Patterson panies(PDCO) - 2024 Q4 - Annual Report

PART I This section provides an overview of Patterson Companies, Inc.'s business, market segments, competitive landscape, operational strategies, and regulatory environment Item 1. BUSINESS Patterson Companies is a specialty distributor for dental and animal health markets in the U.S., Canada, and U.K., emphasizing value-added services and efficient distribution Forward-Looking Statements This section highlights the inherent uncertainties and risks associated with forward-looking statements in the report - The report contains forward-looking statements, identified by words like "believes," "expects," "anticipates," and "estimates," which are subject to inherent uncertainties, risks, and changes in circumstances that could cause actual results to differ materially[10][11] General Patterson Companies, Inc. operates as a value-added specialty distributor in dental and animal health markets - Patterson Companies, Inc. is a value-added specialty distributor serving the U.S. and Canadian dental supply markets and the U.S., Canadian and U.K. animal health supply markets, operating through Patterson Dental and Patterson Animal Health[14] Business Overview This section presents consolidated net sales across dental, animal health, and corporate segments, highlighting e-commerce integration Consolidated Net Sales (Millions) | Segment | Fiscal Year Ended April 27, 2024 (Millions) | Fiscal Year Ended April 29, 2023 (Millions) | Fiscal Year Ended April 30, 2022 (Millions) | | :------------ | :------------------------------------------ | :------------------------------------------ | :------------------------------------------ | | Dental | $2,489 | $2,492 | $2,516 | | Animal Health | $4,067 | $3,965 | $3,983 | | Corporate | $12 | $14 | $— | | Consolidated Net Sales | $6,568 | $6,471 | $6,499 | - Electronic commerce solutions are integral to the distribution business, requiring continuous adaptation to changing technologies and enhancement of existing services to meet evolving customer demands and competitive offerings[17] The Specialty Distribution Markets We Serve Patterson provides cost-effective logistics and broad product access to diverse customers in fragmented distribution markets - Patterson provides manufacturers with cost-effective logistics and sales professionals to access a diverse customer base, offering value-added services and a broad product selection through a single channel[19] - The distribution of supplies and small equipment is characterized by frequent, small-quantity orders and a need for rapid, reliable fulfillment, due to customers' inability to store large quantities[19] - Consolidation within the industry is expected to continue as distributors seek to combine with larger companies to enhance product offerings and expand customer bases[20] Dental Supply Market The North American dental market is fragmented and growing, driven by demographics and technological advancements - The North American dental supply market, serving approximately 202,000 dentists in the U.S. and 25,000 in Canada, is highly fragmented and continues to grow due to increasing and aging populations, advances in dentistry, and demand for new technologies[21][22] - Patterson supports dental professionals with numerous SKUs and value-added services, including equipment installation, practice management software, electronic claims processing, financial services, and continuing education[23] Animal Health Supply Market The animal health market is fragmented and growing, influenced by pet ownership, expenditures, and global protein demand - The animal health supply market is highly fragmented, serving both production animals (beef, dairy, swine, poultry) and companion animals (dogs, cats, horses), with over 70,000 veterinarians in private practice in the U.S. and Canada, and 20,000 in the U.K.[24] - The global animal health supply market is experiencing growth, driven by increasing companion animal ownership, higher expenditures on pet care, an aging pet population, and advancements in animal health products[25] - The production animal segment is expected to benefit from global population growth and demand for protein, though sales can be volatile due to commodity prices, weather patterns, and economic trends[26] Competition The distribution industry is highly competitive, with Patterson differentiating through service, sales force, and extensive product lines - The distribution industry is highly competitive, with national, regional, and local full-service distributors, as well as manufacturers selling directly to end-users[27] - Patterson differentiates itself through premium customer service, a highly qualified sales force, trained service technicians, extensive product lines, technology solutions, accurate and timely delivery, strategic locations, and competitive pricing[28] - Key competitors include Henry Schein, Inc., Benco Dental Supply Company, Burkhart Dental Supply in dental, and Cencora/MWI Animal Health and Covetrus, Inc. in animal health, alongside online retailers like Amazon and Chewy.com[29][31] Competitive Strengths Patterson leverages its long history, brand awareness, value-added services, and operational efficiencies for competitive advantage - Patterson leverages over 140 years of experience and brand awareness, emphasizing value-added, full-service capabilities, broad product offerings, customer relationships, cost-effective purchasing, technology, and operational efficiencies[33][36] Dental Segment - Products, Services and Sources of Supply Patterson Dental distributes consumable products, technology, and equipment, with significant supplier concentration - Patterson Dental is a leading distributor in North America, serving over 100,000 dental practices with consumable products, technology, equipment, and practice optimization solutions, including 3,500 private-label SKUs[35] Dental Segment Product Categories (Percentage of Net Sales) | Category | Fiscal Year Ended April 27, 2024 | Fiscal Year Ended April 29, 2023 | Fiscal Year Ended April 30, 2022 | | :--------------- | :------------------------------- | :------------------------------- | :------------------------------- | | Consumable | 57 % | 55 % | 57 % | | Equipment | 31 | 33 | 32 | | Value-added services and other | 12 | 12 | 11 | | Total | 100 % | 100 % | 100 % | - Patterson Dental's top ten supply vendors accounted for approximately 60% of total cost of sales in fiscal 2024, indicating significant supplier concentration[36] Animal Health Segment - Products, Services and Sources of Supply Patterson Animal Health offers a broad range of SKUs from numerous manufacturers, with high vendor concentration - Patterson Animal Health is a leading distributor in the U.S., Canada, and U.K., offering approximately 100,000 SKUs (2,000 private-label) from over 2,000 manufacturers to more than 50,000 customers[37] Animal Health Segment Product Categories (Percentage of Net Sales) | Category | Fiscal Year Ended April 27, 2024 | Fiscal Year Ended April 29, 2023 | Fiscal Year Ended April 30, 2022 | | :--------------- | :------------------------------- | :------------------------------- | :------------------------------- | | Consumable | 95 % | 96 % | 96 % | | Equipment | 3 | 3 | 3 | | Value-added services and other | 2 | 1 | 1 | | Total | 100 % | 100 % | 100 % | - Patterson Animal Health's top 10 manufacturers comprised approximately 66% of total cost of sales in fiscal 2024, highlighting significant vendor concentration[38] Sales, Marketing and Distribution Patterson serves over 100,000 customers through multi-touchpoint marketing and efficient, centralized distribution - Patterson serves over 100,000 customers across the U.S., Canada, and U.K., with no single customer accounting for more than 10% of sales[39] - The company employs a multi-touchpoint shopping experience, including online platforms (pattersondental.com, pattersonvet.com), print showcases, direct marketing, loyalty programs, and trade show participation[43] - Patterson maintains sufficient inventories at strategically located fulfillment centers for prompt delivery, with purchasing centralized and managed by a real-time perpetual inventory system[45] Impacts of COVID-19 The COVID-19 pandemic caused significant business impacts, including supply chain disruptions and inventory adjustments - The COVID-19 pandemic significantly impacted businesses in fiscal 2021, leading to cost reduction measures, supply chain disruptions, increased PPE demand, and subsequent inventory write-downs due to price drops[46] - While restrictive measures have been lifted, concerns remain about potential resurgence of COVID-19 or new public health outbreaks, which could trigger additional business impacts[47] Geographic Information Details on revenues and long-lived assets by geographic area are provided in the Consolidated Financial Statements - Information on revenues and long-lived assets by geographic area is provided in Note 14 to the Consolidated Financial Statements[49] Seasonality and Other Factors Affecting Our Business and Quarterly Results Quarterly results can fluctuate due to various factors, including sales, marketing, supplier changes, and economic conditions - The business is generally not seasonal, but some products sell more in winter or summer, and unusual weather can impact sales volumes[50] - Quarterly results can fluctuate due to factors like sales and marketing expenditures, supplier pricing changes, new product introductions, supplier contracts, costs of new applications, data security breaches, regulatory actions, and general economic conditions[50][54] Governmental Regulation Patterson is subject to extensive federal, state, and foreign regulations, particularly in healthcare, data privacy, and controlled substances - Patterson is subject to extensive federal, state, and foreign laws and regulations, particularly in healthcare, covering fraud and abuse, anti-bribery, controlled substances, medical devices, and data privacy[52][54] - Compliance with these evolving regulations, including those from the FDA, USDA, EPA, DEA, and FTC, is critical, and non-compliance could lead to criminal or civil sanctions, product recalls, and financial losses[56][63][64] - The Drug Supply Chain Security Act (DSCSA) requires an electronic, interoperable system for tracing prescription drugs, with full implementation extended to November 27, 2024, to avoid supply chain disruption[68] - The company's software products may be subject to FDA regulation as medical devices, and data privacy laws like HIPAA, CCPA, CPRA, and GDPR impose significant compliance costs and risks[95][96][99][100][101] Proprietary Rights Patterson protects its trademarks and intellectual property through registrations and legal measures - Patterson holds trademarks for its name and logo, with U.S. registrations having 10-year renewable terms, and intends to protect them fully[112] Human Capital Patterson's human capital strategy focuses on attracting and retaining talent through competitive benefits and diversity initiatives - As of April 27, 2024, Patterson had approximately 7,600 full-time employees, with 6,200 in the U.S.[114] - The company's human capital strategy focuses on attracting and retaining talent through competitive pay, comprehensive benefits (medical, dental, vision, mental health, 401(k) match, ESPP), and career development opportunities[113][116][119] - Patterson is committed to diversity, equity, and inclusion, with 41.9% of its U.S. workforce and 41.2% of management being female, and 25.1% of its U.S. workforce and 16.2% of management being ethnically diverse as of April 27, 2024[117][118] Environment Patterson aims to track and reduce its environmental impact through internal systems and supply chain collaboration - Patterson aims to track and reduce its environmental impact through internal systems, third-party expertise, and collaboration with supply chain partners to minimize shipping materials and maximize packaging efficiencies[121] Available Information Patterson provides public access to its SEC filings, including Annual and Quarterly Reports, on its investor relations website - Patterson makes its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and other SEC filings available free of charge on its website (www.pattersoncompanies.com) in the Investor Relations section[122] Item 1A. RISK FACTORS Patterson Companies faces risks from supplier dependence, distribution disruptions, customer retention, technology, competition, and regulatory compliance - Patterson Companies, Inc. is a value-added specialty distributor serving the U.S. and Canadian dental supply markets and the U.S., Canadian and U.K. animal health supply markets through Patterson Dental and Patterson Animal Health[14] Consolidated Net Sales (Millions) | Segment | Fiscal Year Ended April 27, 2024 (Millions) | Fiscal Year Ended April 29, 2023 (Millions) | Fiscal Year Ended April 30, 2022 (Millions) | | :------------ | :------------------------------------------ | :------------------------------------------ | :------------------------------------------ | | Dental | $2,489 | $2,492 | $2,516 | | Animal Health | $4,067 | $3,965 | $3,983 | | Corporate | $12 | $14 | $— | | Consolidated Net Sales | $6,568 | $6,471 | $6,499 | - The company's business strategy focuses on emphasizing differentiated, value-added, full-service capabilities, offering broad product and service offerings at competitive prices, focusing on customer relationships and exceptional customer service, cost-effective purchasing and efficient distribution, using technology to enhance customer service, improving operating efficiencies, and growing through internal expansion and acquisitions[33][36] - As of April 27, 2024, Patterson had approximately 7,600 full-time employees, with 6,200 in the U.S. The workforce was 41.9% female and 25.1% ethnically diverse in the U.S.[114][118] Company Risks Patterson faces risks related to supplier dependence, customer retention, and the increasing use of AI systems - Patterson is dependent on suppliers for products, with considerable concentration in animal health and dental businesses with a few key suppliers. Supply chain disruptions, price increases, and changes in supplier relationships (e.g., direct sales) pose risks[126][128][130] - Customer retention and business development rely heavily on sales representatives and service technicians, and the inability to attract or retain qualified employees, especially those with technical expertise, could harm the business[132] - The company's growing use of AI systems in internal operations and products introduces risks such as flaws, biases, malfunctions, ethical/legal challenges, non-compliance with data protection, and increased cybersecurity threats[153] Industry Risks The company faces intense competition, market consolidation, and shifts to e-commerce in the dental and animal health sectors - The dental and animal health supply markets are highly competitive, with risks from national, regional, and local distributors, as well as manufacturers selling directly to end-users, leading to potential pricing pressures and reduced margins[162] - Consolidation among dental and animal health manufacturers and distributors, including vertical integration in the production animal market, could increase competition and limit purchasing decision-makers, affecting margins[163] - Increased over-the-counter (OTC) and e-commerce sales of dental and companion animal health products, including by major online retailers, could adversely affect Patterson's business by shifting consumer purchasing away from traditional distribution channels[169] Litigation and Regulatory Risks Patterson is exposed to litigation, evolving healthcare fraud laws, and data privacy regulations, posing compliance and financial risks - Patterson is subject to various litigation and governmental inquiries, including product liability, intellectual property, employment claims, and healthcare fraud and abuse laws, which can divert resources, incur substantial costs, and harm reputation[170][171] - Failure to comply with U.S. and foreign laws and regulations governing pharmaceuticals and controlled substances, including the DSCSA and UDI system, could lead to penalties, product recalls, and loss of licenses[174][178] - Evolving data privacy laws (HIPAA, CCPA, CPRA, GDPR) and regulations concerning software as medical devices could require significant product changes, incur substantial liabilities, and expose the company to claims from customers and governmental agencies[180][181][183] General Risks Uncertain macro-economic conditions, including inflation and interest rates, could adversely affect demand and operating costs - Uncertain macro-economic conditions, including inflationary pressure, higher interest rates, and geopolitical tensions, could materially adversely affect demand for dental and animal health products and services, increasing operating costs and impacting consumer spending[186][187] Item 1B. UNRESOLVED STAFF COMMENTS There are no unresolved staff comments to report - No unresolved staff comments were reported[188] Item 1C. CYBERSECURITY Patterson integrates cybersecurity risk management into its enterprise framework, with Board oversight and proactive measures - Patterson's cybersecurity risk management is integrated into its enterprise risk framework, with oversight from the Board and Audit and Finance Committee, and involves a cross-functional Cybersecurity Risk Committee[189][198] - The company implements various security measures, including encryption, antivirus protection, multi-factor authentication, intrusion monitoring, network segmentation, and regular employee cybersecurity training[190][191] - As of the report date, Patterson is not aware of any cybersecurity threats that have materially affected or are reasonably likely to materially affect its business strategy, results of operations, or financial condition, despite experiencing non-material security incidents[195] - The Chief Information Security Officer (CISO), with over 25 years of experience and industry certifications, is responsible for developing and implementing the cybersecurity program and reports regularly to management and the Audit and Finance Committee[196][198] Item 2. PROPERTIES Patterson owns its principal offices and most distribution facilities, with extensive property holdings across its segments - Patterson owns its principal executive offices in St. Paul, Minnesota, and most of its distribution facilities, which are considered to be in good operating condition[199] - Patterson Logistics Services, Inc. (PLSI) operates 13 fulfillment centers in the U.S. (seven primary), totaling 1.0 million square feet, with about 90% of the space owned[200][201] - The Dental segment has approximately 55 sales and administrative offices in the U.S. and 10 in Canada, supported by fulfillment centers in Quebec and Alberta[202] - The Animal Health segment operates approximately 100 properties in the U.S., Canada, and U.K., including fulfillment centers, storage, sales offices, retail stores, and 3 laboratory sites in the U.K.[203] Item 3. LEGAL PROCEEDINGS Information regarding legal proceedings is detailed in Note 17 to the Consolidated Financial Statements - For a discussion of Legal Proceedings, refer to Note 17 - Litigation of the Notes to the Consolidated Financial Statements included under Item 8[204] Item 4. MINE SAFETY DISCLOSURES This item is not applicable to Patterson Companies, Inc - Mine Safety Disclosures are not applicable to the registrant[205] PART II This section covers market information, financial performance, liquidity, capital resources, and critical accounting policies Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Patterson's common stock trades on NASDAQ, with details on dividend declarations and share repurchase programs - Patterson's common stock trades on the NASDAQ Global Select Market under the symbol "PDCO"[208] - As of June 10, 2024, there were 1,570 holders of record for common stock[208] - A quarterly cash dividend of $0.26 per share was declared throughout fiscal 2024, with future dividends subject to Board approval based on earnings, capital requirements, and financial condition[209] Share Repurchase Activity (Fourth Quarter Fiscal 2024) | Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Dollar Value of Shares That May Yet Be Purchased Under the Plan | | :-------------------------------- | :------------------------------- | :--------------------------- | :----------------------------------------------------------------------- | :-------------------------------------------------------------------- | | January 28, 2024 to February 24, 2024 | — | $— | — | $194,920,532 | | February 25, 2024 to March 23, 2024 | 497,859 | $29.97 | 497,859 | $500,000,000 | | March 24, 2024 to April 27, 2024 | — | $— | — | $500,000,000 | | Total | 497,859 | $29.97 | 497,859 | $500,000,000 | Item 6. [RESERVED] This item is reserved and contains no information Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section analyzes Patterson's financial performance, liquidity, and capital resources across its Dental, Animal Health, and Corporate segments - Patterson operates three reportable segments: Dental, Animal Health, and Corporate. Dental and Animal Health are strategic business units offering similar products and services to different customer bases[215] - Consolidated net sales in fiscal 2024 increased by 1.5% to $6,568.3 million from $6,471.5 million in fiscal 2023, with a favorable foreign exchange impact of 0.4% and acquisitions contributing 0.3%[227] Consolidated Financial Performance (as % of Net Sales) | Metric | Fiscal Year Ended April 27, 2024 | Fiscal Year Ended April 29, 2023 | Fiscal Year Ended April 30, 2022 | | :------------------------------------ | :------------------------------- | :------------------------------- | :------------------------------- | | Net sales | 100.0 % | 100.0 % | 100.0 % | | Cost of sales | 79.0 | 78.8 | 80.2 | | Gross profit | 21.0 | 21.2 | 19.8 | | Operating expenses | 17.1 | 16.9 | 17.4 | | Operating income | 3.9 | 4.3 | 2.4 | | Other income (expense), net | (0.2) | (0.1) | 1.7 | | Income before taxes | 3.7 | 4.2 | 4.1 | | Income tax expense | 0.9 | 1.0 | 1.0 | | Net income | 2.8 | 3.2 | 3.1 | | Net loss attributable to noncontrolling interests | — | — | — | | Net income attributable to Patterson Companies, Inc. | 2.8 % | 3.2 % | 3.1 % | - Net income attributable to Patterson Companies Inc. was $185.9 million in fiscal 2024, down from $207.6 million in fiscal 2023. Diluted EPS decreased to $1.98 in fiscal 2024 from $2.12 in fiscal 2023[237] Overview Patterson's fiscal year structure and key analytical aspects for business performance are outlined - Patterson's fiscal year ends on the last Saturday in April, with fiscal 2024 and 2023 consisting of 52 weeks, and fiscal 2022 consisting of 53 weeks[217] - Key aspects for analyzing the business include market growth, internal growth, growth through acquisition, and a continuous focus on cost control and efficiency[218] Factors Affecting Our Results Macro-economic conditions, litigation settlements, and investment gains significantly influenced the company's financial results - Macro-economic conditions, including cost inflation and higher interest rates, affect customer investment in capital equipment and purchase volumes. Interest expense on variable rate debt increased due to higher rates[219] - In fiscal 2022, Patterson recorded a pre-tax reserve of $63.0 million for a federal securities class action settlement, partially offset by $27.0 million in probable insurance recoveries, resulting in a net expense of $36.0 million[221][222] - In fiscal 2022, the company recognized aggregate pre-tax gains of $87.8 million from the sale of a portion of its investment in Vetsource and a non-cash gain reflecting the increased carrying value of the remaining investment[223] Results of Operations This section details consolidated financial performance, including net sales, gross profit, and operating income by segment Consolidated Financial Performance (as % of Net Sales) | Metric | Fiscal Year Ended April 27, 2024 | Fiscal Year Ended April 29, 2023 | Fiscal Year Ended April 30, 2022 | | :------------------------------------ | :------------------------------- | :------------------------------- | :------------------------------- | | Net sales | 100.0 % | 100.0 % | 100.0 % | | Cost of sales | 79.0 | 78.8 | 80.2 | | Gross profit | 21.0 | 21.2 | 19.8 | | Operating expenses | 17.1 | 16.9 | 17.4 | | Operating income | 3.9 | 4.3 | 2.4 | | Other income (expense), net | (0.2) | (0.1) | 1.7 | | Income before taxes | 3.7 | 4.2 | 4.1 | | Income tax expense | 0.9 | 1.0 | 1.0 | | Net income | 2.8 | 3.2 | 3.1 | | Net loss attributable to noncontrolling interests | — | — | — | | Net income attributable to Patterson Companies, Inc. | 2.8 % | 3.2 % | 3.1 % | - Dental segment net sales decreased 0.1% to $2,488.6 million in fiscal 2024, primarily due to a 7.0% decrease in equipment sales, partially offset by a 4.2% increase in consumables[228] - Animal Health segment net sales increased 2.6% to $4,067.1 million in fiscal 2024, driven by market share gains in Production Animal categories (beef, dairy, swine), with a favorable foreign exchange impact of 0.8% and acquisitions contributing 0.5%[229] - Consolidated gross profit margin decreased by 20 basis points to 21.0% in fiscal 2024, with approximately 10 basis points of decline attributed to the Change Healthcare cybersecurity attack impacting dental insurance claims processing[230] - Operating income for fiscal 2024 was $252.9 million (3.9% of net sales), down from $276.0 million (4.3% of net sales) in fiscal 2023, primarily due to increased operating expenses and investments in commercial software[232][233] Liquidity and Capital Resources Patterson's cash flow activities, liquidity sources, and capital management strategies are discussed - Net cash used in operating activities was $789.4 million in fiscal 2024, primarily due to the Receivables Securitization Program[240] - Net cash provided by investing activities was $959.5 million in fiscal 2024, including $1,028.3 million from collections of deferred purchase price receivables[241] - Net cash used in financing activities was $215.9 million in fiscal 2024, driven by $229.5 million in share repurchases and $98.3 million in dividend payments, partially offset by a $141.0 million draw on the revolving line of credit[242] - As of April 27, 2024, Patterson had $114.5 million in cash and cash equivalents. The company expects existing liquidity sources to be sufficient for working capital and business financing over the next fiscal year[248][249] Customer Financing Arrangements Patterson offers customer financing programs, typically selling contracts to third-party financial institutions - Patterson offers customer financing through a third-party program and a Patterson-sponsored program, generally selling financing contracts to outside financial institutions[251] - The company sells a portion of its equipment finance contracts to commercial paper conduits, with MUFG Bank, Ltd. as agent, and maintains a capacity of $575,000 under this agreement as of April 27, 2024[252] Contractual Obligations This section outlines Patterson's long-term debt, interest, and operating lease obligations Contractual Obligations as of April 27, 2024 (in thousands) | Obligation | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | | :----------------- | :---------- | :--------------- | :---------- | :---------- | :---------------- | | Long-term debt principal | $453,000 | $122,750 | $26,250 | $304,000 | $— | | Long-term debt interest | $79,759 | $23,827 | $38,136 | $17,796 | $— | | Operating leases | $147,926 | $38,047 | $55,979 | $27,833 | $26,067 | | Total | $680,685| $184,624 | $120,365| $349,629| $26,067 | - The gross liability for uncertain tax positions, including interest and penalties, was $9.8 million as of April 27, 2024, but is excluded from the contractual obligations schedule due to inability to reasonably estimate future changes or cash settlement requirements[254] Working Capital Management Key metrics for working capital management, including days sales outstanding and inventory turnover, are presented Working Capital Management Metrics | Metric | Fiscal Year Ended April 27, 2024 | Fiscal Year Ended April 29, 2023 | Fiscal Year Ended April 30, 2022 | | :------------------ | :------------------------------- | :------------------------------- | :------------------------------- | | Days sales outstanding | 28.6 | 25.0 | 25.2 | | Inventory turnover | 6.2 | 6.2 | 6.6 | Foreign Operations Foreign sales are derived from Canadian and U.K. operations, with currency fluctuations impacting net sales - Foreign sales are derived from Dental operations in Canada and Animal Health operations in Canada and the U.K.[257] - Fluctuations in currency exchange rates positively impacted net sales by $27.8 million in fiscal 2024, but adversely affected net sales by $108.5 million in fiscal 2023. This risk is not considered material to consolidated operations[257] Critical Accounting Policies and Estimates Patterson's critical accounting policies involve significant estimates for revenue, inventory, software, goodwill, and income taxes - Patterson's critical accounting policies involve estimates and judgments for revenue recognition (returns, rebates, loyalty programs), inventory valuation (LIFO method, obsolescence reserves), and recoverability of software development costs, goodwill, and long-lived assets[258][259][266][267][268][271] - No significant impairments were recorded in fiscal 2024, 2023, or 2022 for software development costs, goodwill, or long-lived assets[268][270][272] - Income tax accounting requires significant judgments, with tax liabilities recognized based on estimates of potential additional taxes and interest, and valuation allowances established for deferred tax assets if full realization is unlikely[272][273][275] Recent Accounting Pronouncements Patterson is evaluating the impact of new FASB ASUs on income taxes and segment reporting, effective in future fiscal years - The FASB issued ASU No. 2023-09 (Income Taxes) and ASU No. 2023-07 (Segment Reporting), requiring additional disclosures. Patterson is currently evaluating the impact of adopting these pronouncements, effective for fiscal years 2026 and 2025, respectively[359][360] Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Patterson is exposed to market risks from foreign currency fluctuations and interest rate changes, managed through hedging strategies - Patterson is exposed to market risk from foreign currency rate fluctuations (primarily Canadian Dollars and British Pounds) and changes in interest rates[277][278] - A hypothetical 10% change in the U.S. dollar's value would have changed net sales by approximately $102.7 million and income before taxes by approximately $2.8 million for fiscal year ended April 27, 2024[278] - With variable interest rates on its $300.0 million term loan and $700.0 million revolving credit facility, a 100 basis point change in interest rates would have a $4.8 million annual impact on income before taxes[279] - Interest rate swap agreements are used to hedge against interest rate fluctuations impacting customer financing contracts, limiting the estimated annual impact on income before taxes to less than $1.0 million for a 10% interest rate change[281] Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA This section presents audited consolidated financial statements, including balance sheets, income statements, cash flows, and detailed accounting notes - Ernst & Young LLP issued an unqualified opinion on Patterson Companies, Inc.'s internal control over financial reporting as of April 27, 2024, based on COSO criteria[283] - Ernst & Young LLP also issued an unqualified opinion on the consolidated financial statements for the three years ended April 27, 2024, confirming fair presentation in accordance with U.S. GAAP[291] Consolidated Balance Sheets (in thousands) | ASSETS | April 27, 2024 | April 29, 2023 | | :---------------------------------------- | :------------- | :------------- | | Current assets: | | | | Cash and cash equivalents | $114,462 | $159,669 | | Receivables, net | $547,287 | $477,384 | | Inventory, net | $782,898 | $795,072 | | Prepaid expenses and other current assets | $334,116 | $351,011 | | Total current assets | $1,778,763 | $1,783,136 | | Property and equipment, net | $229,081 | $212,283 | | Operating lease right-of-use assets, net | $122,295 | $92,956 | | Long-term receivables, net | $129,876 | $121,717 | | Goodwill | $156,328 | $156,420 | | Identifiable intangibles, net | $193,261 | $231,873 | | Investments | $166,320 | $160,022 | | Other non-current assets, net | $120,808 | $120,739 |\ | Total assets | $2,896,732 | $2,879,146 | | LIABILITIES AND STOCKHOLDERS' EQUITY | | | | Current liabilities: | | | | Accounts payable | $745,375 | $724,993 | | Accrued payroll expense | $78,211 | $82,253 | | Other accrued liabilities | $167,399 | $168,696 | | Operating lease liabilities | $32,815 | $28,390 | | Current maturities of long-term debt | $122,750 | $36,000 | | Borrowings on revolving credit | $186,000 | $45,000 | | Total current liabilities | $1,332,550 | $1,085,332 | | Long-term debt | $328,911 | $451,231 | | Non-current operating lease liabilities | $92,464 | $67,376 | | Deferred income taxes | $104,521 | $119,143 | | Other non-current liabilities | $36,554 | $37,529 | | Total liabilities | $1,895,000 | $1,760,611 | | Stockholders' equity: | | | | Common stock | $897 | $964 | | Additional paid-in capital | $258,679 | $233,706 | | Accumulated other comprehensive loss | $(89,915) | $(89,262) | | Retained earnings | $831,483 | $972,127 | | Total Patterson Companies, Inc. stockholders' equity | $1,001,144 | $1,117,535 | | Noncontrolling interests | $588 | $1,000 | | Total stockholders' equity | $1,001,732 | $1,118,535 | | Total liabilities and stockholders' equity | $2,896,732 | $2,879,146 | Consolidated Statements of Operations and Other Comprehensive Income (in thousands, except per share amounts) | Metric | Fiscal Year Ended April 27, 2024 | Fiscal Year Ended April 29, 2023 | Fiscal Year Ended April 30, 2022 | | :---------------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | | Net sales | $6,568,272 | $6,471,471 | $6,499,405 | | Cost of sales | $5,188,030 | $5,098,526 | $5,210,318 | | Gross profit | $1,380,242 | $1,372,945 | $1,289,087 | | Operating expenses | $1,127,318 | $1,096,974 | $1,132,085 | | Operating income | $252,924 | $275,971 | $157,002 | | Other income (expense): | | | | | Gains on investments | — | — | $101,809 | | Other income, net | $35,039 | $27,826 | $27,731 | | Interest expense | $(44,910) | $(33,636) | $(20,288) | | Income before taxes | $243,053 | $270,161 | $266,254 | | Income tax expense | $57,534 | $63,563 | $64,540 | | Net income | $185,519 | $206,598 | $201,714 | | Net loss attributable to noncontrolling interests | $(412) | $(959) | $(1,496) | | Net income attributable to Patterson Companies, Inc. | $185,931 | $207,557 | $203,210 | | Earnings per share attributable to Patterson Companies, Inc.: | | | | | Basic | $2.00 | $2.14 | $2.09 | | Diluted | $1.98 | $2.12 | $2.06 | | Weighted average shares: | | | | | Basic | 92,969 | 97,027 | 97,277 | | Diluted | 93,679 | 97,815 | 98,514 | | Dividends declared per common share | $1.04 | $1.04 | $1.04 | | Comprehensive income | | | | | Net income | $185,519 | $206,598 | $201,714 | | Foreign currency translation gain (loss) | $(1,695) | $(8,788) | $(19,966) | | Cash flow hedges, net of tax | $1,042 | $1,042 | $1,042 | | Comprehensive income | $184,866 | $198,852 | $182,790 | Consolidated Statements of Cash Flows (in thousands) | Operating activities: | Fiscal Year Ended April 27, 2024 | Fiscal Year Ended April 29, 2023 | Fiscal Year Ended April 30, 2022 | | :-------------------------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | | Net income | $185,519 | $206,598 | $201,714 | | Adjustments to reconcile net income to net cash used in operating activities: | | | | | Depreciation | $49,617 | $45,772 | $44,180 | | Amortization | $38,539 | $37,932 | $37,812 | | Gains on investments | — | — | $(101,809) | | Bad debt expense | $2,542 | $3,450 | $2,769 | | Stock-based compensation | $17,871 | $15,543 | $23,805 | | Deferred income taxes | $(13,523) | $(1,993) | $(4,718) |\ | Non-cash losses (gains) and other, net | $204 | $654 | $(1,431) | | Change in assets and liabilities: | | | | | Receivables | $(1,102,618) | $(1,047,075) | $(1,144,833) | | Inventory | $11,039 | $(11,086) | $(53,871) | | Accounts payable | $21,343 | $43,095 | $80,904 | | Accrued liabilities | $(2,788) | $(21,714) | $(27,630) | | Other changes from operating activities, net | $2,877 | $(26,028) | $(37,886) | | Net cash used in operating activities | $(789,378) | $(754,852) | $(980,994) | | Investing activities: | | | | | Additions to property and equipment and software | $(67,626) | $(64,220) | $(38,308) | | Payments related to acquisitions, net of cash acquired | $(1,108) | $(33,280) | $(19,793) | | Collection of deferred purchase price receivables | $1,028,277 | $998,912 | $1,213,497 | | Sale of investments | — | — | $75,942 | | Payments related to investments | — | $(15,000) | — | | Other investing activities | — | $15,155 | $7,690 | | Net cash provided by investing activities | $959,543 | $901,567 | $1,239,028 | | Financing activities: | | | | | Dividends paid | $(98,333) | $(101,346) | $(101,111) | | Repurchases of common stock | $(229,508) | $(55,492) | $(35,000) | | Payments on long-term debt | $(36,000) | $(1,500) | $(100,750) | | Draw (payment) on revolving credit | $141,000 | $16,000 | $(24,000) | | Other financing activities | $6,936 | $15,854 | $7,627 | | Net cash used in financing activities | $(215,905) | $(126,484) | $(253,234) | | Effect of exchange rate changes on cash | $533 | $(2,576) | $(6,030) | | Net change in cash and cash equivalents | $(45,207) | $17,655 | $(1,230) | | Cash and cash equivalents at beginning of period | $159,669 | $142,014 | $143,244 | | Cash and cash equivalents at end of period | $114,462 | $159,669 | $142,014 | 1. Summary of Significant Accounting Policies Patterson's key accounting policies cover fiscal year, inventory valuation, goodwill impairment, and revenue recognition - Patterson's fiscal year ends on the last Saturday in April; fiscal 2024 and 2023 were 52 weeks, while fiscal 2022 was 53 weeks[312] - Inventory is valued at the lower of cost or market, using the LIFO method for U.S. inventories (81% of total in fiscal 2024 and 2023) and FIFO for foreign inventories[315] - Goodwill and indefinite-lived intangible assets are tested for impairment annually, or more often if circumstances indicate, using qualitative or quantitative assessments. No impairments were recorded in fiscal 2024, 2023, or 2022[318][320][323] - Revenue is recognized when performance obligations are satisfied, with estimates for returns, rebates, and loyalty programs made at the time of recognition. Customer financing contracts at below-market rates include a subsidy recorded as a reduction to net sales[329][332][334] 2. Acquisitions Patterson completed acquisitions in fiscal 2023, expanding its Animal Health platforms and recording associated goodwill and intangibles - In fiscal 2024, Patterson paid $1.1 million for a holdback related to the acquisition of Miller Vet Holdings, LLC[361] - In fiscal 2023, Patterson acquired Relief Services for Veterinary Practitioners and Animal Care Technologies (RSVP and ACT) and Dairy Tech, Inc., expanding its Companion Animal and Production Animal value-added platforms[362] - The total purchase price for fiscal 2023 acquisitions was $37.5 million, including holdbacks, resulting in $17.3 million in identifiable intangibles and $16.0 million in goodwill recorded within the Animal Health segment[363] 3. Cash and Cash Equivalents This section details the composition of cash and cash equivalents, including cash from sold customer financing contracts Cash and Cash Equivalents (in thousands) | Category | April 27, 2024 | April 29, 2023 | | :---------------- | :------------- | :------------- | | Cash on hand | $109,777 | $111,892 | | Money market funds| $4,685 | $47,777 | | Total | $114,462 | $159,669 | - Included in cash and cash equivalents are $33.8 million (2024) and $33.1 million (2023) representing cash collected from previously sold customer financing contracts not yet settled[365] 4. Receivables Securitization Program Patterson sells certain receivables to financial institutions, accounting for them as asset sales with deferred purchase price receivables - Patterson sells certain receivables to unaffiliated financial institutions through receivables purchase agreements with MUFG Bank, Ltd., accounted for as asset sales[366] - The proceeds include cash and a deferred purchase price (DPP) receivable, which is realized upon collection of underlying receivables. The DPP receivable balance was $198.8 million at April 27, 2024[367][370] - Losses of $13.9 million were recorded in operating expenses in fiscal 2024 related to the sale of receivables under this program[369] 5. Customer Financing Patterson offers customer financing for equipment, selling contracts to third-party financial institutions, primarily through MUFG - Patterson offers customer financing for equipment purchases, generally selling these contracts to outside financial institutions, primarily through commercial paper conduits with MUFG as agent[371][372] - In fiscal 2024, Fifth Third Bank sold and assigned its remaining purchased customer financing contracts to the MUFG facility, ending Patterson's agreement with Fifth Third and expanding MUFG capacity to $575 million[374] - Losses of $11.0 million were recorded in net sales in fiscal 2024 related to these contracts. The DPP receivable balance for customer financing was $114.3 million at April 27, 2024[377][380] 6. Derivative Financial Instruments Patterson uses interest rate derivatives to manage risk, though most do not qualify for hedge accounting - Patterson uses derivative financial instruments, primarily interest rate cap agreements and forward interest rate swap agreements, to manage interest rate risks, but these generally do not qualify for hedge accounting[381][383][385] Fair Value of Derivative Instruments (in thousands) | Derivative Type | Classification | April 27, 2024 | April 29, 2023 | | :-------------- | :--------------------------------- | :------------- | :------------- | | Assets: | | | | | Interest rate contracts | Prepaid expenses and other current assets | $5,781 | $5,875 | | Interest rate contracts | Other non-current assets | $21,193 | $23,210 | | Total asset derivatives | | $26,974 | $29,085 | | Liabilities: | | | | | Interest rate contracts | Other accrued liabilities | $259 | $267 | | Interest rate contracts | Other non-current liabilities | $13,198 | $12,993 | | Total liability derivatives | | $13,457 | $13,260 | - The pre-tax effect of cash flow hedging derivatives on interest expense was $(1,363) thousand for fiscal years 2024, 2023, and 2022[390] 7. Fair Value Measurements Fair value measurements are categorized into a three-level hierarchy, with DPP receivables valued using unobservable inputs - Fair value measurements are categorized into Level 1 (quoted prices in active markets), Level 2 (observable inputs other than Level 1), and Level 3 (unobservable inputs)[392] Fair Value Hierarchy for Assets and Liabilities (in thousands) | Category | Total | Level 1 | Level 2 | Level 3 | | :-------------------------------------- | :---------- | :---------- | :---------- | :---------- | | Assets (April 27, 2024): | | | | | | Cash equivalents | $4,685 | $4,685 | $— | $— | | DPP receivable - receivables securitization program | $198,827 | $— | $— | $198,827 | | DPP receiva