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Shareholders of Patterson Companies (PDCO) haven't had much to smile about this year with the stock down by about 20% on a year-to-date basis entering today's session, but a better-than-feared Q4 earnings report is giving investors something positive to chew on. The dental and animal health product maker and distributor met EPS and revenue expectations, while also issuing in-line FY25 EPS guidance, providing some relief that PDCO expects business to remain stable, despite the persistently high interest rates and macroeconomic uncertainties.

• Those macro-related headwinds did have an impact in Q4, however. In particular, PDCO's dental equipment business had a tough quarter with internal sales declining by 12% due to soft demand in the CAD/CAM categories. A moderation in equipment spending, combined with unfavorable yr/yr comparisons, weighed on growth.
• Making matters worse, a major cybersecurity attack at Change Healthcare -- PDCO's claims processing vendor -- resulted in many of the company's dental practices being unable to use Change Healthcare's services. In turn, this created a setback for PDCO's value-added services business, which generates claims management fees through its software integration with Change Healthcare.
  • PDCO noted that the cybersecurity attack caused a $0.04 negative impact to adjusted EPS.
• Overall, though, revenue for PDCO's Dental segment decreased by just 3.8% as strength in the consumables business helped to offset these issues. On a yr/yr basis, the consumables portfolio delivered growth of nearly 4%, and if the deflationary effect on certain infection control products is excluded, the growth was even stronger at nearly 6%.
• Turning to Animal Health, internal sales grew by approximately 3%, driven by strength in the production animal business. This segment also achieved operating margin expansion as a result of positive sales mix and disciplined cost management. On a company-wide basis, though, gross margin contracted by 90 bps yr/yr to 21.8%, mainly due to the revenue shortfall in Dental that's related to the cybersecurity incident.
• Looking beyond the Q4 results, PDCO's long-term strategy remains in place and that plan includes driving above-market revenue growth by expanding its investments in software and value-added services. During the earnings call, the company commented that its investments in FY24 are yielding meaningful progress on the software side.
  • A couple notable examples include the recently introduced Patterson CarePay+, a one-stop-shop for patient financing, dental insurance, and payment solutions, and a recent agreement with Pearl to integrate a pathology detection feature set called Second Opinion into PDCO's practice management software.

The main takeaway is that while PDCO's results weren't necessarily sparkling, they were good enough to provide a strong dose of Novocain with the stock trading near multi-year lows heading into the print.