10-Q 1 pdco-20220129.htm 10-Q pdco-20220129
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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)
 ____________________________________________________________
Minnesota41-0886515
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification Number)
1031 Mendota Heights Road
St. PaulMinnesota55120
(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 classTrading Symbol(s)Name of exchange on which registered
Common Stock, par value $.01PDCONASDAQ 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.



PATTERSON COMPANIES, INC.

2

PART I—FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PATTERSON COMPANIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
(Unaudited)
January 29, 2022April 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 
Inventory868,728 736,778 
Prepaid expenses and other current assets289,548 286,672 
Total current assets1,790,431 1,615,929 
Property and equipment, net214,426 219,438 
Operating lease right-of-use assets, net71,817 77,217 
Long-term receivables, net153,433 223,970 
Goodwill, net140,670 139,932 
Identifiable intangibles, net262,955 279,644 
Investments138,471 105,522 
Other non-current assets91,293 89,859 
Total assets$2,863,496 $2,751,511 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable$715,544 $609,264 
Accrued payroll expense101,320 118,425 
Other accrued liabilities149,816 175,975 
Operating lease liabilities30,417 32,252 
Current maturities of long-term debt 100,750 
Borrowings on revolving credit135,000 53,000 
Total current liabilities1,132,097 1,089,666 
Long-term debt488,353 487,545 
Non-current operating lease liabilities43,513 48,318 
Other non-current liabilities155,355 161,311 
Total liabilities1,819,318 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 capital191,505 169,099 
Accumulated other comprehensive loss(67,552)(62,592)
Retained earnings918,311 855,741 
Total Patterson Companies, Inc. stockholders' equity1,043,240 963,216 
Noncontrolling interests938 1,455 
Total stockholders’ equity1,044,178 964,671 
Total liabilities and stockholders’ equity$2,863,496 $2,751,511 
See accompanying notes
3

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, 2022January 23, 2021January 29, 2022January 23, 2021
Net sales$1,596,596 $1,551,268 $4,860,633 $4,350,273 
Cost of sales1,259,985 1,226,727 3,919,785 3,451,548 
Gross profit336,611 324,541 940,848 898,725 
Operating expenses275,778 262,860 856,684 725,466 
Operating income60,833 61,681 84,164 173,259 
Other income (expense):
Gains on investments13,092  100,919  
Other income, net6,186 4,323 14,413 9,580 
Interest expense(4,879)(5,532)(15,595)(18,604)
Income before taxes75,232 60,472 183,901 164,235 
Income tax expense18,657 11,905 45,586 37,640 
Net income56,575 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:
Basic97,471 95,734 97,213 95,472 
Diluted98,554 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 tax261 261 782 782 
Comprehensive income$50,330 $60,618 $133,355 $155,083 
See accompanying notes
4

PATTERSON COMPANIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In thousands)
(Unaudited)
Common StockAdditional
Paid-in
Capital
Accumulated
Other
Comprehensive
Loss
Retained
Earnings
Unearned
ESOP
Shares
Non-controlling InterestsTotal
SharesAmount
Balance at April 25, 202095,947 $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 benefits309 4 (899)— — — — (895)
Stock-based compensation— — 6,610 — — — — 6,610 
Balance at July 25, 202096,256 963 152,317 (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 benefits240 2 1,209 — — — — 1,211 
Stock-based compensation— — 4,267 — — — — 4,267 
Balance at October 24, 202096,496 965 157,793 (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 benefits125 1 1,505 — — — — 1,506 
Stock-based compensation— — 5,019 — — — — 5,019 
Balance at January 23, 202196,621 966 164,317 (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 benefits192 2 (545)— — — — (543)
Stock-based compensation— — 5,327 — — — — 5,327 
ESOP activity— — — — — 16,061 — 16,061 
Balance at April 24, 202196,813 $968 $169,099 $(62,592)$855,741 $ $1,455 $964,671 

See accompanying notes
5

PATTERSON COMPANIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In thousands)
(Unaudited)
Common StockAdditional
Paid-in
Capital
Accumulated
Other
Comprehensive
Loss
Retained
Earnings
Unearned
ESOP
Shares
Non-controlling InterestsTotal
SharesAmount
Balance at April 24, 202196,813 $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 benefits422 4 (756)— — — — (752)
Stock-based compensation— — 7,839 — — — — 7,839 
Balance at July 31, 202197,235 972 176,182 (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 benefits257 3 2,708 — — — — 2,711 
Stock-based compensation— — 5,658 — — — — 5,658 
Balance at October 30, 202197,492 975 184,548 (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 benefits95 1 2,070 — — — — 2,071 
Stock-based compensation— — 4,887 — — — — 4,887 
Contribution from noncontrolling interest— — — — — — 500 500 
Balance at January 29, 202297,587 $976 $191,505 $(67,552)$918,311 $ $938 $1,044,178 
See accompanying notes

6


PATTERSON COMPANIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
 Nine Months Ended
January 29, 2022January 23, 2021
Operating activities:
Net income$138,315 $126,595 
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation32,999 30,452 
Amortization28,406 27,903 
Gains on investments(100,919) 
Non-cash employee compensation18,384 25,161 
Non-cash losses (gains) and other, net5,815 6,791 
Change in assets and liabilities:
Receivables(850,628)(685,345)
Inventory(132,689)(12,506)
Accounts payable110,862 (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 receivables918,354 634,499 
Acquisitions, net of cash acquired(19,793) 
Sale of investments74,346 396 
Other investing activities 2,097 
Net cash provided by investing activities946,419 615,891 
Financing activities:
Dividends paid(75,746)(50,077)
Payments on long-term debt(100,750) 
Draw on revolving credit82,000 108,000 
Other financing activities4,030 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 equivalents21,800 78,017 
Cash and cash equivalents at beginning of period143,244 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
7

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, 2022January 23, 2021January 29, 2022January 23, 2021
Gain (loss) on interest rate swap agreements$3,688 $145 $5,805 $(635)
Investment income and other2,498 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.
8

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, 2022January 23, 2021January 29, 2022January 23, 2021
Denominator for basic EPS – weighted average shares97,471 95,734 97,213 95,472 
Effect of dilutive securities – stock options, restricted stock and stock purchase plans1,083 1,219 1,237 907 
Denominator for diluted EPS – weighted average shares98,554 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
9

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
10

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, 2022January 23, 2021
Beginning DPP receivable balance$183,999 $117,327 
Non-cash additions to DPP receivable768,440 572,683 
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.
11

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, 2022January 23, 2021
Beginning DPP receivable balance$227,967 $228,019 
Non-cash additions to DPP receivable54,347 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
12

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 typeClassificationJanuary 29, 2022April 24, 2021
Assets:
Interest rate contractsPrepaid expenses and other current assets$1,355 $ 
Interest rate contractsOther non-current assets6,052 2,120 
Total asset derivatives$7,407 $2,120 
Liabilities:
Interest rate contractsOther accrued liabilities$1,408 $3,776 
Interest rate contractsOther non-current liabilities3,764 7,795 
Total liability derivatives$5,172 $11,571 
The following tables present the pre-tax effect of derivative instruments on the condensed consolidated statements of operations and other comprehensive income:
Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss into Income (Effective Portion)
Three Months Ended Nine Months Ended
Derivatives in cash flow hedging relationshipsStatements of operations locationJanuary 29, 2022January 23, 2021January 29, 2022January 23, 2021
Interest rate contractsInterest expense$(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 instrumentsStatements of operations locationJanuary 29, 2022January 23, 2021January 29, 2022January 23, 2021
Interest rate contractsOther 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
TotalLevel 1Level 2Level 3
Assets:
Cash equivalents$10,854 $10,854 $ $ 
DPP receivable - receivables securitization program167,568   167,568 
DPP receivable - customer financing148,831   148,831 
Derivative instruments7,407  7,407  
Total assets$334,660 $10,854 $7,407 $316,399 
Liabilities:
Derivative instruments$5,172 $ $5,172 $ 
April 24, 2021
TotalLevel 1Level 2Level 3
Assets:
Cash equivalents$1,698 $1,698 $ $ 
DPP receivable - receivables securitization program183,999   183,999 
DPP receivable - customer financing227,967   227,967 
Derivative instruments2,120  2,120  
Total assets$415,784 $1,698 $2,120 $411,966 
Liabilities:
Derivative instruments$11,571 $ $11,571