PATTERSON COMPANIES, INC. [PDCO] Filings

10-Q 1 pdco-20220129.htm 10-Q pdco-20220129

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________________________________________________________

FORM 10-Q

____________________________________________________________


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

FOR THE QUARTERLY PERIOD ENDED January 29, 2022.


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

Commission File No. 0-20572

__________________________________________________________

PATTERSON COMPANIES, INC.

(Exact Name of Registrant as Specified in Its Charter)

____________________________________________________________


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

(651) 686-1600

(Registrant’s Telephone Number, Including Area Code)

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


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

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

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

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

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

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

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

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

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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			26

Item 4 - Controls and Procedures			26

PART II - OTHER INFORMATION

Item 1 - Legal Proceedings			27

Item 1A - Risk Factors			27

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

Item 6 - Exhibits			28

Signatures			29

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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)


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

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

See accompanying notes

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PATTERSON COMPANIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND OTHER COMPREHENSIVE INCOME

(In thousands, except per share amounts)

(Unaudited)


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


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


Basic	$	0.58	$	0.51	$	1.43	$	1.33



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

See accompanying notes

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PATTERSON COMPANIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)


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

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




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

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

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

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

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

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

See accompanying notes

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PATTERSON COMPANIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)


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

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


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

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


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

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

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

See accompanying notes

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PATTERSON COMPANIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


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


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

Gains on investments	(100,919)		—

Non-cash employee compensation	18,384		25,161



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

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

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


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


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




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

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

See accompanying notes

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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 January 29, 2022, and our results of operations and cash flows for the periods ended January 29, 2022 and January 23, 2021. Such adjustments are of a normal recurring nature. The results of operations for the three and nine months ended January 29, 2022 are not necessarily indicative of the results to be expected for any other interim period or for the year ending April 30, 2022. These financial statements should be read in conjunction with the financial statements included in our 2021 Annual Report on Form 10-K filed on June 23, 2021.

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

Fiscal Year End

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

Other Income, Net

Other income, net consisted of the following:


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

Comprehensive Income

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

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Earnings Per Share ("EPS")

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


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

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

Revenue Recognition

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

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

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

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

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

Contract Balances

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

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

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

Recently Issued Accounting Pronouncements

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

Note 2. Acquisitions

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

Note 3. Receivables Securitization Program

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

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

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

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

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

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


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

Note 4. Customer Financing

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

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

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

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

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

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

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

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


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

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

Note 5. Derivative Financial Instruments

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

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

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

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

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

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

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

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

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


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

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


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


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

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

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

Note 6. Fair Value Measurements

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

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

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

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

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


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


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