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Patterson Dental Co. Business Information, Profile, and History

million company sales equipment

1031 Mendota Heights Road
St. Paul, Minnesota 55120
U.S.A.

Company Perspectives:

"The mission of Patterson Dental Company is to remain the leader in the dental marketplace by assessing, meeting and exceeding customer needs which provide tangible value for the customer and profitable growth opportunities for the company while providing personal and professional growth opportunities for our employees."

History of Patterson Dental Co.

Patterson Dental Co. was, in the mid-1990s, the largest distributor of dental products in North America, with a share of about 20 percent of the annual $2.5 billion dental distribution market in the United States and Canada. In 1996 it was supplying a full line of more than 70,000 dental supplies and equipment to dentists, dental laboratories, and institutions in the United States and Canada, including its own private label line of dental supplies, consisting of about 1,500 items. Patterson Dental also was offering related services, including the installation, maintenance, repair, and financing of dental equipment. The company more than doubled its revenues between fiscal 1991 and 1995 (the years ending April 30). It was the most profitable of 194 companies listed on the NASDAQ stock exchange during this period, with a five-year average return on equity of 81 percent. In 1996 it ventured into a new market by acquiring a producer and marketer of stationery and office supply products to health care providers.

Patterson Dental to 1985

The company was established in 1877, when Myron F. and John G. Patterson bought a Milwaukee drugstore, driving up sales volume by offering customers free swigs from a keg of bourbon. It was incorporated in Delaware in 1925 as Patterson (M.F.) Dental Supply Co. of Delaware. In the 1950s it was distributing dental supplies and equipment west of the Mississippi River. Net sales grew from $12.8 million in 1954 to $15.7 million in 1958, and net profit grew from $349,000 to $541,000 in this period. In 1959 the head office was in St. Paul, and the company, in addition to office buildings in St. Paul and Minneapolis, owned buildings occupied by six branches. Its eight subsidiaries included M.F. Patterson Dental Supply Co. of Minnesota and M.F. Patterson Dental Supply Co. of Wisconsin. W.O. Patterson was the president.

Owners and directors of Patterson Dental owned 16 percent of the company, with another 42 percent of the shares held in trust, when the company went public by offering a small block of shares for $10.50 a share in 1959. Also in that year, the company acquired California Dental Supply Co. for $2 million. Net sales grew slowly, from $18.4 million in 1959 to $19.6 million in 1963, and net income of $453,000 in 1963 failed to reach the 1959 peak of $556,000.

By this time high-speed drills and improved devices for cleaning teeth and performing other dental functions had done much to reduce the pain and discomfort suffered by patients and had also provided an important sales stimulant for manufacturers of dental equipment. Of about 200 companies making and distributing dental equipment in 1962, Patterson Dental was among only a handful that were publicly owned. In 1964 it was acquired by another public dental supply firm, Ritter Co., in an exchange of stock valued at about $11.8 million. The transaction gave Ritter a retail operation for the first time, since it had been selling its products through independent dealers.

This merger was formally enacted in 1965 despite a request by the U.S. Department of Justice for delay on the ground that it might raise some questions under federal antitrust laws. In 1970 a federal district court found that the acquisition "might substantially lessen competition in the dental-equipment market" and, therefore, that it violated the Clayton Antitrust Act. Sybron Corp.--the name Ritter had taken in 1968--was ordered in 1971 to divest itself of Patterson Dental within three years.

Sybron sold Patterson Dental to Doric Corp., a conglomerate, in 1972 for $20 million in cash. That year Patterson Dental, which was made a Doric subsidiary, had pretax earnings of $1.6 million on sales of $22.9 million, of which equipment accounted for about 41 percent and supplies and other for the remainder. The dental equipment it was distributing and selling included dental chairs, X-ray machines, sterilizers, lighting, cabinets, and power supplies. Dental supplies sold by the company included artificial teeth, gold, filing materials, instruments, and anesthetics. Its own subsidiary, Dental Capital Corp., was financing customer purchases. At this time Patterson Dental had its headquarters and a central warehousing facility for special products in Bloomington, Minnesota. There were 39 distribution outlets in 17 states in the western United States.

Patterson Dental's sales grew to $40.7 million in 1974, and its pretax earnings rose to $3 million that year. Doric was sold in 1975 to Esmark Inc., a conglomerate holding company, and Patterson Dental became a unit of Estech, Inc., a subsidiary of Esmark. In 1976 Patterson Dental expanded its distribution through the acquisition of certain assets of the Dental Products Division of Litton Industrial Products, Inc. By 1980 Patterson Dental believed itself to be the second largest distributor of dental equipment and supplies in the United States. Soon after that the unit was transferred to Estronicks, Inc., another Esmark subsidiary.

Private Company, 1985-1992

The Beatrice Cos., Inc. acquired Esmark in 1984. In May 1985 PDA Inc., a holding company formed by Patterson Dental's management and certain investors, purchased the company from a subsidiary of Beatrice in a leveraged buyout. Peter L. Frechette, president since 1982, continued as chief executive officer of the private company, which had 1,280 employees and sales of $168 million in 1985. "We bought the company with a fairly simple strategy," Frechette later told a Minnesota reporter. "Buy it at the right price [$50 million] and have a financing portfolio in place which would allow us to pay off the debt right away and give us time to put our distribution strategy in place. We didn't buy this company to make money. ... Making money is more a byproduct of doing something else."

Following the acquisition, management implemented strategies to increase profitability by improving efficiency and the quality and breadth of customer service. One means of doing this was a computerized order-processing network. The company also improved its inventory tracking and other management-information systems, introduced centralized purchasing, and reduced the number of distribution locations in the United States from 56 to 11. It also induced revenue growth by internal expansion and strategic acquisitions, including the 1987 acquisition of D.L. Saslow Co., the third largest distributor of dental products in the United States, for $12 million, and the purchase of smaller firms in 1990. During fiscal 1986 the company had an operating loss of $12,000 on net sales of $165.8 million, but its fortunes improved rapidly thereafter. In fiscal 1990 it earned $6 million in net income on net sales of $220.6 million.

Public Enterprise Again, 1992-1996

Patterson Dental Co. was incorporated in Minnesota in 1992 through the merger of PDA and Patterson-Minnesota. Shortly thereafter it went public, offering three million shares of common stock at $16 a share, the proceeds enabling the company to retire a long-term debt of $19.2 million as well as to clear its balance sheet and store funds for future acquisitions. Following the completion of the offering, prior stockholders retained 79 percent of the shares, with an employee stock ownership plan holding 18 percent of the shares and Frechette and Ronald Ezerski, vice-president of finance, each holding 14.5 percent.

By this time the company was distributing dental supplies and equipment throughout the United States, with a full line of more than 50,000 products, including 1,400 private label products sold under the Patterson name. It also was offering customers a full range of related services, including dental equipment installation, maintenance, and repair, and dental office design. Net income in fiscal 1992, when the company had 79 sales offices in 43 states, was $8.5 million on $277.1 million in revenues.

Patterson Dental proved to be a hit with investors, its stock rising as high as $25.50 a share before 1992 ended. It rewarded them with rosy results for fiscal 1993: $12.8 million in net income of $342.8 million in net sales. In October 1993 the company swallowed the Canadian subsidiary of HealthCo International, Inc., purchasing it from a U.S. bankruptcy trustee for $13.5 million. Prior to HealthCo's bankruptcy, it had been the leading distributor of dental supplies in the United States, a position Patterson Dental now enjoyed. The company hired 73 of Healthco's sales representatives. It also was expanding its electronic order system, in part by the installation, beginning in 1987, of a computer in any dental office. Some 3,000 were already in place, with 100 being added each month.

Patterson Dental's sales and income grew vigorously in fiscal 1994, reaching $466.9 million and $19.3 million, respectively. Some 12.3 percent of its revenue growth was attributed to the U.S. Healthco salespeople it hired and 8.5 percent to the acquisition of the Healthco Canadian subsidiary. The company's stock advanced to a high of $46.50 a share before a three-for-two split at midyear. Investment analysts were bullish on Patterson Dental's business sector, forecasting that, along with greater wealth, aging baby boomers would have more dental care needs. One analyst predicted, "The first generation able to hold on to their teeth for life will be willing to pursue aggressive treatment to keep them in good condition." With dental spending only 4.7 percent of the total $943 billion health care bill in the United States, this item was not seen as a prime target for cost cutting by the federal government.

Patterson Dental ended fiscal 1995 with handsome growth in net sales to $532.6 million and net income to $24.2 million. Sales had now nearly quadrupled and earnings had risen more than sevenfold since the 1985 management-led leveraged buyout. The stock, in October 1995, had almost tripled in value since the 1992 public offering. The following month Patterson Dental agreed to acquire Omaha-based Barber Dental Supply Inc., which had annual sales of about $5 million.

During fiscal 1996 Patterson Dental posted new records, although it was growing at a slower rate. It ended the fiscal year with net sales of $581.9 million and net income of $28.7 million. The company's stock advanced to nearly $37 a share in 1996. In August of that year it acquired Deluxe Corp.'s Colwell division, a national direct supplier of stationery and office products to dental, medical, and allied health providers. Colwell had sales of about $55 million in 1995.

1996 and Beyond

At the end of fiscal 1996 Patterson's full line of products included supplies such as X-ray film and solutions, impression and restorative materials, hand instruments and handpieces, dental chairs, dental handpiece control units, diagnostic equipment, sterilizers, dental lights, and compressors. Its full range of related services included dental equipment installation, maintenance, and repair, dental office design, and equipment financing. Supplies came to 60 percent of net sales and equipment amounted to 29 percent, with other sales accounting for the remaining 11 percent. Patterson Dental was processing an average of more than 8,000 customer orders each business day and estimated that 97 percent of the consumable goods orders were being shipped complete within 24 hours.

In addition to its computerized remote-order entry (REMO) systems permitting customers to place orders directly to the company around the clock through a personal computer, Patterson Dental was offering "use installed" customers PDXpress, a computerized order-entry system introduced in 1991 utilizing a hand-held bar-code scanner to eliminate handwritten order forms. More than 5,500 of its customers were utilizing either REMO or PDXpress to order dental supplies. During the fiscal year the company also originated more than $42 million of equipment finance contracts.

Patterson Dental maintained 90 sales offices at the end of fiscal 1996 and had a staff of more than 750 direct-sales representatives and equipment specialists. There were nine distribution centers. In 1994 corporate headquarters were moved from leased space in Bloomington to a two-story, 52,100-square-foot acquired building on a 12-acre site in Mendota Heights, south of St. Paul. Managers and directors held 26 percent of the company's stock and an employee stock ownership plan accounted for 18 percent in 1995. The company's long-term debt was $3.2 million at the end of fiscal 1996.

Principal Subsidiaries: Direct Dental Supply Co.; Patterson Dental Canada, Inc.; Patterson Dental Supply, Inc.

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