Form 10-Q PATTERSON COMPANIES, For: Jan 29

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March 2, 2022 12:38 PM EST

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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________________________________________________________

FORM 10-Q

____________________________________________________________


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED January 29, 2022.


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 0-20572

__________________________________________________________

PATTERSON COMPANIES, INC.

(Exact Name of Registrant as Specified in Its Charter)

____________________________________________________________


Minnesota		41-0886515
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification Number)
1031 Mendota Heights Road
St. Paul	Minnesota	55120
(Address of Principal Executive Offices)		(Zip Code)

(651) 686-1600

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of exchange on which registered
Common Stock, par value $.01	PDCO	NASDAQ Global Select Market

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of February 23, 2022, there were 97,622,000 shares of Common Stock of the registrant issued and outstanding.

Table of Contents

PATTERSON COMPANIES, INC.

INDEX


			Page
PART I - FINANCIAL INFORMATION

Item 1- Financial Statements			3

Condensed Consolidated Balance Sheets			3

Condensed Consolidated Statements of Operations and Other Comprehensive Income			4

Condensed Consolidated Statements of Changes in Stockholders' Equity			5

Condensed Consolidated Statements of Cash Flows			7

Notes to Condensed Consolidated Financial Statements			8

Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations			19

Item 3 - Quantitative and Qualitative Disclosures about Market Risk			26

Item 4 - Controls and Procedures			26

PART II - OTHER INFORMATION

Item 1 - Legal Proceedings			27

Item 1A - Risk Factors			27

Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds			27

Item 6 - Exhibits			28

Signatures			29

Table of Contents

PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PATTERSON COMPANIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

(Unaudited)


	January 29, 2022		April 24, 2021
ASSETS
Current assets:
Cash and cash equivalents	$	165,044	$	143,244
Receivables, net of allowance for doubtful accounts of $6,780 and $6,138	467,111		449,235
Inventory	868,728		736,778
Prepaid expenses and other current assets	289,548		286,672
Total current assets	1,790,431		1,615,929
Property and equipment, net	214,426		219,438
Operating lease right-of-use assets, net	71,817		77,217
Long-term receivables, net	153,433		223,970
Goodwill, net	140,670		139,932
Identifiable intangibles, net	262,955		279,644
Investments	138,471		105,522
Other non-current assets	91,293		89,859
Total assets	$	2,863,496	$	2,751,511
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	715,544	$	609,264
Accrued payroll expense	101,320		118,425
Other accrued liabilities	149,816		175,975
Operating lease liabilities	30,417		32,252
Current maturities of long-term debt	—		100,750
Borrowings on revolving credit	135,000		53,000
Total current liabilities	1,132,097		1,089,666
Long-term debt	488,353		487,545
Non-current operating lease liabilities	43,513		48,318
Other non-current liabilities	155,355		161,311
Total liabilities	1,819,318		1,786,840
Stockholders’ equity:
Common stock, $0.01 par value: 600,000 shares authorized; 97,587 and 96,813 shares issued and outstanding	976		968
Additional paid-in capital	191,505		169,099
Accumulated other comprehensive loss	(67,552)		(62,592)
Retained earnings	918,311		855,741

Total Patterson Companies, Inc. stockholders' equity	1,043,240		963,216
Noncontrolling interests	938		1,455
Total stockholders’ equity	1,044,178		964,671
Total liabilities and stockholders’ equity	$	2,863,496	$	2,751,511

See accompanying notes

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PATTERSON COMPANIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND OTHER COMPREHENSIVE INCOME

(In thousands, except per share amounts)

(Unaudited)


	Three Months Ended				Nine Months Ended
	January 29, 2022		January 23, 2021		January 29, 2022		January 23, 2021
Net sales	$	1,596,596	$	1,551,268	$	4,860,633	$	4,350,273
Cost of sales	1,259,985		1,226,727		3,919,785		3,451,548
Gross profit	336,611		324,541		940,848		898,725
Operating expenses	275,778		262,860		856,684		725,466
Operating income	60,833		61,681		84,164		173,259
Other income (expense):
Gains on investments	13,092		—		100,919		—
Other income, net	6,186		4,323		14,413		9,580
Interest expense	(4,879)		(5,532)		(15,595)		(18,604)
Income before taxes	75,232		60,472		183,901		164,235
Income tax expense	18,657		11,905		45,586		37,640


Net income	56,575		48,567		138,315		126,595
Net loss attributable to noncontrolling interests	(431)		(192)		(1,017)		(631)
Net income attributable to Patterson Companies, Inc.	$	57,006	$	48,759	$	139,332	$	127,226
Earnings per share attributable to Patterson Companies, Inc.:


Basic	$	0.58	$	0.51	$	1.43	$	1.33



Diluted	$	0.58	$	0.50	$	1.42	$	1.32
Weighted average shares:
Basic	97,471		95,734		97,213		95,472
Diluted	98,554		96,953		98,450		96,379
Dividends declared per common share	$	0.26	$	0.26	$	0.78	$	0.78
Comprehensive income:
Net income	$	56,575	$	48,567	$	138,315	$	126,595
Foreign currency translation (loss) gain	(6,506)		11,790		(5,742)		27,706
Cash flow hedges, net of tax	261		261		782		782
Comprehensive income	$	50,330	$	60,618	$	133,355	$	155,083

See accompanying notes

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PATTERSON COMPANIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)


	Common Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Loss		Retained Earnings		Unearned ESOP Shares		Non-controlling Interests		Total
	Shares	Amount
Balance at April 25, 2020	95,947	$	959	$	146,606	$	(97,039)	$	799,652	$	(16,061)	$	2,327	$	836,444
Foreign currency translation	—	—		—		12,589		—		—		—		12,589
Cash flow hedges	—	—		—		260		—		—		—		260
Net income (loss)	—	—		—		—		24,407		—		(205)		24,202
Dividends declared	—	—		—		—		(24,472)		—		—		(24,472)
Common stock issued and related tax benefits	309	4		(899)		—		—		—		—		(895)

Stock-based compensation	—	—		6,610		—		—		—		—		6,610




Balance at July 25, 2020	96,256	963		152,317		(84,190)		799,587		(16,061)		2,122		854,738
Foreign currency translation	—	—		—		3,327		—		—		—		3,327
Cash flow hedges	—	—		—		261		—		—		—		261
Net income (loss)	—	—		—		—		54,060		—		(234)		53,826
Dividends declared	—	—		—		—		(24,903)		—		—		(24,903)
Common stock issued and related tax benefits	240	2		1,209		—		—		—		—		1,211

Stock-based compensation	—	—		4,267		—		—		—		—		4,267

Balance at October 24, 2020	96,496	965		157,793		(80,602)		828,744		(16,061)		1,888		892,727
Foreign currency translation	—	—		—		11,790		—		—		—		11,790
Cash flow hedges	—	—		—		261		—		—		—		261
Net income (loss)	—	—		—		—		48,759		—		(192)		48,567
Dividends declared	—	—		—		—		(25,265)		—		—		(25,265)
Common stock issued and related tax benefits	125	1		1,505		—		—		—		—		1,506

Stock-based compensation	—	—		5,019		—		—		—		—		5,019

Balance at January 23, 2021	96,621	966		164,317		(68,551)		852,238		(16,061)		1,696		934,605
Foreign currency translation	—	—		—		5,699		—		—		—		5,699
Cash flow hedges	—	—		—		260		—		—		—		260
Net income (loss)	—	—		—		—		28,755		—		(241)		28,514
Dividends declared	—	—		—		—		(25,252)		—		—		(25,252)
Common stock issued and related tax benefits	192	2		(545)		—		—		—		—		(543)

Stock-based compensation	—	—		5,327		—		—		—		—		5,327
ESOP activity	—	—		—		—		—		16,061		—		16,061
Balance at April 24, 2021	96,813	$	968	$	169,099	$	(62,592)	$	855,741	$	—	$	1,455	$	964,671

See accompanying notes

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PATTERSON COMPANIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)


	Common Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Loss		Retained Earnings		Unearned ESOP Shares		Non-controlling Interests		Total
	Shares	Amount
Balance at April 24, 2021	96,813	$	968	$	169,099	$	(62,592)	$	855,741	$	—	$	1,455	$	964,671
Foreign currency translation	—	—		—		324		—		—		—		324
Cash flow hedges	—	—		—		261		—		—		—		261
Net income (loss)	—	—		—		—		33,996		—		(194)		33,802
Dividends declared	—	—		—		—		(25,540)		—		—		(25,540)
Common stock issued and related tax benefits	422	4		(756)		—		—		—		—		(752)

Stock-based compensation	—	—		7,839		—		—		—		—		7,839


Balance at July 31, 2021	97,235	972		176,182		(62,007)		864,197		—		1,261		980,605
Foreign currency translation	—	—		—		440		—		—		—		440
Cash flow hedges	—	—		—		260		—		—		—		260
Net income (loss)	—	—		—		—		48,330		—		(392)		47,938
Dividends declared	—	—		—		—		(25,630)		—		—		(25,630)
Common stock issued and related tax benefits	257	3		2,708		—		—		—		—		2,711

Stock-based compensation	—	—		5,658		—		—		—		—		5,658


Balance at October 30, 2021	97,492	975		184,548		(61,307)		886,897		—		869		1,011,982
Foreign currency translation	—	—		—		(6,506)		—		—		—		(6,506)
Cash flow hedges	—	—		—		261		—		—		—		261
Net income (loss)	—	—		—		—		57,006		—		(431)		56,575
Dividends declared	—	—		—		—		(25,592)		—		—		(25,592)
Common stock issued and related tax benefits	95	1		2,070		—		—		—		—		2,071

Stock-based compensation	—	—		4,887		—		—		—		—		4,887

Contribution from noncontrolling interest	—	—		—		—		—		—		500		500
Balance at January 29, 2022	97,587	$	976	$	191,505	$	(67,552)	$	918,311	$	—	$	938	$	1,044,178

See accompanying notes

Table of Contents

PATTERSON COMPANIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Nine Months Ended
	January 29, 2022		January 23, 2021
Operating activities:
Net income	$	138,315	$	126,595


Adjustments to reconcile net income to net cash used in operating activities:
Depreciation	32,999		30,452
Amortization	28,406		27,903

Gains on investments	(100,919)		—

Non-cash employee compensation	18,384		25,161



Non-cash losses (gains) and other, net	5,815		6,791

Change in assets and liabilities:
Receivables	(850,628)		(685,345)
Inventory	(132,689)		(12,506)
Accounts payable	110,862		(199,558)
Accrued liabilities	(49,296)		67,503

Other changes from operating activities, net	(35,388)		8,120


Net cash used in operating activities	(834,139)		(604,884)
Investing activities:
Additions to property and equipment	(26,488)		(21,101)
Collection of deferred purchase price receivables	918,354		634,499
Acquisitions, net of cash acquired	(19,793)		—
Sale of investments	74,346		396
Other investing activities	—		2,097


Net cash provided by investing activities	946,419		615,891
Financing activities:
Dividends paid	(75,746)		(50,077)




Payments on long-term debt	(100,750)		—
Draw on revolving credit	82,000		108,000
Other financing activities	4,030		2,139
Net cash (used in) provided by financing activities	(90,466)		60,062
Effect of exchange rate changes on cash	(14)		6,948
Net change in cash and cash equivalents	21,800		78,017
Cash and cash equivalents at beginning of period	143,244		77,944
Cash and cash equivalents at end of period	$	165,044	$	155,961

Supplemental disclosure of non-cash investing activity:
Retained interest in securitization transactions	$	822,787	$	659,669

See accompanying notes

Table of Contents

PATTERSON COMPANIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars, except per share amounts, and shares in thousands)

(Unaudited)

Note 1. General

Basis of Presentation

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly the financial position of Patterson Companies, Inc. (referred to herein as "Patterson" or in the first person notations "we," "our," and "us") as of January 29, 2022, and our results of operations and cash flows for the periods ended January 29, 2022 and January 23, 2021. Such adjustments are of a normal recurring nature. The results of operations for the three and nine months ended January 29, 2022 are not necessarily indicative of the results to be expected for any other interim period or for the year ending April 30, 2022. These financial statements should be read in conjunction with the financial statements included in our 2021 Annual Report on Form 10-K filed on June 23, 2021.

The unaudited condensed consolidated financial statements include the assets and liabilities of PDC Funding Company, LLC ("PDC Funding"), PDC Funding Company II, LLC ("PDC Funding II"), PDC Funding Company III, LLC ("PDC Funding III") and PDC Funding Company IV, LLC ("PDC Funding IV"), which are our wholly owned subsidiaries and separate legal entities formed under Minnesota law. PDC Funding and PDC Funding II are fully consolidated special purpose entities established to sell customer installment sale contracts to outside financial institutions in the normal course of their business. PDC Funding III and PDC Funding IV are fully consolidated special purpose entities established to sell certain receivables to unaffiliated financial institutions. The assets of PDC Funding, PDC Funding II, PDC Funding III and PDC Funding IV would be available first and foremost to satisfy the claims of its creditors. There are no known creditors of PDC Funding, PDC Funding II, PDC Funding III or PDC Funding IV. The unaudited condensed consolidated financial statements also include the assets and liabilities of Technology Partner Innovations, LLC, which is further described in Note 8.

Fiscal Year End

We operate with a 52-53 week accounting convention with our fiscal year ending on the last Saturday in April. The third quarter of fiscal 2022 and 2021 represents the 13 weeks ended January 29, 2022 and the 13 weeks ended January 23, 2021, respectively. The nine months ended January 29, 2022 and January 23, 2021 included 40 and 39 weeks, respectively. Fiscal 2022 will include 53 weeks and fiscal 2021 included 52 weeks.

Other Income, Net

Other income, net consisted of the following:


	Three Months Ended				Nine Months Ended
	January 29, 2022		January 23, 2021		January 29, 2022		January 23, 2021
Gain (loss) on interest rate swap agreements	$	3,688	$	145	$	5,805	$	(635)
Investment income and other	2,498		4,178		8,608		10,215
Other income, net	$	6,186	$	4,323	$	14,413	$	9,580

Comprehensive Income

Comprehensive income is computed as net income including certain other items that are recorded directly to stockholders’ equity. Significant items included in comprehensive income are foreign currency translation adjustments and the effective portion of cash flow hedges, net of tax. Foreign currency translation adjustments do not include a provision for income tax because earnings from foreign operations are considered to be indefinitely reinvested outside the U.S. The income tax expense related to cash flow hedges was $80 and $80 for the three months ended January 29, 2022 and January 23, 2021, respectively. The income tax expense related to cash flow hedges was $241 and $241 for the nine months ended January 29, 2022 and January 23, 2021, respectively.

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Earnings Per Share ("EPS")

The following table sets forth the computation of the weighted average shares outstanding used to calculate basic and diluted EPS:


	Three Months Ended		Nine Months Ended
	January 29, 2022	January 23, 2021	January 29, 2022	January 23, 2021
Denominator for basic EPS – weighted average shares	97,471	95,734	97,213	95,472
Effect of dilutive securities – stock options, restricted stock and stock purchase plans	1,083	1,219	1,237	907
Denominator for diluted EPS – weighted average shares	98,554	96,953	98,450	96,379

Potentially dilutive securities representing 828 shares and 758 shares for the three and nine months ended January 29, 2022, respectively, and 638 shares and 1,207 shares for the three and nine months ended January 23, 2021, respectively, were excluded from the calculation of diluted EPS because their effects were anti-dilutive using the treasury stock method.

Revenue Recognition

Revenues are generated from the sale of consumable products, equipment and support, software and support, technical service parts and labor, and other sources. Revenues are recognized when or as performance obligations are satisfied. Performance obligations are satisfied when the customer obtains control of the goods or services.

Consumable, equipment, software and parts sales are recorded upon delivery, except in those circumstances where terms of the sale are FOB shipping point, in which case sales are recorded upon shipment. Technical service labor is recognized as it is provided. Revenue derived from equipment and software support is recognized ratably over the period in which the support is provided.

In addition to revenues generated from the distribution of consumable products under arrangements (buy/sell agreements) where the full market value of the product is recorded as revenue, we earn commissions for services provided under agency agreements. The agency agreement contrasts to a buy/sell agreement in that we do not have control over the transaction, as we do not have the primary responsibility of fulfilling the promise of the good or service and we do not bill or collect from the customer in an agency relationship. Commissions under agency agreements are recorded when the services are provided.

Estimates for returns, damaged goods, rebates, loyalty programs and other revenue allowances are made at the time the revenue is recognized based on the historical experience for such items. The receivables that result from the recognition of revenue are reported net of related allowances. We maintain a valuation allowance based upon the expected collectability of receivables held. Estimates are used to determine the valuation allowance and are based on several factors, including historical collection data, current and forecasted economic trends and credit worthiness of customers. Receivables are written off when we determine the amounts to be uncollectible, typically upon customer bankruptcy or non-response to continuous collection efforts. The portions of receivable amounts that are not expected to be collected during the next twelve months are classified as long-term.

Net sales do not include sales tax as we are considered a pass-through conduit for collecting and remitting sales tax.

Contract Balances

Contract balances represent amounts presented in our condensed consolidated balance sheets when either we have transferred goods or services to the customer or the customer has paid consideration to us under the contract. These contract balances include accounts receivable, contract assets and contract liabilities.

Contract asset balances as of January 29, 2022 and April 24, 2021 were $632 and $2,491, respectively. Our contract liabilities primarily relate to advance payments from customers, upfront payments for software and support provided over time, and options that provide a material right to customers, such as our customer loyalty programs. At January 29, 2022 and April 24, 2021, contract liabilities of $24,104 and $23,526 were reported in other accrued

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liabilities, respectively. During the nine months ended January 29, 2022, we recognized $18,703 of the amount previously deferred at April 24, 2021.

Recently Issued Accounting Pronouncements

In March 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” and in January 2021 issued ASU No. 2021-01, “Reference Rate Reform (Topic 848): Scope”. These ASUs provide temporary optional expedients and exceptions to existing guidance on contract modifications and hedge accounting to facilitate the market transition from existing reference rates, such as LIBOR which is being phased out beginning at the end of 2021, to alternate reference rates. These standards were effective upon issuance. We are evaluating the optional relief guidance provided within these ASUs, and are reviewing our debt securities, derivative instruments and customer financing contracts that currently utilize LIBOR as the reference rate.

Note 2. Acquisitions

During the first quarter of fiscal 2022, we acquired substantially all of the assets of Miller Vet Holdings, LLC, a multiregional veterinary distributor, for total cash consideration of $19,793 and liabilities assumed of $6,799. We have included its results of operations in our financial statements since the date of acquisition within the Animal Health segment. This acquisition is expected to grow our presence in the companion animal market and drive increased operating leverage and synergies. The accounting for the acquisition is not complete because certain information and analysis that may impact our initial valuations are still being obtained or reviewed. As of January 29, 2022, we have recorded $14,000 of identifiable intangibles, $997 of goodwill, which is deductible for income tax purposes, and net tangible assets of $4,796 in our condensed consolidated balance sheets related to this acquisition. Adjustments to decrease goodwill by $192 during the second quarter of fiscal 2022 and to increase goodwill by $126 during the third quarter of fiscal 2022 were made as a result of working capital adjustments. The acquisition did not materially impact our financial statements, and therefore pro forma results are not provided.

Note 3. Receivables Securitization Program

We are party to certain receivables purchase agreements (the “Receivables Purchase Agreements”) with MUFG Bank, Ltd. ("MUFG") (f.k.a. The Bank of Tokyo-Mitsubishi UFJ, Ltd.), under which MUFG acts as an agent to facilitate the sale of certain Patterson receivables (the “Receivables”) to certain unaffiliated financial institutions (the “Purchasers”). The sale of these receivables is accounted for as a sale of assets under the provisions of ASC 860, Transfers and Servicing. We utilize PDC Funding III and PDC Funding IV to facilitate the sale to fulfill requirements within the agreement. We use a daily unit of account for these Receivables.

The proceeds from the sale of these Receivables comprise a combination of cash and a deferred purchase price (“DPP”) receivable. The DPP receivable is ultimately realized by Patterson following the collection of the underlying Receivables sold to the Purchasers. The amount available under the Receivables Purchase Agreements fluctuates over time based on the total amount of eligible Receivables generated during the normal course of business, with maximum availability of $200,000 as of January 29, 2022, of which $200,000 was utilized.

We have no retained interests in the transferred Receivables, other than our right to the DPP receivable and collection and administrative service fees. We consider the fees received adequate compensation for services rendered, and accordingly have recorded no servicing asset or liability. As of January 29, 2022 and April 24, 2021, the fair value of outstanding trade receivables transferred to the Purchasers under the facility and derecognized from the condensed consolidated balance sheets were $368,257 and $384,950, respectively. Sales of trade receivables under this facility were $2,731,755 and $2,307,655, and cash collections from customers on receivables sold were $2,748,173 and $2,251,129 during the nine months ended January 29, 2022 and January 23, 2021, respectively.

The DPP receivable is recorded at fair value within the condensed consolidated balance sheets within prepaid expenses and other current assets. The difference between the carrying amount of the Receivables and the sum of the cash and fair value of the DPP receivable received at time of transfer is recognized as a gain or loss on sale of the related Receivables inclusive of bank fees and allowance for credit losses. In operating expenses in the condensed consolidated statements of operations and other comprehensive income, we recorded a loss of $663 and a gain of $926 during the three months ended January 29, 2022 and January 23, 2021, respectively, and losses

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of $2,278 and $2,075 during the nine months ended January 29, 2022 and January 23, 2021, respectively, related to the Receivables.

The following rollforward summarizes the activity related to the DPP receivable:


	Nine Months Ended
		January 29, 2022		January 23, 2021
Beginning DPP receivable balance		$	183,999	$	117,327
Non-cash additions to DPP receivable		768,440		572,683
Collection of DPP receivable		(784,871)		(526,369)
Ending DPP receivable balance		$	167,568	$	163,641

Note 4. Customer Financing

As a convenience to our customers, we offer several different financing alternatives, including a third party program and a Patterson-sponsored program. For the third party program, we act as a facilitator between the customer and the third party financing entity with no on-going involvement in the financing transaction. Under the Patterson-sponsored program, equipment purchased by creditworthy customers may be financed up to a maximum of $1,000. We generally sell our customers’ financing contracts to outside financial institutions in the normal course of our business. These financing arrangements are accounted for as a sale of assets under the provisions of ASC 860, Transfers and Servicing. We currently have two arrangements under which we sell these contracts. We use a monthly unit of account for these financing contracts.

First, we operate under an agreement to sell a portion of our equipment finance contracts to commercial paper conduits with MUFG serving as the agent. We utilize PDC Funding to fulfill a requirement of participating in the commercial paper conduit. We receive the proceeds of the contracts upon sale to MUFG. At least 15.0% of the proceeds are held by the conduit as security against eventual performance of the portfolio. This percentage can be greater and is based upon certain ratios defined in the agreement with MUFG. The capacity under the agreement with MUFG at January 29, 2022 was $525,000.

Second, we maintain an agreement with Fifth Third Bank ("Fifth Third") whereby Fifth Third purchases customers’ financing contracts. PDC Funding II sells its financing contracts to Fifth Third. We receive the proceeds of the contracts upon sale to Fifth Third. At least 15.0% of the proceeds are held by the conduit as security against eventual performance of the portfolio. This percentage can be greater and is based upon certain ratios defined in the agreement with Fifth Third. The capacity under the agreement with Fifth Third at January 29, 2022 was $100,000.

We service the financing contracts under both arrangements, for which we are paid a servicing fee. The servicing fees we receive are considered adequate compensation for services rendered. Accordingly, no servicing asset or liability has been recorded.

The portion of the purchase price for the receivables held by the conduits is deemed a DPP receivable, which is paid to the applicable special purpose entity as payments on the customers’ financing contracts are collected by Patterson from customers. The difference between the carrying amount of the receivables sold under these programs and the sum of the cash and fair value of the DPP receivable received at time of transfer is recognized as a gain on sale of the related receivables and recorded in net sales in the condensed consolidated statements of operations and other comprehensive income. Expenses incurred related to customer financing activities are recorded in operating expenses in our condensed consolidated statements of operations and other comprehensive income.

During the nine months ended January 29, 2022 and January 23, 2021, we sold $225,300 and $245,552 of contracts under these arrangements, respectively. In net sales in the condensed consolidated statements of operations and other comprehensive income, we recorded losses of $5,143 and $1,484 during the three months ended January 29, 2022 and January 23, 2021, respectively, related to these contracts sold. In net sales in the condensed consolidated statements of operations and other comprehensive income, we recorded losses of $8,433 and $212 during the nine months ended January 29, 2022 and January 23, 2021, respectively, related to these contracts sold. Cash collections on financed receivables sold were $327,205 and $291,074 during the nine months ended January 29, 2022 and January 23, 2021, respectively.

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Included in cash and cash equivalents in the condensed consolidated balance sheets are $40,787 and $36,771 as of January 29, 2022 and April 24, 2021, respectively, which represent cash collected from previously sold customer financing contracts that have not yet been settled. Included in current receivables in the condensed consolidated balance sheets are $65,191 and $50,638 as of January 29, 2022 and April 24, 2021, respectively, of finance contracts we have not yet sold. A total of $571,629 of finance contracts receivable sold under the arrangements was outstanding at January 29, 2022. Since the internal financing program began in 1994, bad debt write-offs have amounted to less than 1% of the loans originated.

The following rollforward summarizes the activity related to the DPP receivable:


	Nine Months Ended
		January 29, 2022		January 23, 2021
Beginning DPP receivable balance		$	227,967	$	228,019
Non-cash additions to DPP receivable		54,347		86,986
Collection of DPP receivable		(133,483)		(108,130)
Ending DPP receivable balance		$	148,831	$	206,875

The arrangements require us to maintain a minimum current ratio and maximum leverage ratio. We were in compliance with those covenants at January 29, 2022.

Note 5. Derivative Financial Instruments

We are a party to certain offsetting and identical interest rate cap agreements entered into to fulfill certain covenants of the equipment finance contract sale agreements. The interest rate cap agreements also provide a credit enhancement feature for the financing contracts sold by PDC Funding and PDC Funding II to the commercial paper conduit.

The interest rate cap agreements are canceled and new agreements are entered into periodically to maintain consistency with the dollar maximum of the sale agreements and the maturity of the underlying financing contracts. As of January 29, 2022, PDC Funding had purchased an interest rate cap from a bank with a notional amount of $525,000 and a maturity date of August 2029. We sold an identical interest rate cap to the same bank. As of January 29, 2022, PDC Funding II had purchased an interest rate cap from a bank with a notional amount of $100,000 and a maturity date of September 2028. We sold an identical interest rate cap to the same bank.

These interest rate cap agreements do not qualify for hedge accounting treatment and, accordingly, we record the fair value of the agreements as an asset or liability and the change in fair value as income or expense during the period in which the change occurs.

In January 2014, we entered into a forward interest rate swap agreement with a notional amount of $250,000 and accounted for it as a cash flow hedge, in order to hedge interest rate fluctuations in anticipation of refinancing the 5.17% senior notes due March 25, 2015. These notes were repaid on March 25, 2015 and replaced with new $250,000 3.48% senior notes due March 24, 2025. A cash payment of $29,003 was made in March 2015 to settle the interest rate swap. This amount is recorded in other comprehensive income (loss), net of tax, and is recognized as interest expense over the life of the related debt.

We utilize forward interest rate swap agreements to hedge against interest rate fluctuations that impact the amount of net sales we record related to our customer financing contracts. These interest rate swap agreements do not qualify for hedge accounting treatment and, accordingly, we record the fair value of the agreements as an asset or liability and the change in fair value as income or expense during the period in which the change occurs.

As of April 24, 2021, the remaining notional amount for interest rate swap agreements was $653,122, with the latest maturity date in fiscal 2028. During the nine months ended January 29, 2022, we entered into forward interest rate swap agreements with a notional amount of $66,623. As of January 29, 2022, the remaining notional amount for interest rate swap agreements was $516,099, with the latest maturity date in fiscal 2029.

Net cash payments of $5,551 and $6,917 were made during the nine months ended January 29, 2022 and January 23, 2021, respectively, to settle a portion of our liabilities related to interest rate swap agreements. These payments

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are reflected as cash outflows in the condensed consolidated statements of cash flows within net cash used in operating activities.

The following presents the fair value of derivative instruments included in the condensed consolidated balance sheets:


Derivative type	Classification	January 29, 2022		April 24, 2021
Assets:
Interest rate contracts	Prepaid expenses and other current assets	$	1,355	$	—
Interest rate contracts	Other non-current assets	6,052		2,120
Total asset derivatives		$	7,407	$	2,120
Liabilities:
Interest rate contracts	Other accrued liabilities	$	1,408	$	3,776
Interest rate contracts	Other non-current liabilities	3,764		7,795
Total liability derivatives		$	5,172	$	11,571

The following tables present the pre-tax effect of derivative instruments on the condensed consolidated statements of operations and other comprehensive income:


		Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss into Income (Effective Portion)
		Three Months Ended				Nine Months Ended
Derivatives in cash flow hedging relationships	Statements of operations location	January 29, 2022		January 23, 2021		January 29, 2022		January 23, 2021
Interest rate contracts	Interest expense	$	(341)	$	(341)	$	(1,023)	$	(1,023)


		Amount of Gain (Loss) Recognized in Income on Derivatives
		Three Months Ended				Nine Months Ended
Derivatives not designated as hedging instruments	Statements of operations location	January 29, 2022		January 23, 2021		January 29, 2022		January 23, 2021
Interest rate contracts	Other income, net	$	3,688	$	145	$	5,805	$	(635)

There were no gains or losses recognized in other comprehensive income (loss) on cash flow hedging derivatives during the three and nine months ended January 29, 2022 or January 23, 2021.

We recorded no ineffectiveness during the three and nine month periods ended January 29, 2022 and January 23, 2021. As of January 29, 2022, the estimated pre-tax portion of accumulated other comprehensive loss that is expected to be reclassified into earnings over the next twelve months is $1,363, which will be recorded as an increase to interest expense.

Note 6. Fair Value Measurements

Fair value is the price at which an asset could be exchanged in a current transaction between knowledgeable, willing parties. The fair value hierarchy of measurements is categorized into one of three levels based on the lowest level of significant input used:

Level 1 - Quoted prices in active markets for identical assets and liabilities at the measurement date.

Level 2 - Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

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Level 3 - Unobservable inputs for which there is little or no market data available. These inputs reflect management’s assumptions of what market participants would use in pricing the asset or liability.

Our hierarchy for assets and liabilities measured at fair value on a recurring basis is as follows:


	January 29, 2022
	Total		Level 1		Level 2		Level 3
Assets:
Cash equivalents	$	10,854	$	10,854	$	—	$	—
DPP receivable - receivables securitization program	167,568		—		—		167,568
DPP receivable - customer financing	148,831		—		—		148,831
Derivative instruments	7,407		—		7,407		—
Total assets	$	334,660	$	10,854	$	7,407	$	316,399
Liabilities:
Derivative instruments	$	5,172	$	—	$	5,172	$	—


	April 24, 2021
	Total		Level 1		Level 2		Level 3
Assets:
Cash equivalents	$	1,698	$	1,698	$	—	$	—
DPP receivable - receivables securitization program	183,999		—		—		183,999
DPP receivable - customer financing	227,967		—		—		227,967
Derivative instruments	2,120		—		2,120		—
Total assets	$	415,784	$	1,698	$	2,120	$	411,966
Liabilities:
Derivative instruments	$	11,571	$	—	$	11,571	$	—

Cash equivalents – We value cash equivalents at their current market rates. The carrying value of cash equivalents approximates fair value and maturities are less than three months.

DPP receivable - receivables securitization program – We value this DPP receivable based on a discounted cash flow analysis using unobservable inputs, which include the estimated timing of payments and the credit quality of the underlying creditor. Significant changes in any of the significant unobservable inputs in isolation would not result in a materially different fair value estimate. The interrelationship between these inputs is insignificant.

DPP receivable - customer financing – We value this DPP receivable based on a discounted cash flow analysis using unobservable inputs, which include a forward yield curve, the estimated timing of payments and the credit quality of the underlying creditor. Significant changes in any of the significant unobservable inputs in isolation would not result in a materially different fair value estimate. The interrelationship between these inputs is insignificant.

Derivative instruments – Our derivative instruments consist of interest rate cap agreements and interest rate swaps. These instruments are valued using inputs such as interest rates and credit spreads.

Certain assets are measured at fair value on a non-recurring basis. These assets are not measured at fair value on an ongoing basis, but are subject to fair value adjustments under certain circumstances. We adjust the carrying value of our non-marketable equity securities to fair value when observable transactions of identical or similar securities occur, or due to an impairment.

During the three months ended July 31, 2021, we sold a portion of our investment in Vetsource, a commercial partner and leading home delivery provider for veterinarians, with a carrying value of $25,814 for $56,849. We recorded a pre-tax gain of $31,035 in gains on investments in our condensed consolidated statements of operations and other comprehensive income as a result of this sale in the first quarter of fiscal 2022. The cash received of $56,849 is reported within investing activities in our condensed consolidated statements of cash flows. During the three months ended July 31, 2021, we also recorded a pre-tax non-cash gain of $31,035 to reflect the increase in

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the carrying value of the remaining portion of our investment in Vetsource, which was based on the selling price of the portion of the investment we sold for $56,849. This gain was recorded in gains on investments in our condensed consolidated statements of operations and other comprehensive income. The carrying value of the investment we owned following this sale was $56,849 and $25,814 as of January 29, 2022 and April 24, 2021, respectively. Concurrent with the sale completed in the first quarter of fiscal 2022, we obtained rights that will allow us, under certain circumstances, to require another shareholder of Vetsource to purchase our remaining shares. We recorded a pre-tax non-cash gain of $25,757 in gains on investments in our condensed consolidated statements of operations and other comprehensive income as a result of this transaction. The carrying value of this put option as of January 29, 2022 is $25,757, and is reported within investments in our condensed consolidated balance sheets. The aggregate gains on investments of $87,827 are reported within operating activities in our condensed consolidated statements of cash flows. Concurrent with obtaining this put option, we also granted rights to the same Vetsource shareholder that would allow such shareholder, under certain circumstances, to require us to sell our remaining shares at fair value. There were no fair value adjustments to such assets during the nine months ended January 23, 2021.

During the three months ended January 29, 2022, we sold a portion of our investment in Vets Plus with a carrying value of $4,009 for $17,101. We recorded a pre-tax gain of $13,092 in gains on investments in our condensed consolidated statements of operations and other comprehensive income as a result of this sale in the third quarter of fiscal 2022. This $13,092 pre-tax gain is reported within operating activities in our condensed consolidated statements of cash flows. The cash received of $17,101 is reported within investing activities in our condensed consolidated statements of cash flows. The carrying value of the investment we owned following this sale was $2,355 and $2,355 as of January 29, 2022 and April 24, 2021, respectively. There were no fair value adjustments to such assets during the nine months ended January 23, 2021.

Our debt is not measured at fair value in the condensed consolidated balance sheets. The estimated fair value of our debt as of January 29, 2022 and April 24, 2021 was $498,771 and $610,811, respectively, as compared to a carrying value of $488,353 and $588,295 at January 29, 2022 and April 24, 2021, respectively. The fair value of debt was measured using a discounted cash flow analysis based on expected market based yields (i.e., Level 2 inputs).

The carrying amounts of receivables, net of allowances, accounts payable, and certain accrued and other current liabilities approximated fair value at January 29, 2022 and April 24, 2021.

Note 7. Income Taxes

The effective income tax rate for the three months ended January 29, 2022 was 24.8% compared to 19.7% for the three months ended January 23, 2021. The increase in the rate for the three months ended January 29, 2022 was primarily due to the impact of excess tax benefit deductions and provision to return adjustments in the prior year quarter. The effective income tax rate for the nine months ended January 29, 2022 was 24.8% compared to 22.9% for the nine months ended January 23, 2021. The increase in the rate for the nine months ended January 29, 2022 was primarily due to provision to return adjustments in the prior year period and a geographical shift in earnings, which was partially offset by excess tax benefits associated with stock-based compensation awards.

Note 8. Technology Partner Innovations, LLC ("TPI")

In fiscal 2019, we entered into an agreement with Cure Partners to form TPI, which offers a cloud-based practice management software, NaVetor, to its customers. Patterson and Cure Partners each contributed net assets of $4,000 to form TPI. We determined that TPI is a variable interest entity, and we consolidate the results of operations of TPI as we have concluded that we are the primary beneficiary of TPI. During the three months ended January 29, 2022 and January 23, 2021, net loss attributable to the noncontrolling interest was $431 and $192, respectively. During the nine months ended January 29, 2022 and January 23, 2021, net loss attributable to the noncontrolling interest was $1,017 and $631, respectively. We contributed additional net assets of $500 during the three months ended October 30, 2021 and $500 during the three months ended January 29, 2022. Cure Partners contributed additional net assets of $500 during the three months ended January 29, 2022 and is expected to contribute additional net assets of $500. Since TPI was formed in fiscal 2019, there have been no changes in ownership interests. As of January 29, 2022, we had noncontrolling interests of $938 on our condensed consolidated balance sheets.

Note 9. Segment and Geographic Data

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virtually complete range of consumable dental products, equipment and software, turnkey digital solutions and value-added services to dentists, dental laboratories, institutions, and other healthcare professionals throughout North America. Animal Health is a leading, full-line distributor in North America and the U.K. of animal health products, services and technologies to both the production-animal and companion-pet markets. Our Corporate segment is comprised of general and administrative expenses, including home office support costs in areas such as information technology, finance, legal, human resources and facilities. In addition, customer financing and other miscellaneous sales are reported within Corporate results. Corporate assets consist primarily of cash and cash equivalents, accounts receivable, property and equipment and long-term receivables. We evaluate segment performance based on operating income. The costs to operate the fulfillment centers are allocated to the operating units based on the through-put of the unit.

The following tables present information about our reportable segments:


	Three Months Ended				Nine Months Ended
	January 29, 2022		January 23, 2021		January 29, 2022		January 23, 2021
Consolidated net sales
United States	$	1,329,051	$	1,272,696	$	4,006,576	$	3,586,674
United Kingdom	168,568		178,260		545,321		507,347
Canada	98,977		100,312		308,736		256,252
Total	$	1,596,596	$	1,551,268	$	4,860,633	$	4,350,273
Dental net sales
United States	$	591,397	$	584,868	$	1,694,044	$	1,553,097
Canada	59,236		64,078		185,671		157,892
Total	$	650,633	$	648,946	$	1,879,715	$	1,710,989
Animal Health net sales
United States	$	736,465	$	679,853	$	2,306,645	$	2,014,970
United Kingdom	168,568		178,260		545,321		507,347
Canada	39,741		36,234		123,065		98,360
Total	$	944,774	$	894,347	$	2,975,031	$	2,620,677
Corporate net sales
United States	$	1,189	$	7,975	$	5,887	$	18,607
Total	$	1,189	$	7,975	$	5,887	$	18,607

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	Three Months Ended				Nine Months Ended
	January 29, 2022		January 23, 20211		January 29, 2022		January 23, 20211
Consolidated net sales
Consumable	$	1,237,127	$	1,199,102	$	3,923,613	$	3,485,669
Equipment and software	276,446		266,628		683,711		616,286
Value-added services and other	83,023		85,538		253,309		248,318
Total	$	1,596,596	$	1,551,268	$	4,860,633	$	4,350,273
Dental net sales
Consumable	$	337,192	$	342,561	$	1,070,422	$	957,013
Equipment and software	241,384		237,205		591,787		548,403
Value-added services and other	72,057		69,180		217,506		205,573
Total	$	650,633	$	648,946	$	1,879,715	$	1,710,989
Animal Health net sales
Consumable	$	899,935	$	856,541	$	2,853,191	$	2,528,656
Equipment and software	35,062		29,423		91,924		67,883
Value-added services and other	9,777		8,383		29,916		24,138
Total	$	944,774	$	894,347	$	2,975,031	$	2,620,677
Corporate net sales
Value-added services and other	$	1,189	$	7,975	$	5,887	$	18,607
Total	$	1,189	$	7,975	$	5,887	$	18,607

1 Certain sales were reclassified between categories to conform to the current period presentation.


	Three Months Ended				Nine Months Ended
	January 29, 2022		January 23, 2021		January 29, 2022		January 23, 2021





Operating income
Dental	$	64,125	$	61,291	$	118,609	$	172,017
Animal Health	23,420		20,615		73,360		55,605
Corporate	(26,712)		(20,225)		(107,805)		(54,363)
Total	$	60,833	$	61,681	$	84,164	$	173,259


	January 29, 2022		April 24, 2021
Total assets
Dental	$	893,996	$	863,718
Animal Health	1,527,152		1,391,892
Corporate	442,348		495,901
Total	$	2,863,496	$	2,751,511

Note 10. Accumulated Other Comprehensive Loss ("AOCL")

The following table summarizes the changes in AOCL as of January 29, 2022:

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	Cash Flow Hedges		Currency Translation Adjustment		Total
AOCL at April 24, 2021	$	(4,496)	$	(58,096)	$	(62,592)
Other comprehensive income before reclassifications	—		(5,742)		(5,742)
Amounts reclassified from AOCL	782		—		782
AOCL at January 29, 2022	$	(3,714)	$	(63,838)	$	(67,552)

The amounts reclassified from AOCL during the nine months ended January 29, 2022 include gains and losses on cash flow hedges, net of taxes of $241. The impact to the condensed consolidated statements of operations and other comprehensive income was an increase to interest expense of $1,023 for the nine months ended January 29, 2022.

Note 11. Legal Proceedings

From time to time, we become involved in lawsuits, administrative proceedings, government subpoenas, and government investigations (which may, in some cases, involve our entering into settlement agreements or consent decrees), relating to antitrust, commercial, environmental, product liability, intellectual property, regulatory, employment discrimination, securities, and other matters, including matters arising out of the ordinary course of business. The results of any such proceedings cannot be predicted with certainty because such matters are inherently uncertain. Significant damages or penalties may be sought in some matters, and some matters may require years to resolve. We also may be subject to fines or penalties, and equitable remedies (including but not limited to the suspension, revocation or non-renewal of licenses).

We accrue for these matters when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Unless otherwise noted, with respect to the specific legal proceedings and claims described below, the amount or range of possible losses is not reasonably estimable. Adverse outcomes in some or all of these matters may result in significant monetary damages or injunctive relief against us that could adversely affect our ability to conduct our business. There also exists the possibility of a material adverse effect on our financial statements for the period in which the effect of an unfavorable outcome becomes probable and reasonably estimable.

On March 28, 2018, Plymouth County Retirement System (“Plymouth”) filed a federal securities class action complaint against Patterson Companies, Inc. and its former CEO Scott P. Anderson and former CFO Ann B. Gugino in the U.S. District Court for the District of Minnesota in a case captioned Plymouth County Retirement System v. Patterson Companies, Inc., Scott P. Anderson and Ann B. Gugino, Case No. 0:18-cv-00871 MJD/SER. On November 9, 2018, the complaint was amended to add former CEO James W. Wiltz and former CFO R. Stephen Armstrong as individual defendants. Under the amended complaint, on behalf of all persons or entities that purchased or otherwise acquired Patterson’s common stock between June 26, 2013 and February 28, 2018, Plymouth alleged that Patterson violated federal securities laws by failing to disclose that Patterson’s revenue and earnings were “artificially inflated by Defendants’ illicit, anti-competitive scheme with its purported competitors, Benco and Schein, to prevent the formation of buying groups that would allow its customers who were office-based practitioners to take advantage of pricing arrangements identical or comparable to those enjoyed by large-group customers.” In its class action complaint, Plymouth asserted one count against Patterson for violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder and a second, related count against the individual defendants for violating Section 20(a) of the Exchange Act. Plymouth sought compensatory damages, pre- and post-judgment interest and reasonable attorneys’ fees and experts’ witness fees and costs. On August 30, 2018, Gwinnett County Public Employees Retirement System and Plymouth County Retirement System, Pembroke Pines Pension Fund for Firefighters and Police Officers, Central Laborers Pension Fund were appointed lead plaintiffs. On January 18, 2019, Patterson and the individual defendants filed a motion to dismiss the amended complaint. On July 25, 2019, the U.S. Magistrate Judge issued a report and recommendation that the motion to dismiss be granted in part and denied in part. The report and recommendation, among other things, recommended the dismissal of all claims against individual defendants Ann B. Gugino, R. Stephen Armstrong and James W. Wiltz. On September 10, 2019, the District Court adopted the Magistrate Judge’s report and recommendation. On September 28, 2020, the District Court granted plaintiffs’ motion to certify the class, appoint class representatives and appoint class counsel. On October 12, 2020, Patterson and the remaining individual defendant, Mr. Anderson, filed a Rule 23(f) petition for interlocutory appeal of the class certification order with the Eighth Circuit Court of Appeals in which the defendants sought clarification of the standard for rebutting the Basic presumption of class-wide reliance in securities class actions. On October 13, 2020, Patterson and Mr. Anderson filed a motion to stay

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the underlying proceeding with the District Court pending the possibility of interlocutory appeal. On November 9, 2020, the District Court denied defendants’ motion to stay and on November 12, 2020, the Eighth Circuit Court of Appeals denied defendants’ Rule 23(f) petition. On May 17, 2021, Patterson and Mr. Anderson filed a motion for summary judgment and a motion to exclude plaintiff's expert. On August 27, 2021, we signed a memorandum of understanding to settle this case. Under the terms of the settlement, Patterson agreed to pay $63,000 to resolve the case. Although we have agreed to settle this matter, we expressly deny the allegations of the complaint and all liability. Our insurers consented to the settlement and contributed an aggregate of $35,000 to fund the settlement and to reimburse us for certain costs and expenses of the litigation. As a result of the foregoing, we recorded a pre-tax reserve of $63,000 in other accrued liabilities in the condensed consolidated balance sheets in our Corporate segment during the first quarter of fiscal 2022 related to the probable settlement of this litigation. During the first quarter of fiscal 2022, we also recorded a receivable of $27,000 in prepaid expenses and other current assets in the condensed consolidated balance sheets in our Corporate segment related to probable insurance recoveries, which amount was paid into the litigation settlement escrow as required by the memorandum of understanding. The net expense of $36,000 was recorded in operating expenses in our condensed consolidated statements of operations and other comprehensive income. We recorded a gain of $8,000 during the second quarter of fiscal 2022 in our Corporate segment to account for our receipt of carrier reimbursement of previously expended fees and costs. The parties filed a stipulation of settlement during the second quarter of fiscal 2022. On February 3, 2022, the District Court entered an order preliminarily approving the settlement and directing the claims administrator to mail a notice of settlement and claim form to all class members. The District Court is expected to hold a final settlement hearing to determine whether the settlement should be approved during the first quarter of fiscal 2023.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

The U.S. Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements to encourage companies to provide prospective information, so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those disclosed in the statement.

This Form 10-Q contains certain “forward-looking statements” within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995, including statements regarding future financial performance, and the objectives and expectations of management. Forward-looking statements often include words such as “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “seeks” or words of similar meaning, or future or conditional verbs, such as “will,” “should,” “could” or “may.” Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions.

Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not place undue reliance on any of these forward-looking statements.

Any number of factors could affect our actual results and cause such results to differ materially from those contemplated by any forward-looking statements, including, but not limited to, the following: the COVID-19 pandemic and measures taken in response thereto; our dependence on relationships with sales representatives and service technicians to retain customers and develop business; potential disruption of distribution capabilities, including service issues with third-party shippers; our dependence on suppliers to manufacture and supply substantially all of the products we sell; the risk of the products we sell becoming obsolete or containing undetected errors; adverse changes in supplier rebates; the risk that private label sales could adversely affect our relationships with suppliers; our dependence on positive perceptions of Patterson’s reputation; risks inherent in acquiring and disposing of assets or other businesses and the risks inherent in integrating acquired businesses; our ability to comply with restrictive covenants in our credit agreement; our dependence on leadership development and succession planning; the risk that our governing documents and Minnesota law may discourage takeovers and business combinations; the effects of the highly competitive and consolidating dental and animal health supply markets in which we compete; exposure to the risks of the animal production business, including changing consumer demand, the cyclical livestock market, and other factors outside our control; risks from the formation of

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GPOs, provider networks and buying groups that may shift purchasing decisions and place us at a competitive disadvantage; increases in over-the-counter sales and e-commerce options for companion animal products or sales of companion animal products from non-veterinarian sources; change and uncertainty in the health care industry, including the effects of health care reform; failure to comply with existing or future U.S. or foreign laws and regulations including those governing the distribution of pharmaceuticals and controlled substances; public concern over the abuse of opioid medication in the U.S.; failure to comply with health care fraud or other laws and regulations; litigation risks, including the diversion of management’s attention, the cost of defending against such actions, the possibility of damage awards or settlements, fines or penalties, or equitable remedies (including but not limited to the revocation of or non-renewal of licenses) and inherent uncertainty; failure to comply with evolving data privacy laws and regulations; tax legislation; the risks inherent in international operations, including currency fluctuations; risks associated with information systems and cyber-security attacks; disruptions from our enterprise resource planning system; and the risk of being required to record significant impairment charges if our Dental segment’s goodwill or other intangible assets become impaired.

The order in which these factors appear should not be construed to indicate their relative importance or priority. We caution that these factors may not be exhaustive, accordingly, any forward-looking statements contained herein should not be relied upon as a prediction of actual results.

You should carefully consider these and other relevant factors, including those risk factors in Part I, Item 1A, (“Risk Factors”) in our most recent Form 10-K, and information which may be contained in our other filings with the U.S. Securities and Exchange Commission, or SEC, when reviewing any forward-looking statement.

Investors should understand it is impossible to predict or identify all such factors or risks. As such, you should not consider the foregoing list, or the risks identified in our SEC filings, to be a complete discussion of all potential risks or uncertainties.

Any forward-looking statement made in this Form 10-Q is based only on information currently available to us and speaks only as of the date on which it is made. We do not undertake any obligation to release publicly any revisions to any forward-looking statements whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise.

OVERVIEW

Our financial information for the first nine months of fiscal 2022 is summarized in this Management’s Discussion and Analysis and the Condensed Consolidated Financial Statements and related Notes. The following background is provided to readers to assist in the review of our financial information.

We present three reportable segments: Dental, Animal Health and Corporate. Dental and Animal Health are strategic business units that offer similar products and services to different customer bases. Dental provides a virtually complete range of consumable dental products, equipment and software, turnkey digital solutions and value-added services to dentists and dental laboratories throughout North America. Animal Health is a leading, full-line distributor in North America and the U.K. of animal health products, services and technologies to both the production-animal and companion-pet markets. Our Corporate segment is comprised of general and administrative expenses, including home office support costs in areas such as information technology, finance, legal, human resources and facilities. In addition, customer financing and other miscellaneous sales are reported within Corporate results.

Operating margins of the animal health business are lower than the dental business. While operating expenses run at a lower rate in the animal health business when compared to the dental business, gross margins in the animal health business are lower due generally to the low margins experienced on the sale of pharmaceutical products.

We believe there are several important aspects of our business that are useful in analyzing it, including: (1) growth in the various markets in which we operate; (2) internal growth; (3) growth through acquisition; and (4) cost controls and efficiency enhancements. Management defines internal growth as net sales adjusted to exclude the impact of foreign currency, changes in product selling relationships, contributions from recent acquisitions and differences in the number of weeks in fiscal periods. Foreign currency impact represents the difference in results that is

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attributable to fluctuations in currency exchange rates the company uses to convert results for all foreign entities where the functional currency is not the U.S. dollar. The company calculates the impact as the difference between the current period results translated using the current period currency exchange rates and using the comparable prior period’s currency exchange rates. The company believes the disclosure of net sales changes in constant currency provides useful supplementary information to investors in light of fluctuations in currency rates.

FACTORS AFFECTING OUR RESULTS

COVID-19. The COVID-19 pandemic, including closures and other steps taken by governmental authorities in response to the virus, has had a significant impact on our businesses. As part of our broad-based effort to respond to the COVID-19 pandemic, we implemented cost reduction measures, including temporary salary reductions, furloughs and reduced work hours across our workforce during the period from May 1, 2020 through July 31, 2020. Within our Dental segment, the effect became less significant during the first quarter of fiscal 2021, as dental offices began opening for elective procedures. In addition, we recorded increased sales of infection control products starting in the first quarter of fiscal 2021 within the Dental segment. The disruptions we experienced in our production animal business as a result of the pandemic became less significant after the first quarter of fiscal 2021.

Gains on Vetsource Investment. During the three months ended July 31, 2021, we sold a portion of our investment in Vetsource, a commercial partner and leading home delivery provider for veterinarians, with a carrying value of $25.8 million for $56.8 million. We recorded a pre-tax gain of $31.0 million in gains on investments in our condensed consolidated statements of operations and other comprehensive income as a result of this sale. The cash received of $56.8 million is reported within investing activities in our condensed consolidated statements of cash flows. During the three months ended July 31, 2021, we also recorded a pre-tax non-cash gain of $31.0 million to reflect the increase in the carrying value of the remaining portion of our investment in Vetsource, which was based on the selling price of the portion of the investment we sold for $56.8 million. This gain was recorded in gains on investments in our condensed consolidated statements of operations and other comprehensive income. Concurrent with the sale completed in the first quarter of fiscal 2022, we obtained rights that will allow us, under certain circumstances, to require another shareholder of Vetsource to purchase our remaining shares. We recorded a pre-tax non-cash gain of $25.8 million in gains on investments in our condensed consolidated statements of operations and other comprehensive income as a result of this transaction. The aggregate gains on investments of $87.8 million are reported within operating activities in our condensed consolidated statements of cash flows. Concurrent with obtaining this put option, we also granted rights to the same Vetsource shareholder that would allow such shareholder, under certain circumstances, to require us to sell our remaining shares at fair value.

Gain on Vets Plus Investment. During the three months ended January 29, 2022, we sold a portion of our investment in Vets Plus with a carrying value of $4.0 million for $17.1 million. We recorded a pre-tax gain of $13.1 million in gains on investments in our condensed consolidated statements of operations and other comprehensive income as a result of this sale in the third quarter of fiscal 2022. This $13.1 million pre-tax gain is reported within operating activities in our condensed consolidated statements of cash flows. The cash received of $17.1 million is reported within investing activities in our condensed consolidated statements of cash flows.

Fiscal 2022 Legal Reserve. On August 27, 2021, we signed a memorandum of understanding to settle the federal securities class action complaint described in Note 11 to the Condensed Consolidated Financial Statements. Under the terms of the settlement, Patterson agreed to pay $63.0 million to resolve the case. Although we have agreed to settle this matter, we expressly deny the allegations of the complaint and all liability. Our insurers consented to the settlement and contributed an aggregate of $35.0 million to fund the settlement and to reimburse us for certain costs and expenses of the litigation. As a result of the foregoing, we recorded a pre-tax reserve of $63.0 million in other accrued liabilities in the condensed consolidated balance sheets in our Corporate segment during the first quarter of fiscal 2022 related to the probable settlement of this litigation (the "Fiscal 2022 Legal Reserve"). During the first quarter of fiscal 2022, we also recorded a receivable of $27.0 million in prepaid expenses and other current assets in the condensed consolidated balance sheets in our Corporate segment related to probable insurance recoveries, which amount was paid into the litigation settlement escrow as required by the memorandum of understanding. The net expense of $36.0 million was recorded in operating expenses in our condensed consolidated statements of operations and other comprehensive income. We recorded a gain of $8.0 million during the second quarter of fiscal 2022 in our Corporate segment to account for our receipt of carrier reimbursement of previously expended fees and costs. The parties filed a stipulation of settlement during the second quarter of fiscal 2022. On February 3, 2022, the District Court entered an order preliminarily approving the settlement and directing the claims administrator to mail a notice of settlement and claim form to all class members. The District Court is expected to hold a final settlement hearing to determine whether the settlement should be approved during the first quarter of fiscal 2023.

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Inventory Donation Charges. During the first quarter of fiscal 2022, we committed to donate certain personal protective equipment to charitable organizations to assist with COVID-19 recovery efforts. We recorded a charge of $49.2 million within cost of sales in our condensed consolidated statements of operations and other comprehensive income as a result ("Inventory Donation Charges") in the first quarter of fiscal 2022. These charges were driven by our intention to not sell these products, but rather to donate them to charitable organizations. Of the $49.2 million expense recorded, $47.2 million and $2.0 million was recorded within our Dental and Animal Health segments, respectively.

Receivables Securitization Program. We are a party to certain receivables purchase agreements with MUFG Bank, Ltd. ("MUFG"), under which MUFG acts as an agent to facilitate the sale of certain Patterson receivables (the “Receivables”) to certain unaffiliated financial institutions (the “Purchasers”). The proceeds from the sale of these Receivables comprise a combination of cash and a deferred purchase price (“DPP”) receivable. The DPP receivable is ultimately realized by Patterson following the collection of the underlying Receivables sold to the Purchasers. The collection of the DPP receivable is recognized as an increase to net cash provided by investing activities within the condensed consolidated statements of cash flows, with a corresponding reduction to net cash used in operating activities within the condensed consolidated statements of cash flows.

RESULTS OF OPERATIONS

QUARTER ENDED JANUARY 29, 2022 COMPARED TO QUARTER ENDED JANUARY 23, 2021

The following table summarizes our results as a percent of net sales:


	Three Months Ended
	January 29, 2022		January 23, 2021
Net sales	100.0	%	100.0	%
Cost of sales	78.9		79.1
Gross profit	21.1		20.9
Operating expenses	17.3		16.9
Operating income	3.8		4.0
Other income (expense)	0.9		(0.1)
Income before taxes	4.7		3.9
Income tax expense	1.2		0.8
Net income	3.5		3.1
Net loss attributable to noncontrolling interests	—		—
Net income attributable to Patterson Companies, Inc.	3.5	%	3.1	%

Net Sales. Consolidated net sales for the three months ended January 29, 2022 were $1,596.6 million, an increase of 2.9% from $1,551.3 million for the three months ended January 23, 2021. Foreign exchange rate changes had a favorable impact of 0.2% on current quarter sales. Sales of certain products previously recognized on a gross basis were recognized on a net basis during the three months ended January 29, 2022. This change in revenue recognition was driven by changes in contractual terms with certain suppliers. The impact of this change in revenue recognition for certain products was partially offset by the impact of the acquisition of substantially all of the assets of Miller Vet Holdings, LLC, a multiregional veterinary distributor ("Miller Vet"), on sales for the three months ended January 29, 2022, resulting in a net decrease in sales of approximately 1.6%.

Dental segment sales for the three months ended January 29, 2022 were $650.6 million, an increase of 0.3% from $648.9 million for the three months ended January 23, 2021. Foreign exchange rate changes had a favorable impact of 0.2% on current quarter sales. Current quarter sales of consumables decreased 1.6%, sales of equipment and software increased 1.8%, and sales of value-added services and other increased 4.2%. Consumable sales declined primarily as a result of lower infection control product sales in the current quarter. The growth in equipment and software sales was due to increased sales in CAD/CAM and digital technology products, partially offset by lower sales of core equipment products due to continued supply chain challenges.

Animal Health segment sales for the three months ended January 29, 2022 were $944.8 million, an increase of 5.6% from $894.3 million for the three months ended January 23, 2021. Foreign exchange rate changes had a

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favorable impact of 0.2% on current quarter sales. Sales of certain products previously recognized on a gross basis were recognized on a net basis during the three months ended January 29, 2022. This change in revenue recognition was driven by changes in contractual terms with certain suppliers. The impact of this change in revenue recognition for certain products was partially offset by the impact of the acquisition of Miller Vet on sales for the three months ended January 29, 2022, resulting in a net decrease in sales of approximately 2.8%. Sales were higher during the three months ended January 29, 2022, driven by increased demand across all of our animal health businesses and geographies after the effect of this change in revenue recognition is taken into account.

Gross Profit. The consolidated gross profit margin rate for the three months ended January 29, 2022 increased 20 basis points to 21.1%. The increase was primarily driven by an increase in the gross profit margin rates in both our Dental and Animal Health segments. The gross profit margin rate was negatively impacted by lower net sales in our Corporate segment due to rising interest rates on our customer financing portfolio. This interest rate impact was offset by a gain on associated interest rate swap agreements, which is reflected in other income, net in our condensed consolidated statements of operations and other comprehensive income.

Operating Expenses. Consolidated operating expenses for the three months ended January 29, 2022 were $275.8 million, a 4.9% increase from the prior year quarter of $262.9 million. We incurred higher personnel costs and higher travel-related expenses during the three months ended January 29, 2022. The consolidated operating expense ratio of 17.3% increased 40 basis points from the prior year quarter, which was also driven primarily by these same factors.

Operating Income. For the three months ended January 29, 2022, operating income was $60.8 million, or 3.8% of net sales, as compared to $61.7 million, or 4.0% of net sales for the three months ended January 23, 2021. The decrease in operating income and operating income as a percent of net sales was primarily due to higher personnel costs and higher travel-related expenses. These increases were partially offset by the growth in sales experienced during the three months ended January 29, 2022 and an increase in the consolidated gross profit margin rate.

Dental segment operating income was $64.1 million for the three months ended January 29, 2022, compared to $61.3 million for the three months ended January 23, 2021. The increase in operating income was primarily due to higher gross margins for the three months ended January 29, 2022.

Animal Health segment operating income was $23.4 million for the three months ended January 29, 2022, compared to $20.6 million for the three months ended January 23, 2021. The increase was primarily driven by higher net sales during the three months ended January 29, 2022, partially offset by higher personnel costs incurred during the three months ended January 29, 2022.

Corporate segment operating loss was $26.7 million and $20.2 million for the three months ended January 29, 2022 and January 23, 2021, respectively. The change was primarily driven by lower customer financing-related net sales in the current quarter related to the effect of rising interest rates on our customer financing portfolio.

Other Income (Expense). Net other income for the three months ended January 29, 2022 was $14.4 million, as compared to net other expense of $1.2 million for the three months ended January 23, 2021. The change was primarily driven by the Gain on Vets Plus Investment of $13.1 million, as well as a larger gain on our interest rate swap recorded during the three months ended January 29, 2022.

Income Tax Expense. The effective income tax rate for the three months ended January 29, 2022 was 24.8%, compared to 19.7% for the three months ended January 23, 2021. The increase in the rate was primarily due to the impact of excess tax benefit deductions and provision to return adjustments in the prior year quarter.

Net Income Attributable to Patterson Companies, Inc. and Earnings Per Share. Net income attributable to Patterson Companies, Inc. for the three months ended January 29, 2022 was $57.0 million, compared to $48.8 million for the three months ended January 23, 2021. Earnings per diluted share were $0.58 in the current quarter compared to $0.50 in the prior year quarter. Weighted average diluted shares outstanding in the current quarter were 98.6 million, compared to 97.0 million in the prior year quarter. The current quarter and prior year quarter cash dividend declared was $0.26 per common share.

NINE MONTHS ENDED JANUARY 29, 2022 COMPARED TO NINE MONTHS ENDED JANUARY 23, 2021

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The following table summarizes our results as a percent of net sales:


	Nine Months Ended
	January 29, 2022		January 23, 2021
Net sales	100.0	%	100.0	%
Cost of sales	80.6		79.3
Gross profit	19.4		20.7
Operating expenses	17.7		16.7
Operating income	1.7		4.0
Other income (expense)	2.1		(0.2)
Income before taxes	3.8		3.8
Income tax expense	1.0		0.9
Net income	2.8		2.9
Net loss attributable to noncontrolling interests	—		—
Net income attributable to Patterson Companies, Inc.	2.8	%	2.9	%

Net Sales. Consolidated net sales for the nine months ended January 29, 2022 were $4,860.6 million, an 11.7% increase from $4,350.3 million for the nine months ended January 23, 2021. Sales were positively impacted by an estimated 2.6% due to the extra week of results in the current period. Foreign exchange rate changes had a favorable impact of 1.1% on current period sales. Sales of certain products previously recognized on a gross basis were recognized on a net basis during the nine months ended January 29, 2022. This change in revenue recognition was driven by changes in contractual terms with certain suppliers. The impact of this change in revenue recognition for certain products was partially offset by the impact of the acquisition of substantially all of the assets of Miller Vet on sales for the nine months ended January 29, 2022, resulting in a net decrease in sales of approximately 2.6%.

Dental segment sales for the nine months ended January 29, 2022 were $1,879.7 million, a 9.9% increase from $1,711.0 million for the nine months ended January 23, 2021. Sales were positively impacted by an estimated 2.4% due to the extra week of results in the current period. Foreign exchange rate changes had a favorable impact of 0.7% on current period sales. Current period sales of consumables increased 11.9%, sales of equipment and software increased 7.9% to $591.8 million, and sales of value-added services and other increased 5.8%. Dental segment sales growth in the current period was driven by a recovery in the Dental end markets, compared to sales during the nine months ended January 23, 2021, which were negatively affected by the COVID-19 pandemic when dental offices were closed for elective procedures, particularly during the first quarter of our fiscal 2021.

Animal Health segment sales for the nine months ended January 29, 2022 were $2,975.0 million, a 13.5% increase from $2,620.7 million for the nine months ended January 23, 2021. Sales were positively impacted by an estimated 2.8% due to the extra week of results in the current period. Foreign exchange rate changes had a favorable impact of 1.5% on current period sales. Sales of certain products previously recognized on a gross basis were recognized on a net basis during the nine months ended January 29, 2022. This change in revenue recognition was driven by changes in contractual terms with certain suppliers. The impact of this change in revenue recognition for certain products was partially offset by the impact of the acquisition of substantially all of the assets of Miller Vet on sales for the nine months ended January 29, 2022, resulting in a net decrease in sales of approximately 4.3%. Sales were higher during the nine months ended January 29, 2022, driven by increased demand across all of our animal health businesses and geographies.

Gross Profit. The consolidated gross profit margin rate for the nine months ended January 29, 2022 decreased 130 basis points from the prior year period to 19.4%, driven primarily by the impact of the Inventory Donation Charges, unfavorable mix in sales among our segments due to faster growth in our Animal Health segment, and lower net sales in our Corporate segment due to the effect of rising interest rates on our customer financing portfolio. This interest rate impact was partially offset by a gain on associated interest rates swap agreements, which is reflected in other income, net in our condensed consolidated statements of operations and other comprehensive income.

Operating Expenses. Consolidated operating expenses for the nine months ended January 29, 2022 were $856.7 million, a 18.1% increase from the prior year period of $725.5 million. We incurred higher operating expenses during the nine months ended January 29, 2022 primarily due to higher personnel costs and the impact of the Fiscal 2022

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Legal Reserve. The higher personnel costs were primarily due to the salary reductions, reduced work hours, and furloughs we implemented as a response to the COVID-19 pandemic during the three months ended July 25, 2020. The consolidated operating expense ratio of 17.7% increased 100 basis points from the prior year period, which was also driven by these same factors.

Operating Income. For the nine months ended January 29, 2022, operating income was $84.2 million, or 1.7% of net sales, as compared to $173.3 million, or 4.0% of net sales for the nine months ended January 23, 2021. The decrease in operating income was primarily due to higher personnel costs, the impact of the Fiscal 2022 Legal Reserve and the Inventory Donation Charges recorded during the nine months ended January 29, 2022. These impacts were partially offset by the growth in sales experienced during the nine months ended January 29, 2022.

Dental segment operating income was $118.6 million for the nine months ended January 29, 2022, a decrease of $53.4 million from the prior year period. The decrease was primarily driven by the expense associated with the Inventory Donation Charges and higher personnel costs, partially offset by an increase in net sales during the nine months ended January 29, 2022.

Animal Health segment operating income was $73.4 million for the nine months ended January 29, 2022, an increase of $17.8 million from the prior year period. The increase was primarily driven by higher net sales during the nine months ended January 29, 2022, partially offset by higher personnel costs incurred during the nine months ended January 29, 2022.

Corporate segment operating loss was $107.8 million and $54.4 million for the nine months ended January 29, 2022 and January 23, 2021, respectively. The change was primarily driven by the impact of the Fiscal 2022 Legal Reserve, as well as higher personnel costs incurred during the nine months ended January 29, 2022 and lower customer financing net sales recorded during the nine months ended January 29, 2022.

Other Income (Expense). Net other income for the nine months ended January 29, 2022 was $99.7 million, compared to net other expense of $9.0 million for the nine months ended January 23, 2021. The change was primarily driven by the Gains on Vetsource Investment of $87.8 million, the Gain on Vets Plus Investment of $13.1 million and a larger gain on our interest rate swap agreements recorded during the nine months ended January 29, 2022.

Income Tax Expense. The effective income tax rate for the nine months ended January 29, 2022 was 24.8%, compared to 22.9% for the nine months ended January 23, 2021. There was an increase in the rate for the nine months ended January 29, 2022 primarily due to provision to return adjustments in the prior year period and a geographical shift in earnings, which was partially offset by excess tax benefits associated with stock-based compensation awards.

Net Income Attributable to Patterson Companies, Inc. and Earnings Per Share. Net income attributable to Patterson Companies, Inc. for the nine months ended January 29, 2022 was $139.3 million, compared to $127.2 million for the nine months ended January 23, 2021. Earnings per diluted share were $1.42 in the current period compared to $1.32 in the prior year period. Weighted average diluted shares outstanding in the current period were 98.5 million, compared to 96.4 million in the prior year period. The current period and prior year period cash dividend declared was $0.78 per common share.

LIQUIDITY AND CAPITAL RESOURCES

Net cash used in operating activities was $834.1 million and $604.9 million for the nine months ended January 29, 2022 and January 23, 2021, respectively. Net cash used in operating activities for the nine months ended January 29, 2022 was primarily due to the impact of our Receivables Securitization Program and a net increase in inventory, inclusive of the impact of the $49.2 million Inventory Donation Charges, partially offset by an increase in accounts payable.

Net cash provided by investing activities was $946.4 million and $615.9 million for the nine months ended January 29, 2022 and January 23, 2021, respectively. Collections of DPP receivables were $918.4 million and $634.5 million for the nine months ended January 29, 2022 and January 23, 2021, respectively. During the nine months ended January 29, 2022, we recorded cash receipts of $74.3 million from the sale of investments and used $19.8 million to acquire Miller Vet. Capital expenditures were $26.5 million and $21.1 million during the nine months ended January 29, 2022 and January 23, 2021, respectively. We expect to use a total of approximately $40.0 million for capital expenditures in fiscal 2022.

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Net cash used in financing activities for the nine months ended January 29, 2022 was $90.5 million, driven by uses of cash of $100.8 million for the retirement of long-term debt and $75.7 million for dividend payments, partially offset by $82.0 million attributed to draws on our revolving line of credit.

For the nine months ended January 23, 2021, net cash provided by financing activities was $60.1 million, driven primarily by $108.0 million attributed to draws on our revolving line of credit. We paid dividends of $50.1 million during the nine months ended January 23, 2021. During the nine months ended January 23, 2021, we declared cash dividends totaling $0.78 per common share.

In fiscal 2021, we entered into an amendment, restatement and consolidation of certain credit agreements with various lenders, including MUFG Bank, Ltd, as administrative agent. This amended and restated credit agreement (the “Credit Agreement”), dated February 16, 2021, consists of a $700.0 million revolving credit facility and a $300.0 million term loan facility, and will mature no later than February 2024. We used the facilities to refinance and consolidate certain credit agreements in existence prior to the Credit Agreement being executed, pay the fees and expenses incurred therewith, and finance our ongoing working capital and other general corporate purposes.

As of January 29, 2022, $300.0 million was outstanding under the Credit Agreement term loan at an interest rate of 1.36%, and $135.0 million was outstanding under the Credit Agreement revolving credit facility at an interest rate of 1.35%. As of April 24, 2021, $300.0 million was outstanding under the Credit Agreement term loan at an interest rate of 1.36%, and $53.0 million was outstanding under the Credit Agreement revolving credit facility at an interest rate of 1.34%.

We expect the collection of deferred purchase price receivables, existing cash balances and credit availability under existing debt facilities, less our funds used in operations, will be sufficient to meet our working capital needs and to finance our business over the remainder of fiscal 2022.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

See Note 1 to the Condensed Consolidated Financial Statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in our exposure to market risk from that disclosed in Item 7A in our 2021 Annual Report on Form 10-K filed June 23, 2021.

ITEM 4. CONTROLS AND PROCEDURES

Under the supervision and with the participation of our management, including our President and Chief Executive Officer ("CEO") and our Chief Financial Officer ("CFO"), management evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of January 29, 2022. Based upon their evaluation of these disclosure controls and procedures, the CEO and CFO concluded that the disclosure controls and procedures were effective as of January 29, 2022.

There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended January 29, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II—OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We accrue for these matters when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Unless otherwise noted, with respect to the specific legal proceedings and claims described herein, the amount or range of possible losses is not reasonably estimable. Adverse outcomes in some or all of these matters may result in significant monetary damages or injunctive relief against us that could adversely affect our ability to conduct our business. There also exists the possibility of a material adverse effect on our financial statements for the period in which the effect of an unfavorable outcome becomes probable and reasonably estimable.

See Note 11 to the Condensed Consolidated Financial Statements appearing in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information.

ITEM 1A. RISK FACTORS

There have been no material changes to the risk factors disclosed in Part I, Item 1A, “Risk Factors” in our 2021 Annual Report on Form 10-K for the fiscal year ended April 24, 2021.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Purchases of Equity Securities by the Issuer

On March 16, 2021, the Board of Directors authorized a $500 million share repurchase program through March 16, 2024. No shares were repurchased under the stock repurchase plan during the third quarter of fiscal 2022.

Our Credit Agreement permits us to declare and pay dividends, and repurchase shares, provided that no default or unmatured default exists and that we are in compliance with applicable financial covenants.

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ITEM 6. EXHIBITS


Exhibit No.						Exhibit Description







31.1						Certification of the Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2						Certification of the Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1						Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2						Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101						(Filed Electronically) The following financial information from our Quarterly Report on Form 10-Q for the period ended January 29, 2022, formatted in Inline XBRL (Extensible Business Reporting Language): (i) the condensed consolidated balance sheets, (ii) the condensed consolidated statements of operations and other comprehensive income, (iii) the condensed consolidated statements of changes in stockholders’ equity, (iv) the condensed consolidated statements of cash flows and (v) the notes to the condensed consolidated financial statements.(*)

104						(Filed Electronically) The cover page from our Quarterly Report on Form 10-Q for the period ended January 29, 2022 is formatted in Inline XBRL (Extensible Business Reporting Language).(*)

(*) The Inline XBRL related information in Exhibits 101 and 104 to this Quarterly Report on Form 10-Q shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability of that section and shall not be incorporated by reference into any filing or other document pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing or document.

All other items under Part II have been omitted because they are inapplicable or the answers are negative, or were previously reported in the 2021 Annual Report on Form 10-K filed June 23, 2021.

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		PATTERSON COMPANIES, INC.
		(Registrant)

Dated: March 2, 2022	By:	/s/ Donald J. Zurbay
		Donald J. Zurbay
		Chief Financial Officer
		(Principal Financial Officer and Principal Accounting Officer)

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Form 10-Q PATTERSON COMPANIES, For: Jan 29

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