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 27, 2018
, and our results of operations and cash flows for the periods ended
January 27, 2018
and
January 28, 2017
. Such adjustments are of a normal recurring nature. The results of operations for the periods ended
January 27, 2018
and
January 28, 2017
are not necessarily indicative of the results to be expected for the full year. These financial statements should be read in conjunction with the financial statements included in our 2017 Annual Report on Form 10-K filed on June 28, 2017.
The unaudited condensed consolidated financial statements include the assets and liabilities of PDC Funding Company, LLC ("PDC Funding") and PDC Funding Company II, LLC ("PDC Funding II"), 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. The assets of PDC Funding and PDC Funding II would be available first and foremost to satisfy the claims of its creditors. There are no known creditors of PDC Funding or PDC Funding II.
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 2018 and 2017 represents the 13 weeks ended
January 27, 2018
and the 13 weeks ended
January 28, 2017
, respectively. The
nine
months ended
January 27, 2018
and
January 28, 2017
each included 39 weeks. Fiscal 2018 will include 52 weeks and fiscal 2017 included 52 weeks.
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
$265
and
$265
for the three months ended
January 27, 2018
and
January 28, 2017
, respectively. The income tax expense related to cash flow hedges was
$795
and
$792
for the
nine
months ended
January 27, 2018
and
January 28, 2017
, respectively.
Earnings Per Share
The following table sets forth the computation of the weighted average shares outstanding used to calculate basic and diluted earnings per share ("EPS"):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
January 27,
2018
|
|
January 28,
2017
|
|
January 27,
2018
|
|
January 28,
2017
|
Denominator for basic earnings per share – weighted average shares
|
91,949
|
|
|
94,737
|
|
|
92,674
|
|
|
95,252
|
|
Effect of dilutive securities – stock options, restricted stock and stock purchase plans
|
660
|
|
|
622
|
|
|
649
|
|
|
663
|
|
Denominator for diluted earnings per share – weighted average shares
|
92,609
|
|
|
95,359
|
|
|
93,323
|
|
|
95,915
|
|
Potentially dilutive securities representing
1,568
and
1,354
shares for the
three and nine
months ended
January 27, 2018
, respectively, and
1,499
and
1,261
shares for the
three and nine
months ended
January 28, 2017
, respectively, were excluded from the calculation of diluted earnings per share because their effects were anti-dilutive.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, "Revenue from Contracts with Customers (Topic 606)". ASU No. 2014-09 supersedes the revenue recognition requirements in "Revenue Recognition (Topic 605)," and requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In July 2015, the FASB deferred the effective date of this pronouncement by one year to December 15, 2017 for annual reporting periods beginning after that date. Companies may use either a full retrospective or a modified retrospective approach to adopt the standard. We plan to adopt the new guidance in the first quarter of fiscal 2019 and are currently evaluating the standard, including the method we will use for adoption and the effect it will have on our financial statements. We do not expect the standard to materially affect our consolidated net earnings, financial position, or cash flows. We are currently evaluating the new standard as it relates to certain sales transactions in which products are shipped directly from the vendor to our customers. We currently report these sales on a gross basis, and are evaluating if we will be required to report these sales on a net basis. Such sales represent approximately
2%
of our consolidated net sales. Any change to net presentation would not impact gross margin or earnings.
In July 2015, the FASB issued ASU No. 2015-11, "Inventory (Topic 330), Simplifying the Measurement of Inventory." ASU 2015-11 requires inventory measured using any method other than LIFO or the retail inventory method to be subsequently measured at the lower of cost or net realizable value, rather than at the lower of cost or market. Subsequent measurement of inventory using the LIFO and retail inventory method is unchanged. During the first quarter of fiscal 2018, we adopted ASU No. 2015-11 and it had no material impact to the condensed consolidated financial statements.
In January 2016, the FASB issued ASU No. 2016-01, "Financial Instruments- Recognition and Measurement of Financial Assets and Financial Liabilities (Subtopic 825-10)", which amends certain aspects of recognition, measurement, presentation and disclosure of financial instruments, including the requirement to measure certain equity investments at fair value with changes in fair value recognized in net income. We are required to adopt the ASU No. 2016-01 in the first quarter of fiscal 2019. We are evaluating the impact of adopting this pronouncement.
In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)," which requires lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by most leases, as well as requires additional qualitative and quantitative disclosures. We are required to adopt ASU 2016-02 in the first quarter of fiscal 2020, with early adoption permitted. We plan to adopt the new guidance in the first quarter of fiscal 2020 and are currently evaluating the impact of adopting this pronouncement.
In February 2018, the FASB issued ASU No. 2018-02, "Income Statement-Reporting Comprehensive Income (Topic 220) Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income," which will allow a reclassification from accumulated other comprehensive income to retained earnings for the tax effects that are stranded in accumulated other comprehensive income as a result of tax reform. This standard also requires certain disclosures about stranded tax effects. We are required to adopt ASU No. 2018-02 in the first quarter of fiscal 2020, with early adoption permitted and apply it either in the period of adoption or retrospectively to each period in which the income tax effects of the tax reform related to items in accumulated other comprehensive income are recognized. We are currently evaluating the impact of adopting this pronouncement.
Note 2. 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.
First, we operate under an agreement to sell a portion of our equipment finance contracts to commercial paper conduits with The Bank of Tokyo-Mitsubishi UFJ, Ltd. ("BTMU") 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 BTMU. At least
9.5%
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 BTMU. The capacity under the agreement with BTMU at
January 27, 2018
was
$575,000
.
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
11.0%
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 27, 2018
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 deferred purchase price 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 deferred purchase price receivables 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 income and other comprehensive income. Expenses incurred related to customer financing activities are recorded in operating expenses in our condensed consolidated statements of income and other comprehensive income.
During the three months ended
January 27, 2018
and
January 28, 2017
, we sold
$45,361
and
$106,272
of contracts under these arrangements, respectively. During the
nine
months ended
January 27, 2018
and
January 28, 2017
, we sold
$197,072
and
$278,529
of contracts under these arrangements, respectively. In net sales in the condensed consolidated statements of income and other comprehensive income, we recorded a loss of
$1,688
during the three months ended
January 27, 2018
, and a gain of
$2,450
during the three months ended
January 28, 2017
related to these contracts sold. In net sales in the condensed consolidated statements of income and other comprehensive income, we recorded a gain of
$8,539
and
$16,966
during the
nine
months ended
January 27, 2018
and
January 28, 2017
, respectively, related to these contracts sold.
Included in cash and cash equivalents in the condensed consolidated balance sheets are
$36,009
and
$17,902
as of
January 27, 2018
and
April 29, 2017
, 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
$114,521
, net of unearned income of
$0
, and
$124,098
, net of unearned income of
$940
, as of
January 27, 2018
and
April 29, 2017
, respectively, of finance contracts we have not yet sold. A total of
$581,291
of finance contracts receivable sold under the arrangements was outstanding at
January 27, 2018
. The deferred purchase price receivable under the arrangements was
$137,054
and
$119,798
as of
January 27, 2018
and
April 29, 2017
, respectively. Since the internal financing program began in 1994, bad debt write-offs have amounted to less than
1%
of the loans originated.
The arrangements require us to maintain a minimum current ratio and maximum leverage ratio. We were in compliance with those covenants at
January 27, 2018
.
Note 3. 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 27, 2018
, PDC Funding had purchased an interest rate cap from a bank with a notional amount of
$575,000
and a maturity date of July 2025. We sold an identical interest rate cap to the same bank. As of
January 27,
2018
, PDC Funding II had purchased an interest rate cap from a bank with a notional amount of
$100,000
and a maturity date of July 2025. 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 as income or expense during the period in which the change occurs.
In March 2008, we entered into
two
forward starting interest rate swap agreements, each with notional amounts of
$100,000
and accounted for as cash flow hedges, to hedge interest rate fluctuations in anticipation of the issuance of the senior notes due fiscal
2015
and fiscal
2018
. Upon issuance of the hedged debt, we settled the forward starting interest rate swap agreements and recorded a
$1,000
increase, net of income taxes, to other comprehensive income (loss), which is being amortized as a reduction to interest expense over the life of the related debt.
In January 2014, we entered into a forward interest rate swap agreement with a notional amount of
$250,000
and accounted for as cash flow hedge, 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.
The following presents the fair value of derivative instruments included in the condensed consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
Derivative type
|
Classification
|
January 27, 2018
|
|
April 29, 2017
|
Assets:
|
|
|
|
|
Interest rate cap agreements
|
Other noncurrent assets
|
$
|
1,061
|
|
|
$
|
1,188
|
|
Liabilities:
|
|
|
|
|
Interest rate cap agreements
|
Other noncurrent liabilities
|
1,061
|
|
|
1,188
|
|
The following table presents the pre-tax effect of derivative instruments in cash flow hedging relationships on the condensed consolidated statements of income and other comprehensive income ("OCI"):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Income statement location
|
|
January 27, 2018
|
|
January 28, 2017
|
|
January 27, 2018
|
|
January 28, 2017
|
Interest rate swap
|
|
Interest expense
|
|
$
|
(702
|
)
|
|
$
|
(702
|
)
|
|
$
|
(2,107
|
)
|
|
$
|
(2,099
|
)
|
We recorded
no
effective portion of gains or losses on derivative instruments in cash flow hedging relationships in OCI during the current period.
We recorded
no
ineffectiveness during the
three and nine
month periods ended
January 27, 2018
and
January 28, 2017
. As of
January 27, 2018
, the estimated pre-tax portion of accumulated other comprehensive loss that is expected to be reclassified into earnings over the next twelve months is
$2,885
, which will be recorded as an increase to interest expense.
Note 4. 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 27, 2018
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets:
|
|
|
|
|
|
|
|
Cash equivalents
|
$
|
3,401
|
|
|
$
|
3,401
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Deferred purchase price receivable
|
137,054
|
|
|
—
|
|
|
—
|
|
|
137,054
|
|
Derivative instruments
|
1,061
|
|
|
—
|
|
|
1,061
|
|
|
—
|
|
Total assets
|
$
|
141,516
|
|
|
$
|
3,401
|
|
|
$
|
1,061
|
|
|
$
|
137,054
|
|
Liabilities:
|
|
|
|
|
|
|
|
Derivative instruments
|
$
|
1,061
|
|
|
$
|
—
|
|
|
$
|
1,061
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 29, 2017
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets:
|
|
|
|
|
|
|
|
Cash equivalents
|
$
|
6,798
|
|
|
$
|
6,798
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Deferred purchase price receivable
|
119,798
|
|
|
—
|
|
|
—
|
|
|
119,798
|
|
Derivative instruments
|
1,188
|
|
|
—
|
|
|
1,188
|
|
|
—
|
|
Total assets
|
$
|
127,784
|
|
|
$
|
6,798
|
|
|
$
|
1,188
|
|
|
$
|
119,798
|
|
Liabilities:
|
|
|
|
|
|
|
|
Derivative instruments
|
$
|
1,188
|
|
|
$
|
—
|
|
|
$
|
1,188
|
|
|
$
|
—
|
|
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.
Deferred purchase price receivable
– We value the deferred purchase price 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, such as when there is evidence of impairment. There were no fair value adjustments to such assets during the
nine
month period ended
January 27, 2018
. During the nine month period ended
January 28, 2017
, we recorded a non-cash impairment charge of
$36,312
related to a distribution agreement intangible asset. Refer to Note 6 for more information.
Our debt is not measured at fair value in the condensed consolidated balance sheets. The estimated fair value of our debt as of
January 27, 2018
and
April 29, 2017
was
$1,013,300
and
$1,025,761
, respectively, as compared to a carrying value of
$1,006,173
and
$1,013,026
at
January 27, 2018
and
April 29, 2017
, respectively. The fair value of debt was measured using a discounted cash flow analysis based on expected market based yields (i.e., level 2 inputs).
The carrying amounts of receivables, net of allowances, accounts payable, and certain accrued and other current liabilities approximated fair value at
January 27, 2018
and
April 29, 2017
.
Note 5. Income Taxes
The effective income tax rate for the three months ended
January 27, 2018
was
(170.0)%
compared to
23.2%
for the three months ended
January 28, 2017
, and for the
nine
months ended
January 27, 2018
was
(20.9)%
compared to
31.9%
for the
nine
months ended
January 28, 2017
.
The tax benefit for the three and nine months ended
January 27, 2018
was primarily due to the impact of the Tax Cuts and Jobs Act ("Tax Act"), enacted on December 22, 2017 by the U.S. government. The Tax Act significantly revises the future ongoing U.S. federal corporate income tax by, among other things, lowering U.S. federal corporate tax rates and implementing a territorial tax system. Effective January 1, 2018, the Tax Act reduced the U.S. federal corporate tax rate from
35.0%
to
21.0%
. For our fiscal year ending April 28, 2018, we will utilize a blended rate of approximately
30.5%
. For the quarter ended January 27, 2018, these impacts resulted in a provisional discrete net tax benefit of
$77,256
, which included provisional amounts of
$81,206
of tax benefit on U.S. deferred tax assets and liabilities and
$3,950
of tax expense for a one-time transition tax on unremitted foreign earnings.
The legislative changes included in the Tax Act are broad and complex. We determined that the transition tax on unremitted foreign earnings is provisional because various components of the computation are unknown as of January 27, 2018. In addition, we determined that the impact of the U.S. federal corporate income tax rate change on the U.S. deferred tax assets and liabilities is provisional because the amount cannot be calculated until the underlying timing differences are known rather than estimated.
Given the Tax Act’s significant changes and potential opportunities to repatriate cash tax free, we are in the process of evaluating our current indefinite assertions with regard to cash and earnings that have been subjected to the transition tax. We continue to apply ASC 740 based on the provisions of the tax law that were in effect immediately prior to the enactment of the Tax Act. With regard to unremitted earnings of foreign subsidiaries that have not been previously taxed, we do not currently provide for U.S. taxes since we intend to invest such undistributed earnings indefinitely outside of the U.S.
We continue to review the anticipated impacts of the global intangible low taxed income (“GILTI”) and base erosion and anti-abuse tax (“BEAT”) provisions which are not effective until fiscal year 2019. We have not recorded any impact associated with either GILTI or BEAT in the tax rate for the three months ended January 27, 2018.
The final transition impacts of the Tax Act may differ from the above estimate, possibly materially, due to, among other things, changes in interpretations of the Tax Act, any federal and/or state legislative action to address questions that arise because of the Tax Act, any changes in accounting standards for income taxes or related interpretations in response to the Tax Act, or any updates or changes to estimates we have utilized to calculate the transition impacts, including impacts from changes to current year earnings estimates and foreign exchange rates of foreign subsidiaries. The Securities and Exchange Commission has issued rules that will allow for a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts.
Note 6. Intangible Asset Impairment
In 2006, we extended our exclusive North American distribution relationship with Sirona Dental Systems for Sirona’s CEREC 3D dental restorative system. At that time, we paid a
$100,000
distribution fee to extend the existing exclusive relationship for at least a
10
-year period beginning in 2007. This distribution fee was accounted for as an intangible asset and amortized since 2007.
Based on our November 2016 decision not to extend sales exclusivity for the full Sirona portfolio of products, we recorded a pre-tax non-cash impairment charge of
$36,312
in our Dental segment in the third quarter of fiscal 2017, related to the distribution fee associated with the CEREC product component of this arrangement. This charge was recorded within operating expenses in the condensed consolidated statements of income and other comprehensive income.
Note 7. Segment Reporting
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 table presents information about our reportable segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
January 27,
2018
|
|
January 28,
2017
|
|
January 27,
2018
|
|
January 28,
2017
|
Net sales
|
|
|
|
|
|
|
|
Dental
|
$
|
577,877
|
|
|
$
|
626,343
|
|
|
$
|
1,650,314
|
|
|
$
|
1,782,911
|
|
Animal Health
|
794,867
|
|
|
762,577
|
|
|
2,394,586
|
|
|
2,332,354
|
|
Corporate
|
2,478
|
|
|
8,498
|
|
|
20,174
|
|
|
32,830
|
|
Consolidated net sales
|
$
|
1,375,222
|
|
|
$
|
1,397,418
|
|
|
$
|
4,065,074
|
|
|
$
|
4,148,095
|
|
Operating income (loss) from continuing operations
|
|
|
|
|
|
|
|
Dental
|
$
|
58,439
|
|
|
$
|
40,018
|
|
|
$
|
183,165
|
|
|
$
|
177,356
|
|
Animal Health
|
18,037
|
|
|
23,777
|
|
|
57,930
|
|
|
60,460
|
|
Corporate
|
(26,430
|
)
|
|
(17,241
|
)
|
|
(62,457
|
)
|
|
(46,043
|
)
|
Consolidated operating income from continuing operations
|
$
|
50,046
|
|
|
$
|
46,554
|
|
|
$
|
178,638
|
|
|
$
|
191,773
|
|
|
|
|
|
|
|
|
|
|
|
January 27,
2018
|
|
April 29,
2017
|
Total assets
|
|
|
|
Dental
|
$
|
953,273
|
|
|
$
|
863,970
|
|
Animal Health
|
2,196,733
|
|
|
2,119,512
|
|
Corporate
|
524,352
|
|
|
524,431
|
|
Total assets
|
$
|
3,674,358
|
|
|
$
|
3,507,913
|
|
The following table presents sales information by product for all of our reportable segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
January 27,
2018
|
|
January 28,
2017
|
|
January 27,
2018
|
|
January 28,
2017
|
Net sales
|
|
|
|
|
|
|
|
Consumable
|
$
|
1,074,189
|
|
|
$
|
1,064,098
|
|
|
$
|
3,270,385
|
|
|
$
|
3,252,551
|
|
Equipment and software
|
222,574
|
|
|
249,047
|
|
|
540,860
|
|
|
627,187
|
|
Other
|
78,459
|
|
|
84,273
|
|
|
253,829
|
|
|
268,357
|
|
Consolidated net sales
|
$
|
1,375,222
|
|
|
$
|
1,397,418
|
|
|
$
|
4,065,074
|
|
|
$
|
4,148,095
|
|
Note 8. Accumulated Other Comprehensive Loss ("AOCL")
The following table summarizes the changes in AOCL as of
January 27, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flow
Hedges
|
|
Currency
Translation
Adjustment
|
|
Total
|
AOCL at April 29, 2017
|
$
|
(14,989
|
)
|
|
$
|
(77,680
|
)
|
|
$
|
(92,669
|
)
|
Other comprehensive loss before reclassifications
|
—
|
|
|
24,594
|
|
|
24,594
|
|
Amounts reclassified from AOCL
|
1,312
|
|
|
—
|
|
|
1,312
|
|
AOCL at January 27, 2018
|
$
|
(13,677
|
)
|
|
$
|
(53,086
|
)
|
|
$
|
(66,763
|
)
|
The amounts reclassified from AOCL during fiscal
2018
represent gains and losses on cash flow hedges, net of taxes of
$795
. The impact to the condensed consolidated statements of income and other comprehensive income was an increase to interest expense of
$2,107
.
Note 9. Legal Proceedings
In September 2015, we were served with a summons and complaint in an action commenced in the U.S. District Court for the Eastern District of New York, entitled SourceOne Dental, Inc. v. Patterson Companies, Inc., Henry Schein, Inc. and Benco Dental Supply Company, Civil Action No. 15-cv-05440-JMA-GRB. SourceOne, as plaintiff, alleges that, through its website, it markets and sells dental supplies and equipment to dentists. SourceOne alleges in the complaint, among other things, that we, along with the defendants Henry Schein and Benco, conspired to eliminate plaintiff as a competitor and to exclude them from the market for the marketing, distribution and sale of dental supplies and equipment in the U.S. and that defendants unlawfully agreed with one another to boycott dentists, manufacturers, and state dental associations that deal with, or considered dealing with, plaintiff. Plaintiff asserts the following claims: (i) unreasonable restraint of trade in violation of state and federal antitrust laws; (ii) tortious interference with prospective business relations; (iii) civil conspiracy; and (iv) aiding and abetting the other defendants’ ongoing tortious and anticompetitive conduct. Plaintiff seeks equitable relief, compensatory and treble damages, jointly and severally, punitive damages, interest, and reasonable costs and expenses, including attorneys’ fees and expert fees. In June 2017, Henry Schein settled with SourceOne and was dismissed from this litigation with prejudice. We are vigorously defending ourselves in this litigation. We do not anticipate that this matter will have a material adverse effect on our financial statements.
Beginning in January 2016, purported class action complaints were filed against defendants Henry Schein, Inc., Benco Dental Supply Company and Patterson Companies, Inc. Although there were factual and legal variations among these complaints, each alleged that defendants conspired to foreclose and exclude competitors by boycotting manufacturers, state dental associations, and others that deal with defendants’ competitors. On February 9, 2016, the U.S. District Court for the Eastern District of New York ordered all of these actions, and all other actions filed thereafter asserting substantially similar claims against defendants, consolidated for pre-trial purposes. On February 26, 2016, a consolidated class action complaint was filed by Arnell Prato, D.D.S., P.L.L.C., d/b/a Down to Earth Dental, Evolution Dental Sciences, LLC, Howard M. May, DDS, P.C., Casey Nelson, D.D.S., Jim Peck, D.D.S., Bernard W. Kurek, D.M.D., Larchmont Dental Associates, P.C., and Keith Schwartz, D.M.D., P.A. (collectively, “putative class representatives”) in the U.S. District Court for the Eastern District of New York, entitled In re Dental Supplies Antitrust Litigation, Civil Action No. 1:16-CV-00696-BMC-GRB. Subject to certain exclusions, the putative class representatives seek to represent all persons who purchased dental supplies or equipment in the U.S. directly from any of the defendants, since August 31, 2008. In the consolidated class action complaint, putative class representatives allege a nationwide agreement among Henry Schein, Benco, Patterson and non-party Burkhart Dental Supply Company, Inc. not to compete on price. The consolidated class action complaint asserts a single count under Section 1 of the Sherman Act, and seeks equitable relief, compensatory and treble damages, jointly and severally, interest, and reasonable costs and expenses, including attorneys’ fees and expert fees. While the outcome of litigation is inherently uncertain, we believe the consolidated class action complaint is without merit, and we are vigorously defending ourselves in this litigation.
On August 31, 2012, Archer and White Sales, Inc. (“Archer”) filed a complaint against Henry Schein, Inc. as well as Danaher Corporation and its subsidiaries Instrumentarium Dental, Inc., Dental Equipment, LLC, Kavo Dental Technologies, LLC and Dental Imaging Technologies Corporation (collectively, the “Danaher Defendants”) in the United States District Court for the Eastern District of Texas, Civil Action No. 2:12-CV-00572-JRG, styled as an antitrust action under Section 1 of the Sherman Act, and the Texas Free Enterprise Antitrust Act. Archer alleges a conspiracy between Henry Schein, an unnamed company and the Danaher Defendants to terminate or limit Archer’s distribution rights. On August 1, 2017, Archer filed an amended complaint, adding Patterson Companies, Inc. and Benco Dental Supply Company as defendants, and alleging that Henry Schein, Patterson, Benco and non-defendant Burkhart Dental Supply Company, Inc. conspired to pressure and agreed to enlist their common suppliers, including the Danaher Defendants,
to join a price-fixing conspiracy and boycott by reducing the distribution territory of, and eventually terminating, Archer. Archer seeks injunctive relief, and damages in an amount to be proved at trial, to be trebled with interest and costs, including attorneys’ fees, jointly and severally. On March 2, 2018, the case was stayed by the United States Supreme Court pending its decision as to whether to review an arbitration issue raised by the Danaher Defendants. We are vigorously defending ourselves in this litigation. We do not anticipate that this matter will have a material adverse effect on our financial statements.
On August 17, 2017, IQ Dental Supply, Inc. (“IQ Dental”) filed a complaint in the United States District Court for the Eastern District of New York, entitled IQ Dental Supply, Inc. v. Henry Schein, Inc., Patterson Companies, Inc. and Benco Dental Supply Company, Case No. 2:17-cv-4834. Plaintiff alleges that it is a distributor of dental supplies and equipment, and sells dental products through an online dental distribution platform operated by SourceOne Dental, Inc. IQ Dental alleges, among other things, that defendants conspired to suppress competition from IQ Dental and SourceOne for the marketing, distribution and sale of dental supplies and equipment in the United States, and that defendants unlawfully agreed with one another to boycott dentists, manufacturers and state dental associations that deal with, or considered dealing with, plaintiff and SourceOne. Plaintiff claims that this alleged conduct constitutes unreasonable restraint of trade in violation of Section 1 of the Sherman Act, New York’s Donnelly Act and the New Jersey Antitrust Act, and also makes pendant state law claims for tortious interference with prospective business relations, civil conspiracy and aiding and abetting. Plaintiff seeks injunctive relief, compensatory, treble and punitive damages, jointly and severally, and reasonable costs and expenses, including attorneys’ fees and expert fees. On December 21, 2017, the District Court granted defendants motion to dismiss the complaint with prejudice. Plaintiff has appealed to the Fifth Circuit Court of Appeals. We are vigorously defending ourselves in this litigation. We do not anticipate that this matter will have a material adverse effect on our financial statements.
On February 12, 2018, the Federal Trade Commission (“FTC”) issued an administrative complaint entitled
In the Matter of Benco Dental Supply Co., Henry Schein, Inc., and Patterson Companies, Inc.
Docket No. 9379. The administrative complaint alleges “reason to believe” that Patterson and the other respondents violated Section 5 of the FTC Act, 15 U.S.C. § 45 by conspiring to refuse to offer discounted prices or otherwise negotiate with buying groups seeking to obtain supply agreements on behalf of groups of solo practitioners or small group dental practices. The administrative complaint seeks injunctive relief against Patterson, including an order to cease and desist from the conduct alleged in the complaint and a prohibition from conspiring or agreeing with any competitor or any person to refuse to provide discounts to or compete for the business of any customer. No money damages are sought. We intend to vigorously defend ourselves against the administrative complaint. The administrative complaint provides notice of an October 16, 2018 hearing in front of an Administrative Law Judge of the FTC in Washington, D.C. We do not anticipate this matter will have a material adverse effect on our financial statements.
From time to time, we may become a party to other legal proceedings, including, without limitation, product liability claims, intellectual property claims, employment matters, commercial disputes, governmental inquiries and investigations (which may in some cases involve our entering into settlement arrangements or consent decrees), and other matters arising out of the ordinary course of our business. While the results of any legal proceeding cannot be predicted with certainty, in our opinion none of these other pending matters is anticipated to have a material adverse effect on our financial statements.