006 were $346.1 million. Operating income totaled $18.4 million.
The Company estimates the market for pharmaceuticals and supplies sold to companion-pet and equine veterinarians through distribution is approximately $2.8 billion on an annual basis. Based upon the estimated
$2.8 billion market, the Company believes its share of this market is approximately 13%. Similar to the dental supply market, the veterinary supply market is fragmented and geographically diverse. There are approximately 79,000 veterinarians practicing at 27,000 animal health clinics. The vast majority, approximately 67% of veterinarians, work in private animal health clinics specializing in small animals, predominately companion pets. The average private veterinary practice generates approximately $770,000 of annual revenue. These practices purchase between $80,000 and $120,000 of supplies each year, and similar to the dental practitioner, do not maintain a large supply of inventory on hand. The typical veterinary practice purchases approximately 80% of its supplies from its top two suppliers. The average purchase of consumables by the veterinary practice is noticeably higher than that of the dental practitioner due predominately to pharmaceutical products which are administered and dispensed by veterinarians.
According to a market study prepared by KPMG LLP for three veterinary professional organizations in 1999, the demand for veterinary services has historically grown significantly faster than growth in the overall economy. Total expenditures for veterinary services in the United States grew at an inflation adjusted real annual rate of 7.2% from 1980 through 1997, and are projected to grow 5% on a real basis annually, through the year 2015. The companion pet segment is the fastest growing area of the overall U.S. veterinary supply market. The Company believes this growth is sustainable due to the following favorable factors:
• Number of households with companion pets. The number of households with companion pets is steadily expanding which increases the demand for veterinary services. Today, 63% of U.S. households own a companion pet compared with 56% in 1988. Overall, 45% of all households in the U.S. own more than one pet.
• 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 $38.4 billion in 2006 to care for the American pet population, or $555 per household. This is a 125% increase over the $17 billion spent in 1994.
• Veterinary products and techniques. Many new therapeutic and preventive products are being developed for the companion pet market. Technological developments have resulted in new innovative veterinary products and advances in veterinary services.
Strategy
Webster’s objective is to build a leading national position in the companion-pet veterinary market through internal expansion and acquisitions, while continuing to improve its profitability and enhance its value to customers. Its key strategies and priorities for accomplishing this objective are to open new geographic markets, make acquisitions that expand market share, emphasize value-added capabilities, consistently improve operating efficiencies and broaden the product offering.
Growing Through Internal Expansion and Acquisitions. In April 2004, Webster acquired the assets of ProVet, which was the companion-pet veterinary supply division of Lextron, Inc. ProVet was a distributor with locations in Indianapolis, Kansas City, Houston, Denver and Seattle. Management believes this acquisition made Webster the second largest distributor of companion-pet veterinary supplies in the U.S. This acquisition added 44 sales representative territories expanding Webster’s geographic coverage to include the states of Indiana, Illinois, Missouri, Kansas, Oklahoma, Colorado, Nevada, Idaho and Oregon. In addition, the acquisition increased market coverage in Washington state and Texas where Webster already had a presence.
In October 2004, Webster acquired Milburn Distributions, Inc., the largest distributor specializing in the U.S. equine veterinary supply market. Milburn’s annualized sales exceed $50 million. The company operates facilities in Arizona, Pennsylvania, Kentucky, Texas and Florida. Most companion-pet and large animal veterinary supply distributors have not successfully served the nation’s equine veterinarians due to the highly specialized nature of this niche market. Milburn has capitalized on this opportunity by focusing exclusively on the unique needs of equine veterinarians.
In fiscal 2006, Webster grew through both an acquisition and greenfield expansion. In December 2005, it acquired Intra Corp., one of the nation’s leading developers of veterinary practice management software that is marketed under the IntraVet brand name. IntraVet has approximately 1,600 software installations nationwide and furthers Webster’s strategy of establishing a value-added business platform similar to that of Patterson Dental.
Also in fiscal 2006, Webster developed business through a program of internal start-ups, including operations in Ohio, Michigan and California. The expansion into California, which had been Webster’s largest unserved market, was particularly successful and made a solid contribution to Webster’s fiscal 2006 sales results. Further expansion of Webster’s geographic marketplace is anticipated in the future.
Emphasizing Value-Added, Full-Service Capabilities. Webster believes that veterinary customers value full service and responsive delivery of product, in addition to competitive prices. Customers also increasingly expect suppliers to be knowledgeable about products and services, and generally a superior sales representative can create a special relationship with the practitioner by providing an informational link to the overall industry. Webster’s knowledgeable sales representatives assist customers in the selection and purchasing of supplies. Most veterinarians are independent, or small unit based, practitioners who are unable to store and manage large volumes of supplies in their offices. Webster meets its customer’s requirements by delivering frequent, small quantity orders rapidly and reliably from its strategically located distribution centers.
Continuing to Improve Operating Efficiencies . Webster continuously pursues opportunities to lower costs and improve efficiencies. This is being done through the sharing of distribution capacity with Patterson’s other two business segments and the integration of new and proven systems that improve service levels and can be shared with multiple business segments. A new corporate level officer position was created in early fiscal 2005 in order to identify, implement and manage shared services strategies across all business segments. This process started when the Company created a veterinary version of the eMAGINE ® electronic order entry system and began to distribute veterinary products from its Kent, Washington dental distribution center. This strategy continues to be executed, as additional distribution centers are being integrated, are currently under construction, or are being planned, which include capacity for distributing dental as well as veterinary and rehabilitation products. In addition, a new customer system that can be used by multiple business segments but will maintain the same look and feel of the eMAGINE ® system was implemented initially in the veterinary supply segment and is now fully deployed within the unit. The new system provides customer support staff with integrated customer information on one screen.
Broaden the Product Line . Webster continuously seeks to broaden its portfolio of product offerings to maximize the opportunities within its existing customer base. For example, in the past two years Webster’s expansion of its product offerings included the entire line of Pfizer Animal Health equine products, Rimadyl ® canine analgesic, Vetsulin™ canine insulin, Continuum™ small animal vaccines, equine anti-inflammatory Surpass ® , feline nutraceutical Enisyl-F ™ and canine nutraceutical Welactin™, Alphatrack blood glucose monitor, Cislak dental instruments, Previcox ® canine analgesic, Mometamax otic preparation, Genesis topical spray, SCA2000 blood coagulation analyzer, Polymune equine plasma, Solitude feed-through fly preventive, and SNAP Bile Acid diagnostic test.
Webster also strives to consistently introduce innovative products. In fiscal 2005, Webster successfully launched its private label initiative to supply veterinary customers with quality consumable goods (exam gloves, sutures, surgical blades and microscope slides) at value prices and this initiative continued in fiscal 2006 with the introduction of various white goods such as gauze, cotton bandages, and cohesive tape. Management believes that product innovation allows Webster to maintain its competitive position and helps fuel internal growth. Management also believes that its emphasis on new product offerings enables its sales force to remain effective in creating demand among veterinarians.
Broadening the product line also includes bringing new, innovative services to the customer to allow them to generate greater revenues and profitability from their practice. As Webster continues to expand and build its
equipment business, it has added clinic and hospital design capabilities and technical service personnel to install and repair equipment that is sold by Webster as well as by others. With the recent acquisition of the IntraVet software product, new services and revenue opportunities have become possible. In addition, as the equipment and software business grows, more financing transactions should result.
Products and Services
The following table sets forth the sales by principal categories of products and services offered to veterinary supply customers:
| 2006 | 2005 | 2004 | |||||||
| Consumable and printed products |
93 | % | 94 | % | 94 | % | |||
| Equipment and software |
5 | 4 | 4 | ||||||
| Other |
2 | 2 | 2 | ||||||
| Total |
100 | % | 100 | % | 100 | % | |||
Consumable and Printed Products
Webster offers its customers a broad selection of veterinary supply products including consumable supplies, pharmaceuticals, diagnostics, and biologicals. Consumable supplies distributed by Webster include lab supplies, various types and sizes of paper goods, needles and syringes, gauze and wound dressings, sutures, latex gloves, orthopedic and casting products. Webster’s pharmaceutical products include anesthetics, antibiotics, injectibles, ointments and nutraceuticals. The diagnostics product category includes on-site testing products for heartworm, FIV, FELV and Parvo-virus. Biological products are comprised of vaccines and injectibles. Many of the office supply products sold to the dental supply market are also offered to the veterinary supply market.
Equipment
Webster sells equipment for hospital, laboratory and general surgical use within the veterinary practice. Fiscal 2006 equipment sales increased 49% from fiscal 2005 and accounted for about 5% of veterinary segment sales. Webster offers innovative, quality equipment that differentiates Webster from the competition. New equipment offerings in fiscal 2006 included iM3 Dental stations, ScanX Digital Radiography System, Schick Dental Digital Radiography System, EVA-VET Digital Dental X-ray System, Sedecal Veterinary X-Ray Systems, Min Xray High Frequency Radiology Systems, Image Vet 70ACP Dental X-ray unit, Provecta-V Mobile Dental X-Ray unit, Sunnex Surgical Lights, European Design and Midmark Medical Cabinets. About 50% of veterinary equipment orders are drop shipped directly to the customer, of which 15% are custom ordered from the manufacturer. The balance of veterinary equipment is distributed in a fashion similar to consumable supplies.
Other
Other products and services include commissions on agency sales and freight recovery on shipments to customers.
Sales and Marketing
A primary component of Webster’s value-added approach is its sales force. Due to the fragmented nature of the veterinary supply market, Webster believes 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 representative works within an assigned sales territory under the supervision of a location (branch) manager. Sales representatives are employees and are generally compensated on a commission basis, with some, less experienced, representatives receiving a base salary and commission.
To assist its sales representatives, Webster publishes a catalog, which contains approximately 11,000 SKUs. This catalog includes detailed descriptions and specifications of products and is utilized by practitioners as a reference source. Selected consumable supplies, new products, specially priced items and high-demand items are promoted through merchandise fliers printed and distributed monthly.
During fiscal 2005, Webster released an updated version of its website. Based upon the proven technology of the Patterson Dental website, this new site allows customers the ability to order items 24 hours a day, 7 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
As of April 29, 2006, the decentralized distribution network in the veterinary supply segment consisted of 12 distribution centers. The distribution network is complemented by telesales representatives who are responsible for processing approximately 70% of customer orders in this segment. In order to meet the rapid delivery requirements of customers, most consumable products are delivered within 24 hours. Webster estimates that approximately 98% of its consumable orders are delivered to the customer on time. During fiscal year 2005, Webster merged its existing Charlotte, North Carolina distribution center into Patterson’s new Blythewood, South Carolina distribution facility. In fiscal 2006, Webster merged its Washington state distribution center into a shared distribution center with the dental segment in Kent, Washington. In fiscal 2007, Webster products will begin shipping out of the new, eastern Pennsylvania shared distribution center that opened in the first quarter of fiscal 2007.
Sources of Supply
Webster obtains products from nearly 550 vendors.
While Webster makes purchases from many suppliers and there is generally more than one source of supply for most of the categories of products, the concentration of business with key suppliers is considerable. In fiscal 2006 and 2005, Webster’s top 10 veterinary supply manufacturers comprised 67% and 64%, respectively, and the single largest supplier comprised 19% and 19%, respectively, of the total cost of veterinary supply sales.
Competition
Within the “companion pet” market segment, competitors range from small local distributors to large national and regional full-service companies, and to a lesser extent, mail order distributors or buying groups. Webster also competes directly with pharmaceutical companies who sell certain products directly to the customer.
The Company approaches its markets by emphasizing and delivering a value-added model to the practitioner. To differentiate itself from its competition it deploys a strategy of premium customer service, a highly qualified and motivated sales force, an extensive breadth and mix of products and services, accurate and timely delivery of product, strategic location of sales offices and competitive pricing.
Rehabilitation Supply
Overview
Patterson Medical, formerly known as AbilityOne Corporation, is headquartered in Bolingbrook, Illinois and is the world’s leading distributor of rehabilitation medical supplies and non-wheelchair assistive products. Patterson Medical believes it offers the most comprehensive range of distributed and self-manufactured rehabilitation products to health care professionals globally. Its mission is to provide health care professionals
and their patients with access to products that improve peoples’ lives by helping them to attain their highest achievable level of independence, safety and comfort. Patterson Medical operates as Sammons Preston Rolyan in North America and Homecraft in International markets.
Patterson Medical serves as the gateway through which over 23,000 rehabilitation products originating from more than 2,000 suppliers and manufacturers are sold to a diverse customer base with an emphasis on physical therapists (“PTs”) and occupational therapists (“OTs”). It offers its customers a “one-stop shop” through what it believes to be the most comprehensive catalog in the industry, one of the largest direct sales forces 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, Patterson believes 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 its capabilities, reputation and customer partnerships can result in a competitive advantage. Its goal is to become its customers’ first choice for rehabilitation medical supplies and assistive products in each of its 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), Patterson Medical’s products often do not represent a major expense category for its customers.
In March 2002, Patterson Medical completed the acquisition of the Smith & Nephew Rehabilitation (“SNR”) division of Smith & Nephew plc, and in doing so, acquired the Rolyan, Homecraft and Kinetec brand names. The SNR acquisition added 3,500 additional products, as well as a broad array of other brand names and proprietary products. The acquisition of SNR combined the two leading distributors of rehabilitation medical supplies to create what Patterson believes is the only “one-stop shop” in the industry. Patterson Medical manufactures or has exclusively manufactured for it products representing approximately 30% of its total revenue and purchases products representing the remaining 70%. Approximately 80% of its revenue is in North America.
Patterson Medical believes the rehabilitation medical supplies and assistive products industry is approximately $4.4 billion in the U.S. and $6.0 billion worldwide and is expected to grow approximately 6% 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. Patterson Medical does not compete in wheelchairs or scooters, markets estimated to be a combined $2.0 billion worldwide. Therefore, Patterson Medical’s addressable market (defined as the collective market for products sold by Patterson Medical) is approximately $4.0 billion worldwide. Patterson Medical believes that it has an industry leading market share of approximately 5% in a highly fragmented rehabilitation and assistive products market.
Patterson Medical believes that the demand for rehabilitation products will continue to be influenced by the following factors:
• Favorable Demographics. Favorable demographic trends such as extended life expectancy, active lifestyles and a general willingness to spend discretionary income on health care and well being, are expected to contribute to increased demand for products distributed by Patterson Medical. Specifically, the aging baby-boomer population, together with their increased disposable income and desire for independence, will fuel product purchases to assist with the frailties associated with old age and provide sustained sales growth.
The U.S. Census Bureau has projected the 85 and older population in the U.S. to more than triple from four million in 2000 to 14 million by 2040. The 65 to 84 year old population is expected to more than double during the same time period. Current trends indicate that these age groups represent the majority of home and community-based health care patients.
The aging of the population is a revenue growth driver because approximately 10% of people over the age of 65 and approximately 50% of people over the age of 85 need assistance with everyday activities. Patterson Medical believes it is 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 Occupational Outlook Handbook, there were approximately 132,000 PTs and 78,000 OTs in the U.S. in 2000. Approximately two-thirds of PTs were employed in either hospitals or offices of physical therapists. The remaining one-third of PTs was employed in home health agencies, outpatient rehabilitation clinics, physician offices and nursing homes. The majority of OTs works 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 largely driven by the (i) increase in the number of individuals with disabilities or limited function requiring therapy services; (ii) rapidly growing elderly population which is particularly vulnerable to chronic and debilitating conditions that require therapeutic services; (iii) baby-boom generation which is entering the prime age for heart attacks and strokes, increasing the demand for cardiac and physical rehabilitation; (iv) advances in medical technology which permit treatment of more disabling conditions; and (v) widespread interest in health promotion.
• 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. Younger patients are opting for reconstructive implants over less invasive alternatives due to improved and longer lasting implant technology. Patterson Medical believes it is well positioned to benefit from the growth in reconstructive implants, by providing orthopedic products, namely Continuous Passive Motion machines and splinting, which are critical to post-operatory rehabilitation.
International Operations
Patterson Medical’s international operations are based in the United Kingdom (“U.K.”) and made up of two divisions: Homecraft in the U.K. and Kinetec in France. The international operations broadly reflect the same business model as used in the North American market. In the U.K., Homecraft operations include sales and marketing, customer service, distribution, purchasing and administration. In France, Kinetec is a self-contained manufacturing unit with limited sales and marketing, distribution, administration and purchasing.
Homecraft 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, Homecraft is the prime source for numerous established and market leading ADL brands, including products sold under the Sammons Preston Rolyan brand. The Homecraft catalog offers a broad line of ADL, therapy, rehabilitation and pediatric products containing over 10,000 items. Their catalog is circulated to PTs, OTs, loan equipment stores and private clinics, trade outlets and the general public.
Homecraft’s central sales and marketing strategy is to provide a “one-stop shop” proposition to hospitals, local government and trade customers throughout the U.K. Customers are reached through a combination of mail order, a 13 person sales force, telemarketing and in-market promotional and exhibition activity.
Kinetec consists of two operations, the manufacturing and distribution of Continuous Passive Motions machines (“CPMs”) for sale on a worldwide basis and the sale and distribution of Sammons Preston Rolyan and Homecraft products in France. Products are marketed to customers through product brochures, mailings, tele-marketing and a 6 person sales force that covers the French rehabilitation market.
Strategy
Patterson Medical’s objective is to be the customers’ first choice for rehabilitation medical supplies and non-wheelchair assistive products in each of its chosen markets. It intends to grow through internal expansion and acquisitions in both rehabilitation and related products. In the second half of fiscal 2006, a new management team was installed and is responsible for accelerating the unit’s adoption of Patterson’s value-added strategy.
Emphasizing Value-Added, Full-Service Capabilities. Patterson Medical currently offers its customers a “one-stop shop” for products through their industry-leading catalog with over 20,000 items, focused primarily on physical and occupational therapy products. Patterson Medical adds new products each year to its 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.
Patterson Medical recognizes 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 its customers, while focusing on niches, worldwide, where its capabilities, reputation and customer partnerships can result in a competitive advantage. As such, Patterson Medical foresees an on-going evolution of its product offerings to meet the ever-increasing demands of its 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 30% of total revenues. The accelerated adoption of Patterson’s value-added strategy at this unit will require investments in new sales and marketing programs during fiscal 2007. The Company believes these investments will result in additional sales and operating efficiencies in the future.
Growing Through Internal Expansion and Acquisitions. Patterson Medical believes it is well positioned to expand in its core markets. Patterson Medical’s market presence, clinical understanding and close customer relationships allow Patterson Medical to anticipate and flexibly respond to the diverse needs of its customers. Patterson Medical believes its market knowledge, strong vendor relationships and manufacturing capabilities will continue to drive the delivery of value-added solutions through the continual enrichment of its product mix. Additionally, Patterson Medical believes its broad portfolio of national accounts and commitment to expand its sales force will enhance Patterson Medical’s growth and penetration within its current and new customer base.
Patterson Medical acquired Homecraft and Kinetec as part of the SNR transaction. Patterson Medical is leveraging this platform to accelerate international expansion, in terms of both product lines and geographic regions. Since the SNR transaction, Patterson Medical has added over 550 pages of new products to the Homecraft catalog. Homecraft and Kinetec brought with them a proven capability to source products at favorable costs and at high levels of quality from China, which has resulted in meaningful cost savings. Patterson Medical’s management team believes its business model is transferable to other countries, and is using Homecraft 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. (“Medco”) from NCH Corporation. With sales of nearly $50 million, Medco is one of the nation’s leading sports medicine distributors and is based in Buffalo, New York. In addition to its sports medicine business, it 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 15 territory sales people. Medco markets to athletic trainers, schools and school nurses, daycare providers and healthcare professionals including podiatrists, chiropractors and physical therapists.
Patterson Medical operates in the highly fragmented rehabilitation medical supplies and non-wheelchair assistive products industry. Patterson Medical’s competition is generally either locally or regionally focused. Patterson Medical intends to opportunistically pursue expansion opportunities in order to add products, customers and capabilities, which will further differentiate Patterson Medical from its competition.
Patterson Medical plans to penetrate several new markets. Target markets with significant core business product overlap include chiropractic, podiatry, sports medicine and institutional activities and crafts. These markets are similar to Patterson Medical’s core business in that they are characterized by large patient volumes and heavy reliance on the course of treatment advice of the respective professional.
Products and Services
The following table sets forth the sales by principal categories offered to rehabilitation supply customers:
| 2006 | 2005 | 2004 | |||||||
| Consumable and printed products |
86 | % | 85 | % | 81 | % | |||
| Equipment |
9 | 11 | 15 | ||||||
| Other |
5 | 4 | 4 | ||||||
| Total |
100 | % | 100 | % | 100 | % | |||
Consumable and Printed Products
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 orthonics 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. This 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
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.
Sales and Marketing
Its PT and OT customers generally know Patterson Medical as Sammons Preston Rolyan in the U.S. and Canada, and Homecraft in the remainder of the world. The Sammons Preston Rolyan and Homecraft business models, which Patterson Medical employs in the U.S., Canada and the U.K., have driven revenue growth and profitability.
A core element of Sammons Preston Rolyan’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.
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 Patterson Medical to compete across the entire spectrum of the rehabilitation medical supplies and non-wheelchair assistive products industry.
A key priority in fiscal 2007 will be expanding the sales force, which is currently 149 worldwide. Like the current sales force, new sales representatives will be hired from the ranks of PTs and OTs, manufacturers representatives and others with extensive industry knowledge.
Additionally, Patterson Medical will be developing branch offices in fiscal 2007. Much like a dental branch, these offices will have a showroom, commissioned sales staff and service department that provides equipment installation, repair and warranty service for equipment manufacturers. The branch office structure is expected to expand through a combination of internal start-ups and dealer/distributor acquisitions. Patterson Medical recently acquired Dale Surgical Professional Supply in a June 2006 transaction. This business will be the platform for a branch operation in the New York metropolitan market. In the Chicago market, a branch operation will be initiated during the summer of calendar 2006 by hiring the needed personnel and combining them with existing sales customer service personnel.
Sammons Preston Rolyan’s national accounts group collaborates with its sales force to meet the changing needs of its expanding account base. The product management group works closely with customers, suppliers and the sales force to evaluate new products for inclusion in Sammons Preston Rolyan’s product offering. Sammons Preston Rolyan adds approximately 2,500 new products to the catalog each year. Sammons Preston Rolyan’s U.S. national accounts program is staffed by seasoned professionals who have developed a comprehensive portfolio of contracts. Furthermore, the integrated Sammons Preston Rolyan organization has national contracts with major purchasing groups within each submarket, including hospitals, nursing homes and dealers.
For many years, Sammons Preston and SNR had the only national sales forces in the U.S. dedicated to the clinical education and sale of products to institutionally based PTs and OTs. With the acquisition and integration of SNR, Patterson Medical’s clinical presence and sales capability have been enhanced with a broader product offering and a more complete range of proprietary brands. The Patterson Medical sales professionals, many whom are therapists, are located throughout the U.S. and Canada. These sales professionals have utilized the extensive product line and the comprehensive national contracts portfolio to establish direct sales to U.S. hospitals, nursing homes and rehab clinics. Patterson Medical also distributes to national distributors and local dealers.
The rehabilitation medical supplies and non-wheelchair assistive products that Patterson Medical offers are generally not subject to direct reimbursement pressures from Medicare and Medicaid. Patterson Medical does not engage in third-party billing and collection activities, but sells to customers, including dealers, who provide this service.
The rehabilitation medical supplies and non-wheelchair assistive products industry is highly fragmented. No one manufacturer, distributor or customer represents a significant portion of Patterson Medical’s revenue.
Distribution
Patterson Medical’s distribution process centers on its ability to fill small unit size and small dollar amount orders. In the U.S., over 5,000 packages ship daily from six locations. The primary distribution center is located
in Bolingbrook, IL, with certain high volume product also fulfilled from multi-segment facilities within the Patterson distribution network. Approximately 95% of the packages in the U.S. ship via UPS. During fiscal 2007, the distribution operations at the Bolingbrook, IL location will moving to the new, shared services facility located in eastern Pennsylvania that will be shipping products for all three Patterson operating units.
Patterson Medical’s call center operates from 7am – 7pm Monday through Friday, processing in excess of 4,000 calls per day. Order entry capability from 7pm – 7am from Monday through Friday and weekends exists through an offsite, third-party contractor with limited systems access. The combination of in-house staff, supplemented with contracted, third party services, provide customers with 24 hours a day, 7 days a week ordering capabilities. In addition, fax orders and EDI capabilities support the larger, more technologically advanced customers, including dealers, hospitals and long-term care facilities. While Internet ordering capabilities currently exist, customer reception to ordering products via the Internet is currently minimal, but growing.
Sources of Supply
Among Patterson Medical’s core strengths is its ability to obtain premier products from vendors. Patterson Medical purchases its products from over 2,000 suppliers and manufacturers. Although no single supplier accounted for more than 4% of Patterson Medical’s total purchases in fiscal 2006, Patterson Medical frequently is the largest single customer of these manufacturers. Suppliers view the ability to distribute their products through Sammons Preston Rolyan and Homecraft positively due to reputation, longstanding industry-leading position, comprehensive catalogs, national account contracts, sales force presence and distribution capabilities. Patterson Medical continually works at strengthening its supplier relationships through the introduction of supplier programs.
Competition
Patterson Medical believes it is the only national player to offer “one-stop shopping” to its customers. Patterson Medical’s competition is generally highly fragmented, locally or regionally focused and without the product offering necessary to be a “one-stop shop.” Patterson Medical’s national and international scale and purchasing power provide Patterson Medical with a favorable cost position and strong pricing trends relative to its competition.
Patterson Companies, Inc.
For further information on each of the Company’s 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.
Trademarks
Patterson has registered with the United States Patent and Trademark Office the trademarks “Patterson ® ,” “PDXpress ® ,” “EagleSoft ® “ and “eMAGINE ® .” With the addition of AbilityOne, the Company acquired the marks Sammons, Preston, Roylan, Homecraft and numerous other tradenames and trademarks. The Company believes that the Patterson trademark is well recognized in the dental products industry and by dental professionals, and is therefore a valuable asset of the Company.
Employees
As of April 29, 2006, the Company had approximately 6,440 employees. Patterson has not experienced a shortage of qualified personnel in the past, and believes that it will be able to attract such employees in the future. None of Patterson’s employees are subject to collective bargaining agreements or represented by a union. The Company considers its relations with its employees to be good.
Website
The Company makes available, free of charge, on its website, its Annual Report on Form 10-K, Quarterly reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports as soon as reasonably practicable after the material is electronically filed with or furnished to the Securities and Exchange Commission. This material may be accessed by visiting the Investor Relations section of the Company’s website at www.pattersoncompanies.com .
Information relating to corporate governance at Patterson, including our Principles of Business Conduct and Code of Ethics and information concerning our executive officers, directors and Board committees, and transactions in Patterson securities by directors and officers, is available on or through our website www.pattersoncompanies.com under the “Corporate Governance” and “Investor Relations” captions.
We are not including the information maintained on our website as a part of, or incorporating it by reference into, our Annual Report on Form 10-K.
Governmental Regulation
The marketing, distribution and sale of certain products sold by the Company are subject to the requirements of various federal, state and local laws and regulations. The Company is 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 the Company are the Federal Food, Drug and Cosmetic Act, which regulates the advertising, record keeping, labeling, handling, storage and sale of drugs and medical devices which are distributed by the Company, and which requires the Company to be registered with the Federal Food and Drug Administration; the Safe Medical Devices Act, which imposes certain reporting requirements on the Company in the event of an incident involving serious illness, injury or death caused by a medical device distributed by the Company; and the Controlled Substance Act, which regulates the record keeping, handling, storage and sale of certain drugs sold by the Company, and which requires the Company to be registered with the Drug Enforcement Administration. In addition, the transportation of certain products distributed by the Company that are considered hazardous materials is subject to regulation by the U.S. Department of Transportation.
The Company also is required to be licensed as a distributor of drugs and medical devices by each state in which it conducts business. In addition, several state Boards of Pharmacy require the Company to be licensed in their state for the sale of animal health products within their jurisdiction. The Company is also subject to the requirements of foreign laws and regulations, which impact the Company’s operations in those foreign countries where the Company conducts business.
While the Company believes it is in substantial compliance with the laws and regulations which regulate its business, and that it possesses all the licenses required in the conduct of its business, the failure to comply with any of those laws or regulations, or the imposition of new laws or regulations could negatively impact the Company’s business.
Executive Officers of the Registrant
Set forth below is the name, age and position of the executive officers of the Company as of July 7, 2006.
James W. Wiltz
61 President and Chief Executive Officer—Patterson Companies, Inc.
Peter L. Frechette
68 Chairman of the Board—Patterson Companies, Inc.
R. Stephen Armstrong
55 Executive Vice President, Chief Financial Officer and Treasurer—Patterson Companies, Inc.
Gary D. Johnson
59 Vice President, Operations—Patterson Companies, Inc.
Lynn E. Askew
43 Vice President, Management Information Systems—Patterson Companies, Inc.
Jerome E. Thygesen
48 Vice President, Human Resources—Patterson Companies, Inc.
Scott P. Anderson
39 President—Patterson Dental Supply, Inc.
Jeffrey H. Webster
44 President—Webster Veterinary Supply, Inc.
David P. Sproat
39 President—Patterson Medical Products, Inc.
The officers of the Company are elected annually and serve at the discretion of the Board of Directors.
Background of Executive Officers
James W. Wiltz was named the Company’s Chief Executive Officer in May 2005. Mr. Wiltz had held the position of President and Chief Operating Officer since April 2003. Upon being elected Chief Executive Officer, Mr. Wiltz retained the title of President, however the Company eliminated the Chief Operating Officer position. Mr. Wiltz also served as a Vice President of the Company from 1986 to 2003 and as President of Patterson Dental Supply, Inc., from 1996 to 2003. Patterson has employed him since September 1969, initially as a territory sales representative. Mr. Wiltz was appointed to the Board of Directors in March 2001.
Peter L. Frechette was Chief Executive Officer of the Company from September 1982 to May 2005. Mr. Frechette has been a Director of Patterson since March 1983 and was named Chairman of the Board in May 1985. Mr. Frechette served as President of the Company from September 1982 to April 2003. Prior to joining Patterson, Mr. Frechette was employed by American Hospital Supply Corporation for 18 years, the last seven of which he served as President of its Scientific Products Division.
R. Stephen Armstrong was elected Executive Vice President, Chief Financial Officer and Treasurer of the Company effective July 1999. Prior to joining Patterson, Mr. Armstrong had been an Assurance Partner with Ernst & Young LLP. Ernst & Young LLP is currently the Company’s independent registered public accounting firm. Mr. Armstrong has been a director of Delphax Technologies, Inc. since 2000.
Gary D. Johnson was elected Vice President, Operations, Patterson Companies, Inc. in June 2004. Mr. Johnson held the position of Vice President, Sales, of Patterson Dental Supply, Inc. from October 1996 through May 2004. Mr. Johnson has served in various sales and management positions since he joined the Company in August 1981.
Lynn E. Askew became Vice President, Management Information Systems, in September 1999. Mr. Askew joined Patterson in 1994 as Manager, Distributed Systems, and was promoted to Director, Systems and Development in 1996. Prior to joining Patterson, Mr. Askew provided advanced technology consulting and project management services to various organizations, including Patterson.
Jerome E. Thygesen became our 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.
Scott P. Anderson was named President of the Company’s subsidiary Patterson Dental Supply, Inc., in June 2006. Mr. Anderson most recently held the position of Vice President, Sales of Patterson Dental Supply, Inc. and prior to that was the unit’s Vice President of Marketing. Mr. Anderson joined Patterson in 1993 and was recently elected to the board of directors of the Dental Trade Alliance, the trade association of dental manufacturers, distributors and laboratories.
Jeffrey H. Webster has been President of Webster Veterinary Supply, Inc., since its acquisition by Patterson in July 2001. Mr. Webster held various management positions with J. A. Webster, Inc. since 1984. At the time of the acquisition, Mr. Webster was President of J. A. Webster, Inc.
David P. Sproat was named President of Patterson Medical Products, Inc. in September 2005. Mr. Sproat joined Patterson Companies in 1997 and has served in various sales and marketing capacities, most recently as Vice President, Sales, of the Patterson Dental Supply, Inc. unit from June 2004 through September 2005.
Item 1A. RISK FACTORS
The following list describes several risk factors that are specific to our company. The risk factors described below should be carefully considered, together with the information included elsewhere in this Annual Report on Form 10-K and other documents filed with the SEC.
We compete in distribution industries that are highly competitive and we may not be able to compete successfully.
Our competitors include numerous manufacturers and distributors. Some of our competitors may have different resources than we do, which could allow them to compete more successfully. Many of our products are available from several resources and our customers tend to have relationships with several different distributors. Competitors could obtain exclusive rights to market particular products, which we would then be unable to market. Our failure to compete effectively may limit and/or reduce our revenues, profitability and cash flow.
Acquisitions of businesses could negatively impact our profitability and return on invested capital.
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 international operations are subject to risks that could adversely affect our operating results.
There are a number of risks inherent in foreign operations, which include regulatory, economic and political requirements and changes. Additionally, foreign operations expose us to foreign currency fluctuations that could impact our results of operations and financial condition based on the movements of the applicable foreign currency exchange rates in relation to the U.S. Dollar.
Our future operating results can be affected by our relationships with our sales representatives and vendors and manufacturers of products that we distribute.
The inability to attract or retain qualified sales personnel or build or maintain relationships with vendors and manufacturers of products that we distribute may have an adverse effect on our business.
We sell products that could be subject to market and technological obsolescence.
We carry over 100,000 different product stock keeping units. Some of these products are subject to technological obsolescence that may not be within our control since we do not manufacture the products. If we were no longer able to sell these products due to customers making decisions not to buy them, we may have to record expense related to the diminution in value of inventories we have in stock that would 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 claims for damages arising out of the use of products we distribute, claims relating to intellectual property matters, and claims involving employment matters. We are also subject to securities litigation.
The defense of these lawsuits may divert our management’s attention, we may incur significant expenses in defending these lawsuits, and we may be required to 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 exposures.
Sales of dental equipment can significantly fluctuate from quarter to quarter.
Sales of dental equipment can experience large fluctuations from quarter to quarter and future sales patterns of equipment are difficult to predict. Such fluctuations can adversely affect our operating results. An equipment purchase generally represents a significant capital expenditure for a dental practitioner and reflecting this significance, there is a generally long lead-time associated with such purchases.
Other factors that can cause fluctuations in the sale of dental equipment include product availability; timing and amount of sales and marketing expenditures; timing of the introduction of new or improved products; general economic conditions; changes in the tax code; and changes in technology.
Our compensation strategy includes a substantial amount of targeted incentive compensation. Actual incentive compensation awarded can be significantly different from year to year.
Our compensation strategy includes a substantial amount of targeted incentive compensation. Incentive compensation amounts awarded are based on financial and/or operational goals of individual business units and/or the consolidated Company. Incentive compensation expense for any year can vary within a significant range based on the actual results as compared to the applicable goals.
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 intangible assets. Under generally accepted accounting principles in the United States, if impairment of our goodwill or other intangible assets is determined we may be required to record a significant charge to earnings in the period of such determination.
We are exposed to the risk of an increase in interest rates.
Our balance sheet includes variable rate long-term debt and certain non-current assets that are sensitive to movements in short-term interest rates. The variable rates are comprised of LIBOR plus a spread and reset on certain dates, as prescribed by the respective agreements.
Item 1B. UNRESOLVED STAFF COMMENTS
We have no unresolved comments from the staff of the United States Securities and Exchange Commission that were issued 180 days or more preceding the end of fiscal 2006.
