PATTERSON COMPANIES, INC. [PDCO] Filings

10-Q 1 pdco-20220730.htm 10-Q pdco-20220730

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 July 30, 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 August 23, 2022, there were 96,899,000 shares of Common Stock of the registrant issued and outstanding.

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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			24

Item 4 - Controls and Procedures			24

PART II - OTHER INFORMATION

Item 1 - Legal Proceedings			25

Item 1A - Risk Factors			25

Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds			25

Item 6 - Exhibits			26

Signatures			27

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PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PATTERSON COMPANIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

(Unaudited)


	July 30, 2022		April 30, 2022
ASSETS
Current assets:
Cash and cash equivalents	$	149,560	$	142,014
Receivables, net of allowance for doubtful accounts of $6,090 and $5,913	370,347		447,162
Inventory	874,817		785,604
Prepaid expenses and other current assets	311,257		304,242
Total current assets	1,705,981		1,679,022
Property and equipment, net	216,269		213,140
Operating lease right-of-use assets, net	73,841		70,722
Long-term receivables, net	135,632		138,812
Goodwill, net	140,657		140,630
Identifiable intangibles, net	242,771		252,614
Investments	140,113		139,182
Other non-current assets, net	103,104		107,508
Total assets	$	2,758,368	$	2,741,630
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	655,648	$	681,321
Accrued payroll expense	59,941		102,266
Other accrued liabilities	153,989		173,734
Operating lease liabilities	28,986		29,348

Borrowings on revolving credit	145,000		29,000
Total current liabilities	1,043,564		1,015,669
Long-term debt	488,809		488,554
Non-current operating lease liabilities	47,455		43,332
Other non-current liabilities	151,525		151,440
Total liabilities	1,731,353		1,698,995
Stockholders’ equity:
Common stock, $0.01 par value: 600,000 shares authorized; 96,899 and 96,762 shares issued and outstanding	969		968
Additional paid-in capital	205,531		200,520
Accumulated other comprehensive loss	(86,246)		(81,516)
Retained earnings	905,632		921,704

Total Patterson Companies, Inc. stockholders' equity	1,025,886		1,041,676
Noncontrolling interests	1,129		959
Total stockholders’ equity	1,027,015		1,042,635
Total liabilities and stockholders’ equity	$	2,758,368	$	2,741,630

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
	July 30, 2022		July 31, 2021
Net sales	$	1,523,265	$	1,614,876
Cost of sales	1,211,132		1,337,074
Gross profit	312,133		277,802
Operating expenses	277,289		317,331
Operating income (loss)	34,844		(39,529)
Other income (expense):
Gains on investments	—		87,827
Other income, net	1,780		1,423
Interest expense	(5,563)		(5,195)
Income before taxes	31,061		44,526
Income tax expense	6,801		10,724


Net income	24,260		33,802
Net loss attributable to noncontrolling interests	(330)		(194)
Net income attributable to Patterson Companies, Inc.	$	24,590	$	33,996
Earnings per share attributable to Patterson Companies, Inc.:


Basic	$	0.25	$	0.35



Diluted	$	0.25	$	0.35
Weighted average shares:
Basic	96,629		96,864
Diluted	97,794		98,255
Dividends declared per common share	$	0.26	$	0.26
Comprehensive income:
Net income	$	24,260	$	33,802
Foreign currency translation (loss) gain	(4,991)		324
Cash flow hedges, net of tax	261		261
Comprehensive income	$	19,530	$	34,387

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		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
Foreign currency translation	—	—		—		(14,224)		—		—		(14,224)
Cash flow hedges	—	—		—		260		—		—		260
Net income (loss)	—	—		—		—		63,878		(479)		63,399
Dividends declared	—	—		—		—		(25,495)		—		(25,495)
Common stock issued and related tax benefits	207	2		3,594		—		—		—		3,596
Repurchases of common stock	(1,032)	(10)		—		—		(34,990)		—		(35,000)
Stock-based compensation	—	—		5,421		—		—		—		5,421
Contribution from noncontrolling interest	—	—		—		—		—		500		500
Balance at April 30, 2022	96,762	$	968	$	200,520	$	(81,516)	$	921,704	$	959	$	1,042,635

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		Non-controlling Interests		Total
	Shares	Amount
Balance at April 30, 2022	96,762	$	968	$	200,520	$	(81,516)	$	921,704	$	959	$	1,042,635
Foreign currency translation	—	—		—		(4,991)		—		—		(4,991)
Cash flow hedges	—	—		—		261		—		—		261
Net income (loss)	—	—		—		—		24,590		(330)		24,260
Dividends declared	—	—		—		—		(25,667)		—		(25,667)
Common stock issued and related tax benefits	653	6		(2,148)		—		—		—		(2,142)
Repurchases of common stock	(516)	(5)		—		—		(14,995)		—		(15,000)
Stock-based compensation	—	—		7,159		—		—		—		7,159
Contribution from noncontrolling interest	—	—		—		—		—		500		500

Balance at July 30, 2022	96,899	$	969	$	205,531	$	(86,246)	$	905,632	$	1,129	$	1,027,015

See accompanying notes

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PATTERSON COMPANIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Three Months Ended
	July 30, 2022		July 31, 2021
Operating activities:
Net income	$	24,260	$	33,802


Adjustments to reconcile net income to net cash used in operating activities:
Depreciation	10,827		10,977
Amortization	9,351		9,541

Gains on investments	—		(87,827)

Non-cash employee compensation	7,159		7,839



Non-cash losses (gains) and other, net	3,559		3,385

Change in assets and liabilities:
Receivables	(171,148)		(206,199)
Inventory	(91,124)		(30,750)
Accounts payable	(22,926)		(15,974)
Accrued liabilities	(60,061)		208

Other changes from operating activities, net	(12,436)		(38,423)


Net cash used in operating activities	(302,539)		(313,421)
Investing activities:
Additions to property and equipment	(14,554)		(7,717)
Collection of deferred purchase price receivables	252,909		315,217
Acquisitions, net of cash acquired	—		(19,793)
Sale of investments	—		57,245



Net cash provided by investing activities	238,355		344,952
Financing activities:
Dividends paid	(25,418)		(25,138)
Repurchases of common stock	(15,000)		—




Draw (payment) on revolving credit	116,000		(11,000)
Other financing activities	(2,142)		(1,897)
Net cash provided by (used in) financing activities	73,440		(38,035)
Effect of exchange rate changes on cash	(1,710)		190
Net change in cash and cash equivalents	7,546		(6,314)
Cash and cash equivalents at beginning of period	142,014		143,244
Cash and cash equivalents at end of period	$	149,560	$	136,930

Supplemental disclosure of non-cash investing activity:
Retained interest in securitization transactions	$	241,375	$	286,607

See accompanying notes

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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 July 30, 2022, and our results of operations and cash flows for the periods ended July 30, 2022 and July 31, 2021. Such adjustments are of a normal recurring nature. The results of operations for the three months ended July 30, 2022 are not necessarily indicative of the results to be expected for any other interim period or for the year ending April 29, 2023. These financial statements should be read in conjunction with the financial statements included in our 2022 Annual Report on Form 10-K filed on June 29, 2022.

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 7.

Fiscal Year End

We operate with a 52-53 week accounting convention with our fiscal year ending on the last Saturday in April. The first quarter of fiscal 2023 and 2022 represents the 13 weeks ended July 30, 2022 and the 14 weeks ended July 31, 2021, respectively. Fiscal 2023 will include 52 weeks and fiscal 2022 included 53 weeks.

Other Income, Net

Other income, net consisted of the following:


	Three Months Ended
	July 30, 2022		July 31, 2021
Loss on interest rate swap agreements	$	(1,948)	$	(1,187)
Investment income and other	3,728		2,610
Other income, net	$	1,780	$	1,423

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 July 30, 2022 and July 31, 2021, respectively.

Earnings Per Share ("EPS")

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


	Three Months Ended
	July 30, 2022	July 31, 2021
Denominator for basic EPS – weighted average shares	96,629	96,864
Effect of dilutive securities – stock options, restricted stock and stock purchase plans	1,165	1,391
Denominator for diluted EPS – weighted average shares	97,794	98,255

Potentially dilutive securities representing 877 shares for the three months ended July 30, 2022 and 628 shares for the three months ended July 31, 2021 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 July 30, 2022 and April 30, 2022 were $378 and $134, 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 July 30, 2022 and April 30, 2022, contract liabilities of $41,587 and $38,581 were reported in other accrued liabilities, respectively. During the three months ended July 30, 2022, we recognized $14,203 of the amount previously deferred at April 30, 2022.

Recently Issued Accounting Pronouncements

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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” in March 2020 and ASU No. 2021-01, “Reference Rate Reform (Topic 848): Scope” in January 2021. 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 began to be phased out 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. 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 July 30, 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 July 30, 2022 and April 30, 2022, the fair value of outstanding trade receivables transferred to the Purchasers under the facility and derecognized from the condensed consolidated balance sheets were $393,071 and $396,443, respectively. Sales of trade receivables under this facility were $903,780 and $958,767, and cash collections from customers on receivables sold were $907,112 and $955,378 during the three months ended July 30, 2022 and July 31, 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 losses of $1,435 and $721 during the three months ended July 30, 2022 and July 31, 2021, respectively, related to the Receivables.

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


	Three Months Ended
		July 30, 2022		July 31, 2021
Beginning DPP receivable balance		$	195,764	$	183,999
Non-cash additions to DPP receivable		227,291		267,497
Collection of DPP receivable		(230,780)		(264,075)
Ending DPP receivable balance		$	192,275	$	187,421

Note 3. 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,

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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 July 30, 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 July 30, 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 three months ended July 30, 2022 and July 31, 2021, we sold $73,612 and $73,043 of contracts under these arrangements, respectively. In net sales in the condensed consolidated statements of operations and other comprehensive income, we recorded gains of $988 and $73 during the three months ended July 30, 2022 and July 31, 2021, respectively, related to these contracts sold. Cash collections on financed receivables sold were $84,094 and $108,111 during the three months ended July 30, 2022 and July 31, 2021, respectively.

Included in cash and cash equivalents in the condensed consolidated balance sheets are $36,475 and $39,106 as of July 30, 2022 and April 30, 2022, 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 $14,266 and $58,190 as of July 30, 2022 and April 30, 2022, respectively, of finance contracts we have not yet sold. A total of $569,347 of finance contracts receivable sold under the arrangements was outstanding at July 30, 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:


	Three Months Ended
		July 30, 2022		July 31, 2021
Beginning DPP receivable balance		$	125,332	$	227,967
Non-cash additions to DPP receivable		14,084		19,110
Collection of DPP receivable		(22,129)		(51,142)
Ending DPP receivable balance		$	117,287	$	195,935

The arrangements require us to maintain a minimum current ratio and maximum leverage ratio. We were in compliance with those covenants at July 30, 2022.

Note 4. Derivative Financial Instruments

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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 July 30, 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 July 30, 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 2029. 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 30, 2022, the remaining notional amount for interest rate swap agreements was $574,144, with the latest maturity date in fiscal 2029. During the three months ended July 30, 2022, we entered into forward interest rate swap agreements with a notional amount of $54,620. As of July 30, 2022, the remaining notional amount for interest rate swap agreements was $568,075, with the latest maturity date in fiscal 2030.

Net cash payments of $560 and $2,188 were made during the three months ended July 30, 2022 and July 31, 2021, respectively, to settle a portion of our liabilities related to interest rate swap agreements. These payments 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	July 30, 2022		April 30, 2022
Assets:
Interest rate contracts	Prepaid expenses and other current assets	$	3,669	$	3,875
Interest rate contracts	Other non-current assets, net	16,634		19,871
Total asset derivatives		$	20,303	$	23,746
Liabilities:
Interest rate contracts	Other accrued liabilities	$	300	$	250
Interest rate contracts	Other non-current liabilities	7,908		10,013
Total liability derivatives		$	8,208	$	10,263

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

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Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss into Income (Effective Portion)

Three Months Ended

Derivatives in cash flow hedging relationships

Statements of operations location

July 30, 2022

July 31, 2021

Interest rate contracts

Interest expense

(341)

Amount of Gain (Loss) Recognized in Income on Derivatives

Three Months Ended

Derivatives not designated as hedging instruments

Statements of operations location

July 30, 2022

July 31, 2021

Interest rate contracts

Other income, net

(1,948)

(1,187)

There were no gains or losses recognized in other comprehensive income (loss) on cash flow hedging derivatives during the three months ended July 30, 2022 or July 31, 2021.

We recorded no ineffectiveness during the three month periods ended July 30, 2022 and July 31, 2021. As of July 30, 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 5. 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.

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:


	July 30, 2022
	Total		Level 1		Level 2		Level 3
Assets:
Cash equivalents	$	4,210	$	4,210	$	—	$	—
DPP receivable - receivables securitization program	192,275		—		—		192,275
DPP receivable - customer financing	117,287		—		—		117,287
Derivative instruments	20,303		—		20,303		—
Total assets	$	334,075	$	4,210	$	20,303	$	309,562
Liabilities:
Derivative instruments	$	8,208	$	—	$	8,208	$	—

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	April 30, 2022
	Total		Level 1		Level 2		Level 3
Assets:
Cash equivalents	$	3,186	$	3,186	$	—	$	—
DPP receivable - receivables securitization program	195,764		—		—		195,764
DPP receivable - customer financing	125,332		—		—		125,332
Derivative instruments	23,746		—		23,746		—
Total assets	$	348,028	$	3,186	$	23,746	$	321,096
Liabilities:
Derivative instruments	$	10,263	$	—	$	10,263	$	—

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 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 $56,849 as of July 30, 2022 and April 30, 2022, 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 July 30, 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 three months ended July 30, 2022.

Our debt is not measured at fair value in the condensed consolidated balance sheets. The estimated fair value of our debt as of July 30, 2022 and April 30, 2022 was $488,507 and $489,777, respectively, as compared to a carrying value of $488,809 and $488,554 at July 30, 2022 and April 30, 2022, 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).

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The carrying amounts of receivables, net of allowances, accounts payable, and certain accrued and other current liabilities approximated fair value at July 30, 2022 and April 30, 2022.

Note 6. Income Taxes

The effective income tax rate for the three months ended July 30, 2022 was 21.9% compared to 24.1% for the three months ended July 31, 2021. The decrease in the rate for the three months ended July 30, 2022 was primarily due to the impact of excess tax benefit deductions and a geographical shift in earnings.

Note 7. 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. Patterson and Cure Partners each contributed additional net assets of $1,000 during the fiscal year ended April 30, 2022 and $500 during the three months ended July 30, 2022 . We have 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 July 30, 2022 and July 31, 2021, net loss attributable to the noncontrolling interest was $330 and $194, respectively. Since TPI was formed, there have been no changes in ownership interests. As of July 30, 2022, we had noncontrolling interests of $1,129 on our condensed consolidated balance sheets.

Note 8. Segment and Geographic Data

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, 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:

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	Three Months Ended
	July 30, 2022		July 31, 2021
Consolidated net sales
United States	$	1,260,398	$	1,313,772
United Kingdom	162,221		192,747
Canada	100,646		108,357
Total	$	1,523,265	$	1,614,876
Dental net sales
United States	$	499,835	$	541,073
Canada	58,082		65,794
Total	$	557,917	$	606,867
Animal Health net sales
United States	$	755,585	$	767,480
United Kingdom	162,221		192,747
Canada	42,564		42,563
Total	$	960,370	$	1,002,790
Corporate net sales
United States	$	4,978	$	5,219
Total	$	4,978	$	5,219

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	Three Months Ended
	July 30, 2022		July 31, 2021
Consolidated net sales
Consumable	$	1,261,769	$	1,341,674
Equipment and software	173,935		183,452
Value-added services and other	87,561		89,750
Total	$	1,523,265	$	1,614,876
Dental net sales
Consumable	$	337,840	$	376,576
Equipment and software	146,510		156,966
Value-added services and other	73,567		73,325
Total	$	557,917	$	606,867
Animal Health net sales
Consumable	$	923,929	$	965,098
Equipment and software	27,425		26,486
Value-added services and other	9,016		11,206
Total	$	960,370	$	1,002,790
Corporate net sales
Value-added services and other	$	4,978	$	5,219
Total	$	4,978	$	5,219


	Three Months Ended
	July 30, 2022		July 31, 2021





Operating income (loss)
Dental	$	36,895	$	(1,086)
Animal Health	21,859		23,805
Corporate	(23,910)		(62,248)
Total	$	34,844	$	(39,529)


	July 30, 2022		April 30, 2022
Total assets
Dental	$	887,774	$	851,746
Animal Health	1,502,113		1,459,450
Corporate	368,481		430,434
Total	$	2,758,368	$	2,741,630

Note 9. Accumulated Other Comprehensive Loss ("AOCL")

The following table summarizes the changes in AOCL as of July 30, 2022:

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	Cash Flow Hedges		Currency Translation Adjustment		Total
AOCL at April 30, 2022	$	(3,454)	$	(78,062)	$	(81,516)
Other comprehensive income before reclassifications	—		(4,991)		(4,991)
Amounts reclassified from AOCL	261		—		261
AOCL at July 30, 2022	$	(3,193)	$	(83,053)	$	(86,246)

The amounts reclassified from AOCL during the three months ended July 30, 2022 include gains and losses on cash flow hedges, net of taxes of $80. The impact to the condensed consolidated statements of operations and other comprehensive income was an increase to interest expense of $341 for the three months ended July 30, 2022.

Note 10. 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. On June 9, 2022, the District Court held a final settlement hearing to determine whether the settlement should be approved. On June 10, 2022, the District Court entered an order granting final approval to the settlement.

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; uncertain macro-economic conditions, including inflationary pressures; 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 or other purchasing incentives; 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; turnover or loss of key personnel or highly skilled employees; the risk that our governing documents and Minnesota law may discourage takeovers and business combinations; risks

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related to climate change; 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, and the risks of the companion animal business, including the possibility of disease adversely affecting the pet population; risks from the formation or expansion of 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; failure to comply with existing or future U.S. or foreign laws and regulations including those governing the distribution of pharmaceuticals and controlled substances; 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; and risks associated with information systems, software products and cyber-security attacks.

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 three months of fiscal 2023 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) continued focus on controlling costs and enhancing efficiency. Management defines internal growth as net sales adjusted to exclude the impact of foreign currency and differences in the number of weeks in fiscal periods. Foreign currency

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impact represents the difference in results that is 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 has had a significant impact on our businesses. Within our Dental segment, supply chain disruptions for personal protective equipment ("PPE") and an increased demand for these products initially resulted in backorders of PPE and a potential scarcity in raw materials to make PPE, causing substantial price increases. We had to prepay suppliers in order to obtain PPE for resale to our customers, and as manufacturing caught up to increased demand for PPE, prices dropped, impacting our margins and requiring us to write down certain inventory, primarily in the first quarter of fiscal 2022. The various impacts of the COVID-19 pandemic continue to affect our customers and supply chain.

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.

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 10 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. On June 9, 2022, the District Court held a final settlement hearing to determine whether the settlement should be approved. On June 10, 2022, the District Court entered an order granting final approval to the settlement.

Inventory Donation Charges. During the first quarter of fiscal 2022, we committed to donate certain PPE 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

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(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 JULY 30, 2022 COMPARED TO QUARTER ENDED JULY 31, 2021

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


	Three Months Ended
	July 30, 2022		July 31, 2021
Net sales	100.0	%	100.0	%
Cost of sales	79.5		82.8
Gross profit	20.5		17.2
Operating expenses	18.2		19.6
Operating income (loss)	2.3		(2.4)
Other income (expense)	(0.3)		5.2
Income before taxes	2.0		2.8
Income tax expense	0.4		0.7
Net income	1.6		2.1
Net loss attributable to noncontrolling interests	—		—
Net income attributable to Patterson Companies, Inc.	1.6	%	2.1	%

Net Sales. Consolidated net sales for the three months ended July 30, 2022 were $1,523.3 million, a decrease of 5.7% from $1,614.9 million for the three months ended July 31, 2021. Sales were negatively impacted by an estimated 7.2% due to the extra week of results in the prior year quarter. Foreign exchange rate changes had an unfavorable impact of 1.7% on current quarter sales.

Dental segment sales for the three months ended July 30, 2022 were $557.9 million, a decrease of 8.1% from $606.9 million for the three months ended July 31, 2021. Sales were negatively impacted by an estimated 6.8% due to the extra week of results in the prior year quarter. Foreign exchange rate changes had an unfavorable impact of 0.4% on curr