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Article by DailyStocks_admin    (12-29-08 05:52 AM)

The Daily Magic Formula Stock for 12/29/2008 is Patterson Companies Inc. According to the Magic Formula Investing Web Site, the ebit yield is 14% and the EBIT ROIC is 50-75%.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.


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BUSINESS OVERVIEW

Certain information of a non-historical nature contained in Items 1, 2, 3 and 7 of this Form 10-K includes forward-looking statements. Reference is made to Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors that May Affect Future Operating Results, for a discussion of certain factors that could cause the Company’s actual operating results to differ materially from those expressed in any forward-looking statements.

General

In June 2004, the Company changed its corporate name from Patterson Dental Company to Patterson Companies, Inc. (“Patterson” or the “Company”). Patterson retained its existing Nasdaq stock symbol—PDCO. The corporate name change was adopted to reflect Patterson’s expanding base of business, which now encompasses the veterinary and rehabilitation supply markets, as well as its traditional base of operations in the dental supply market. Patterson’s operating units include Patterson Dental, Webster Veterinary and Patterson Medical.

Patterson is a value-added distributor serving three major markets:


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North American dental supply;


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U.S. companion-pet (dogs, cats and other common household pets) and equine veterinary supply;


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and the worldwide rehabilitation and assistive products supply market.

Unless otherwise indicated, all references to Patterson or the Company include its subsidiaries: Patterson Dental Holdings, Inc., Direct Dental Supply Co., Patterson Dental Canada Inc., Patterson Dental Supply, Inc., Webster Veterinary Supply, Inc., PDC Funding Company, LLC, PDC Funding Company II, LLC, Patterson Technology Center, Inc., Patterson Office Supplies, Inc., Webster Management LP, Intra Corp., Patterson Medical Holdings, Inc., Patterson Medical Supply, Inc., Sammons Preston Canada, Inc., AO Liquidation, Inc., Tumble Forms, Inc., Midland Manufacturing Company Inc., Patterson Logistics Services, Inc., Accu-Bite, Inc., Accu-Bite Products Limited Liability Company, Williamston Industrial Center, LLC, Strategic Dental Marketing, Inc., AbilityOne Homecraft Limited, AbilityOne Limited, AbilityOne Kinetec SA, Theraquip, Inc., Metro Medical, Inc., and Advance Practice Systems LLC.

Patterson began distributing dental supplies in 1877. The modern history of the business dates to May 1985, when the Company’s management and certain investors purchased the Company from a subsidiary of The Beatrice Companies, Inc. Patterson became a publicly traded company in October 1992. The Company is a corporation organized under the laws of Minnesota.

The Company historically reported under one operating segment, dental supply. In July 2001, the Company purchased the veterinary supply assets of J. A. Webster, Inc., which became a reportable business segment. Then in September 2003, the Company acquired Patterson Medical (formerly AbilityOne Products Corp.), creating a third business segment which serves the rehabilitation supply market.

The Company’s three reportable segments, dental supply, veterinary supply and rehabilitation supply, are strategic business units that offer similar products and services to different customer bases. Each business is a market leader with a strong competitive position, serves a fragmented market that offers consolidation opportunities and offers relatively low-cost consumable supplies, making the Company’s value-added business proposition highly attractive to customers.

Shared Services Initiative

To streamline Patterson’s cost structure, the Company continues to consolidate its distribution infrastructure and business systems. With respect to the distribution infrastructure, in late fiscal 2005 a facility in Columbia, SC was opened that replaced the individual dental and veterinary distribution centers that were serving this region. In fiscal 2006, separate dental and veterinary facilities in Seattle, WA were consolidated into a new shared distribution center. In addition, certain high-volume Patterson Medical inventory was being stocked at shared distribution facilities in Dinuba, CA, Jacksonville, FL and Fort Worth, TX.

During fiscal 2007, a new distribution center in eastern Pennsylvania was opened that replaced nearby, separate dental and veterinary facilities. Patterson Medical moved into this new distribution center and closed its former primary distribution facility in Bolingbrook, IL.

In fiscal 2008, the Company began to expand the existing facility in Dinuba, CA. In fiscal 2009, this location will be the second in the distribution system to service customers of all three business units.

The first shared sales branch office locations have been established and the Company plans to leverage additional branch locations by sharing between two or three business units in select markets during fiscal 2009.

Dental Supply

Overview

As Patterson’s largest business, Patterson Dental is one of the two largest distributors of dental products in North America. The business has operations in the United States and Canada. Patterson Dental, a full-service, value-added supplier to dentists, dental laboratories, institutions, and other healthcare professionals, provides: consumable products (including x-ray film, restorative materials, hand instruments and sterilization products); basic and advanced technology dental equipment; practice management and clinical software; patient education systems; and office forms and stationery. Patterson Dental offers its customers a broad selection of dental products including more than 90,000 stock keeping units (“SKUs”) of which approximately 4,000 are private-label products sold under the Patterson name. Patterson Dental also offers customers a full range of related services including dental equipment installation, maintenance and repair, dental office design and equipment financing. Patterson Dental markets its dental products and services through approximately 1,450 direct sales representatives, 391 of whom are equipment specialists.

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 approximately $2.2 billion in fiscal 2008 and profitability has increased from an operating loss in fiscal 1986 to operating income of $281.9 million in fiscal 2008.

Patterson estimates the dental supply market it serves to be approximately $6.8 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 $92 billion in 2006. 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:


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Demographics. The U.S. population grew from 235 million in 1980 to 302 million in 2007, 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.

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Dental products and techniques. Technological developments in dental products have contributed to advances in dental techniques and procedures, including cosmetic dentistry and dental implants.


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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.


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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 an increased willingness to invest in dental equipment and office infrastructure that can strengthen the productivity of their practices.


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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.


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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 $892 billion in total expenditures for 2006.

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.pattersondental.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 65% of Patterson’s consumable dental product volume or $790 million in fiscal year 2008.

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 the Company expects to be installed eventually in most dental offices, has a current market penetration of approximately 30%. 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 the Company’s shared services concept is the consolidation and leveraging of distribution centers between the segments of the Company, which began in fiscal 2005. As of April 2008, the dental segment shares six distribution centers with one or both of the other operating units. In addition, the Company has begun to establish shared sales branch office locations between multiple segments, with the first location established in northern California in late fiscal 2007. 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 20 years the Company has made a number of acquisitions, including the following:

Dental distribution acquisitions in the United States


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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. In April 2008, a full-service regional distributor serving customers in the northeastern U.S., Leventhal & Sons, Inc., was acquired.

Dental distribution acquisitions in Canada


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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 520 people, 150 of whom are sales representatives.

Printed office products acquisitions


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In October 1996, Patterson acquired the Colwell Systems division of Deluxe Corporation. Colwell Systems, now known as Patterson Office Supplies, produces and sells a variety of printed office products used in medical, dental and veterinary offices, as well as other clinical based settings.

Software acquisitions




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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 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.


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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.



CEO BACKGROUND


Ronald E. Ezerski , age 62, served as our Vice President, Treasurer and Chief Financial Officer from December 1982 through July 1999 and was President of our subsidiary, Dental Capital Corporation, from December 1982 until October 1988 when it was merged into our company. From September 1996 through July 1999, Mr. Ezerski also served as our Executive Vice President. Mr. Ezerski has been one of our directors since March 1983.

Andre B. Lacy , age 68, has served as Chairman of the Board of LDI Ltd., LLC since 1992. Mr. Lacy served as LDI Ltd., LLC’s Chief Executive Officer from 1986 through 2006. LDI Ltd., LLC is an industrial and investment limited liability company. Mr. Lacy is Director Emeritus of FinishMaster, Inc. Mr. Lacy also serves as a director of The National Bank of Indianapolis Corporation and Herff Jones, Inc. Mr. Lacy has been one of our directors since 1989.

Directors Whose Terms Expire at the Annual Meeting in 2009

Ellen A. Rudnick , age 57, has served as Executive Director and Clinical Professor of the Michael P. Polsky Center for Entrepreneurship at the University of Chicago Graduate School of Business since March 1999. She served as Chairman of Pacific Biometrics, a medical diagnostics company which she co-founded from 1993 to 1999; President of HCIA, and CEO of Healthcare Knowledge Resources, both healthcare information service companies from 1990 to 1992; and served in a variety of capacities at Baxter Healthcare from 1975 to 1990, including Corporate Vice President of Baxter Healthcare and President and Founder of Baxter Management Services Division. Ms. Rudnick also served as Founder and Chairman of CEO Advisors, a consulting firm established in 1992. Ms. Rudnick also serves as director of First Midwest Bancorp, Inc., HMS Holdings Corporation and Liberty Mutual Insurance Company. She has been one of our directors since December 2003.

Harold C. Slavkin , age 70, has been Dean of the University of Southern California School of Dentistry since August 2000. Dr. Slavkin returned to USC after serving as the sixth director of the National Institute of Dental and Craniofacial Research, one of the National Institutes of Health. Dr. Slavkin is a member of the Institute of Medicine of the National Academy of Sciences, a Fellow of the American Association for the Advancement of Science, a Fellow of both the American College of Dentistry and the International College of Dentistry, Past-President of the American Dental Research Association and a member of the International Association for Dental Research. In 1968, Dr. Slavkin joined the faculty of the USC School of Dentistry. He has been one of our directors since December 2001.

James W. Wiltz , age 63, was elected President and Chief Executive Officer in May 2005. He served as one of our Vice Presidents from 1986 to 2003, and as our President and Chief Operating Officer from April 2003 through May 2005. He has been employed by us since September 1969, initially as a territory sales representative, then an equipment specialist and later a branch manager. In 1980, Mr. Wiltz was appointed Vice President of the Midwestern Division and was appointed Vice President, Sales and Distribution in 1986. From 1996 to 2003, Mr. Wiltz served as President of our subsidiary, Patterson Dental Supply, Inc. He has been one of our directors since March 2001.

Directors Whose Terms Expire at the Annual Meeting in 2010

John D. Buck , age 58, has served as Chief Executive Officer of Whitefish Ventures, LLC, which provides financial services and strategic business expertise to small companies, since 2000. Mr. Buck was Chief Executive Officer of Medica, the second largest health benefits plan in Minnesota, from February 2002 to May 2003. He was President and Chief Operating Officer at Fingerhut Companies, Inc. from 1996 to 2000 and played an integral role in developing the business services area of the company. Prior to Fingerhut, Mr. Buck was Vice President of Administration at Alliant Techsystems, a leading supplier of aerospace and defense technologies. Prior to that, Mr. Buck spent 21 years at Honeywell, Inc., most recently serving as Vice President of Administration. Mr. Buck is Chairman of the Board of Directors of Medica and non-executive Chairman of the Board of ValueVision Media, Inc./Shop NBC. He has been one of our directors since December 2006.

Peter L. Frechette , age 70, currently serves as our Chairman of the Board and has held that position since May 1985. He served as our Chief Executive Officer from September 1982 through May 2005. He was our President from September 1982 to April 2003 and has been one of our directors since March 1983. Prior to joining us, 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.

Charles Reich , age 66, has been retired since October 2004. From October 2002 to October 2004, Dr. Reich served as Executive Vice President of 3M Health Care, a business segment of 3M Company. Dr. Reich joined 3M Company in 1968 as a research chemist and assumed a variety of management positions in the Research & Development organization before moving to business management in 1989. He held a variety of management and executive positions, including international postings, within 3M Company since that time. He also served as a member of the Executive Advisory Board, Juran Center for Leadership in Quality at the University of Minnesota. Dr. Reich has been a director of Imation Corp. since July 2004. He has been one of our directors since December 2005.


MANAGEMENT DISCUSSION FROM LATEST 10K

Overview

The Company’s fiscal 2008 financial information is summarized in this Management’s Discussion and Analysis, the Consolidated Financial Statements, and the related Notes. The following background is essential to more fully understand the Company’s financial information.

Patterson operates a distribution business in three complementary markets: dental supply, veterinary supply and rehabilitation supply. Historically the Company’s strategy for growth focused on internal growth and the acquisition of smaller distributors and businesses offering related products and services to the dental market. In fiscal 2002, the Company expanded its strategy to take advantage of a parallel growth opportunity in the veterinary supply market by acquiring the assets of J. A. Webster, Inc. on July 9, 2001. The Company added a third component to its business platform in fiscal 2004 when it entered the rehabilitation supply market with the acquisition of AbilityOne Products Corp. (“AbilityOne”) on September 12, 2003. AbilityOne is now known as Patterson Medical.

The historical operating performance of the veterinary supply and rehabilitation supply businesses are somewhat different than the dental supply business. Operating margins of the veterinary business are considerably lower than the dental supply business. While operating expenses run at a lower rate in the veterinary business, its gross margin is substantially lower. Veterinary gross margins have been in the low-to-mid 20’s as compared to dental gross margins in the mid 30’s. The rehabilitation business has realized gross margins in the high 30’s to low 40’s.

There are several important aspects of the Company’s business that are useful in analyzing the Company, including: (1) market growth in the various markets it operates; (2) internal growth; (3) growth through acquisition; and (4) continued focus on controlling costs and enhancing efficiency. Management defines “internal growth” as the increase in net sales from period to period, excluding the impact of changes in currency exchange rates, and excluding the net sales, for a period of twelve months following the transaction date, of businesses that it has acquired. With these factors in mind, management has established certain operating objectives, which include increasing net sales two to four percentage points faster than the average market growth rate at each business unit and improving operating margins by 50 basis points annually.

During fiscal 2008, the Company executed a series of transactions that effectively changed our capital structure, that lowered our weighted average cost of capital by almost 100 basis points, and positioned the Company to increase returns to our shareholders. First, the Company repurchased approximately 18 million shares of its common stock on the open market and through an accelerated share repurchase agreement for a total of approximately $636 million. A portion of the funding for the share repurchases came from debt issued in the fourth quarter of the year, consisting of fixed-rate private placement notes totaling $450 million and a variable-rate term loan from a group of banks of $75 million. The positive impact of this share repurchase activity in the fourth quarter was largely offset by increased interest expense and lower cash reserves, however the Company estimates the accretion to earnings per share from the share repurchases going forward to be approximately $0.08 annually.

Fiscal 2008 Compared to Fiscal 2007

Net Sales. Consolidated sales in fiscal 2008 totaled $2,998.7 million, an increase of 7.2% compared to $2,798.4 million in fiscal 2007. Foreign currency translation rates contributed one percentage point and acquisitions contributed 0.6% to the sales growth in fiscal 2008.

Sales of our dental supply unit increased 5.7% to $2,181.3 million. Sales of dental consumable supplies grew 5.5%. Dental equipment sales grew 4.2%, including basic equipment growth of 4.3%. Sales of CEREC ® 3D dental restorative systems rose 3.7%. In late fiscal 2007, CEREC’s manufacturer, Sirona, introduced improved software included in all installations and a next-generation crown milling chamber that is sold both as an upgrade for existing installations and as an option on new system sales. The process of transitioning to these upgraded features began in late fiscal 2007 and continued into early fiscal 2008. Total CEREC sales in the first half of fiscal 2008 declined, while sales improved approximately 12% in the second half of the year.

Other dental sales, consisting primarily of technical service parts and labor, software support services and artificial teeth, grew 11.7% in fiscal 2008.

Webster Veterinary sales grew 11.8% to $446.4 million from $399.4 million. Effective January 2007, Webster made a strategic decision to drop a line of products previously sold under an agency agreement, including flea/tick and heartworm products, and replaced them with a combination of fully distributed product offerings and products under agency agreements from several vendor partners. This transition progressed throughout the year as planned, although there was a modest negative impact to Webster’s operating metrics during the first half of fiscal 2008.

Veterinary equipment and software sales accounted for approximately 7% of Webster’s total sales during the past two fiscal years. In the second half of fiscal 2008, efforts were underway to restructure and refine this aspect of the business and the Company believes equipment and software sales will benefit from these initiatives in fiscal 2009.

Sales growth of 11.0% at Patterson Medical included the contribution of new branch offices which have been established by acquisition and greenfield expansion. As a part of its initiative to expand and strengthen its value-added model, the rehabilitation unit has opened twelve branch offices in selected markets throughout the United States over the past two years. Certain acquisitions over the past two years have given the business access to premium equipment lines previously unavailable to Patterson Medical. The November 2007 acquisition of PTOS software, a leading line of practice management software for physical therapists, is enabling Patterson Medical to create relationships with new customers and deepen relationships with existing customers.

Gross Margin. Consolidated gross margin of 34.4% was 20 basis points lower in fiscal 2008 due to declines at Patterson Medical and Webster Veterinary. In addition, the sales growth of Webster outpaced both the dental and rehabilitation segments, resulting in a dilutive impact to consolidated gross margin, since Veterinary gross margins are lower than the other two businesses.

The Dental segment’s gross margin was flat, despite approximately $2 million of expense related to a distribution agreement fee which began to be amortized in October 2007. In addition, local currency pricing in Canada was lowered in the third quarter of fiscal 2008 in response to the strengthening of the Canadian dollar compared to the United States dollar.

Gross margins decreased by 50 basis points in fiscal 2008 at the Veterinary unit. This was largely a result of the decision to terminate the agency relationship late in the third quarter of fiscal 2007, (the agency commission is effectively 100% gross margin), and many of the replacement offerings for the products previously sold under the agency relationship are now being fully distributed. While gross margin decreased in each of the first three quarters of fiscal 2008 compared to the year-earlier quarters, respectively, gross margin improved 110 basis points in the fourth quarter due to product mix and higher vendor rebates.

Patterson Medical’s gross margin declined 20 basis points, due mostly to higher freight costs in the early part of fiscal 2008. In the second half of the year, better freight management and product pricing mitigated much of the higher freight costs.

Operating Expenses . The consolidated operating expense ratio improved 20 basis points to 22.4%.

Operating expenses as a percent of sales at the Dental unit decreased 30 basis points, reflecting the leverage of infrastructure investments over the past two years and the elimination of duplicate costs from the distribution system. The operating expense ratio of the Veterinary unit declined 50 basis points due both to leverage on higher sales volume and distribution system realignment, including the closing of a stand-alone warehouse.

Patterson Medical’s operating expense ratio was 100 basis points higher in fiscal 2008, resulting from the infrastructure expense of adding branch locations through both acquisition and internal startups. This impact on the operating expense ratio is expected to dissipate as the newer locations become more established.

Operating Income. Operating income was $359.2 million or 12.0% of net sales in fiscal 2008. This amount represents an increase of 7.0% from $335.7 million in fiscal 2007. Operating margin in fiscal 2007 was also 12.0%.

Interest Expense. Interest expense was $12.8 million compared to $14.2 million in fiscal 2007. The average debt balance carried for the majority of fiscal 2008 was lower than in fiscal 2007, resulting in the decrease in interest expense. The Company issued $525 million of long-term debt in the fourth quarter of fiscal 2008 and thus, a significantly higher level of interest expense is expected in fiscal 2009.

Other Income, net. Other income, net of other expenses, increased to $11.0 million from $8.1 million due to higher levels of interest income and foreign currency transaction gains.

Income Taxes. The effective income tax rate was 37.1% in fiscal 2008, slightly higher than a rate of 36.8% in the prior year.

Net Income and Earnings Per Share. Net income increased 7.9% to $224.9 million. Earnings per diluted share of $1.69 represents an increase of $0.18 or 11.9% from the $1.51 earnings per share reported in fiscal 2007.

Approximately 18 million shares of common stock were repurchased in the second half of fiscal 2008. Since these shares were purchased late in the fiscal year, and the Company borrowed funds to help finance the share repurchases, the resulting net impact on the earnings per diluted share in fiscal 2008 was approximately 1 to 2 cents. The full impact on earnings per diluted share from the repurchases is expected to be approximately 8 cents of accretion.

Fiscal 2007 Compared to Fiscal 2006

Net Sales. Net sales for the year ended April 28, 2007 totaled $2,798.4 million, an increase of 7.0% from $2,615.1 million in fiscal 2006. The favorable impact of foreign currency translation on sales growth was 0.5%. Acquisitions contributed approximately one percentage point to sales growth.

The Company acquired Accu-Bite, a dental supplier, in September 2005. This business included both a field sales organization similar to our traditional dental sales model, as well as a low-margin telesales business. For approximately eight months of fiscal 2006, from the date of acquisition through the end of fiscal year, the dental segment operated Accu-Bite’s telesales business. In early May 2006, the telesales operations were closed for business reasons, including continuing losses from operations. In closing the business, as much of the sales volume as could be, was moved into the field organization. However, as the Company expected, much of this sales volume went to dental suppliers who approach the market with a low-price model. The closing of the telesales business had a negative impact on consolidated fiscal 2007 sales growth of approximately one percentage point.

Sales of our dental supply unit increased 5.0% in fiscal 2007 to $2,064.6 million. Sales of dental consumable supplies grew 5.7%. The Accu-Bite telesales negative impact on sales growth of the dental unit’s total sales and sales of consumable supplies was approximately 1.5% and 2.5%, respectively. Equipment sales grew 1.6%, led by basic equipment growth of 6.1%. Largely offsetting the increase in basic equipment growth was a decline in the sales of CEREC ® 3D dental restorative systems.

Late in the third quarter of fiscal 2007, CEREC’s manufacturer, Sirona, introduced several important enhancements. First, CEREC’s software was significantly improved; making it easier to design highly aesthetic and precise restorations, while also greatly streamlining the system’s learning curve. In addition, a faster and more robust milling unit was introduced as an option on new installations, as well as an upgrade to all existing CEREC users. The Company believes the news of the impending enhancements to CEREC, which reached the market early in fiscal 2007, as well as the timing of the introduction at the end of the third fiscal quarter, and the process of transitioning to these upgraded features, which was still underway at the end of fiscal 2007, has a negative impact on sales throughout the year.

Other dental sales, consisting primarily of technical service parts and labor, software support services and teeth, grew 14.1% in fiscal 2007.

Sales at the Webster Veterinary unit grew 15.4% to $399.4 million from $346.1 million. The business has strategically emphasized expansion of its value-added platform, including its equipment and software initiatives. Webster’s core consumables business performed well throughout the year and equipment and software increased 69.6%. Excluding the acquisition impact of Intra Corp, developer and marketer of IntraVet ® practice management software, total veterinary sales exceeded prior year sales by 14.2%.

Patterson Medical consistently grew sales throughout the year, improving 10.7% over fiscal 2006. Three acquisitions related to the unit’s branch office strategy contributed 3 percentage points of the growth and foreign currency translation added an additional 1.5% of sales improvement. During fiscal 2007, Patterson Medical established five full-service branch offices in selected markets through acquisitions and internal start-ups. Also, the business continued to increase its sales force and add programs and systems to advance their value-added offerings.

Gross Margin. Consolidated gross margin declined 40 basis points in fiscal 2007 to 34.6%, primarily due to lower margins at Patterson Medical. In addition, the sales growth of Webster Veterinary outpaced both the dental and rehabilitation segments, resulting in a dilutive impact to consolidated gross margin, since Veterinary gross margins are lower than the other two businesses.

The Dental segment’s gross margin improved 20 basis points in fiscal 2007. The closing of the Accu-Bite telesales business which operated for eight months in fiscal 2006 and was dilutive to overall dental gross margin during that period, acted to improve Dental gross margins in 2007. The telesales business produced substantially lower gross margins than the traditional dental sales operations. A decline in sales of the high-margin CEREC dental restorative systems during fiscal 2007 negatively impacted gross margin.

The gross margin of the Veterinary business decreased by 10 basis points compared to fiscal 2006. The negative impact on gross margin of lower agency commissions and vendor rebates in fiscal 2007 was mostly offset by the sales growth of equipment and software, which carry higher margins than core consumables.

Patterson Medical’s gross margin declined 250 basis points due to several factors. Higher freight costs impacted this business more than the Dental and Veterinary segments due to the nature of the average order size and related package levels. In addition, this segment had fixed price contracts with certain large group customers and price increases from vendors created some margin compression in this customer group. These contracts are renewed periodically, at which time pricing may be renegotiated to address changes in vendor pricing. Many of the contracts were amended in the latter part of fiscal 2007. A third factor in the gross margin decline at Patterson Medical is that the business hired a number of new sales representatives during the past fiscal year who had been given some short-term latitude to establish their book of business through discretionary discounting. This latitude will be phased out as these new representatives reach their sales targets.

Operating Expenses . The consolidated operating expense ratio remained unchanged from a year ago at 22.6%, however the ratio in fiscal 2007 was negatively impacted by 30 basis points due to $7.8 million of share-based compensation expense related to the Company’s adoption of SFAS No. 123(R) in fiscal 2007.

Excluding the impact of SFAS No. 123(R), the Dental segment experienced a 10 basis point improvement in its operating expense ratio. The Veterinary segment experienced a 60 basis points decrease in its operating expense ratio, due primarily to leverage on sales growth. In addition, during fiscal 2006 the business incurred costs from the initial expense structure of its greenfield expansion into California. Fiscal 2007 was a year of investment for Patterson Medical in sales and marketing personnel and programs, however the business was able to maintain their operating expense ratio due to growth in sales.

Operating Income. Operating income was $335.7 million, or 12.0% of net sales. Excluding $7.8 million of expense under SFAS No. 123(R), operating income was 12.3% of net sales, totaling $343.4 million, an increase of 6.3% from $323.0 million in fiscal 2006.

Interest Expense. Interest expense was $14.2 million compared to $13.4 million in fiscal 2006. For more than half of fiscal 2006, an interest rate swap on $100 million of variable rate debt effectively fixed interest rate expense on the $100 million at 2.6% until the agreement terminated in November 2005. The average debt balance carried in fiscal 2007 was lower than fiscal 2006; however, the weighted average interest rate on the $100 million of variable rate debt was approximately 6.0% in fiscal 2007, resulting in an overall increase in interest expense.

Other Income, net. Other income, net of other expenses, increased to $8.1 million from $7.3 million. Composed primarily of finance interest income in both years, the increase was due primarily to higher interest rates.

Income Taxes. The effective income tax rate was 36.8% in fiscal year 2007 compared to 37.4% in the prior year. During fiscal 2007, the Company finalized several years of Canadian income tax returns and the reversal of related tax reserves lowered the effective income tax rate by approximately one percentage point. The impact of SFAS No. 123(R) on our effective tax rate partially offset the finalization of the Canadian tax returns since certain compensation expense under SFAS No. 123(R) is non-deductible.

Net Income and Earnings per Share. Net income was $208.3, an increase of 5.0% from fiscal 2006. Fiscal 2007 earnings per diluted share of $1.51 were $0.08 or 5.6% higher than $1.43 earnings per share in fiscal 2006. The adoption of SFAS No. 123(R) in fiscal 2007 lowered earnings per share by $0.05.

Liquidity and Capital Resources

Patterson’s operating cash flow had been the Company’s principal source of liquidity in fiscal 2008, 2007, and 2006, until the issuance of $525 million of debt in the March 2008. Operating activities generated cash of $265.4 million in fiscal 2008 compared with $243.5 million in fiscal 2007 and $164.0 million in fiscal 2006. In fiscal 2006, the Company did not sell approximately $30 million of short-duration finance contracts that were generated as a part of our traditional calendar year-end financing programs. These contracts had an average maturity of less than 24 months and generated interest income at rates approximating what cash would earn, thus the Company elected not to incur the administrative expense of selling these contracts. Had these contracts been sold, cash from operations would have been approximately $200 million.

Capital expenditures were $36.0, $19.5 and $49.2 million in fiscal years 2008, 2007 and 2006, respectively. Fiscal 2008 significant expenditures included the expansion of our general office building, expansion of an existing distribution center to accommodate multiple business units, the purchase of a distribution center that had been under a short-term lease, and continuing investments in information systems. The expansions of the office building and distribution center were in progress as of April 26, 2008. Fiscal 2006 included several significant projects, including expenditures for shared distribution centers in Kent, WA and eastern Pennsylvania. In addition, 2006 included expenditures for a new distribution facility for the Patterson Medical operations in the U.K.

The Company expects to invest approximately $30 to $35 million in capital expenditures during fiscal 2009, including the completion of the two projects in progress as of April 26, 2008 and investments in information systems.

Cash used for acquisitions totaled $22.7 million in fiscal 2008 and included acquisition in all three business units, with the majority being local and regional dealer/distributors in the rehabilitation supply business.

Payments on long-term debt in fiscal 2008 were $50 million. In March 2008, the Company closed on $525 million of long-term debt financing which was comprised of $450 million of fixed-rate private notes with maturities of five, seven and ten years in addition to a $75 million term loan at a floating rate of interest through a group of banks. The Company used $250 million of the debt financing to repurchase shares under an accelerated share repurchase agreement (“ASR”). The remaining proceeds from the debt issuances were used to repay borrowings under the Company’s revolving credit agreement and for general corporate purposes. $130 million of debt issued in fiscal 2004 becomes due in November 2008. As of April 26, 2008, no amounts are outstanding under the revolving credit facility which expires in fiscal 2013. A total of $300 million is available under this facility.

During the second half of fiscal 2008, the Company purchased shares of its common stock on the open market, under a 25 million share repurchase program authorized by the board of directors. In the fourth quarter of fiscal 2008, the Company entered into an ASR under which it paid $250 million and took an initial delivery of 6.3 million shares. In total, the Company repurchased approximately 18 million shares for $636.1 million during fiscal 2008. Under the terms of the ASR, the Company could have received additional shares, or could have been required to pay the counterparty in the form of either cash or shares. The final settlement of the ASR occurred in June 2008, with an additional 1.1 million shares being delivered to the Company. After the June 2008 settlement, an additional 5.9 million shares may be repurchased under the current authorization by the board of directors, which expires on December 31, 2012. Going forward, in the absence of desirable acquisition opportunities, the Company would likely return excess cash to its shareholders through additional open market purchases of its common stock, or possibly consider a dividend strategy.

Management expects funds generated from operations and existing cash to be sufficient to meet the Company’s working capital needs for the next fiscal year. The Company expects to continue to obtain liquidity from the sale of its equipment finance contracts. In addition, as of April 26, 2008, $300 million is available under a revolving credit facility. The Company’s short-term and long-term debt facilities are believed to be adequate as a supplement to internally generated cash flows to fund anticipated expansion plans and strategic initiatives.

MANAGEMENT DISCUSSION FOR LATEST QUARTER


OVERVIEW

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) should be read in conjunction with the MD&A included in our 2008 Annual Report on Form 10-K filed June 25, 2008, for important background information regarding, among other things, an overview of the markets in which we operate and our business strategies.

QUARTER ENDED OCTOBER 25, 2008 COMPARED TO QUARTER ENDED OCTOBER 27, 2007.

Net Sales. Consolidated net sales for the three months ended October 25, 2008 (“Current Quarter”) increased 2.4% to $759.5 million as compared to $742.0 million for the three months ended October 27, 2007 (“Prior Quarter”). The sales results of each of our business units were impacted by a difficult economic environment and were below our planned levels. The contribution from acquisitions added 2.3% to sales growth, while changes in foreign currency translation rates reduced sales in the Current Quarter by 0.5%.

Dental segment sales grew 0.4% to $536.8 million in the Current Quarter. Sales of consumable dental supplies and printed office products were flat compared to the Prior Quarter and we believe a significant factor in this result is that dental patients have started deferring higher level as well as discretionary services due to economic conditions.

In total, Dental equipment and software sales increased 1.0% compared to the Prior Quarter. Basic dental equipment sales, including chairs, units and lighting, grew approximately 7.0%, but this growth was offset by lower sales of software, intra-oral digital x-ray and CEREC 3D ® dental restorative systems. The growth in basic equipment was largely generated by orders received prior to the worst of the economic weakening seen during our second fiscal quarter and we believe that the continuation of challenging economic conditions may affect the equipment purchasing decisions of dental practitioners throughout the second half of fiscal 2009.

The Company anticipated that software and digital x-ray sales would be adversely affected in the first part of fiscal 2009 by the roll-out of new sales and marketing initiatives in the Dental segment. In the Prior quarter, sales of CEREC, the chair-side dental restorative unit, included shipments of backlogged orders for the new MC-XL milling chamber. The fulfillment of these backlogged orders represented approximately 50% of total CEREC sales in the Prior Quarter.

The Veterinary segment reported sales of $123.6 million, an increase of 13.5% from $108.9 million in the Prior Quarter. Acquisitions, primarily Columbus Serum Company, a full-service distributor of companion-pet veterinary supplies which was acquired on October 2, 2008, contributed 9.8% of the sales growth.

Current Quarter Rehabilitation segment sales of $99.0 million were 0.5% higher than sales of $98.6 million in the Prior Quarter. Acquisitions added 2.2% to sales, but were largely offset by unfavorable changes in foreign currency translation rates.

The weak economic conditions during the Current Quarter affected the sales at each of our businesses and, given our expectation for these conditions to continue to remain challenging throughout the remainder of the fiscal year, the Company is taking steps to reduce its cost structure by at least an annualized $20 to $25 million. These company-wide actions include a hiring freeze except in the area of sales representatives, a wage freeze and restrictions on travel. The initial impact will be realized in the third quarter and we expect the full impact to be apparent in the fourth quarter. While we will streamline our cost structure where prudent, we also plan to continue making strategic investments such as acquisitions and the consolidation of our distribution facilities.

Gross Margins. Consolidated gross margin decreased to 33.4%, down 60 basis points from the Prior Quarter. Since the Veterinary segment contributed to Current Quarter sales growth at a higher rate than the other two segments, but also contributes the lowest gross margin, there is a dilutive effect on the consolidated gross margin.

Dental segment gross margin decreased 60 basis points in the Current Quarter. Factors causing the decrease included a financing promotion on CEREC that was in place during the Current Quarter, a reduction in the level of gains on financing contracts sold as compared to the Prior Quarter, and the reduced level of software revenue related to the offering of EagleSoft ® practice management software at no cost to customers.

Gross margin of the Veterinary segment decreased 10 basis points in the Current Quarter due to reduced levels of equipment and software revenue and the effect of the Columbus Serum revenues which had a slightly lower gross margin. Patterson Medical’s gross margin was 40 basis points higher in the Current Quarter due to product mix, including software revenues, as well as improved freight management than in the Prior Quarter.

Operating Expenses. Although each segment’s operating expense ratio was higher in the Current Quarter, the consolidated ratio was flat with the Prior Quarter at 22.5% due to higher contribution from the Veterinary segment, which has the lowest operating expense ratio of the three business units. Because the Company’s expense structure is more semi-variable, after excluding product and commission costs, it requires an amount of time to properly adjust the expense structure to maintain service levels to customers when revenues do not achieve planned levels of performance.

The operating expense ratio of the Dental segment was 20 basis points higher than in the Prior Quarter, reflecting the effects of our fixed costs on lower than planned sales results and the incremental expense from the roll-out of sales and marketing strategy changes that began in the first quarter of the current fiscal year. The impact of these changes is expected to progressively decline over the remaining two quarters of fiscal 2009.

The Veterinary segment’s operating expense ratio increased 40 basis points from the Prior Quarter due to lower than planned internal sales growth and the integration of acquisitions. Operating expenses as a percentage of sales increased 10 basis points over the Prior Quarter in the Rehabilitation segment, again impacted by lower than planned sales levels.

Operating Income. Operating income was $82.6 million, or 10.9% of net sales in the Current Quarter. In the Prior Quarter, operating income was $85.6 million, which was 11.5% of net sales. As discussed above, there was a 60 basis point decrease in consolidated gross margin in the Current Quarter while the operating expense ratio remained flat.

Other (Expense) Income, Net. Net other expense was $7.5 million in the Current Quarter compared to net other income of $0.8 million in the Prior Quarter. Interest expense was $5.6 million higher in the Current Quarter due to the issuance of $525 million of long-term debt in March 2008. The proceeds from the issuance of the debt were used primarily to repurchase shares of the Company’s common stock. The impact of the new debt on interest expense in the Current Quarter was $6.9 million, but was partially offset by the scheduled payment of $50 million of fixed rate debt in November 2007. In addition to higher interest expense, the loss on foreign currency transactions was $1.2 million in the Current Quarter, while there was a gain of $0.6 million in the Prior Quarter.

Income Taxes . The effective income tax rate for the Current Quarter was 37.5%. In the Prior Quarter, the rate was 37.8%.

Earnings Per Share. Earnings per share were $0.40 in the Current Quarter, compared to $0.39 in the Prior Quarter. Approximately 19 million shares of the Company’s common stock were purchased and retired since the end of the Prior Quarter.

SIX MONTHS ENDED OCTOBER 25, 2008 COMPARED TO SIX MONTHS ENDED OCTOBER 27, 2007.

Net Sales. Consolidated net sales for the six months ended October 25, 2008 (“Current Period”) totaled $1,503.3 million, an increase of 4.2% from $1,443.4 million during the six months ended October 27, 2007 (“Prior Period”).

Sales of Patterson Dental increased 2.2% to $1,056.7 million in the Current Period compared to $1,034.2 million in the Prior Period. Sales of consumable dental supplies and printed office products rose 2.8%. In the first quarter of fiscal 2009, consumables grew 5.8%, but were flat in the second quarter as discussed above in the three month comparison.

In total, Dental equipment and software sales decreased 0.2% compared to the Prior Period. Basic dental equipment and software sales, led by core equipment such as chairs, units and lighting, grew 2.0%, while sales of CEREC 3D ® dental restorative systems declined just over 10%.

The Veterinary segment reported sales of $246.9 million, an increase of 12.5% from $219.3 million in the Prior Period. Acquisitions, primarily the Columbus Serum Company, accounted for 5.0% of the sales growth.

Current Period Rehabilitation segment sales of $199.7 million were 5.2% higher than sales of $189.8 million in the Prior Period. Excluding the impact of acquisitions and changes in foreign currency translation rates, sales growth was 2.9%.

Gross Margins. Consolidated gross margin decreased 30 basis points to 33.6% in the Current Period.

Dental segment gross margin decreased 20 basis points in the Current Period. Lower sales of high-margin software due to the free offering of EagleSoft ® practice management software and a financing promotion on CEREC during the second quarter of the Current Period lowered gross margin, but the impact was partially offset by stronger point of sale margins on consumables.

Gross margin of the Veterinary segment was 19.6% in both the Current and Prior Period. The Rehabilitation segment gross margin increased by 40 basis points due to improved freight management and the contribution of the higher margin PTOS practice management software sales. PTOS was acquired in the third quarter of fiscal 2008.

Operating Expenses. In the Current Period, operating expenses as a percent of sales were flat with the Prior Period at 22.8%.

The operating expense ratio of the Dental segment was 10 basis points higher than in the Prior Period, reflecting the incremental expense from the roll-out of the sales and marketing strategy changes at the beginning of the fiscal year.

The Veterinary segment operating expense ratio remained unchanged at 15.0% from the Prior Period. Leverage from higher first quarter sales and the consolidation of the distribution function with the other business units was offset in the second quarter by lower than planned sales and the cost structure of two acquisitions.

Operating expenses as a percentage of sales increased 30 basis points over the Prior Period in the Rehabilitation segment. The infrastructure costs of new branch locations over the past year and costs related to the conversion onto Patterson systems negatively affected the operating expense ratio.

Operating Income. Operating income was $162.2 million, or 10.8% of net sales in the Current Period. In the Prior Period, operating income was $160.8 million, or 11.1% of net sales. As discussed above, consolidated gross margins declined by 30 basis points, while the operating expense ratio was unchanged in the current Period.

Other (Expense) Income, Net. Net other expense was $13.4 million in the Current Period compared to net other income of $1.4 million in the Prior Period. Interest expense of $16.2 million was $11.1 million higher in the Current Period due to the issuance of $525 million of long-term debt in March 2008. The proceeds from the issuance of the debt were used primarily to repurchase shares of the Company’s common stock. In addition to higher interest expense, lower rates of return on investments during the Current Period resulted in a decrease of $1.3 million from interest income.

Income Taxes . The effective income tax rate for the Current Period was 37.6%. In the Prior Period, the rate was 37.5%.

Earnings Per Share. Earnings per share were $0.78 in the Current Period, compared to $0.74 in the Prior Period. Approximately 19 million shares of the Company’s common stock were purchased and retired since the end of the Prior Period.

LIQUIDITY AND CAPITAL RESOURCES

The Company generated $57.8 million of cash flow from operating activities in the six months ending October 25, 2008 (“Current Period”), compared to $108.8 million for the six months ending October 27, 2007 (“Prior Period”). There are several factors in the lower cash flow from operating activities in the Current Period, including a decrease of $8.4 million in net income, a lesser amount of finance contract receivables sold as compared to the Prior Period, and the timing of payments of accounts payables.

Net cash used in investing activities in the Current Period was $87.4 million compared to $20.7 million in the Prior Period. Current Period capital expenditures of $17.5 million included the completion of the expansion of an existing distribution facility in Dinuba, California and the renovation and expansion of our corporate headquarters in Saint Paul, Minnesota. The Company expects capital expenditures to total approximately $30 million in fiscal 2009. Cash used for acquisitions was $69.9 million, an increase of nearly $59 million from the Prior Period. The majority of cash used for acquisitions related to the Columbus Serum Company acquisition in October 2008.

Net cash provided by financing activities was $5.7 million in the Current Period compared to $7.1 million in the Prior Period. A scheduled payment of $130 million on long-term debt will be made in November 2008. A $300 million revolving credit facility is available until November 2012. No amounts were outstanding under the revolving credit facility as of October 25, 2008.

The Company expects funds generated by operations, existing cash balances and availability under existing debt facilities will be sufficient to meet the Company’s working capital needs and finance anticipated expansion plans and strategic initiatives over the next twelve months.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

There have been no material changes in the Company’s Critical Accounting Policies and Estimates, as disclosed in its 2008 Annual Report on Form 10-K filed June 25, 2008.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “ Business Combinations ” (“SFAS 141R”). SFAS 141R changes the accounting for business combinations in a number of areas including the treatment of contingent consideration, pre-acquisition contingencies, transaction costs, in-process research and development and restructuring costs. SFAS 141R will be effective at the beginning of our fiscal 2010 year and will change our accounting treatment for business combinations on a prospective basis.

In March 2008, the FASB issued SFAS No. 161, “ Disclosures about Derivative Instruments and Hedging Activities , an amendment of SFAS No. 133 ” (“SFAS 161”). SFAS 161 is intended to improve financial standards for derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand the effects on an entity’s financial position, financial performance and cash flows. Entities are required to provide enhanced disclosures about: how and why an entity uses derivative instruments; how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations; and how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. SFAS 161 will be effective at the beginning of our fourth quarter of fiscal year 2009. The Company is evaluating the impact the adoption of SFAS 161 will have on our consolidated financial statements.

FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS

Certain information of a non-historical nature contains forward-looking statements. Words such as “believes,” “expects,” “plans,” “estimates,” “intends” and variations of such words are intended to identify such forward-looking statements. These statements are not guaranties of future performance and are subject to certain risks, uncertainties or assumptions that are difficult to predict; therefore, the Company cautions shareholders and prospective investors that the following important factors, among others, could cause the Company’s actual operating results to differ materially from those expressed in any forward-looking statements. The statements under this caption are intended to serve as cautionary statements within the meaning of the Private Securities Litigation Reform Act of 1995. The following information is not intended to limit in any way the characterization of other statements or information under other captions as cautionary statements for such purpose. The order in which such factors appear below should not be construed to indicate their relative importance or priority.


CONF CALL


James Wiltz

Thank you, Nicole. Good morning and thanks for participating in our first quarter conference call. Joining me today is Steve Armstrong, our Executive Vice President and Chief Financial Officer. We will be pleased to your questions at the conclusion of our remarks.

Since Regulation FD prohibits us from providing investors with any earnings guidance, unless we release that information simultaneously, we’ve included financial guidance for the second quarter of 2009 in our press release earlier today.

Our guidance is subject to a number of risks and uncertainties that could cause Patterson’s actual results to vary from our forecast. These risks and uncertainties are discussed in detail in our annual report on Form 10-K, and our other SEC filings and we urge you to review this material.

Turning now to our first quarter results. Consolidated sales rose 6% to $743.9 million. Earnings per share increased 11% to $0.39 from $0.35 in last year’s first quarter. As many of you know, we completed $525 million of new long-term debt financing in last year’s fourth quarter, which enabled us to lower cost of capital about 100 basis points.

The proceeds of this debt issuance are the portions of our cash reserve were used to repurchase 19 million shares of our common stock in 2008. We are expecting accretion of additional $0.06 to $0.07 per share in 2009 as a result of these transactions. An additional interest expense associated with this debt negatively affected our net income in the first quarter and it will continue to affect the comparability of net income over the balance of 2009.

But by completing these transactions in 2008, we believe we have better positioned Patterson to increase its returns to our shareholders, while maintaining our financial flexibility to take advantage of acquisition or other investment opportunities. Steve will provide more detail on the financial impact of these transactions during his prepared remarks.

Now, I will briefly review the performance of our three businesses. Patterson Dental results were generally consistent with our internal forecast for this period. Sales of consumable supplies increased 6%, reflecting the continued strength of the North American dental market.

Total sales of equipment and software were down modestly in the first quarter, but sales of basic equipment were up 4% in this period. As anticipated, first quarter sales of software and digital x-ray systems were adversely affected by the roll-out of our previously announced sales and marketing initiatives which have fundamentally changed many of the ways we do business. Given the nature of these changes and the short-term distractions they created for our sales force, we believe this roll-out also had an impact on the CEREC sales.

Our recently implemented initiative consists of the following elements. The commission structure of Patterson Dental’s sales force has been revamped to better align compensation with the growth objectives and strategies of the organization. Among other things our new compensation structure is designed to sharpen our focus on the digital market. Responsibility for selling digital solutions and patient education products has been refocused on our territory field representatives and equipment specialists.

We have started offering our EagleSoft practice management software free of charge to any dentist with the goal of winning new customers for our digital x-ray solution and growing revenues generated by software support and e-business services and increasing sales of other equipment and consumable supplies.

In addition our customer loyalty program, now called Patterson Advantage, has been thoroughly redesigned to give customers a strong incentive to partner with us for meeting all of their dental office needs. And finally, the selection and training of field sales representatives has been significantly strengthened.

By further strengthening our position as the leader and innovator in the North American dental market. These initiatives are expected to generate improving results at Patterson Dental in the future.

Turning now to Webster, sales of Veterinary supply unit increased 10% in the first quarter to $123.3 million. This solid growth was driven by the continued robust performance of Webster’s consumable supply business. Later this quarter Webster will be stocking a whole compliment of the inventory in our expanded Dinuba, California distribution center, which is already utilized by our Dental and rehabilitation units. As a result Dinuba will become Patterson’s second distribution center serving all three businesses while four other facilities are currently dual use.

Patterson Medical, our rehabilitation supply and equipment unit posted first quarter sales growth of 10% to $100.7 million. Excluding the impact of acquisitions over the past year related to this units branch office strategy and foreign currency translations, first quarter sales of Patterson Medical rose a solid 6%.

Sales of rehabilitation equipment were particularly strong in the first quarter, due partly to the addition of the industry-leading equipment lines manufactured by Chattanooga group. Patterson Medical’s performance also benefited from strong sales posted by it’s sports medicine business.

Our rehabilitation unit also is benefiting from on-going efforts to further expand and strengthen it's value added platform. 12 branches are currently operating and each one is cut over to Patterson and management systems. We expect to acquire or internally start additional branch offices in 2009, although at a slower rate than in 2008.

In addition, Patterson Medical sales force has grown to more than 200 and we will be increasing this number during the coming year. Patterson Medical has made a significant process in strengthening it's operations and market position and we believe this business is increasingly well positioned to realize it's full potential in the global rehabilitation market.

Turning now to our guidance contained in this mornings release. We are forecasting earnings of $0.45 to $0.47 per diluted share for the second quarter ending October 25, 2008. We are also reiterating our previously issued guidance for the full year of $1.94 to $1.98 per diluted share, reaffirming our belief that 2009 should be a year of improved performance.

Thank you. Now Steve Armstrong will review some highlights from our first quarter results. Steve.

Steve Armstrong

Thank you, Jim. On a consolidated basis our key operating statistics in the first quarter weren’t change from the prior year and generally in lined with our expectations. With the strategy changes announced in the Dental segment during the quarter, which we believe are very important to improving the success of this segment. There were two immediate impacts that adversely affected our operating results. First, since we are no longer charging for EagleSoft, practice management software, our revenues from this product are down 100%. The impact of this decision reasonably reduced consolidated operating margins by over 30 basis points on a comparable basis.

And secondly, operating expenses for the Dental segment reflect the incremental expense from the initial rollout of this strategy changes. As we move through this fiscal year, we expect that the extent of the impact of these changes will progressively decline over the next three quarters.

Our Veterinary segment saw improvement in both their gross margins and operating leverage result, brining 50 basis points of operating margin expansion in the quarter.

Our Medical segment improved their gross margins but the expense structure continues to be impacted by the branch expansion initiatives from last year and the conversion cost of this unit transitions to the Patterson system.

By segment our first quarter operating margins were 11.5% for Dental, 13.9% for Medical and 4.8% for Veterinary.

As Jim mentioned the debt that we issued in the latter part of fiscal 2008 and an incremental interest expense and nearly $6.7 million or $4.2 million net of tax. Since most of the new debt was issued at fixed rate, we would expect the same incremental impact going forward. We will have this same incremental impact going forward, however, total interest expense will decline by $1.3 million per quarter following the pay down in November of the remaining $130 million of debt we issued in 2003 is part of the Patterson Medical acquisition.

A quick review of our balance sheet shows that our accounts receivable was reduced by about $50 million in comparison to the fiscal year and we historically produced higher levels of sales in our third and fourth fiscal quarters in comparison to the first quarter of the new fiscal year which result in an accounts receivable pay down in most year's.

In comparison to the end of fiscal 2008, inventory increased by approximately $38 million at the end of this year's first quarter. This increase resulted from normal seasonal increases in our warehouse inventories to improve service levels along with higher levels of CEREC and other equipment inventory.

As CEREC growth was due primarily to increasingly unit levels of the XL milling chamber for the [trade-in] program that is running this summer.

Our DSO stands at 43 days unchanged from the prior year, while inventory return are 6.7 compared to 7.3 a year ago. The inventory return should improve as we move through the year. We generated cash flow from operations of approximately $33 million in the first quarter compared to $53 million in the year earlier period. The decrease is primarily due to a large sale of finance contracts in the first quarter of last year.

Capital expenditures in the quarter reflect the expansion cost of the Dinuba Distribution Center which will be completed in the second quarter and the expansion and renovation of the general office here in Minnesota. With that, I am going to turn it back to Nicole,

and she will poll you for your questions. Thank you.


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