NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 25, 2020
(Dollars, except per share amounts, and shares in thousands)
1. Summary of Significant Accounting Policies
Description of Business
Patterson Companies, Inc. (referred to herein as “Patterson” or in the first person notations “we,” “our,” and “us”) is a value-added specialty distributor serving the U.S. and Canadian dental supply and the U.S., Canadian and U.K. animal health supply markets. Patterson has three reportable segments: Dental, Animal Health and Corporate.
Basis of Presentation
The 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 entity 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 consolidated financial statements also include the assets and liabilities of Technology Partner Innovations, LLC, which is further described in Note 12.
Fiscal Year End
We operate with a 52-53 week accounting convention with our fiscal year ending on the last Saturday in April. Fiscal 2020, 2019 and 2018 ended on April 25, 2020, April 27, 2019 and April 28, 2018, respectively, and all years consisted of 52 weeks. Fiscal 2021 will end on April 24, 2021 and will consist of 52 weeks.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash equivalents consist primarily of investments in money market funds and government securities. The maturity of these securities at the time of purchase is 90 days or less. All cash and cash equivalents are classified as available-for-sale and carried at fair value, which approximates cost.
Inventory
Inventory consists of merchandise held for sale and is stated at the lower of cost or market. The cost of our inventory includes the amount we pay to our suppliers to acquire inventory and freight costs incurred in connection with the delivery of product to our distribution centers and our other locations. Cost is determined using the last-in, first-out ("LIFO") method for all inventories, except for foreign inventories, which are valued using the first-in, first-out ("FIFO") method. Inventories valued at LIFO represented 83% and 82% of total inventories at April 25, 2020 and April 27, 2019, respectively.
The accumulated LIFO reserve was $99,726 at April 25, 2020 and $91,342 at April 27, 2019. We believe that inventory replacement cost exceeds the inventory balance by an amount approximating the LIFO reserve.
Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated on the straight-line method over estimated useful lives of up to 39 years for buildings or the expected remaining life of purchased buildings, the term of the lease for leasehold improvements, 3 to 10 years for computer hardware and software, and 5 to 10 years for furniture and equipment.
Goodwill and Other Indefinite-Lived Intangible Assets
Goodwill represents the excess of cost over the fair value of identifiable net assets of businesses acquired. Impairment testing for goodwill is done at the reporting unit level, with all goodwill assigned to a reporting unit. We have two reporting units as of April 25, 2020; Dental and Animal Health. Our Corporate reportable segment's assets and liabilities, and net sales and expenses, are allocated to the two reporting units. We assess goodwill for impairment annually and whenever an event occurs or circumstances change that would indicate that the carrying amount may be impaired. Any goodwill impairment is measured as the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying value of goodwill.
The determination of fair value involves uncertainties because it requires management to make assumptions and to apply judgment to estimate industry and economic factors and the profitability of future business strategies. Patterson conducts impairment testing based on current business strategy in light of present industry and economic conditions, as well as future expectations. Additionally, in assessing goodwill for impairment, the reasonableness of the implied control premium is considered based on market capitalizations and recent market transactions.
Our indefinite-lived intangible asset is a trade name, which is assessed for impairment by comparing the carrying value of the asset with its fair value. If the carrying value exceeds fair value, an impairment loss is recognized in an amount equal to the excess. The determination of fair value involves assumptions, including projected revenues and gross profit levels, as well as consideration of any factors that may indicate potential impairment.
In connection with the preparation of these financial statements in the fourth quarter of fiscal 2020, management completed its annual goodwill and other indefinite-lived intangible asset impairment tests using the beginning of our fiscal 2020 fourth quarter as the valuation date. We determined that there was no impairment of our indefinite-lived intangible asset. Our annual goodwill impairment test resulted in no impairment to the Dental reporting unit’s goodwill, and a $269,000 non-cash pre-tax impairment charge of our Animal Health reporting unit’s goodwill.
The decrease in the fair value of the Animal Health reporting unit below its carrying value was mainly the result of a reduction in management’s estimates of future cash flows. Future cash flows were affected by a reduction in future sales volume and operating margins. The sales volume estimate is a reflection of recent sales trends we’ve experienced. Future operating margins are expected to be lower based on current trends in our markets. These trends are driven by customer and vendor consolidation.
Subsequent to the annual test being completed and in connection with the preparation of these financial statements, we experienced events and circumstances that indicated that the carrying amount of goodwill may be further impaired. These events and circumstances included a decline in our projected future earnings and a sustained decrease in our share price. As such, we tested our goodwill for impairment as of the beginning of our fiscal April 2020. This test resulted in no impairment to the Dental reporting unit’s goodwill, and a $406,055 non-cash pre-tax impairment charge of our Animal Health reporting unit’s goodwill.
The decrease in the fair value of the Animal Health reporting unit subsequent to the annual goodwill impairment test was caused by additional reductions in management’s estimates of future cash flows, driven by reduced sales volumes, as well as reduced EBITDA multiples of comparable companies. These estimates and market multiples were negatively affected by COVID-19. The animal health industry has experienced a reduction in sales volume as a result of stay at home and shelter in place orders, as well as a result of meat packing plant closures. Our future cash flow estimates for this business unit reflect the long-term impact of COVID-19.
As of April 25, 2020, our Animal Health reporting unit had no remaining goodwill as a result of the total goodwill impairment charges recorded in fiscal 2020 of $675,055.
Long-Lived Assets
Long-lived assets, including definite-lived intangible assets, are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through the estimated undiscounted future cash flows derived from such assets. Our definite-lived intangible assets primarily consist of customer relationships, trade names and trademarks. When impairment exists, the related assets are written down to fair value using level 3 inputs, as discussed further in Note 9.
Financial Instruments
We account for derivative financial instruments under the provisions of Accounting Standards Codification ("ASC") Topic 815, “Derivatives and Hedging.” Our use of derivative financial instruments is generally limited to managing well-defined interest rate risks. We do not use financial instruments or derivatives for any trading purposes.
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, 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.
Patterson has a relatively large, dispersed customer base and no single customer accounts for more than 10% of consolidated net sales. In addition, the equipment sold to customers under finance contracts generally serves as collateral for the contract and the customer provides a personal guarantee as well.
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 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 April 25, 2020 and April 27, 2019 were $1,586 and $0, 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 April 25, 2020 and April 27, 2019, contract liabilities of $21,205 and $22,004 were reported in other accrued liabilities, respectively. During the fiscal year ended April 25, 2020, we recognized $19,291 of the amount previously deferred at April 27, 2019.
Patterson Advantage Loyalty Program
The Dental segment provides a point-based awards program to qualifying customers involving the issuance of “Patterson Advantage dollars” which can be used toward equipment and technology purchases. Patterson Advantage dollars earned during a program year expire one year after the end of the program year. The cost and corresponding liability associated with the program are recognized as contra-revenue. As of April 25, 2020, we believe we have sufficient experience with the program to reasonably estimate the amount of Patterson Advantage dollars that will not be redeemed and thus have recorded a liability for 92.0% of the maximum potential amount that could be redeemed. We recognize the expected breakage amount as revenue in proportion to the pattern of rights exercised by the customer, and we recognize the estimated value of unused Patterson Advantage dollars as redemptions occur. Breakage recognized was immaterial to all periods presented.
Freight and Delivery Charges
Freight and delivery charges are included in cost of sales in the consolidated statements of operations and other comprehensive (loss) income.
Advertising
We expense all advertising and promotional costs as incurred, except for direct marketing expenses, which are expensed over the shorter of the life of the asset or one year. Total advertising and promotional expenses were $5,793, $8,356 and $6,926 for fiscal 2020, 2019 and 2018, respectively. There were no deferred direct-marketing expenses included in the consolidated balance sheets as of April 25, 2020 and April 27, 2019.
Related Party Transactions
We have interests in a number of entities that are accounted for using the equity method. During fiscal 2020, 2019 and 2018 we made purchases of $94,238, $87,944 and $84,175 from these entities, respectively. During fiscal 2020, 2019 and 2018, we recorded net sales of $110,262, $74,489 and $19,743 to these entities, respectively.
Income Taxes
The liability method is used to account for income tax expense. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.
Valuation allowances are established for deferred tax assets if, after assessment of available positive and negative evidence, it is more likely than not that the deferred tax asset will not be fully realized.
Employee Stock Ownership Plan ("ESOP")
Compensation expense related to our defined contribution ESOP is computed based on the shares allocated method.
Self-insurance
Patterson is self-insured for certain losses related to general liability, product liability, automobile, workers’ compensation and medical claims. We estimate our liabilities based upon an analysis of historical data and actuarial estimates. While current estimates are believed reasonable based on information currently available, actual results could differ and affect financial results due to changes in the amount or frequency of claims, medical cost inflation or other factors. Historically, actual results related to these types of claims have not varied significantly from estimated amounts.
Stock-based Compensation
We recognize stock-based compensation expense based on estimated grant date fair values. The grant date fair value of stock options and stock purchases made through our Employee Stock Purchase Plan and our Capital Accumulation Plan are estimated using the Black-Scholes option pricing valuation model. The grant date fair value of performance stock units that vest upon meeting certain market conditions is estimated using the Monte Carlo valuation model. These valuations require estimates to be made including expected stock price volatility which considers historical volatility trends, implied future volatility based on certain traded options and other factors. We
estimate the expected life of awards based on several factors, including types of participants, vesting schedules, contractual terms and various factors surrounding exercise behavior of different groups.
The grant date fair value of time-based restricted stock awards and restricted stock units is calculated based on the closing price of our common stock on the date of grant.
Compensation expense for all share-based payment awards is recognized over the requisite service period (or to the date a participant becomes eligible for retirement, if earlier) for awards that are expected to vest.
Other Income, Net
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Fiscal Year Ended
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|
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|
April 25, 2020
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|
April 27, 2019
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|
April 28, 2018
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|
Gain on investment
|
$
|
34,334
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|
|
$
|
4,477
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|
|
|
$
|
—
|
|
|
Loss on interest rate swap agreements
|
(18,712)
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|
|
(2,903)
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|
|
—
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Other
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7,877
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|
|
6,604
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|
|
|
6,117
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|
|
Other income, net
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$
|
23,499
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|
|
$
|
8,178
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|
|
|
$
|
6,117
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|
Comprehensive (Loss) Income
Comprehensive (loss) income is computed as net (loss) income plus certain other items that are recorded directly to stockholders’ equity. Significant items included in comprehensive (loss) 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 hedge losses was $2,460, $620 and $938 for fiscal 2020, 2019 and 2018, respectively.
(Loss) Earnings Per Share ("EPS")
The amount of basic EPS is computed by dividing net (loss) income attributable to Patterson Companies, Inc. by the weighted average number of outstanding common shares during the period. The amount of diluted EPS is computed by dividing net (loss) income by the weighted average number of outstanding common shares and common share equivalents, when dilutive, during the period.
The following table sets forth the denominator for the computation of basic and diluted EPS. There were no material adjustments to the numerator.
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Fiscal Year Ended
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|
|
April 25, 2020
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|
April 27, 2019
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|
April 28, 2018
|
|
Denominator for basic EPS – weighted average shares
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94,154
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|
|
92,755
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|
|
92,467
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|
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Effect of dilutive securities – stock options, restricted stock and stock purchase plans
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—
|
|
|
729
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|
|
627
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|
|
Denominator for diluted EPS – weighted average shares
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94,154
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|
|
93,484
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|
|
93,094
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|
Potentially dilutive securities representing 2,517, 1,792 and 1,380 shares for fiscal 2020, 2019 and 2018, respectively, were excluded from the calculation of diluted EPS because their effects were anti-dilutive using the treasury stock method.
For the fiscal year ended April 25, 2020, 905 incremental shares related to dilutive securities were not included in the diluted EPS calculation because we reported a loss for this period. Shares related to dilutive securities have an anti-dilutive impact on EPS when a net loss is reported and therefore are not included in the calculation.
Recent Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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 adopted the new guidance in the first quarter of fiscal 2020 on a modified retrospective
basis through a cumulative-effect adjustment to the beginning retained earnings in the period of adoption. We elected the transition package of practical expedients provided within the guidance, which eliminated the requirements to reassess lease identification, lease classification and initial direct costs for leases commenced before the effective date. We elected not to separate lease from non-lease components and to exclude short-term leases from our consolidated balance sheets.
The impact of adopting the new lease standard primarily relates to the recognition of a lease right-of-use (“ROU”) asset and current and non-current lease liabilities on the consolidated balance sheets. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As we cannot readily determine the rate implicit in most of our leases, we use an incremental borrowing rate determined by country of lease origin based on the anticipated lease term as determined at commencement date in determining the present value of lease payments.
The new lease standard resulted in the recognition of lease ROU assets and liabilities of $86,046 and $88,333 as of April 28, 2019. In addition, $1,447 of net deferred gains on sale-leaseback transactions that existed as of April 27, 2019 were derecognized from our consolidated balance sheet, with the offsetting impact being an adjustment to retained earnings as of April 28, 2019. The adoption of the guidance did not have a material impact on our consolidated statement of operations and other comprehensive (loss) income or consolidated statements of cash flows as of the adoption date. Under the transition method of adoption, comparative information was not restated, but will continue to be reported under the standards in effect for those periods.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments-Credit Losses (Topic 326),” which requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. We will adopt the new guidance in the first quarter of fiscal 2021, but do not anticipate any material changes to our consolidated balance sheet or consolidated statement of operations and other comprehensive (loss) income.
In January 2017, the FASB issued ASU No. 2017-04, “Simplifying the Test for Goodwill Impairment (Topic 350)”. Under the new standard, goodwill impairment is measured as the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying value of goodwill. This ASU eliminates existing guidance that requires an entity to determine goodwill impairment by calculating the implied fair value of goodwill by hypothetically assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. We were required to adopt this ASU in the first quarter of fiscal 2021, with early adoption permitted. We adopted this ASU in the fourth quarter of 2020 in conjunction with our annual goodwill impairment testing. See Goodwill and Other Indefinite-Lived Intangible Assets above for the results of our fiscal 2020 goodwill impairment testing results.
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 adopted ASU No. 2018-02 in the first quarter of fiscal 2020 and applied it in the period of adoption. As a result of the adoption, $2,707 was reclassified from accumulated other comprehensive loss to retained earnings in the first quarter of fiscal 2020.
2. Cash and Cash Equivalents
Cash and cash equivalents consisted of the following:
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April 25, 2020
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April 27, 2019
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Cash on hand
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$
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74,553
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|
|
$
|
76,117
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|
|
Money market funds
|
3,391
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|
|
19,529
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Total
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$
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77,944
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|
|
$
|
95,646
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Cash on hand is generally in interest earning accounts. Included in cash and cash equivalents in the consolidated balance sheets are $21,830 and $34,016 as of April 25, 2020 and April 27, 2019, respectively, which represent cash collected from previously sold customer financing contracts that have not yet been settled. See Note 7 for additional information.
3. Receivables Securitization Program
In fiscal 2019 and fiscal 2020, we entered into Receivables Purchase Agreements (the “Receivables Purchase Agreements”) with MUFG Bank, Ltd. ("MUFG") (f.k.a. The Bank of Tokyo-Mitsubishi UFJ, Ltd.). Under these agreements, 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.
Sales of Receivables occur daily and are settled with the Purchasers on a monthly basis. 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 Agreement 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 April 25, 2020, 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. The DPP receivable is recorded at fair value within the consolidated balance sheets within prepaid expenses and other current assets. The DPP receivable was $117,327 as of April 25, 2020 and $57,238 as of April 27, 2019. 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. We recorded a loss on sale of Receivables within operating expenses in the consolidated statements of operations and other comprehensive (loss) income during fiscal 2020 and 2019 of $7,242 and $7,622, respectively.
4. Goodwill and Other Intangible Assets
The changes in the carrying value of goodwill for each of our reportable segments for the fiscal year ended April 25, 2020 are as follows:
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Balance at April 27, 2019
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Impairment
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Other Activity
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Balance at April 25, 2020
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Dental
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$
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139,160
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$
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—
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$
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(436)
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|
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$
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138,724
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Animal Health
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677,066
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(675,055)
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(2,011)
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|
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—
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Corporate
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—
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|
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|
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—
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|
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—
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|
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—
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Total
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$
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816,226
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$
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(675,055)
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|
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$
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(2,447)
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|
|
$
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138,724
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See Note 1 for additional information regarding the impairment charges recorded in our Animal Health segment. Other activity in fiscal 2020 consists of the impact from foreign currency translation.
Balances of other intangible assets, excluding goodwill, were as follows:
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April 25, 2020
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April 27, 2019
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Gross
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Accumulated Amortization
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Net
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Gross
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Accumulated Amortization
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Net
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Unamortized - indefinite lived:
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Trade name
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$
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12,300
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$
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—
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|
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$
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12,300
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|
|
$
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12,300
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|
|
$
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—
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|
|
$
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12,300
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Amortized - definite lived:
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Customer relationships
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352,469
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135,745
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216,724
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|
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353,639
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113,812
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|
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239,827
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|
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Trade names and trademarks
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132,841
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72,681
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|
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60,160
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|
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133,202
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|
|
61,435
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|
|
71,767
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Developed technology and other
|
70,518
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|
46,197
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24,321
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70,469
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43,210
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|
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27,259
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Total amortized intangible assets
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555,828
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|
|
254,623
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|
|
301,205
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557,310
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|
|
218,457
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338,853
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Total identifiable intangible assets
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$
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568,128
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|
$
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254,623
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|
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$
|
313,505
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|
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$
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569,610
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|
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$
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218,457
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|
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$
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351,153
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With respect to the amortized intangible assets, future amortization expense is expected to approximate $37,138, $36,832, $36,457, $35,501 and $35,496 for fiscal 2021, 2022, 2023, 2024 and 2025, respectively. Actual amounts of amortization expense may differ from estimated amounts due to additional intangible asset acquisitions, changes
in foreign currency exchange rates, impairment of intangible assets, accelerated amortization of intangible assets and other events.
5. Property and Equipment
Property and equipment consisted of the following items:
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|
|
April 25, 2020
|
|
April 27, 2019
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Land
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$
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11,919
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|
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$
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11,969
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Buildings
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119,585
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118,556
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Leasehold improvements
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29,427
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28,359
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Furniture and equipment
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181,986
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175,774
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Computer hardware and software
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226,114
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218,893
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Construction-in-progress (1)
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89,604
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75,860
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Property and equipment, gross
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658,635
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|
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629,411
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|
|
Accumulated depreciation
|
(354,910)
|
|
|
(323,621)
|
|
|
Property and equipment, net
|
$
|
303,725
|
|
|
$
|
305,790
|
|
(1)Includes $68,728 and $57,006 of unamortized computer software development costs of software to be sold as of April 25, 2020 and April 27, 2019, respectively.
6. Debt
Our long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Value
|
|
|
|
|
Interest Rate
|
|
April 25, 2020
|
|
April 27, 2019
|
|
Senior notes due fiscal 2022 (1)
|
3.59
|
%
|
|
100,750
|
|
|
165,000
|
|
|
Senior notes due fiscal 2024 (1)
|
3.74
|
%
|
|
33,000
|
|
|
100,000
|
|
|
Senior notes due fiscal 2025 (2)
|
3.48
|
%
|
|
117,500
|
|
|
250,000
|
|
|
Senior notes due fiscal 2028 (3)
|
3.79
|
%
|
|
40,000
|
|
|
150,000
|
|
|
Term loan due fiscal 2022 (4)
|
3.73
|
%
|
|
—
|
|
|
87,091
|
|
|
Term loan due fiscal 2023 (5)
|
1.87
|
%
|
|
300,000
|
|
|
—
|
|
|
Less: Deferred debt issuance costs
|
|
|
(3,484)
|
|
|
(2,775)
|
|
|
Total debt
|
|
|
587,766
|
|
|
749,316
|
|
|
Less: Current maturities of long-term debt
|
|
|
—
|
|
|
(23,975)
|
|
|
Long-term debt
|
|
|
$
|
587,766
|
|
|
$
|
725,341
|
|
(1)Issued in December 2011.
(2)Issued in March 2015.
(3)Issued in March 2018.
(4)Issued in June 2015, amended in January 2017.
(5)Issued in December 2019. Interest rate is 1-month LIBOR plus 1.25% as of April 25, 2020.
Future principal payments due, based on stated contractual maturities for our long-term debt, are as follows as of April 25, 2020:
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
2021
|
$
|
—
|
|
|
2022
|
100,750
|
|
|
2023
|
300,000
|
|
|
2024
|
33,000
|
|
|
2025
|
117,500
|
|
|
Thereafter
|
40,000
|
|
|
Total
|
$
|
591,250
|
|
In fiscal 2017, we entered into an amended credit agreement ("Amended Credit Agreement"), consisting of a $295,075 term loan and a $750,000 revolving line of credit. In March 2019, we permanently reduced the capacity under the revolving line of credit to $500,000. Interest on borrowings is variable and is determined as a base rate plus a spread. This spread, as well as a commitment fee on the unused portion of the facility, is based on our leverage ratio, as defined in the Amended Credit Agreement. During the quarter ended October 26, 2019, we repaid the remaining $81,558 outstanding under the unsecured term loan. As of April 25, 2020, no amount was outstanding under the Amended Credit Agreement unsecured term loan or revolving line of credit. At April 27, 2019, $87,091 was outstanding under the Amended Credit Agreement unsecured term loan at an interest rate of 3.73%, and no amount was outstanding under the Amended Credit Agreement revolving line of credit. The term loan and revolving line of credit mature no later than January 2022.
In May 2020, we requested draws on our Amended Credit Agreement revolving line of credit, resulting in a total of $450,000 outstanding under the revolving credit facility, representing 90% of the full amount available. The Company elected to drawdown the revolving line of credit to increase its cash position and provide financial flexibility in light of current economic conditions and uncertainties arising in connection with the COVID-19 pandemic. The proceeds are being used for working capital and other general corporate purposes.
In December 2019, we entered into a senior unsecured term loan facility agreement (the “Term Facility Agreement”), consisting of a $300,000 term loan. Interest on borrowings is variable and is determined as a base rate plus a spread. This spread is based on our leverage ratio, as defined in the Term Facility Agreement. The proceeds were used to repay certain existing indebtedness, pay fees and expenses incurred in connection with the Term Facility Agreement, and finance our ongoing working capital and other general corporate purposes. The Term Facility will mature no later than December 20, 2022. As of April 25, 2020, $300,000 was outstanding under the Term Facility at an interest rate of 1.87%.
During the three months ended January 25, 2020, we repaid certain indebtedness totaling $373,750. The changes to the senior notes due between fiscal 2022 and fiscal 2028 shown in the table above reflect the aggregate $373,750 repaid. As a result, we recorded a pre-tax non-cash charge of $8,984 during the three months ended January 25, 2020. This charge relates to the January 2014 forward interest rate swap agreement and accelerated amortization of debt issuance costs.
We are subject to various financial covenants under our debt agreements including the maintenance of leverage and interest coverage ratios. In the event of our default, any outstanding obligations may become due and payable immediately. We were in compliance with the covenants under our debt agreements as of April 25, 2020.
7. 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 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 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 MUFG. The capacity under the agreement with MUFG at April 25, 2020 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 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 April 25, 2020 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 consolidated statements of operations and other comprehensive (loss) income. Expenses incurred related to customer financing activities are recorded in operating expenses in our consolidated statements of operations and other comprehensive (loss) income.
During fiscal 2020, 2019 and 2018, we sold $357,616, $279,204 and $312,699 of contracts under these arrangements, respectively. In net sales in the consolidated statements of operations and other comprehensive (loss) income, we recorded a gain of $43,919, $16,883 and $13,347 during fiscal 2020, 2019 and 2018, respectively, related to these contracts sold.
Included in cash and cash equivalents in the consolidated balance sheets are $21,830 and $34,016 as of April 25, 2020 and April 27, 2019, respectively, which represent cash collected from previously sold customer financing contracts that have not yet been settled. Included in current receivables in the consolidated balance sheets are $21,391 and $48,559 as of April 25, 2020 and April 27, 2019, respectively, of finance contracts we have not yet sold. A total of $613,570 of finance contracts receivable sold under the arrangements was outstanding at April 25, 2020. The DPP receivable under the arrangements was $228,019 and $121,657 as of April 25, 2020 and April 27, 2019, 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 April 25, 2020.
8. 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 April 25, 2020, PDC Funding had purchased an interest rate cap from a bank with a notional amount of $525,000 and a maturity date of July 2027. We sold an identical interest rate cap to the same bank. As of April 25, 2020, PDC Funding II had purchased an interest rate cap from a bank with a notional amount of $100,000 and a maturity date of November 2026. 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 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 (loss) income, net of tax, and is recognized as interest expense over the life of the related debt. In fiscal 2020, we repaid certain indebtedness, resulting in accelerating a portion of this interest expense and recording a pre-tax non-cash charge of $8,134. See Note 6 for additional information.
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 as income or expense during the period in which the change occurs.
As of April 27, 2019, the remaining notional amount for these interest rate swap agreements was $553,719, with the latest maturity date in fiscal 2026. During fiscal 2020, we entered into forward interest rate swap agreements with a notional amount of $317,749. As of April 25, 2020, the remaining notional amount for these interest rate swap agreements was $634,029, with the latest maturity date in fiscal 2027.
Net cash payments of $1,881 and $89 were made in fiscal 2020 and 2019, respectively, to settle a portion of our liabilities related to these interest rate swap agreements. These payments are reflected as cash outflows in the consolidated statements of cash flows within net cash (used in) provided by operating activities.
The following presents the fair value of derivative instruments included in the consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative type
|
Classification
|
|
April 25, 2020
|
|
April 27, 2019
|
|
Assets:
|
|
|
|
|
|
|
Interest rate contracts
|
Other non-current assets
|
|
$
|
204
|
|
|
$
|
380
|
|
|
Liabilities:
|
|
|
|
|
|
|
Interest rate contracts
|
Other accrued liabilities
|
|
6,789
|
|
|
1,034
|
|
|
Interest rate contracts
|
Other non-current liabilities
|
|
13,060
|
|
|
2,160
|
|
|
Total liability derivatives
|
|
|
$
|
19,849
|
|
|
$
|
3,194
|
|
The following tables present the pre-tax effect of derivative instruments on the consolidated statements of operations and other comprehensive (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss into Income (Effective Portion)
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
|
|
Derivatives in cash flow hedging relationships
|
Income statement location
|
|
April 25, 2020
|
|
April 27, 2019
|
|
April 28, 2018
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
Interest expense
|
|
$
|
(10,458)
|
|
|
$
|
(2,908)
|
|
|
$
|
(2,809)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss) Recognized in Income on Derivative
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
|
|
Derivatives not designated as hedging instruments
|
Income statement location
|
|
4/25/2020
|
|
4/27/2019
|
|
4/28/2018
|
|
Interest rate contracts
|
Other income, net
|
|
$
|
(18,712)
|
|
|
$
|
(2,903)
|
|
|
$
|
—
|
|
There were no gains or losses recognized in other comprehensive (loss) income on cash flow hedging derivatives in fiscal 2020, 2019 or 2018.
We recorded no ineffectiveness during fiscal 2020, 2019 or 2018. As of April 25, 2020, 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.
9. 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 25, 2020
|
|
|
|
|
|
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
Cash equivalents
|
$
|
3,391
|
|
|
$
|
3,391
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
DPP receivable - receivables securitization program
|
117,327
|
|
|
—
|
|
|
—
|
|
|
117,327
|
|
|
DPP receivable - customer financing
|
228,019
|
|
|
—
|
|
|
—
|
|
|
228,019
|
|
|
Derivative instruments
|
204
|
|
|
—
|
|
|
204
|
|
|
—
|
|
|
Total assets
|
$
|
348,941
|
|
|
$
|
3,391
|
|
|
$
|
204
|
|
|
$
|
345,346
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Derivative instruments
|
$
|
19,849
|
|
|
$
|
—
|
|
|
$
|
19,849
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 27, 2019
|
|
|
|
|
|
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
Cash equivalents
|
$
|
19,529
|
|
|
$
|
19,529
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
DPP receivable - receivables securitization program
|
57,238
|
|
|
—
|
|
|
—
|
|
|
57,238
|
|
|
DPP receivable - customer financing
|
121,657
|
|
|
—
|
|
|
—
|
|
|
121,657
|
|
|
Derivative instruments
|
380
|
|
|
—
|
|
|
380
|
|
|
—
|
|
|
Total assets
|
$
|
198,804
|
|
|
$
|
19,529
|
|
|
$
|
380
|
|
|
$
|
178,895
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Derivative instruments
|
$
|
3,194
|
|
|
$
|
—
|
|
|
$
|
3,194
|
|
|
$
|
—
|
|
Cash equivalents – We value cash equivalents at their current market rates. The carrying value of cash equivalents approximates fair value and maturities are less than three months.
DPP receivable - receivables securitization program – We value this DPP receivable based on a discounted cash flow analysis using unobservable inputs, which include the estimated timing of payments and the credit quality of the underlying creditor. Significant changes in any of the significant unobservable inputs in isolation would not result in a materially different fair value estimate. The interrelationship between these inputs is insignificant.
DPP receivable - customer financing – We value this DPP receivable based on a discounted cash flow analysis using unobservable inputs, which include a forward yield curve, the estimated timing of payments and the credit quality of the underlying creditor. Significant changes in any of the significant unobservable inputs in isolation would not result in a materially different fair value estimate. The interrelationship between these inputs is insignificant.
Derivative instruments –Our derivative instruments consist of interest rate cap agreements and interest rate swaps. These instruments are valued using inputs such as interest rates and credit spreads.
Certain assets are measured at fair value on a non-recurring basis. These assets are not measured at fair value on an ongoing basis, but are subject to fair value adjustments under certain circumstances. We adjust the carrying
value of our non-marketable equity securities to fair value when observable transactions of identical or similar securities occur, or due to an impairment.
During the fiscal year ended April 25, 2020, we recorded a pre-tax gain of $34,334 related to one of our investments in other income, net in our consolidated statements of operations and other comprehensive (loss) income. This gain was based on the selling price of preferred stock in this investment that is similar to the preferred stock we own, and was adjusted for differences in liquidation preferences. As of April 25, 2020 and April 27, 2019, this investment had a carrying value of $51,628 and $17,294, respectively. There were no fair value adjustments to such assets during the fiscal years ended April 27, 2019 or April 28, 2018.
Our debt is not measured at fair value in the consolidated balance sheets. The estimated fair value of our debt as of April 25, 2020 and April 27, 2019 was $601,856 and $758,121, respectively, as compared to a carrying value of $587,766 and $749,316 at April 25, 2020 and April 27, 2019, 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 April 25, 2020 and April 27, 2019.
10. Leases
We lease certain warehouses, office space, vehicles and equipment. Leases with an initial term of 12 months or less are not recorded on the consolidated balance sheets. We recognize lease expense for these leases on a straight-line basis over the lease term. We do not separate lease and non-lease components, and instead account for each lease and non-lease component associated with that lease as a single lease component. Some leases include one or more options to renew. The exercise of renewal options is at our sole discretion. Our lease agreements do not contain significant residual value guarantees, restrictions or covenants.
Total lease cost for the fiscal year ended April 25, 2020 was $36,302 which includes variable lease costs and short-term lease costs, which are immaterial.
The following table presents future maturities of lease liabilities:
|
|
|
|
|
|
|
|
2021
|
$
|
33,195
|
|
|
2022
|
26,062
|
|
|
2023
|
15,648
|
|
|
2024
|
7,181
|
|
|
2025
|
1,956
|
|
|
After 2025
|
877
|
|
|
Total lease payments
|
84,919
|
|
|
Less: imputed interest
|
(4,359)
|
|
|
Present value of lease liabilities
|
$
|
80,560
|
|
The following tables present other supplemental information related to leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
April 25, 2020
|
|
Cash paid for amounts included in the measurement of operating lease liabilities
|
|
$
|
37,934
|
|
|
Lease assets obtained in exchange for new operating lease liabilities
|
|
$
|
28,321
|
|
|
|
|
|
|
|
|
April 25, 2020
|
|
Weighted-average remaining lease term - operating leases
|
|
3.11 years
|
|
Weighted-average discount rate - operating leases
|
|
3.58
|
%
|
11. Income Taxes
The components of (loss) income before taxes were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
|
|
|
April 25,
2020
|
|
April 27,
2019
|
|
April 28,
2018
|
|
(Loss) income before taxes
|
|
|
|
|
|
|
United States
|
$
|
(594,431)
|
|
|
$
|
76,035
|
|
|
$
|
144,278
|
|
|
International
|
4,024
|
|
|
30,193
|
|
|
34,985
|
|
|
Total
|
$
|
(590,407)
|
|
|
$
|
106,228
|
|
|
$
|
179,263
|
|
Significant components of income tax (benefit) expense were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
|
|
|
April 25,
2020
|
|
April 27,
2019
|
|
April 28,
2018
|
|
Current:
|
|
|
|
|
|
|
Federal
|
$
|
18,300
|
|
|
$
|
(19)
|
|
|
$
|
5,876
|
|
|
Foreign
|
7,501
|
|
|
9,207
|
|
|
11,228
|
|
|
State
|
4,959
|
|
|
3,402
|
|
|
2,243
|
|
|
Total current expense
|
30,760
|
|
|
12,590
|
|
|
19,347
|
|
|
Deferred:
|
|
|
|
|
|
|
Federal
|
(25,918)
|
|
|
9,709
|
|
|
(45,177)
|
|
|
Foreign
|
164
|
|
|
(53)
|
|
|
(743)
|
|
|
State
|
(6,046)
|
|
|
1,106
|
|
|
4,862
|
|
|
Total deferred (benefit) expense
|
(31,800)
|
|
|
10,762
|
|
|
(41,058)
|
|
|
Income tax (benefit) expense
|
$
|
(1,040)
|
|
|
$
|
23,352
|
|
|
$
|
(21,711)
|
|
U.S. Tax Reform
On December 22, 2017, the Tax Cuts and Jobs Act (the "Tax Act") was enacted into law. The Tax Act significantly revises the future ongoing U.S. federal corporate income tax by, among other things, lowering the U.S. federal corporate tax rate, implementing a territorial tax system, imposing a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, and creates new taxes on foreign sourced earnings. Effective January 1, 2018, the Tax Act reduced the U.S. federal corporate tax rate from 35.0% to 21.0%. For the fiscal years ended April 25, 2020 and April 27, 2019, we utilized a 21.0% U.S. federal statutory rate. For the fiscal year ended April 28, 2018, we utilized a blended rate of approximately 30.5%.
Effective for the fiscal year ended April 27, 2019, the Tax Act subjects Patterson to tax on global intangible low-taxed income (“GILTI”). We have made an accounting policy election to treat the impacts of GILTI as a period cost in the period incurred.
For the fiscal year ended April 28, 2018, these impacts resulted in a provisional discrete net tax benefit of $76,648, which included provisional amounts of $81,871 of tax benefit on U.S. deferred tax assets and liabilities, $4,006 of tax expense for a one-time transition tax on unremitted foreign earnings and $1,217 in withholding tax paid on current year distributions. During the fiscal year ended April 27, 2019, we completed our accounting for the previously recorded provisional impacts of the Tax Act and recorded additional remeasurement benefit of $2,355 on U.S. deferred tax assets and liabilities and a reduction to the transition tax cost of $331.
While we have completed our accounting for the impacts of the Tax Act, changes in interpretation of the Tax Act, analysis of proposed and final regulations as they are issued, current and additional guidance from the Internal Revenue Service and/or state legislative actions as well as potential changes in accounting standards surrounding income taxes and the Tax Act may result in further, potentially material, changes to these completed computations.
On March 27, 2020, the “Coronavirus Aid, Relief and Economic Security (CARES) Act” was signed into law. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit
refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. These benefits did not materially impact the Company’s effective tax rate for the fiscal year ended April 25, 2020. We are continuing to evaluate these tax related provisions as additional guidance from the Internal Revenue Service and/or state tax authorities becomes available.
Deferred tax assets and liabilities are included in other non-current assets and deferred income taxes on the consolidated balance sheets. Significant components of our deferred tax assets (liabilities) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 25,
2020
|
|
April 27,
2019
|
|
Deferred tax assets:
|
|
|
|
|
Capital accumulation plan
|
$
|
2,541
|
|
|
$
|
3,988
|
|
|
Inventory related items
|
10,354
|
|
|
4,887
|
|
|
Bad debt allowance
|
1,857
|
|
|
1,888
|
|
|
Stock based compensation expense
|
7,486
|
|
|
6,918
|
|
|
Interest rate swap
|
1,580
|
|
|
4,041
|
|
|
Foreign tax credit
|
7,248
|
|
|
7,358
|
|
|
Lease liability
|
16,572
|
|
|
—
|
|
|
|
|
|
|
|
Other
|
2,945
|
|
|
5,053
|
|
|
Gross deferred tax assets
|
50,583
|
|
|
34,133
|
|
|
Less: Valuation allowance
|
(14,886)
|
|
|
(11,237)
|
|
|
Total net deferred tax assets
|
35,697
|
|
|
22,896
|
|
|
Deferred tax liabilities
|
|
|
|
|
LIFO reserve
|
(32,630)
|
|
|
(24,098)
|
|
|
Amortizable intangibles
|
(69,254)
|
|
|
(77,126)
|
|
|
Goodwill
|
(11,848)
|
|
|
(43,903)
|
|
|
Property, plant, equipment
|
(39,999)
|
|
|
(40,793)
|
|
|
Lease right-of-use asset
|
(16,195)
|
|
|
—
|
|
|
Total deferred tax liabilities
|
(169,926)
|
|
|
(185,920)
|
|
|
Deferred net long-term income tax liability
|
$
|
(134,229)
|
|
|
$
|
(163,024)
|
|
At April 25, 2020, we had a U.S. foreign tax credit asset that will expire in six years. In addition, we have deferred tax assets which would give rise to tax capital losses if triggered in the future. These losses can only be used against capital gain income. At this time, we believe that it is more likely than not that the foreign tax credit and potential capital loss carryforward attributes totaling $14,886 will not be fully utilized prior to expiration. As a result, a full valuation allowance has been established against these assets.
With regard to unremitted earnings of foreign subsidiaries generated after December 31, 2017, we do not currently provide for U.S. taxes since we intend to reinvest such undistributed earnings indefinitely outside of the United States. 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 new law.
Income tax (benefit) expense varies from the amount computed using the U.S. statutory rate. The reasons for this difference and the related tax effects are shown below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
|
|
|
April 25,
2020
|
|
April 27,
2019
|
|
April 28,
2018
|
|
Tax at U.S. statutory rate
|
$
|
(123,987)
|
|
|
$
|
22,306
|
|
|
$
|
54,674
|
|
|
State tax provision, net of federal benefit
|
(466)
|
|
|
3,492
|
|
|
4,650
|
|
|
Effect of foreign taxes
|
7,277
|
|
|
2,728
|
|
|
(186)
|
|
|
Goodwill impairment
|
107,999
|
|
|
—
|
|
|
—
|
|
|
Legal settlement
|
11,088
|
|
|
—
|
|
|
—
|
|
|
ESOP
|
(2,393)
|
|
|
(2,465)
|
|
|
(4,036)
|
|
|
Other permanent differences
|
1,533
|
|
|
1,074
|
|
|
(728)
|
|
|
|
|
|
|
|
|
|
Tax reform
|
—
|
|
|
(2,686)
|
|
|
(76,648)
|
|
|
Other
|
(2,091)
|
|
|
(1,097)
|
|
|
563
|
|
|
Income tax (benefit) expense
|
$
|
(1,040)
|
|
|
$
|
23,352
|
|
|
$
|
(21,711)
|
|
We have accounted for the uncertainty in income taxes recognized in the financial statements in accordance with ASC Topic 740, “Income Taxes”. This standard clarifies the separate identification and reporting of estimated amounts that could be assessed upon audit. The potential assessments are considered unrecognized tax benefits, because, if it is ultimately determined they are unnecessary, the reversal of these previously recorded amounts will result in a beneficial impact to our financial statements.
As of April 25, 2020 and April 27, 2019, Patterson’s gross unrecognized tax benefits were $11,740 and $13,035, respectively. If determined to be unnecessary, these amounts (net of deferred tax assets of $2,113 and $2,225, respectively, related to the tax deductibility of the gross liabilities) would decrease our effective tax rate. The gross unrecognized tax benefits are included in other non-current liabilities on the consolidated balance sheets.
A summary of the changes in the gross amounts of unrecognized tax benefits is shown below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 25,
2020
|
|
April 27,
2019
|
|
Balance at beginning of period
|
$
|
13,035
|
|
|
$
|
14,227
|
|
|
Additions for tax positions related to the current year
|
1,182
|
|
|
972
|
|
|
Additions for tax positions of prior years
|
218
|
|
|
50
|
|
|
Reductions for tax positions of prior years
|
(37)
|
|
|
(228)
|
|
|
Statute expirations
|
(2,289)
|
|
|
(1,984)
|
|
|
Settlements
|
(369)
|
|
|
(2)
|
|
|
Balance at end of period
|
$
|
11,740
|
|
|
$
|
13,035
|
|
We also recognize both interest and penalties with respect to unrecognized tax benefits as a component of income tax expense. As of April 25, 2020 and April 27, 2019, we had recorded $1,968 and $1,926, respectively, for interest and penalties. These amounts are also included in other non-current liabilities on the consolidated balance sheets. These amounts, net of related deferred tax assets, if determined to be unnecessary, would decrease our effective tax rate. During the year ended April 25, 2020, we recorded as part of tax expense $394 related to an increase in our estimated liability for interest and penalties.
Patterson files income tax returns, including returns for our subsidiaries, with federal, state, local and foreign jurisdictions. During fiscal 2018, the Internal Revenue Service (“IRS”) concluded an audit of fiscal years ended April 25, 2015 and April 30, 2016. The IRS has either examined or waived examination for all periods up to and including our fiscal year ended April 30, 2016, resulting in these periods being closed. In addition to the IRS, periodically, state, local and foreign income tax returns are examined by various taxing authorities. We do not believe that the outcome of these various examinations will have a material adverse impact on our financial statements.
12. Technology Partner Innovations, LLC ("TPI")
In fiscal 2019, we entered into an agreement with Cure Partners to form TPI, which offers a cloud-based practice management software, NaVetor, to its customers. Patterson and Cure Partners each contributed net assets of
$4,000 to form TPI. We determined that TPI is a variable interest entity, and we consolidate the results of operations of TPI as we have concluded that we are the primary beneficiary of TPI. During fiscal 2020 and 2019, net loss attributable to the noncontrolling interest was $921 and $752, respectively, resulting in noncontrolling interests of $2,327 on the consolidated balance sheets at April 25, 2020.
13. Segment and Geographic Data
We present three reportable segments: Dental, Animal Health and Corporate. Dental and Animal Health are strategic business units that offer similar products and services to different customer bases. Dental provides a virtually complete range of consumable dental products, equipment and software, turnkey digital solutions and value-added services to dentists, dental laboratories, institutions, and other healthcare professionals throughout North America. Animal Health is a leading, full-line distributor in North America and the U.K. of animal health products, services and technologies to both the production-animal and companion-pet markets. Our Corporate segment is comprised of general and administrative expenses, including home office support costs in areas such as information technology, finance, legal, human resources and facilities. In addition, customer financing and other miscellaneous sales are reported within Corporate results. Corporate assets consist primarily of cash and cash equivalents, accounts receivable, property and equipment and long-term receivables. We evaluate segment performance based on operating (loss) income. The costs to operate the fulfillment centers are allocated to the business units based on the through-put of the unit.
The following tables present information about our reportable segments and the geographic areas in which we operate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
|
|
|
April 25,
2020
|
|
April 27,
2019
|
|
April 28,
2018
|
|
Consolidated net sales
|
|
|
|
|
|
|
United States
|
$
|
4,554,345
|
|
|
$
|
4,638,184
|
|
|
$
|
4,537,326
|
|
|
United Kingdom
|
608,320
|
|
|
597,953
|
|
|
583,057
|
|
|
Canada
|
327,346
|
|
|
338,386
|
|
|
345,300
|
|
|
Total
|
$
|
5,490,011
|
|
|
$
|
5,574,523
|
|
|
$
|
5,465,683
|
|
|
Dental net sales
|
|
|
|
|
|
|
United States
|
$
|
1,900,539
|
|
|
$
|
1,989,875
|
|
|
$
|
1,985,398
|
|
|
Canada
|
201,383
|
|
|
201,915
|
|
|
210,680
|
|
|
Total
|
$
|
2,101,922
|
|
|
$
|
2,191,790
|
|
|
$
|
2,196,078
|
|
|
Animal Health net sales
|
|
|
|
|
|
|
United States
|
$
|
2,601,970
|
|
|
$
|
2,620,104
|
|
|
$
|
2,524,887
|
|
|
United Kingdom
|
608,320
|
|
|
597,953
|
|
|
583,057
|
|
|
Canada
|
125,963
|
|
|
136,471
|
|
|
134,620
|
|
|
Total
|
$
|
3,336,253
|
|
|
$
|
3,354,528
|
|
|
$
|
3,242,564
|
|
|
Corporate net sales
|
|
|
|
|
|
|
United States
|
$
|
51,836
|
|
|
$
|
28,205
|
|
|
$
|
27,041
|
|
|
Total
|
$
|
51,836
|
|
|
$
|
28,205
|
|
|
$
|
27,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
|
|
|
April 25,
2020
|
|
April 27,
2019
|
|
April 28,
2018
|
|
Consolidated net sales
|
|
|
|
|
|
|
Consumable
|
$
|
4,378,018
|
|
|
$
|
4,482,016
|
|
|
$
|
4,415,643
|
|
|
Equipment and software
|
736,702
|
|
|
753,805
|
|
|
709,253
|
|
|
Value-added services and other
|
375,291
|
|
|
338,702
|
|
|
340,787
|
|
|
Total
|
$
|
5,490,011
|
|
|
$
|
5,574,523
|
|
|
$
|
5,465,683
|
|
|
Dental net sales
|
|
|
|
|
|
|
Consumable
|
$
|
1,136,083
|
|
|
$
|
1,214,814
|
|
|
$
|
1,251,642
|
|
|
Equipment and software
|
677,548
|
|
|
694,864
|
|
|
660,355
|
|
|
Value-added services and other
|
288,291
|
|
|
282,112
|
|
|
284,081
|
|
|
Total
|
$
|
2,101,922
|
|
|
$
|
2,191,790
|
|
|
$
|
2,196,078
|
|
|
Animal Health net sales
|
|
|
|
|
|
|
Consumable
|
$
|
3,241,935
|
|
|
$
|
3,267,202
|
|
|
$
|
3,164,001
|
|
|
Equipment and software
|
59,154
|
|
|
58,941
|
|
|
48,898
|
|
|
Value-added services and other
|
35,164
|
|
|
28,385
|
|
|
29,665
|
|
|
Total
|
$
|
3,336,253
|
|
|
$
|
3,354,528
|
|
|
$
|
3,242,564
|
|
|
Corporate net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value-added services and other
|
$
|
51,836
|
|
|
$
|
28,205
|
|
|
$
|
27,041
|
|
|
Total
|
$
|
51,836
|
|
|
$
|
28,205
|
|
|
$
|
27,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
|
|
|
April 25,
2020
|
|
April 27,
2019
|
|
April 28,
2018
|
|
Operating (loss) income
|
|
|
|
|
|
|
Dental
|
$
|
168,304
|
|
|
$
|
179,236
|
|
|
$
|
229,201
|
|
|
Animal Health
|
(594,743)
|
|
|
81,472
|
|
|
78,058
|
|
|
Corporate
|
(145,680)
|
|
|
(122,992)
|
|
|
(87,370)
|
|
|
Consolidated operating (loss) income
|
$
|
(572,119)
|
|
|
$
|
137,716
|
|
|
$
|
219,889
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
Dental
|
$
|
8,434
|
|
|
$
|
8,792
|
|
|
$
|
7,435
|
|
|
Animal Health
|
49,958
|
|
|
49,362
|
|
|
50,892
|
|
|
Corporate
|
23,790
|
|
|
24,619
|
|
|
25,489
|
|
|
Consolidated depreciation and amortization
|
$
|
82,182
|
|
|
$
|
82,773
|
|
|
$
|
83,816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 25,
2020
|
|
April 27,
2019
|
|
Property and equipment, net
|
|
|
|
|
United States
|
$
|
294,169
|
|
|
$
|
295,381
|
|
|
United Kingdom
|
2,030
|
|
|
1,976
|
|
|
Canada
|
7,526
|
|
|
8,433
|
|
|
Total property and equipment, net
|
$
|
303,725
|
|
|
$
|
305,790
|
|
|
|
|
|
|
|
|
April 25,
2020
|
|
April 27,
2019
|
|
Total assets
|
|
|
|
|
Dental
|
$
|
704,216
|
|
|
$
|
641,721
|
|
|
Animal Health
|
1,485,284
|
|
|
2,156,723
|
|
|
Corporate
|
525,850
|
|
|
470,825
|
|
|
Total assets
|
$
|
2,715,350
|
|
|
$
|
3,269,269
|
|
14. Stockholders’ Equity
Dividends
The following table presents our declared and paid cash dividends per share on our common stock for the past three years. Dividends were declared and paid in the same period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
|
|
|
|
|
|
|
|
Fiscal year
|
1
|
|
2
|
|
3
|
|
4
|
|
2020
|
$
|
0.26
|
|
|
$
|
0.26
|
|
|
$
|
0.26
|
|
|
$
|
0.26
|
|
|
2019
|
0.26
|
|
|
0.26
|
|
|
0.26
|
|
|
0.26
|
|
|
2018
|
0.26
|
|
|
0.26
|
|
|
0.26
|
|
|
0.26
|
|
Share Repurchases
During fiscal 2020 and 2019, we had no repurchases of shares of our common stock. During fiscal 2018, we repurchased and retired 2,147 shares of our common stock for $87,500, or an average of $40.75 per share.
On March 13, 2018, the Board of Directors authorized a $500,000 share repurchase program through March 13, 2021. As of April 25, 2020, $500,000 remains available under the current repurchase authorization.
ESOP
During 1990, Patterson’s Board of Directors adopted a leveraged ESOP. In fiscal 1991, under the provisions of the plan and related financing arrangements, Patterson loaned the ESOP $22,000 (the “1990 note”) for the purpose of acquiring its then outstanding preferred stock, which was subsequently converted to common stock. The Board of Directors determines the contribution from the Company to the ESOP annually. The contribution is used to retire a portion of the debt, which triggers a release of shares that are then allocated to the employee participants. Shares of stock acquired by the plan are allocated to each participant who has completed 1000 hours of service during the plan year. In fiscal 2011, the final payment on the 1990 note was made and all remaining shares were released for allocation to participants.
In fiscal 2002, Patterson’s ESOP and an ESOP sponsored by the Thompson Dental Company (“Thompson”) were used to facilitate the acquisition and merger of Thompson into Patterson. The net result of this transaction was an additional loan of $12,612 being made to the ESOP and the ESOP acquiring 666 shares of common stock. The loan bears interest at current rates but principal did not begin to amortize until fiscal 2012. Beginning in fiscal 2012 and through fiscal 2020, an annual payment of $200 plus interest is due. In fiscal 2021, a final payment of any outstanding principal and interest balance is due. Prepayments of principal can be made at any time without penalty. Of the 666 shares issued in the transaction, 98 were previously allocated to Thompson employees. The remaining 568 shares began to be allocated in fiscal 2004 as interest was paid on the loan.
In September 2006, we entered into a third loan agreement with the ESOP and loaned $105,000 (the “2006 note”) for the sole purpose of enabling the ESOP to purchase shares of our common stock. The ESOP purchased 3,160 shares with the proceeds from the 2006 note. Interest on the unpaid principal balance accrues at a rate equal to six-month LIBOR, with the rate resetting semi-annually. Interest payments were not required during the period from and including September 11, 2006 through April 30, 2010. On April 30, 2010, accrued and unpaid interest was added to the outstanding principal balance under the note, with interest thereafter accruing on the increased principal amount. Unpaid interest accruing after April 30, 2010 is due and payable on each successive April 30 occurring through September 10, 2026. Principal payments aren't due until September 10, 2026; however, prepayments can be made without penalty. In fiscal 2012, Patterson contributed $20,214 to the ESOP, which then purchased 844 shares for allocation to the participants. No shares secured by the 2006 note were released prior to fiscal 2011.
At April 25, 2020, a total of 9,592 shares of common stock that have been allocated to participants remained in the ESOP and had a fair market value of $175,347. Related to the shares from the Thompson transaction, committed-to-be-released shares were 15 and suspense shares were 379. Finally, with respect to the 2006 note, committed-to-be-released shares were 467 and suspense shares were 230.
Unearned ESOP shares are not considered outstanding for the computation of earnings per share until the shares are committed for release to the participants. During fiscal 2020, 2019 and 2018, the compensation expense recognized related to the ESOP was $14,419, $13,740 and $18,132, respectively.
We anticipate the allocation of the remaining suspense, or unearned, shares to occur in fiscal 2021. As of April 25, 2020, the fair value of all unearned shares held by the ESOP was $9,319. We will recognize an income tax deduction as the unearned ESOP shares are released. Such deductions will be limited to the ESOP’s original cost to acquire the shares.
Dividends on allocated shares are passed through to the ESOP participants. Dividends on unallocated shares are used by the ESOP to make debt service payments on the notes due to Patterson.
15. Stock-based Compensation
The consolidated statements of operations and other comprehensive (loss) income for fiscal 2020, 2019 and 2018 include pre-tax (after-tax) stock-based compensation expense of $22,935 ($17,789), $19,685 ($15,588) and $18,400 ($13,037), respectively. Pre-tax expense is included in operating expenses within the consolidated statements of operations and other comprehensive (loss) income.
As of April 25, 2020, the total unrecognized compensation cost related to non-vested awards was $24,461, and it is expected to be recognized over a weighted average period of approximately 1.5 years.
2015 Omnibus Incentive Plan
In September 2015, our shareholders approved the 2015 Omnibus Incentive Plan ("Incentive Plan"), which was amended and restated in September 2018. The aggregate number of shares of common stock that may be issued is 11,500. The Incentive Plan authorizes various award types to be issued under the plan, including stock options, restricted stock awards, restricted stock units, stock appreciation rights, performance awards, non-employee director awards, cash-based awards and other stock-based awards. We issue new shares for stock option exercises, restricted stock award grants and also for vesting of restricted stock units and performance stock units. Awards that expire or are canceled without delivery of shares generally become available for reissuance under the plan.
At April 25, 2020, there were 5,322 shares available for awards under the Incentive Plan.
As a result of the approval of the Incentive Plan, awards are no longer granted under any prior equity incentive plan, but all outstanding awards previously granted under such prior plans will remain outstanding and subject to the terms of such prior plans. At April 25, 2020, there were 447 shares outstanding under prior plans.
Inducement Awards
On June 29, 2018, we issued a combination of non-statutory stock options and restricted stock units outside our Incentive Plan to our Chief Financial Officer. The stock option covers 99 shares of our common stock, has an exercise price of $22.67 per share, and has a 10-year term. Such award will vest, assuming continued employment, to the extent of one-third of the award on the first anniversary of the date of grant, one-third of the award on the
second anniversary of the date of grant, and the remaining one-third of the award on the third anniversary of the date of grant. The restricted stock unit award covers 31 shares of our common stock. Such award will vest, assuming continued employment, to the extent of 50% of the award on the first anniversary of the date of grant and the remaining 50% of the award on the second anniversary of the date of grant.
On December 1, 2017, we issued a restricted stock unit award outside our Incentive Plan to our Chief Executive Officer. The award covers 56 shares of common stock and will vest, assuming continued employment, to the extent of 50% of the award on the first anniversary of the date of grant and the remaining 50% of the award on the second anniversary of the date of grant.
Stock Option Awards
Stock options granted to employees expire no later than ten years after the date of grant. Awards typically vest over three or five years.
The fair value of stock options granted was estimated as of the grant date using a Black-Scholes option-pricing model with the following assumptions:
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Fiscal Year Ended
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April 25,
2020
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April 27,
2019
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April 28,
2018
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Expected dividend yield
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4.7
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%
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|
4.5
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%
|
|
2.2
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%
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|
Expected stock price volatility
|
26.8
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%
|
|
24.6
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%
|
|
21.6
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%
|
|
Risk-free interest rate
|
1.8
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%
|
|
2.9
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%
|
|
1.9
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%
|
|
Expected life (years)
|
6.0
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|
6.2
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|
6.6
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|
Weighted average grant date fair value per share
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$
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3.37
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|
|
$
|
3.66
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|
|
$
|
8.18
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The following is a summary of stock option activity:
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Number
of
Options
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Weighted-
Average
Exercise
Price
|
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Aggregate Intrinsic
Value
|
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Balance as of April 27, 2019
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1,556
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|
$
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39.96
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Granted
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1,318
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22.22
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Exercised
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—
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—
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Canceled
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(441)
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46.94
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Balance as of April 25, 2020
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2,433
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|
$
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29.08
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|
$
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—
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Vested or expected to vest as of April 25, 2020
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2,349
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|
$
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29.28
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$
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—
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Exercisable as of April 25, 2020
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402
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$
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41.65
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$
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—
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The weighted average remaining contractual lives of options outstanding and options exercisable as of April 25, 2020 were 8.1 and 5.9 years, respectively.
Related to stock options exercised, the intrinsic value, cash received and tax benefits realized were $2, $13 and $0, respectively, in fiscal 2019; and $88, $324 and $3, respectively, in fiscal 2018. No stock options were exercised in fiscal 2020.
Restricted Stock
Restricted stock awards and restricted stock units granted to employees generally vest over a three, five or seven year period. Certain restricted stock awards, which are held by branch managers, are subject to accelerated vesting provisions beginning three years after the grant date, based on certain operating goals. Restricted stock awards are also granted to non-employee directors annually and vest over one year. The grant date fair value of restricted stock awards and restricted stock units is based on the closing stock price on the day of the grant. The total fair value of restricted stock awards and restricted stock units that vested in fiscal 2020, 2019 and 2018 was $8,788, $5,683 and $6,939, respectively.
The following is a summary of restricted stock award activity:
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Restricted Stock Awards
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Shares
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|
Weighted-
Average
Grant Date
Fair Value
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Outstanding at April 27, 2019
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167
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|
$
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37.91
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Granted
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43
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|
18.71
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Vested
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(93)
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|
34.28
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|
Forfeitures
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(11)
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|
|
43.43
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|
Outstanding at April 25, 2020
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106
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|
|
$
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32.71
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|
The following is a summary of restricted stock unit activity:
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Restricted Stock Units
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|
|
|
|
Shares
|
|
Weighted-
Average
Grant Date
Fair Value
|
|
Outstanding at April 27, 2019
|
1,125
|
|
|
$
|
30.97
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|
Granted
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508
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|
|
22.11
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Vested
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(328)
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|
|
31.24
|
|
|
Forfeitures
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(89)
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|
|
31.69
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Outstanding at April 25, 2020
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1,216
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|
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$
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27.16
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Performance Unit Awards
In fiscal 2020 and 2019, we granted performance unit awards to certain executives which are earned at the end of a three year period if certain operating goals are met. Accordingly, we recognize expense over the requisite service period based on the outcome that is probable for these awards. In fiscal 2018, we granted performance unit awards with a market-based condition to certain executives. The number of shares to be received at vesting will range from 0% - 200% of the target number of stock units based on Patterson's total shareholder return ("TSR") relative to the performance of companies in the S&P Midcap 400 Index measured over a three year period. We estimate the grant date fair value of the TSR awards using the Monte Carlo valuation model. No performance unit awards vested in fiscal 2020, 2019 or 2018. In fiscal 2020, it was determined that a portion of the operating goals established for performance unit awards granted in fiscal 2019 had been met and 120 shares will vest, assuming continued employment, at the end of the requisite service period.
The following is a summary of performance unit award activity at target:
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Performance Unit Awards
|
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Shares
|
|
Weighted-
Average
Grant Date
Fair Value
|
|
Outstanding at April 27, 2019
|
285
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|
|
$
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34.86
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|
|
Granted
|
151
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|
|
22.25
|
|
|
Vested
|
—
|
|
|
—
|
|
|
Forfeitures and cancellations
|
(74)
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|
|
50.80
|
|
|
Outstanding at April 25, 2020
|
362
|
|
|
$
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26.38
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Employee Stock Purchase Plan ("ESPP")
We sponsor an ESPP under which a total of 9,000 shares have been reserved for purchase by employees. Eligible employees may purchase shares at 85% of the lower of the fair market value of our common stock on the beginning of the annual offering period, or on the end of each quarterly purchase period, which occur on March 31, June 30, September 30 and December 31. The offering periods begin on January 1 of each calendar year and end on
December 31 of each calendar year. At April 25, 2020, there were 2,068 shares available for purchase under the ESPP.
We estimate the grant date fair value of shares purchased under our ESPP using the Black-Scholes option pricing valuation model with the following assumptions:
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Fiscal Year Ended
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|
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|
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|
April 25,
2020
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|
April 27,
2019
|
|
April 28,
2018
|
|
Expected dividend yield
|
5.1
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%
|
|
5.2
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%
|
|
2.8
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%
|
|
Expected stock price volatility
|
34.3
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%
|
|
38.6
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%
|
|
28.1
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%
|
|
Risk-free interest rate
|
1.6
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%
|
|
2.5
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%
|
|
1.7
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%
|
|
Expected life (years)
|
0.6
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|
0.6
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|
0.6
|
|
Weighted average grant date fair value per share
|
$
|
4.98
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|
|
$
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5.21
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$
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8.73
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Capital Accumulation Plan ("CAP")
We also sponsored an employee CAP. A total of 6,000 shares of common stock were reserved for issuance under the CAP. Key employees of Patterson were eligible to participate by purchasing common stock through payroll deductions at 75% of the price of the common stock at the beginning of or the end of the calendar year, whichever was lower. The shares issued are restricted stock and are held in the custody of Patterson until the restrictions lapse. The restriction period is typically three years from the beginning of the plan year, and shares are subject to forfeiture provisions.
Effective September 5, 2018, our Board of Directors took the following irrevocable actions with respect to our CAP: (1) it immediately reduced the number of shares available for purchase under the CAP by 1,500, and (2) it terminated the CAP for new participants, effective January 1, 2019. At April 25, 2020, 274 shares were available for purchase under the CAP.
We estimated the grant date fair value of shares purchased under our CAP using the Black-Scholes option pricing valuation model with the following assumptions. No CAP shares were granted in fiscal 2020 or 2019.
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|
|
|
|
|
|
|
|
|
|
|
|
April 28,
2018
|
|
Expected dividend yield
|
|
|
2.8
|
%
|
|
Expected stock price volatility
|
|
|
24.4
|
%
|
|
Risk-free interest rate
|
|
|
1.8
|
%
|
|
Expected life (years)
|
|
|
1.0
|
|
Weighted average grant date fair value per share
|
|
|
$
|
12.98
|
|
16. Litigation
From time to time, we become involved in lawsuits, administrative proceedings, government subpoenas, and government investigations (which may, in some cases, involve our entering into settlement agreements or consent decrees), relating to antitrust, commercial, environmental, product liability, intellectual property, regulatory, employment discrimination, securities, and other matters, including matters arising out of the ordinary course of business. The results of any legal proceedings cannot be predicted with certainty because such matters are inherently uncertain. Significant damages or penalties may be sought in some matters, and some matters may require years to resolve.
We accrue for these matters when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Unless otherwise noted, with respect to the specific legal proceedings and claims described below, the amount or range or possible losses is not reasonably estimable. Adverse outcomes in some or all of these matters may result in significant monetary damages or injunctive relief against us that could adversely affect our ability to conduct our business. There also exists the possibility of a material adverse effect on our financial statements for the period in which the effect of an unfavorable outcome becomes probable and reasonably estimable.
On 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 U.S. 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 June 25, 2018, the U.S. Supreme Court granted certiorari to review an arbitration issue raised by the Danaher Defendants, thereby continuing the case stay implemented in March 2018. On October 29, 2018, the Supreme Court heard oral arguments. On January 8, 2019, the Supreme Court issued its published decision vacating the judgment of the U.S. Court of Appeals for the Fifth Circuit and remanded the case to the Fifth Circuit for further proceedings on a second arbitration issue consistent with the Supreme Court’s opinion. The Fifth Circuit heard oral arguments on May 1, 2019. On August 14, 2019, the Fifth Circuit affirmed the District Court’s finding that the arbitration provision does not apply to this litigation. On January 15, 2020, we reached an agreement in principle to settle with Archer. On March 23, 2020, we settled with Archer and the action against Patterson was dismissed on March 31, 2020.
On March 28, 2018, Plymouth County Retirement System (“Plymouth”) filed a federal securities class action complaint against Patterson Companies, Inc. and its former CEO Scott P. Anderson and former CFO Ann B. Gugino in the U.S. District Court for the District of Minnesota in a case captioned Plymouth County Retirement System v. Patterson Companies, Inc., Scott P. Anderson and Ann B. Gugino, Case No. 0:18-cv-00871 MJD/SER. On November 9, 2018, the complaint was amended to add former CEO James W. Wiltz and former CFO R. Stephen Armstrong as individual defendants. Under the amended complaint, on behalf of all persons or entities that purchased or otherwise acquired Patterson’s common stock between June 26, 2013 and February 28, 2018, Plymouth alleges that Patterson violated federal securities laws by failing to disclose that Patterson’s revenue and earnings were “artificially inflated by Defendants’ illicit, anti-competitive scheme with its purported competitors, Benco and Schein, to prevent the formation of buying groups that would allow its customers who were office-based practitioners to take advantage of pricing arrangements identical or comparable to those enjoyed by large-group customers.” In its class action complaint, Plymouth asserts one count against Patterson for violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder and a second, related count against the individual defendants for violating Section 20(a) of the Exchange Act. Plymouth seeks compensatory damages, pre- and post-judgment interest and reasonable attorneys’ fees and experts’ witness fees and costs. On August 30, 2018, Gwinnett County Public Employees Retirement System and Plymouth County Retirement System, Pembroke Pines Pension Fund for Firefighters and Police Officers, Central Laborers Pension Fund were appointed lead plaintiffs. On January 18, 2019, Patterson and the individual defendants filed a motion to dismiss the amended complaint. On July 25, 2019, the U.S. Magistrate Judge issued a report and recommendation that the motion to dismiss be granted in part and denied in part. The report and recommendation, among other things, recommends the dismissal of all claims against individuals defendants Ann B. Gugino, R. Stephen Armstrong and James W. Wiltz. On September 10, 2019, the District Court adopted the Magistrate Judge’s report and recommendation. While the outcome of litigation is inherently uncertain, we believe that the class action complaint is without merit, and 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. Patterson has also received, and responded to, requests under Minnesota Business Corporation Act § 302A.461 to inspect corporate books and records relating to the issues raised in the securities class action complaint and certain antitrust litigation.
During the first quarter of fiscal 2019, the U.S. Attorney’s Office for the Western District of Virginia (“USAO-WDVA”) informed us that our subsidiary, Animal Health International, Inc., had been designated a target of a criminal investigation. The investigation originally related to Animal Health International’s sales of prescription animal health products to certain persons and/or locations not licensed to receive them in Virginia and Tennessee in violation of federal law. After being contacted by the USAO-WDVA, Patterson retained outside legal counsel and began an internal investigation. Since that time, we produced documents both responsive to grand jury subpoenas and voluntarily. In December 2018, as a result of our internal investigation, we voluntarily advised the USAO-WDVA that some of Animal Health International’s shipments of prescription animal health products were made from a warehouse rather than a pharmacy to end-user customers in the states of Virginia and Tennessee. Thereafter, as part of our internal investigation, we conducted a comprehensive review of Animal Health International’s distribution
and licensing practices across all 50 U.S. states. That review identified compliance issues in additional states, which we voluntarily disclosed to the USAO-WDVA in April 2019. Our Board of Directors established a special investigation committee to oversee and conduct the investigation, to review our licensing, dispensing, distribution and related sales practices company-wide, and to report on its findings to the Board and to the USAO-WDVA. As a result of the internal investigation, we modified our licensing, dispensing, distribution and related sales processes company-wide. We reached an agreement with the USAO-WDVA that resolved the federal government’s criminal investigation into Animal Health International and other non-compliant licensing, dispensing, distribution and related sales processes disclosed during the investigation. Under the terms of the agreement, Animal Health International paid a total criminal fine and forfeiture of $52,800 in the fourth quarter of fiscal 2020, and Animal Health International pleaded guilty to a strict-liability misdemeanor offense under the Federal Food, Drug and Cosmetic Act in connection with its failure to comply with federal law relating to the sales of prescription animal health products. In addition, Animal Health International and Patterson entered into a non-prosecution agreement for other non-compliant licensing, dispensing, distribution and related sales processes disclosed during the investigation and committed to undertake additional compliance program enhancements and provide compliance certifications for the period from the date of signing the non-prosecution agreement through the next three full fiscal years. The sentencing hearing took place on May 4, 2020, and the court entered a one-year probation period for Animal Health International. We recorded a reserve of $58,300 in our Corporate segment for the three and six months ended October 26, 2019 to account for the then-anticipated settlement of this matter and certain related costs and expenses. This matter may continue to divert management’s attention and cause us to suffer reputational harm. We also may be subject to other fines or penalties, equitable remedies (including but not limited to the suspension, revocation or non-renewal of licenses) and litigation. The occurrence of any of these events could adversely affect our business, financial condition and results of operations.
On October 1, 2018, Sally Pemberton filed a stockholder derivative complaint against Patterson Companies, Inc., as a nominal defendant, and the following former and current officers and directors of Patterson: Scott Anderson, Ann Gugino, Mark Walchirk, John Buck, Alex Blanco, Jody Feragen, Sarena Lin, Ellen Rudnick, Neil Schrimsher, Les Vinney, James Wiltz, Paul Guggenheim, David Misiak and Tim Rogan as individual defendants in the U.S. District Court for the District of Minnesota in a case captioned Sally Pemberton v. Scott P. Anderson, et al., Case No. 18-CV-2818 (PJS/HB). Derivatively on behalf of Patterson, plaintiff alleges that Patterson, with Benco and Henry Schein, “engage[d] in a conspiracy in restraint of trade, whereby the companies agreed to refuse to offer discounted prices or otherwise negotiate with GPOs, agreed to fix margins on dental supplies and equipment, agreed not to poach one another’s customers or sales representatives, and agreed to block the entry and expansion of rival distributors. Plaintiff further alleges that the individual defendants failed to disclose Patterson’s alleged “antitrust misconduct” to the public and purportedly caused Patterson to repurchase $412,800 of its own stock at prices that were artificially inflated. In the derivative complaint, plaintiff asserts six counts against the individual defendants for: (i) breach of fiduciary duty; (ii) waste of corporate assets; (iii) unjust enrichment; (iv) violations of Section 14(a) of the Exchange Act; (v) violations of Section 10(b) and Rule 10b-5 of the Exchange Act and (vi) violations of Section 20(a) of the Exchange Act. Plaintiff seeks compensatory damages with pre-judgment and post-judgment interest, costs, disbursements and reasonable attorneys’ fees, experts’ fees, costs and expenses, and an order awarding restitution from the individual defendants and directing Patterson “to take all necessary actions to reform and improve its corporate governance and internal procedures.” On September 10, 2019, the Honorable Patrick J. Schiltz dismissed this action without prejudice because the plaintiff failed to make a pre-suit demand on Patterson’s Board of Directors. On October 31, 2019, Patterson’s Board received a written demand to initiate litigation against its officers and directors based on the claims Ms. Pemberton originally presented in her complaint. Following this demand, and after consultation with legal counsel, effective March 16, 2020, the Board adopted a resolution appointing Professor John Matheson and The Honorable George McGunnigle, retired Judge of Hennepin County District Court, as a special litigation committee pursuant to Minnesota Statutes Section 302A.241. Pursuant to the resolution, the special litigation committee has complete power and authority to investigate the demand, analyze the legal rights or remedies of Patterson, determine whether those rights or remedies should be pursued, and respond to Ms. Pemberton on behalf of Patterson.
On August 28, 2018, Kirsten Johnsen filed a stockholder derivative complaint against Patterson Companies, Inc., as a nominal defendant, and the following former and current officers and directors of Patterson: Scott Anderson, Ann Gugino, James Wiltz, John Buck, Jody Feragen, Ellen Rudnick, Les Vinney, Neil Schrimsher, Sarena Lin, Harold Slavkin, Alex Blanco and Mark Walchirk as individual defendants in Hennepin County District Court in a case captioned Kirsten Johnsen v. Scott P. Anderson et al., Case No. 27-CV-18-14315. Derivatively on behalf of Patterson, plaintiff alleges that Patterson “suppressed price competition and maintained supracompetitive prices for dental supplies and equipment by entering into agreements with Henry Schein and Benco to: (i) fix margins for dental supplies and equipment; and (ii) block the entry and expansion of lower-margin, lower-priced, rival dental
distributors through threatened and actual group boycotts.” Plaintiff further alleges that the individual defendants failed to disclose Patterson’s alleged “price-fixing scheme” to the public and purportedly “caused Patterson to repurchase over $412,800 worth of its own stock at artificially inflated prices.” In the derivative complaint, plaintiff asserts three counts against the individual defendants for: (i) breach of fiduciary duty; (ii) waste of corporate assets; and (iii) unjust enrichment. Plaintiff seeks compensatory damages, equitable and injunctive relief as permitted by law, costs, disbursements and reasonable attorneys’ fees, accountants’ fees and experts’ fees, costs and expenses, and an order awarding restitution from the individual defendants and directing Patterson “to take all necessary actions to reform and improve its corporate governance and internal procedures.” On February 19, 2019, the Hennepin County District Court ordered this litigation stayed pending resolution of the above-described case brought by Sally Pemberton. On September 10, 2019, the Honorable Patrick J. Schiltz dismissed Pemberton without prejudice because the plaintiff failed to make a pre-suit demand on Patterson’s Board of Directors. On November 5, 2019, the defendants in Johnsen moved to dismiss such action based on plaintiff’s failure to make a pre-suit demand or otherwise properly plead demand futility. On December 12, 2019, in light of the outcome in Pemberton, the defendants and Johnsen entered into a stipulation for voluntary dismissal of the Johnsen action, which the court granted on December 13, 2019. On April 27, 2020, Patterson’s Board received a written demand to initiate litigation against its officers and directors based on the claims Ms. Johnsen originally presented in her complaint. The Board is in the process of reviewing the demand and determining how to address it.
17. Quarterly Results (unaudited)
Quarterly results are determined in accordance with the accounting policies used for annual data and include certain items based upon estimates for the entire year. All fiscal quarters presented include results for 13 weeks.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
|
|
|
|
|
April 25, 2020 (1)
|
|
January 25, 2020
|
|
October 26, 2019 (2)
|
|
July 27, 2019 (3)
|
|
Net sales
|
$
|
1,286,461
|
|
|
$
|
1,456,155
|
|
|
$
|
1,418,744
|
|
|
$
|
1,328,651
|
|
|
Gross profit
|
294,032
|
|
|
311,830
|
|
|
301,494
|
|
|
290,054
|
|
|
Operating (loss) income
|
(614,463)
|
|
|
43,816
|
|
|
(18,146)
|
|
|
16,674
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
(608,797)
|
|
|
22,972
|
|
|
(33,349)
|
|
|
29,807
|
|
|
Net loss attributable to noncontrolling interests
|
(211)
|
|
|
(255)
|
|
|
(220)
|
|
|
(235)
|
|
|
Net (loss) income attributable to Patterson Companies, Inc.
|
$
|
(608,586)
|
|
|
$
|
23,227
|
|
|
$
|
(33,129)
|
|
|
$
|
30,042
|
|
|
(Loss) earnings per share attributable to Patterson Companies, Inc.:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
(6.44)
|
|
|
$
|
0.25
|
|
|
$
|
(0.35)
|
|
|
$
|
0.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
$
|
(6.44)
|
|
|
$
|
0.24
|
|
|
$
|
(0.35)
|
|
|
$
|
0.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
|
|
|
|
|
April 27, 2019
|
|
January 26, 2019
|
|
October 27, 2018
|
|
July 28, 2018 (4)
|
|
Net sales
|
$
|
1,436,706
|
|
|
$
|
1,396,745
|
|
|
$
|
1,404,752
|
|
|
$
|
1,336,320
|
|
|
Gross profit
|
312,527
|
|
|
299,509
|
|
|
295,076
|
|
|
283,663
|
|
|
Operating (loss) income
|
46,623
|
|
|
45,363
|
|
|
41,216
|
|
|
4,514
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
27,685
|
|
|
31,054
|
|
|
28,646
|
|
|
(4,509)
|
|
|
Net loss attributable to noncontrolling interests
|
(305)
|
|
|
(171)
|
|
|
(223)
|
|
|
(53)
|
|
|
Net (loss) income attributable to Patterson Companies, Inc.
|
$
|
27,990
|
|
|
$
|
31,225
|
|
|
$
|
28,869
|
|
|
$
|
(4,456)
|
|
|
(Loss) earnings per share attributable to Patterson Companies, Inc.:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.30
|
|
|
$
|
0.34
|
|
|
$
|
0.31
|
|
|
$
|
(0.05)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
$
|
0.30
|
|
|
$
|
0.33
|
|
|
$
|
0.31
|
|
|
$
|
(0.05)
|
|
(1)In the fourth quarter of fiscal 2020, we recorded goodwill impairment charges totaling $675,055 in our Animal Health segment. See Note 1 for additional information. In addition, the COVID-19 virus had a significant impact on our businesses in the fourth quarter of fiscal 2020. Through March 2020, sales in our Dental and Animal Health segments were up year over year. In April 2020, our Dental segment sales were
down approximately 71% and our Animal Health segment sales were down approximately 9%, as compared to April 2019. In addition, operating expenses were also down significantly in April 2020 as certain variable expenses decreased with sales.
(2)We incurred costs and expenses of $58,300 during the second quarter of fiscal 2020 related to the then-probable settlement of an investigation by the U.S. Attorney's Office for the Western District of Virginia. See Note 16 for additional information.
(3)We recorded a pre-tax gain of $34,334 related to one of our investments during the first quarter of fiscal 2020. This gain was based on the selling price of preferred stock in this investment that is similar to the preferred stock we own, and was adjusted for differences in liquidation preferences. In addition, we incurred expenses of $17,666 during the first quarter of fiscal 2020 related to the settlement of litigation with SourceOne Dental, Inc.
(4)In the first quarter of fiscal 2019, we recorded a pre-tax charge of $28,263 related to a litigation settlement.
18. Accumulated Other Comprehensive Loss ("AOCL")
The following table summarizes the changes in AOCL as of April 25, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flow
Hedges
|
|
Currency
Translation
Adjustment
|
|
Total
|
|
AOCL at April 27, 2019
|
$
|
(10,830)
|
|
|
$
|
(77,439)
|
|
|
$
|
(88,269)
|
|
|
Other comprehensive loss before reclassifications
|
—
|
|
|
(14,062)
|
|
|
(14,062)
|
|
|
Amounts reclassified from AOCL
|
5,292
|
|
|
—
|
|
|
5,292
|
|
|
AOCL at April 25, 2020
|
$
|
(5,538)
|
|
|
$
|
(91,501)
|
|
|
$
|
(97,039)
|
|
The amounts reclassified from AOCL during fiscal 2020 represent gains and losses on cash flow hedges, net of taxes of $2,460. The impact to the consolidated statements of operations and other comprehensive (loss) income was an increase to interest expense of $10,458, which includes $8,134 of expense related to the early repayment of debt discussed further in Note 6. In addition, due to the adoption of ASU No. 2018-02, $2,707 was reclassified from AOCL to retained earnings in the first quarter of fiscal 2020. See Note 1 for additional information.