Patterson panies(PDCO) - 2021 Q4 - Annual Report

PART I Item 1. Business Patterson Companies is a value-added distributor in dental and animal health markets, adapting operations and cost controls in response to the COVID-19 pandemic - Patterson operates as a value-added specialty distributor in the dental and animal health supply markets across North America and the U.K., organized into two strategic business units: Patterson Dental and Patterson Animal Health[15] - The COVID-19 pandemic significantly impacted operations, leading to management adapting business practices, reducing non-critical expenditures, implementing compensation reductions and furloughs, and deferring payroll taxes to manage liquidity and costs[17][18] Consolidated Net Sales by Segment (in millions) | Segment | FY 2021 | FY 2020 | FY 2019 | | :--- | :--- | :--- | :--- | | Dental | $2,327 | $2,102 | $2,192 | | Animal Health | $3,560 | $3,336 | $3,355 | | Corporate | $25 | $52 | $28 | | Consolidated net sales | $5,912 | $5,490 | $5,575 | Business Overview The company's business strategy focuses on expanding as a leading value-added distributor by leveraging competitive strengths - The company's business strategy focuses on expanding as a leading value-added distributor by leveraging competitive strengths such as broad product offerings, strong customer relationships, efficient distribution, and technology integration[40] The Specialty Distribution Markets We Serve The dental and animal health markets exhibit growth driven by demographic trends, technological advances, and increased spending - The North American dental supply market is characterized by growth driven by an aging population, technological advances, and demand for preventative and specialty services[28] - The global animal health market is growing, with the companion animal segment driven by increased pet ownership and spending, and the production animal segment influenced by global demand for protein, though it is subject to market volatility[31][32] Competition The company faces significant competition from national, regional, and online distributors in both dental and animal health markets - In the dental market, key competitors include Henry Schein, Inc. and Benco Dental Supply Company[35] - In the animal health market, primary competitors are AmerisourceBergen/MWI Animal Health and Covetrus, Inc., with increasing competition from online retailers like Amazon and Chewy.com[36] Business Segments - Products, Services and Sources of Supply The company's business segments, Dental and Animal Health, exhibit distinct sales mixes and significant supplier concentration Dental Segment Sales Mix | Category | FY 2021 | FY 2020 | FY 2019 | | :--- | :--- | :--- | :--- | | Consumable | 56% | 54% | 55% | | Equipment and software | 31% | 32% | 32% | | Value-added services and other | 13% | 14% | 13% | Animal Health Segment Sales Mix | Category | FY 2021 | FY 2020 | FY 2019 | | :--- | :--- | :--- | :--- | | Consumable | 96% | 97% | 97% | | Equipment and software | 3% | 2% | 2% | | Value-added services and other | 1% | 1% | 1% | - Both segments have considerable concentration with key suppliers. In fiscal 2021, the top ten vendors accounted for approximately 57% of the Dental segment's cost of sales and 70% of the Animal Health segment's cost of sales[42][44] Governmental Regulation The company operates under extensive U.S. and foreign regulations, including those for pharmaceuticals, controlled substances, and data privacy - The company is subject to extensive regulation by U.S. and foreign bodies, including the FDA and DEA, covering the distribution of pharmaceuticals and medical devices, controlled substances, and supply chain security (DSCSA)[55][57][60] - Subsidiary Animal Health International pleaded guilty to a misdemeanor for non-compliance with federal law on prescription animal health product sales, resulting in a $52.8 million fine and forfeiture[65] - The company must comply with evolving data privacy laws such as HIPAA, GDPR (Europe), and the CCPA/CPRA (California), which govern the handling of sensitive personal and health information[74][77][78] Human Capital As of April 24, 2021, the company employed approximately 7,800 full-time individuals, with reported diversity metrics for its U.S. workforce and management - As of April 24, 2021, the company had approximately 7,800 full-time employees[87] - As of April 24, 2021, 40.9% of the U.S. workforce and 37.8% of management was female. 20.4% of the U.S. workforce and 13.4% of management was ethnically diverse[89] Item 1A. Risk Factors Key risks include the COVID-19 pandemic, intense competition, supply chain reliance, regulatory compliance, cybersecurity, and potential goodwill impairment - The COVID-19 pandemic poses a significant risk, with potential adverse effects on operations, supply chains, and customer demand, the full impact of which remains uncertain[103][104][107] - The dental and animal health supply markets are highly competitive and consolidating, which could pressure sales and profitability. Competition comes from national, regional, and online distributors, as well as manufacturers selling directly to end-users[130][131][132] - Failure to comply with numerous U.S. and foreign laws, particularly those governing pharmaceuticals and controlled substances, could result in significant penalties. A subsidiary recently incurred a $52.8 million fine and forfeiture for non-compliance[143][145][146] - In fiscal 2020, the company recorded goodwill impairment charges totaling $675.1 million, eliminating all goodwill in the Animal Health segment. Future impairment of the Dental segment's goodwill remains a risk[167] Item 1B. Unresolved Staff Comments The company has no unresolved staff comments from the SEC - None[168] Item 2. Properties Patterson owns its principal offices and most distribution facilities, with its subsidiary operating 13 U.S. fulfillment centers, while also leasing various other facilities - The company owns its principal executive offices in St. Paul, Minnesota, and the majority of its distribution facilities[169] - Patterson Logistics Services, Inc. (PLSI) operates 13 fulfillment centers in the U.S., totaling 1.0 million square feet, of which approximately 90% is owned[170][171] Item 3. Legal Proceedings Legal proceedings information is detailed in Note 16 of the Consolidated Financial Statements under Item 8 - For a discussion of Legal Proceedings, see Note 16 - Litigation of the Notes to the Consolidated Financial Statements included under Item 8[174] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[175] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Patterson's common stock trades on NASDAQ, declared a $0.26 quarterly dividend, and authorized a new $500 million share repurchase program in fiscal 2021 - The company's common stock trades on the NASDAQ Global Select Market under the symbol "PDCO"[178] - A quarterly cash dividend of $0.26 per share was declared throughout fiscal 2021[179] - On March 16, 2021, the Board authorized a new $500 million share repurchase program. No shares were repurchased under this plan during fiscal 2021[181] Item 6. Selected Consolidated Financial Data This item is not applicable - Not applicable[185] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Fiscal 2021 saw consolidated net sales grow 7.7% to $5.9 billion, with operating income recovering to $210.6 million, and liquidity managed through operating cash flows and credit facilities Fiscal 2021 vs. Fiscal 2020 Key Financials | Metric | FY 2021 | FY 2020 | Change | | :--- | :--- | :--- | :--- | | Net Sales | $5,912.1M | $5,490.0M | +7.7% | | Gross Profit Margin | 20.4% | 21.8% | -140 bps | | Operating Income (Loss) | $210.6M | ($572.1M) | N/A | | Net Income (Loss) | $156.0M | ($588.4M) | N/A | | Diluted EPS | $1.61 | ($6.25) | N/A | - The significant improvement in operating income from fiscal 2020 was driven by the absence of the prior year's $675.1 million goodwill impairment charge, as well as lower legal fees, travel expenses, and personnel costs in fiscal 2021[206] - Net cash used in operating activities was $730.5 million in fiscal 2021, primarily due to the impact of the Receivables Securitization Program, where collections of the deferred purchase price are classified under investing activities[194][213] Results of Operations Fiscal 2021 consolidated net sales increased 7.7% to $5.91 billion, driven by growth in both Dental and Animal Health segments, despite a decrease in gross profit margin - Fiscal 2021 consolidated net sales increased 7.7% to $5.91 billion. Dental segment sales grew 10.7%, driven by a 15.2% increase in consumables. Animal Health segment sales grew 6.7%, led by the companion animal business[201][202][203] - Consolidated gross profit margin decreased by 140 basis points to 20.4%, negatively impacted by inventory adjustments for infection control products in the Dental segment and lower transactional margins in the Animal Health segment[204] - Operating expenses decreased 9.3% to $992.5 million, primarily due to lower legal fees and settlements, reduced travel, and temporary cost-saving measures on personnel costs implemented in response to COVID-19[205] Liquidity and Capital Resources The company manages liquidity through operating cash flows, a receivables securitization program, and credit facilities, with significant cash used in operations in fiscal 2021 Cash Flow Summary (in millions) | Cash Flow Activity | FY 2021 | FY 2020 | FY 2019 | | :--- | :--- | :--- | :--- | | Net Cash (Used in) Provided by Operating Activities | ($730.5) | ($243.5) | $48.2 | | Net Cash Provided by Investing Activities | $810.7 | $499.1 | $340.7 | | Net Cash Used in Financing Activities | ($22.6) | ($271.2) | ($355.2) | - In February 2021, the company entered into a new Credit Agreement, consolidating previous facilities into a $700.0 million revolving credit facility and a $300.0 million term loan facility, maturing in February 2024[220] - As of April 24, 2021, the company had $143.2 million in cash and cash equivalents, with $86.1 million held in foreign bank accounts intended for permanent reinvestment[223] Critical Accounting Policies and Estimates Key accounting estimates include revenue recognition, inventory valuation, and impairment testing for goodwill and other intangible assets, with a significant goodwill impairment recorded in fiscal 2020 - Key estimates include revenue recognition (allowances for returns, rebates), inventory valuation (LIFO method, obsolescence reserves), and impairment testing for goodwill and other intangible assets[240][243][246][247] - In fiscal 2020, the company recorded a total of $675.1 million in non-cash goodwill impairment charges for the Animal Health reporting unit, driven by reduced future cash flow estimates and the impacts of COVID-19[251][252][254] - The annual goodwill and indefinite-lived intangible asset impairment test for fiscal 2021, conducted in the fourth quarter, resulted in no impairment[250] Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from foreign currency fluctuations and interest rate changes, with potential impacts on net sales and pre-tax income - The company is exposed to foreign currency risk from transactions in Canadian Dollars and British Pounds. A hypothetical 10% change in the USD exchange rate would impact net sales by approximately $94.1 million and pre-tax income by about $3.0 million for fiscal 2021[267] - Interest rate risk exists due to variable-rate debt under the Credit Agreement. A 100 basis point change in interest rates is estimated to have a $3.5 million annual impact on pre-tax income[268] Item 8. Financial Statements and Supplementary Data This section provides audited consolidated financial statements for the three years ended April 24, 2021, with key figures and an unqualified auditor's report Consolidated Balance Sheet Highlights (in thousands) | Account | April 24, 2021 | April 25, 2020 | | :--- | :--- | :--- | | Total current assets | $1,615,929 | $1,542,765 | | Total assets | $2,751,511 | $2,715,350 | | Total current liabilities | $1,089,666 | $1,074,898 | | Total liabilities | $1,786,840 | $1,878,906 | | Total stockholders' equity | $964,671 | $836,444 | Consolidated Statement of Operations Highlights (in thousands) | Account | FY 2021 | FY 2020 | FY 2019 | | :--- | :--- | :--- | :--- | | Net sales | $5,912,066 | $5,490,011 | $5,574,523 | | Gross profit | $1,203,130 | $1,197,410 | $1,190,775 | | Operating income (loss) | $210,607 | ($572,119) | $137,716 | | Net income (loss) attributable to Patterson | $155,981 | ($588,446) | $83,628 | - The independent auditor, Ernst & Young LLP, issued an unqualified opinion on the financial statements and on the effectiveness of internal control over financial reporting. The impairment of capitalized development costs for software was identified as a critical audit matter[273][281][288] Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants regarding financial disclosure - None[452] Item 9A. Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of April 24, 2021, affirmed by an unqualified audit report - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of the end of the fiscal year (April 24, 2021)[455] - Management's assessment concluded that internal control over financial reporting was effective as of April 24, 2021. The independent registered public accounting firm, Ernst & Young LLP, issued an unqualified report on this assessment[457] Item 9B. Other Information The company reports no other information for this item - None[460] PART III This section incorporates information by reference from the 2021 Proxy Statement, covering directors, executive officers, corporate governance, and compensation Item 10. Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2021 Proxy Statement - Information regarding directors, executive officers, and corporate governance is incorporated by reference from the 2021 Proxy Statement[462] - The company has adopted a Code of Conduct, which is available on its website[463] Item 11. Executive Compensation Executive and director compensation details are incorporated by reference from the 2021 Proxy Statement - Information regarding executive and director compensation is incorporated by reference from the 2021 Proxy Statement[464] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership and equity compensation plan information is incorporated by reference from the 2021 Proxy Statement - Information on security ownership and equity compensation plans is incorporated by reference from the 2021 Proxy Statement[465] Item 13. Certain Relationships and Related Transactions, and Director Independence Information on related party transactions and director independence is incorporated by reference from the 2021 Proxy Statement - Information on related transactions and director independence is incorporated by reference from the 2021 Proxy Statement[466] Item 14. Principal Accountant Fees and Services Details on principal accountant fees and pre-approval policies are incorporated by reference from the 2021 Proxy Statement - Information on principal accountant fees and services is incorporated by reference from the 2021 Proxy Statement[467] PART IV Item 15. Exhibits and Financial Statement Schedules This section lists financial statements, schedules, and all exhibits filed with the Form 10-K, including corporate governance and debt agreements - This item lists the financial statements included in Part II, Item 8, and the financial statement schedule Schedule II – Valuation and Qualifying Accounts[469][470] - A comprehensive list of exhibits filed with the report is provided, including articles of incorporation, bylaws, material contracts, and certifications[471][472][473] Item 16. Form 10-K Summary The company indicates there is no Form 10-K summary - None[476]