NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars, except per share amounts, and shares in thousands)
(Unaudited)
Note 1. General
Basis of Presentation
In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly the financial position of Patterson Companies, Inc. (referred to herein as "Patterson" or in the first person notations "we," "our," and "us") as of October 24, 2020, and our results of operations and cash flows for the periods ended October 24, 2020 and October 26, 2019. Such adjustments are of a normal recurring nature. The results of operations for the three and six months ended October 24, 2020 are not necessarily indicative of the results to be expected for any other interim period or for the year ending April 24, 2021. These financial statements should be read in conjunction with the financial statements included in our 2020 Annual Report on Form 10-K filed on June 24, 2020.
The unaudited condensed consolidated financial statements include the assets and liabilities of PDC Funding Company, LLC ("PDC Funding"), PDC Funding Company II, LLC ("PDC Funding II"), PDC Funding Company III, LLC ("PDC Funding III") and PDC Funding Company IV, LLC ("PDC Funding IV"), which are our wholly owned subsidiaries and separate legal entities formed under Minnesota law. PDC Funding and PDC Funding II are fully consolidated special purpose entities established to sell customer installment sale contracts to outside financial institutions in the normal course of their business. PDC Funding III and PDC Funding IV are fully consolidated special purpose 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 unaudited condensed consolidated financial statements also include the assets and liabilities of Technology Partner Innovations, LLC, which is further described in Note 7.
Fiscal Year End
We operate with a 52-53 week accounting convention with our fiscal year ending on the last Saturday in April. The second quarter of fiscal 2021 and 2020 represents the 13 weeks ended October 24, 2020 and the 13 weeks ended October 26, 2019, respectively. The six months ended October 24, 2020 and October 26, 2019 each included 26 weeks. Fiscal 2021 will include 52 weeks and fiscal 2020 included 52 weeks.
Other Income, Net
Other income, net consisted of the following:
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|
Three Months Ended
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|
Six Months Ended
|
|
|
October 24, 2020
|
|
October 26, 2019
|
|
October 24, 2020
|
|
October 26, 2019
|
|
Gain on investment
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
34,334
|
|
|
Gain (loss) on interest rate swap agreements
|
415
|
|
|
(1,778)
|
|
|
(780)
|
|
|
(5,563)
|
|
|
Other
|
2,808
|
|
|
2,047
|
|
|
6,037
|
|
|
3,415
|
|
|
Other income, net
|
$
|
3,223
|
|
|
$
|
269
|
|
|
$
|
5,257
|
|
|
$
|
32,186
|
|
Comprehensive Income
Comprehensive income is computed as net income including certain other items that are recorded directly to stockholders’ equity. Significant items included in comprehensive income are foreign currency translation adjustments and the effective portion of cash flow hedges, net of tax. Foreign currency translation adjustments do not include a provision for income tax because earnings from foreign operations are considered to be indefinitely reinvested outside the U.S. The income tax expense related to cash flow hedges was $81 and $171 for the three months ended October 24, 2020 and October 26, 2019, respectively. The income tax expense related to cash flow hedges was $161 and $342 for the six months ended October 24, 2020 and October 26, 2019, respectively.
Earnings (Loss) Per Share ("EPS")
The following table sets forth the computation of the weighted average shares outstanding used to calculate basic and diluted EPS:
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Three Months Ended
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|
Six Months Ended
|
|
|
October 24, 2020
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|
October 26, 2019
|
|
October 24, 2020
|
|
October 26, 2019
|
|
Denominator for basic EPS – weighted average shares
|
95,518
|
|
|
94,093
|
|
|
95,341
|
|
|
93,944
|
|
|
Effect of dilutive securities – stock options, restricted stock and stock purchase plans
|
897
|
|
|
—
|
|
|
764
|
|
|
—
|
|
|
Denominator for diluted EPS – weighted average shares
|
96,415
|
|
|
94,093
|
|
|
96,105
|
|
|
93,944
|
|
Potentially dilutive securities representing 1,178 shares and 2,524 shares for the three and six months ended October 24, 2020, respectively, and 3,595 shares and 2,880 shares for the three and six months ended October 26, 2019, respectively, were excluded from the calculation of diluted EPS because their effects were anti-dilutive using the treasury stock method.
For the three and six months ended October 26, 2019, 707 and 769 incremental shares related to dilutive securities, respectively, were not included in the diluted EPS calculation because we reported a loss for these periods. 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.
Revenue Recognition
Revenues are generated from the sale of consumable products, equipment and support, software and support, technical service parts and labor, and other sources. Revenues are recognized when or as performance obligations are satisfied. Performance obligations are satisfied when the customer obtains control of the goods or services.
Consumable, equipment, software and parts sales are recorded upon delivery, except in those circumstances where terms of the sale are FOB shipping point, in which case sales are recorded upon shipment. Technical service labor is recognized as it is provided. Revenue derived from equipment and software support is recognized ratably over the period in which the support is provided.
In addition to revenues generated from the distribution of consumable products under arrangements (buy/sell agreements) where the full market value of the product is recorded as revenue, we earn commissions for services provided under agency agreements. The agency agreement contrasts to a buy/sell agreement in that we do not have control over the transaction, as we do not have the primary responsibility of fulfilling the promise of the good or service and we do not bill or collect from the customer in an agency relationship. Commissions under agency agreements are recorded when the services are provided.
Estimates for returns, damaged goods, rebates, loyalty programs and other revenue allowances are made at the time the revenue is recognized based on the historical experience for such items. The receivables that result from the recognition of revenue are reported net of related allowances. We maintain a valuation allowance based upon the expected collectability of receivables held. Estimates are used to determine the valuation allowance and are based on several factors, including historical collection data, current and forecasted economic trends and credit worthiness of customers. Receivables are written off when we determine the amounts to be uncollectible, typically upon customer bankruptcy or non-response to continuous collection efforts. The portions of receivable amounts that are not expected to be collected during the next twelve months are classified as long-term.
Net sales do not include sales tax as we are considered a pass-through conduit for collecting and remitting sales tax.
Contract Balances
Contract balances represent amounts presented in our condensed consolidated balance sheets when either we have transferred goods or services to the customer or the customer has paid consideration to us under the contract. These contract balances include accounts receivable, contract assets and contract liabilities.
Contract asset balances as of October 24, 2020 and April 25, 2020 were $0 and $1,586, 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 October 24, 2020 and April 25, 2020, contract liabilities of $22,261 and $21,205 were reported in other accrued liabilities, respectively. During the six months ended October 24, 2020, we recognized $9,284 of the amount previously deferred at April 25, 2020.
Recently Issued Accounting Pronouncements
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 adopted the new guidance in the first quarter of fiscal 2021, and it did not have a material impact on our condensed consolidated financial statements.
Reclassifications
Certain prior period amounts in the condensed consolidated statements of cash flows have been reclassified to conform to the current year presentation.
Note 2. Receivables Securitization Program
We are party to certain receivables purchase agreements (the “Receivables Purchase Agreements”) with MUFG Bank, Ltd. ("MUFG") (f.k.a. The Bank of Tokyo-Mitsubishi UFJ, Ltd.), under which MUFG acts as an agent to facilitate the sale of certain Patterson receivables (the “Receivables”) to certain unaffiliated financial institutions (the “Purchasers”). The sale of these receivables is accounted for as a sale of assets under the provisions of ASC 860, Transfers and Servicing. We utilize PDC Funding III and PDC Funding IV to facilitate the sale to fulfill requirements within the agreement. We use a daily unit of account for these Receivables.
The proceeds from the sale of these Receivables comprise a combination of cash and a deferred purchase price (“DPP”) receivable. The DPP receivable is ultimately realized by Patterson following the collection of the underlying Receivables sold to the Purchasers. The amount available under the Receivables Purchase Agreements fluctuates over time based on the total amount of eligible Receivables generated during the normal course of business, with maximum availability of $200,000 as of October 24, 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. As of October 24, 2020 and April 25, 2020, the fair value of outstanding trade receivables transferred to the Purchasers under the facility and derecognized from the condensed consolidated balance sheets were $368,937 and $305,020, respectively. Sales of trade receivables under this facility were $1,507,189 and $981,973, and cash collections from customers on receivables sold were $1,442,620 and $955,705 during the six months ended October 24, 2020 and October 26, 2019, respectively.
The DPP receivable is recorded at fair value within the condensed consolidated balance sheets within prepaid expenses and other current assets. The difference between the carrying amount of the Receivables and the sum of the cash and fair value of the DPP receivable received at time of transfer is recognized as a gain or loss on sale of the related Receivables inclusive of bank fees and allowance for credit losses. We recorded a loss on sale of Receivables within operating expenses in the condensed consolidated statements of operations and other comprehensive income of $615 and $2,067 during the three months ended October 24, 2020 and October 26, 2019, respectively, and $3,001 and $3,545 during the six months ended October 24, 2020 and October 26, 2019, respectively.
The following rollforward summarizes the activity related to the DPP receivable:
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Six Months Ended
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|
October 24, 2020
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|
October 26, 2019
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|
Beginning DPP receivable balance
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|
|
|
|
$
|
117,327
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|
|
$
|
57,238
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|
|
Non-cash additions to DPP receivable
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|
|
|
|
386,159
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|
|
205,389
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|
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Cash collections on DPP receivable
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|
|
|
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(335,228)
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|
|
(187,066)
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Ending DPP receivable balance
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|
|
|
|
$
|
168,258
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|
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$
|
75,561
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Note 3. Customer Financing
As a convenience to our customers, we offer several different financing alternatives, including a third party program and a Patterson-sponsored program. For the third party program, we act as a facilitator between the customer and the third party financing entity with no on-going involvement in the financing transaction. Under the Patterson-sponsored program, equipment purchased by creditworthy customers may be financed up to a maximum of $1,000. We generally sell our customers’ financing contracts to outside financial institutions in the normal course of our business. These financing arrangements are accounted for as a sale of assets under the provisions of ASC 860, Transfers and Servicing. We currently have two arrangements under which we sell these contracts. We use a monthly unit of account for these financing contracts.
First, we operate under an agreement to sell a portion of our equipment finance contracts to commercial paper conduits with MUFG serving as the agent. We utilize PDC Funding to fulfill a requirement of participating in the commercial paper conduit. We receive the proceeds of the contracts upon sale to MUFG. At least 15.0% of the proceeds are held by the conduit as security against eventual performance of the portfolio. This percentage can be greater and is based upon certain ratios defined in the agreement with MUFG. The capacity under the agreement with MUFG at October 24, 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 15.0% of the proceeds are held by the conduit as security against eventual performance of the portfolio. This percentage can be greater and is based upon certain ratios defined in the agreement with Fifth Third. The capacity under the agreement with Fifth Third at October 24, 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 condensed consolidated statements of operations and other comprehensive income. Expenses incurred related to customer financing activities are recorded in operating expenses in our condensed consolidated statements of operations and other comprehensive income.
During the six months ended October 24, 2020 and October 26, 2019, we sold $130,258 and $101,624 of contracts under these arrangements, respectively. In net sales in the condensed consolidated statements of operations and other comprehensive income, we recorded a gain of $1,614 and $3,550 during the three months ended October 24, 2020 and October 26, 2019, respectively, related to these contracts sold. In net sales in the condensed consolidated statements of operations and other comprehensive income, we recorded a gain of $1,272 and $10,896 during the six months ended October 24, 2020 and October 26, 2019, respectively, related to these contracts sold. Cash collections on financed receivables sold were $177,193 and $181,702 during the six months ended October 24, 2020 and October 26, 2019, respectively.
Included in cash and cash equivalents in the condensed consolidated balance sheets are $43,955 and $21,830 as of October 24, 2020 and April 25, 2020, respectively, which represent cash collected from previously sold customer financing contracts that have not yet been settled. Included in current receivables in the condensed consolidated
balance sheets are $59,328 and $21,391 as of October 24, 2020 and April 25, 2020, respectively, of finance contracts we have not yet sold. A total of $612,003 of finance contracts receivable sold under the arrangements was outstanding at October 24, 2020. Since the internal financing program began in 1994, bad debt write-offs have amounted to less than 1% of the loans originated.
The following rollforward summarizes the activity related to the DPP receivable:
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|
Six Months Ended
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|
|
|
|
|
|
|
October 24, 2020
|
|
October 26, 2019
|
|
Beginning DPP receivable balance
|
|
|
|
|
|
$
|
228,019
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|
|
$
|
121,657
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|
|
Non-cash additions to DPP receivable
|
|
|
|
|
|
51,171
|
|
|
5,667
|
|
|
Cash collections on DPP receivable
|
|
|
|
|
|
(73,679)
|
|
|
(25,241)
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|
|
Ending DPP receivable balance
|
|
|
|
|
|
$
|
205,511
|
|
|
$
|
102,083
|
|
The arrangements require us to maintain a minimum current ratio and maximum leverage ratio. We were in compliance with those covenants at October 24, 2020.
Note 4. 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 October 24, 2020, PDC Funding had purchased an interest rate cap from a bank with a notional amount of $525,000 and a maturity date of August 2028. We sold an identical interest rate cap to the same bank. As of October 24, 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 2027. 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 income (loss), net of tax, and is recognized as interest expense over the life of the related debt.
We utilize forward interest rate swap agreements to hedge against interest rate fluctuations that impact the amount of net sales we record related to our customer financing contracts. These interest rate swap agreements do not qualify for hedge accounting treatment and, accordingly, we record the fair value of the agreements as an asset or liability and the change as income or expense during the period in which the change occurs.
As of April 25, 2020, the remaining notional amount for interest rate swap agreements was $634,029, with the latest maturity date in fiscal 2027. During the six months ended October 24, 2020, we entered into forward interest rate swap agreements with a notional amount of $125,458. As of October 24, 2020, the remaining notional amount for interest rate swap agreements was $663,114, with the latest maturity date in fiscal 2028.
Net cash payments of $5,116 and $615 were made during the six months ended October 24, 2020 and October 26, 2019, respectively, to settle a portion of our liabilities related to interest rate swap agreements. These payments are reflected as cash outflows in the condensed consolidated statements of cash flows within net cash used in operating activities.
The following presents the fair value of derivative instruments included in the condensed consolidated balance sheets:
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|
|
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|
|
|
|
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|
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|
|
|
Derivative type
|
Classification
|
October 24, 2020
|
|
April 25, 2020
|
|
Assets:
|
|
|
|
|
|
Interest rate contracts
|
Other non-current assets
|
$
|
365
|
|
|
$
|
204
|
|
|
Liabilities:
|
|
|
|
|
|
Interest rate contracts
|
Other accrued liabilities
|
5,160
|
|
|
6,789
|
|
|
Interest rate contracts
|
Other non-current liabilities
|
10,513
|
|
|
13,060
|
|
|
Total liability derivatives
|
|
$
|
15,673
|
|
|
$
|
19,849
|
|
The following tables present the pre-tax effect of derivative instruments on the condensed consolidated statements of operations and other comprehensive income:
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|
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|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss into Income (Effective Portion)
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
Derivatives in cash flow hedging relationships
|
|
Statements of operations location
|
|
October 24, 2020
|
|
October 26, 2019
|
|
October 24, 2020
|
|
October 26, 2019
|
|
Interest rate contracts
|
|
Interest expense
|
|
$
|
(342)
|
|
|
$
|
(725)
|
|
|
$
|
(682)
|
|
|
$
|
(1,450)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss) Recognized in Income on Derivatives
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
Derivatives not designated as hedging instruments
|
|
Statements of operations location
|
|
October 24, 2020
|
|
October 26, 2019
|
|
October 24, 2020
|
|
October 26, 2019
|
|
Interest rate contracts
|
|
Other income, net
|
|
$
|
415
|
|
|
$
|
(1,778)
|
|
|
$
|
(780)
|
|
|
$
|
(5,563)
|
|
There were no gains or losses recognized in other comprehensive income (loss) on cash flow hedging derivatives during the three and six months ended October 24, 2020 or October 26, 2019.
We recorded no ineffectiveness during the three and six month periods ended October 24, 2020 and October 26, 2019. As of October 24, 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.
Note 5. Fair Value Measurements
Fair value is the price at which an asset could be exchanged in a current transaction between knowledgeable, willing parties. The fair value hierarchy of measurements is categorized into one of three levels based on the lowest level of significant input used:
Level 1 - Quoted prices in active markets for identical assets and liabilities at the measurement date.
Level 2 - Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 - Unobservable inputs for which there is little or no market data available. These inputs reflect management’s assumptions of what market participants would use in pricing the asset or liability.
Our hierarchy for assets and liabilities measured at fair value on a recurring basis is as follows:
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|
|
|
|
|
|
October 24, 2020
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
Cash equivalents
|
$
|
2,269
|
|
|
$
|
2,269
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
DPP receivable - receivables securitization program
|
168,258
|
|
|
—
|
|
|
—
|
|
|
168,258
|
|
|
DPP receivable - customer financing
|
205,511
|
|
|
—
|
|
|
—
|
|
|
205,511
|
|
|
Derivative instruments
|
365
|
|
|
—
|
|
|
365
|
|
|
—
|
|
|
Total assets
|
$
|
376,403
|
|
|
$
|
2,269
|
|
|
$
|
365
|
|
|
$
|
373,769
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Derivative instruments
|
$
|
15,673
|
|
|
$
|
—
|
|
|
$
|
15,673
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
$
|
—
|
|
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 six months ended October 26, 2019, we recorded a pre-tax gain of $34,334 related to one of our investments in other income, net in our condensed consolidated statements of operations and other comprehensive 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 both October 24, 2020 and April 25, 2020, this investment had a carrying value of $51,628. There were no fair value adjustments to such assets during the six months ended October 24, 2020.
Our debt is not measured at fair value in the condensed consolidated balance sheets. The estimated fair value of our debt as of October 24, 2020 and April 25, 2020 was $612,648 and $601,856, respectively, as compared to a carrying value of $588,329 and $587,766 at October 24, 2020 and April 25, 2020, 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 October 24, 2020 and April 25, 2020.
Note 6. Income Taxes
The effective income tax rate for the three months ended October 24, 2020 was 23.7%. For the three months ended October 26, 2019, income tax expense was $6,426 on a loss before taxes of $26,923. The effective income tax rate for the six months ended October 24, 2020 was 24.8%. For the six months ended October 26, 2019, income tax expense was $16,520 on income before taxes of $12,978, for an effective income tax rate of 127.3%. Income tax expense for the three and six months ended October 26, 2019 was adversely impacted by the Fiscal 2020 U.S. Attorney's Office Legal Reserve, as these costs and expenses were not fully deductible.
Note 7. Technology Partner Innovations, LLC ("TPI")
In fiscal 2019, we entered into an agreement with Cure Partners to form TPI, which offers a cloud-based practice management software, NaVetor, to its customers. Patterson and Cure Partners each contributed net assets of $4,000 to form TPI. 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 the three months ended October 24, 2020 and October 26, 2019, net loss attributable to the noncontrolling interest was $234 and $220, respectively. During the six months ended October 24, 2020 and October 26, 2019, net loss attributable to the noncontrolling interest was $439 and $455, respectively, resulting in noncontrolling interests of $1,888 on the condensed consolidated balance sheets at October 24, 2020.
Note 8. Segment and Geographic Data
We present three reportable segments: Dental, Animal Health and Corporate. Dental and Animal Health are strategic business units that offer similar products and services to different customer bases. Dental provides a virtually complete range of consumable dental products, equipment and software, turnkey digital solutions and value-added services to dentists, dental laboratories, institutions, and other healthcare professionals throughout North America. Animal Health is a leading, full-line distributor in North America and the U.K. of animal health products, services and technologies to both the production-animal and companion-pet markets. Our Corporate segment is comprised of general and administrative expenses, including home office support costs in areas such as information technology, finance, legal, human resources and facilities. In addition, customer financing and other miscellaneous sales are reported within Corporate results. Corporate assets consist primarily of cash and cash equivalents, accounts receivable, property and equipment and long-term receivables. We evaluate segment performance based on operating income. The costs to operate the fulfillment centers are allocated to the operating units based on the through-put of the unit.
The following tables present information about our reportable segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
October 24, 2020
|
|
October 26, 2019
|
|
October 24, 2020
|
|
October 26, 2019
|
|
Consolidated net sales
|
|
|
|
|
|
|
|
|
United States
|
$
|
1,279,106
|
|
|
$
|
1,183,047
|
|
|
$
|
2,313,978
|
|
|
$
|
2,273,762
|
|
|
United Kingdom
|
179,695
|
|
|
153,404
|
|
|
329,087
|
|
|
302,818
|
|
|
Canada
|
94,367
|
|
|
82,293
|
|
|
155,940
|
|
|
170,815
|
|
|
Total
|
$
|
1,553,168
|
|
|
$
|
1,418,744
|
|
|
$
|
2,799,005
|
|
|
$
|
2,747,395
|
|
|
Dental net sales
|
|
|
|
|
|
|
|
|
United States
|
$
|
570,769
|
|
|
$
|
513,141
|
|
|
$
|
968,229
|
|
|
$
|
957,783
|
|
|
Canada
|
60,979
|
|
|
51,462
|
|
|
93,814
|
|
|
107,956
|
|
|
Total
|
$
|
631,748
|
|
|
$
|
564,603
|
|
|
$
|
1,062,043
|
|
|
$
|
1,065,739
|
|
|
Animal Health net sales
|
|
|
|
|
|
|
|
|
United States
|
$
|
701,094
|
|
|
$
|
663,953
|
|
|
$
|
1,335,117
|
|
|
$
|
1,300,050
|
|
|
United Kingdom
|
179,695
|
|
|
153,404
|
|
|
329,087
|
|
|
302,818
|
|
|
Canada
|
33,388
|
|
|
30,831
|
|
|
62,126
|
|
|
62,859
|
|
|
Total
|
$
|
914,177
|
|
|
$
|
848,188
|
|
|
$
|
1,726,330
|
|
|
$
|
1,665,727
|
|
|
Corporate net sales
|
|
|
|
|
|
|
|
|
United States
|
$
|
7,243
|
|
|
$
|
5,953
|
|
|
$
|
10,632
|
|
|
$
|
15,929
|
|
|
Total
|
$
|
7,243
|
|
|
$
|
5,953
|
|
|
$
|
10,632
|
|
|
$
|
15,929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
October 24, 2020
|
|
October 26, 20191
|
|
October 24, 2020
|
|
October 26, 20191
|
|
Consolidated net sales
|
|
|
|
|
|
|
|
|
Consumable
|
$
|
1,241,586
|
|
|
$
|
1,127,481
|
|
|
$
|
2,286,567
|
|
|
$
|
2,222,665
|
|
|
Equipment and software
|
220,181
|
|
|
205,790
|
|
|
349,558
|
|
|
348,323
|
|
|
Value-added services and other
|
91,401
|
|
|
85,473
|
|
|
162,880
|
|
|
176,407
|
|
|
Total
|
$
|
1,553,168
|
|
|
$
|
1,418,744
|
|
|
$
|
2,799,005
|
|
|
$
|
2,747,395
|
|
|
Dental net sales
|
|
|
|
|
|
|
|
|
Consumable
|
$
|
357,849
|
|
|
$
|
304,565
|
|
|
$
|
614,452
|
|
|
$
|
608,039
|
|
|
Equipment and software
|
198,135
|
|
|
188,192
|
|
|
311,098
|
|
|
313,876
|
|
|
Value-added services and other
|
75,764
|
|
|
71,846
|
|
|
136,493
|
|
|
143,824
|
|
|
Total
|
$
|
631,748
|
|
|
$
|
564,603
|
|
|
$
|
1,062,043
|
|
|
$
|
1,065,739
|
|
|
Animal Health net sales
|
|
|
|
|
|
|
|
|
Consumable
|
$
|
883,737
|
|
|
$
|
822,916
|
|
|
$
|
1,672,115
|
|
|
$
|
1,614,626
|
|
|
Equipment and software
|
22,046
|
|
|
17,598
|
|
|
38,460
|
|
|
34,447
|
|
|
Value-added services and other
|
8,394
|
|
|
7,674
|
|
|
15,755
|
|
|
16,654
|
|
|
Total
|
$
|
914,177
|
|
|
$
|
848,188
|
|
|
$
|
1,726,330
|
|
|
$
|
1,665,727
|
|
|
Corporate net sales
|
|
|
|
|
|
|
|
|
Value-added services and other
|
$
|
7,243
|
|
|
$
|
5,953
|
|
|
$
|
10,632
|
|
|
$
|
15,929
|
|
|
Total
|
$
|
7,243
|
|
|
$
|
5,953
|
|
|
$
|
10,632
|
|
|
$
|
15,929
|
|
1 Certain sales were reclassified between categories to conform to the current period presentation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
October 24, 2020
|
|
October 26, 2019
|
|
October 24, 2020
|
|
October 26, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
|
|
|
|
|
|
Dental
|
$
|
72,957
|
|
|
$
|
52,632
|
|
|
$
|
110,726
|
|
|
$
|
86,636
|
|
|
Animal Health
|
17,591
|
|
|
18,174
|
|
|
34,990
|
|
|
37,798
|
|
|
Corporate
|
(16,842)
|
|
|
(88,952)
|
|
|
(34,138)
|
|
|
(125,906)
|
|
|
Consolidated operating income (loss)
|
$
|
73,706
|
|
|
$
|
(18,146)
|
|
|
$
|
111,578
|
|
|
$
|
(1,472)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 24, 2020
|
|
April 25, 2020
|
|
Total assets
|
|
|
|
|
Dental
|
$
|
790,788
|
|
|
$
|
704,216
|
|
|
Animal Health
|
1,445,853
|
|
|
1,485,284
|
|
|
Corporate
|
552,383
|
|
|
525,850
|
|
|
Total assets
|
$
|
2,789,024
|
|
|
$
|
2,715,350
|
|
Note 9. Accumulated Other Comprehensive Loss ("AOCL")
The following table summarizes the changes in AOCL as of October 24, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flow
Hedges
|
|
Currency
Translation
Adjustment
|
|
Total
|
|
AOCL at April 25, 2020
|
$
|
(5,538)
|
|
|
$
|
(91,501)
|
|
|
$
|
(97,039)
|
|
|
Other comprehensive loss before reclassifications
|
—
|
|
|
15,916
|
|
|
15,916
|
|
|
Amounts reclassified from AOCL
|
521
|
|
|
—
|
|
|
521
|
|
|
AOCL at October 24, 2020
|
$
|
(5,017)
|
|
|
$
|
(75,585)
|
|
|
$
|
(80,602)
|
|
The amounts reclassified from AOCL during the six months ended October 24, 2020 include gains and losses on cash flow hedges, net of taxes of $161. The impact to the condensed consolidated statements of operations and other comprehensive income was an increase to interest expense of $682 for the six months ended October 24, 2020.
Note 10. Legal Proceedings
From time to time, we become involved in lawsuits, administrative proceedings, government subpoenas, and government investigations (which may, in some cases, involve our entering into settlement agreements or consent decrees), relating to antitrust, commercial, environmental, product liability, intellectual property, regulatory, employment discrimination, securities, and other matters, including matters arising out of the ordinary course of business. The results of any such proceedings cannot be predicted with certainty because such matters are inherently uncertain. Significant damages or penalties may be sought in some matters, and some matters may require years to resolve. We also may be subject to fines or penalties, and equitable remedies (including but not limited to the suspension, revocation or non-renewal of licenses).
We accrue for these matters when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Unless otherwise noted, with respect to the specific legal proceedings and claims described below, the amount or range 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 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 individual defendants Ann B. Gugino, R. Stephen Armstrong and James W. Wiltz. On September 10, 2019, the District Court adopted the Magistrate Judge’s report and recommendation. On September 28, 2020, the District Court granted plaintiffs’ motion to certify the class, appoint class representatives and appoint class counsel. On October 12, 2020, Patterson and the remaining individual defendant, Mr. Anderson, filed a Rule 23(f) petition for interlocutory appeal of the class certification order with the Eighth Circuit Court of Appeals in which the defendants sought clarification of the standard for rebutting the Basic presumption of class-wide reliance in securities class actions. On October 13, 2020, Patterson and Mr. Anderson filed a motion to stay
the underlying proceeding with the District Court pending the possibility of interlocutory appeal. On November 9, 2020, the District Court denied defendants’ motion to stay and on November 12, 2020, the Eighth Circuit Court of Appeals denied defendants’ Rule 23(f) petition. 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.
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. Effective June 30, 2020, the Board adopted a resolution expanding the scope of the previously constituted special litigation committee to include this matter. 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. Johnsen on behalf of Patterson.
On October 27, 2020, Patterson’s Board received a written demand from Matthew Davis to undertake an independent investigation and take action to remedy alleged breaches of fiduciary duties by the following current and former directors and officers of Patterson: John Buck, Scott Anderson, Stephen Armstrong, Ann Gugino, Mark Walchirk, Alex Blanco, Jody Feragen, Sarena Lin, Ellen Rudnick, Neil Schrimsher, Les Vinney, James Wiltz, Paul Guggenheim, David Misiak, Harold Slavkin and Tim Rogan. The demand arises from the allegations that Patterson (a) conspired with Henry Schein and Benco over a multi-year period to boycott GPOs and fix dental supply prices; and (b) issued a series of materially false and misleading statements in connection with such scheme. The demand seeks the institution of an action for breach of fiduciary duty and appropriate remedial measures, including obtaining damages from all persons unjustly enriched. Effective November 20, 2020, Patterson’s Board adopted a resolution expanding the scope of the previously constituted special litigation committee to include this matter. 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 Mr. Davis on behalf of Patterson.