SEC Form 10-Q filed by Patterson Companies Inc.

8/28/24 11:39:50 AM ET

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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________________________________________________________

FORM 10-Q

____________________________________________________________


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED July 27, 2024.


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 0-20572

__________________________________________________________

PATTERSON COMPANIES, INC.

(Exact Name of Registrant as Specified in Its Charter)

____________________________________________________________


Minnesota		41-0886515
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification Number)
1031 Mendota Heights Road
St. Paul	Minnesota	55120
(Address of Principal Executive Offices)		(Zip Code)

(651) 686-1600

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of exchange on which registered
Common Stock, par value $.01	PDCO	NASDAQ Global Select Market

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of August 20, 2024, there were 88,145,000 shares of Common Stock of the registrant issued and outstanding.

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PATTERSON COMPANIES, INC.

INDEX


			Page
PART I - FINANCIAL INFORMATION

Item 1- Financial Statements			3

Condensed Consolidated Balance Sheets			3

Condensed Consolidated Statements of Operations and Other Comprehensive Income			4

Condensed Consolidated Statements of Changes in Stockholders' Equity			5

Condensed Consolidated Statements of Cash Flows			7

Notes to Condensed Consolidated Financial Statements			8

Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations			19

Item 3 - Quantitative and Qualitative Disclosures about Market Risk			23

Item 4 - Controls and Procedures			23

PART II - OTHER INFORMATION

Item 1 - Legal Proceedings			25

Item 1A - Risk Factors			25

Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds			25

Item 5 - Other Information			25

Item 6 - Exhibits			27

Signatures			28

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PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PATTERSON COMPANIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

(Unaudited)


	July 27, 2024		April 27, 2024
ASSETS
Current assets:
Cash and cash equivalents	$	148,079	$	114,462
Receivables, net of allowance for doubtful accounts of $2,690 and $2,731	442,342		547,287
Inventory, net	849,504		782,898
Prepaid expenses and other current assets	322,185		334,116
Total current assets	1,762,110		1,778,763
Property and equipment, net	226,151		229,081
Operating lease right-of-use assets, net	124,473		122,295
Long-term receivables, net	132,683		129,876
Goodwill	156,211		156,328
Identifiable intangibles, net	183,955		193,261
Investments	167,386		166,320
Other non-current assets, net	121,789		120,808
Total assets	$	2,874,758	$	2,896,732
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	656,977	$	745,375
Accrued payroll expense	49,656		78,211
Other accrued liabilities	173,369		167,399
Operating lease liabilities	33,643		32,815
Current maturities of long-term debt	123,875		122,750
Borrowings on revolving credit	320,000		186,000
Total current liabilities	1,357,520		1,332,550
Long-term debt	327,153		328,911
Non-current operating lease liabilities	94,261		92,464
Other non-current liabilities	143,323		141,075
Total liabilities	1,922,257		1,895,000
Stockholders’ equity:
Common stock, $0.01 par value: 600,000 shares authorized; 88,146 and 89,701 shares issued and outstanding	881		897
Additional paid-in capital	265,584		258,679
Accumulated other comprehensive loss	(86,473)		(89,915)
Retained earnings	771,997		831,483

Total Patterson Companies, Inc. stockholders' equity	951,989		1,001,144
Noncontrolling interests	512		588
Total stockholders’ equity	952,501		1,001,732
Total liabilities and stockholders’ equity	$	2,874,758	$	2,896,732

See accompanying notes

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PATTERSON COMPANIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND OTHER COMPREHENSIVE INCOME

(In thousands, except per share amounts)

(Unaudited)


	Three Months Ended
	July 27, 2024		July 29, 2023
Net sales	$	1,541,742	$	1,576,745
Cost of sales	1,229,133		1,257,690
Gross profit	312,609		319,055
Operating expenses	283,240		280,833
Operating income	29,369		38,222
Other income (expense):

Other income, net	1,714		11,901
Interest expense	(13,223)		(9,512)
Income before taxes	17,860		40,611
Income tax expense	4,221		9,481


Net income	13,639		31,130
Net loss attributable to noncontrolling interests	(76)		(104)
Net income attributable to Patterson Companies, Inc.	$	13,715	$	31,234
Earnings per share attributable to Patterson Companies, Inc.:


Basic	$	0.16	$	0.33



Diluted	$	0.15	$	0.32
Weighted average shares:
Basic	88,127		95,544
Diluted	88,645		96,190
Dividends declared per common share	$	0.26	$	0.26
Comprehensive income:
Net income	$	13,639	$	31,130
Foreign currency translation gain	3,181		7,368
Cash flow hedges, net of tax	261		261
Comprehensive income	$	17,081	$	38,759

See accompanying notes

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PATTERSON COMPANIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)


	Common Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Loss		Retained Earnings		Non-controlling Interests		Total
	Shares	Amount
Balance at April 29, 2023	96,350	$	964	$	233,706	$	(89,262)	$	972,127	$	1,000	$	1,118,535
Foreign currency translation	—	—		—		7,368		—		—		7,368
Cash flow hedges	—	—		—		261		—		—		261
Net income (loss)	—	—		—		—		31,234		(104)		31,130
Dividends declared	—	—		—		—		(25,134)		—		(25,134)
Common stock issued	565	5		1,569		—		—		—		1,574
Repurchases of common stock	(1,109)	(11)		—		—		(29,497)		—		(29,508)
Stock-based compensation	—	—		7,015		—		—		—		7,015




Balance at July 29, 2023	95,806	958		242,290		(81,633)		948,730		896		1,111,241
Foreign currency translation	—	—		—		(17,589)		—		—		(17,589)
Cash flow hedges	—	—		—		260		—		—		260
Net income (loss)	—	—		—		—		39,958		(103)		39,855
Dividends declared	—	—		—		—		(24,897)		—		(24,897)
Common stock issued	180	2		3,226		—		—		—		3,228
Repurchases of common stock	(1,897)	(19)		(661)		—		(60,964)		—		(61,644)
Stock-based compensation	—	—		4,635		—		—		—		4,635

Balance at October 28, 2023	94,089	941		249,490		(98,962)		902,827		793		1,055,089
Foreign currency translation	—	—		—		12,538		—		—		12,538
Cash flow hedges	—	—		—		261		—		—		261
Net income (loss)	—	—		—		—		47,703		(110)		47,593
Dividends declared	—	—		—		—		(23,591)		—		(23,591)
Common stock issued	103	1		1,844		—		—		—		1,845
Repurchases of common stock	(4,101)	(41)		(1,219)		—		(124,055)		—		(125,315)
Stock-based compensation	—	—		3,745		—		—		—		3,745

Balance at January 27, 2024	90,091	901		253,860		(86,163)		802,884		683		972,165
Foreign currency translation	—	—		—		(4,012)		—		—		(4,012)
Cash flow hedges	—	—		—		260		—		—		260
Net income (loss)	—	—		—		—		67,036		(95)		66,941
Dividends declared	—	—		—		—		(23,521)		—		(23,521)
Common stock issued	107	1		2,462		—		—		—		2,463
Repurchases of common stock	(497)	(5)		(119)		—		(14,916)		—		(15,040)
Stock-based compensation	—	—		2,476		—		—		—		2,476

Balance at April 27, 2024	89,701	$	897	$	258,679	$	(89,915)	$	831,483	$	588	$	1,001,732

See accompanying notes

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PATTERSON COMPANIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)


	Common Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Loss		Retained Earnings		Non-controlling Interests		Total
	Shares	Amount
Balance at April 27, 2024	89,701	$	897	$	258,679	$	(89,915)	$	831,483	$	588	$	1,001,732
Foreign currency translation	—	—		—		3,181		—		—		3,181
Cash flow hedges	—	—		—		261		—		—		261
Net income (loss)	—	—		—		—		13,715		(76)		13,639
Dividends declared	—	—		—		—		(23,221)		—		(23,221)
Common stock issued	385	4		(752)		—		—		—		(748)
Repurchases of common stock	(1,940)	(20)		(403)		—		(49,980)		—		(50,403)
Stock-based compensation	—	—		8,060		—		—		—		8,060


Balance at July 27, 2024	88,146	$	881	$	265,584	$	(86,473)	$	771,997	$	512	$	952,501

See accompanying notes

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PATTERSON COMPANIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Three Months Ended
	July 27, 2024		July 29, 2023
Operating activities:
Net income	$	13,639	$	31,130


Adjustments to reconcile net income to net cash used in operating activities:
Depreciation	13,111		11,406
Amortization	9,639		9,627



Stock-based compensation	8,060		7,015



Non-cash losses (gains) and other, net	1,745		2,268

Change in assets and liabilities:
Receivables	(140,656)		(154,602)
Inventory	(65,292)		(114,323)
Accounts payable	(91,995)		(11,093)
Accrued liabilities	(22,698)		(21,715)

Other changes from operating activities, net	(10,523)		(13,079)


Net cash used in operating activities	(284,970)		(253,366)
Investing activities:
Additions to property and equipment and software	(13,507)		(17,087)
Collection of deferred purchase price receivables	271,834		242,013
Payments related to acquisitions, net of cash acquired	—		(1,108)





Net cash provided by investing activities	258,327		223,818
Financing activities:
Dividends paid	(23,312)		(25,432)
Repurchases of common stock	(50,000)		(29,508)



Payments on long-term debt	(750)		(750)
Draw on revolving credit	134,000		31,000
Other financing activities	(1,151)		1,574
Net cash provided by (used in) financing activities	58,787		(23,116)
Effect of exchange rate changes on cash	1,473		1,568
Net change in cash and cash equivalents	33,617		(51,096)
Cash and cash equivalents at beginning of period	114,462		159,669
Cash and cash equivalents at end of period	$	148,079	$	108,573

Supplemental disclosure of non-cash investing activity:
Retained interest in securitization transactions	$	251,917	$	226,957

See accompanying notes

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PATTERSON COMPANIES, INC.

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 July 27, 2024, and our results of operations and cash flows for the periods ended July 27, 2024 and July 29, 2023. Such adjustments are of a normal, recurring nature. The results of operations for the three months ended July 27, 2024 are not necessarily indicative of the results to be expected for any other interim period or for the year ending April 26, 2025. These financial statements should be read in conjunction with the financial statements included in our 2024 Annual Report on Form 10-K filed on June 18, 2024.

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 unaffiliated financial institutions in the normal course of their business. PDC Funding III and PDC Funding IV are fully consolidated special purpose entities 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 8.

Fiscal Year End

We operate with a 52-53 week accounting convention with our fiscal year ending on the last Saturday in April. The first quarter of fiscal 2025 and 2024 represents the 13 weeks ended July 27, 2024 and July 29, 2023, respectively. Fiscal 2025 will include 52 weeks and fiscal 2024 included 52 weeks.

Other Income, Net

Other income, net consisted of the following:


	Three Months Ended
	July 27, 2024		July 29, 2023
(Loss) gain on interest rate swap agreements	$	(3,755)	$	6,775
Investment income and other	5,469		5,126
Other income, net	$	1,714	$	11,901

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 $80 and $80 for the three months ended July 27, 2024 and July 29, 2023, respectively.

Earnings 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
	July 27, 2024	July 29, 2023
Denominator for basic EPS – weighted average shares	88,127	95,544
Effect of dilutive securities – stock options, restricted stock and stock purchase plans	518	646
Denominator for diluted EPS – weighted average shares	88,645	96,190

Potentially dilutive securities representing 1,041 shares for the three months ended July 27, 2024 and 1,066 shares for the three months ended July 29, 2023 were excluded from the calculation of diluted EPS because their effects were anti-dilutive using the treasury stock method.

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 product, 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 support and software services is recognized ratably over the period in which the support and services are provided.

In addition to revenues generated from the distribution of consumable products under arrangements (buy/sell agreements) where the full market value of the product is recorded as revenue, we earn commissions for services provided under agency agreements. The agency agreement contrasts to a buy/sell agreement in that we do not have control over the transaction, as we do not have the primary responsibility of fulfilling the promise of the good or service and we do not bill or collect from the customer in an agency relationship. Commissions under agency agreements are recorded when the services are provided.

Estimates for returns, damaged goods, rebates, loyalty programs and other revenue allowances are made at the time the revenue is recognized based on the historical experience for such items. The receivables that result from the recognition of revenue are reported net of related allowances. We maintain a valuation allowance based upon the expected collectability of receivables held. Estimates are used to determine the valuation allowance and are based on several factors, including historical collection data, economic trends and credit worthiness of customers. Receivables are written off when we determine the amounts to be uncollectible, typically upon customer bankruptcy or non-response to continuous collection efforts. The portions of receivable amounts that are not expected to be collected during the next twelve months are classified as long-term.

Receivables from vendors earned as a result of volume rebates and reimbursements for customer pricing contracts and promotions are recorded as a reduction of cost of sales in the period in which the related revenue is recognized. We estimate the vendor receivables earned but not received based on sales forecasts, transactional data and historical vendor collection trends.

We offer customer financing contracts on equipment purchases by creditworthy customers. For financing contracts at a below-market interest rate, we record a subsidy as a reduction to net sales in the period the contract is originated. The subsidy on below-market rate contracts is estimated based on analyses of current publicly-available interest rate trends. We do not consider contracts with a term of one year or less to have a significant financing component and do not record a subsidy for these contracts.

We generally sell our customers’ financing contracts to unaffiliated 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 receive the proceeds of the contracts upon sale to financial institutions, with a portion of the proceeds held by the financial institutions as a deferred purchase price (DPP) as security against eventual performance of the portfolio. Customer financing net sales include the impact of changes in interest rates on DPP receivables, as the average interest rate in our contract portfolio may not fluctuate at the same rate as interest rate markets, resulting in an increase or reduction of gain on contract sales. We enter into an interest rate swap to hedge a portion of the related interest rate risk. These agreements do not qualify for hedge accounting, and the gains or losses on an interest rate swap are reported in other income and expense in our Condensed Consolidated Statements of Operation and Other Comprehensive Income.

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Our financing business is described in further detail in Note 4 to the Condensed Consolidated Financial Statements.

Patterson has a relatively large, dispersed customer base and no single customer accounts for more than 10% of consolidated net sales. In addition, the equipment sold to customers under finance contracts generally serves as collateral for the contract and the customer provides a personal guarantee as well.

Net sales do not include sales tax as we are considered a pass-through conduit for collecting and remitting sales tax.

Contract Balances

Contract balances represent amounts presented in our 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 July 27, 2024 and April 27, 2024 were $951 and $1,373, 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 July 27, 2024 and April 27, 2024, contract liabilities of $35,529 and $37,399 were reported in other accrued liabilities, respectively. During the three months ended July 27, 2024, we recognized $13,635 of the amount previously deferred at April 27, 2024.

Recently Issued Accounting Pronouncements

In December 2023, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2023-09, "Income Taxes (Topic 740): Improvements to Income Tax Disclosures". This ASU requires additional disclosures related to rate reconciliation and income taxes paid. The new standard is effective for annual disclosures in fiscal year 2026 and interim disclosures in fiscal year 2027, with early adoption permitted. We currently are evaluating the impact of adopting this pronouncement.

In November 2023, the FASB issued ASU No. 2023-07, "Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures". This ASU requires disclosures of significant segment expenses and other segment items. Disclosures about a reportable segment's profit or loss and assets will be required for both annual and interim periods. This ASU also requires disclosure of the title and position of Chief Operating Decision Maker ("CODM") and an explanation of how the CODM uses the reported measures of profit or loss in assessing performance and allocating resources. The new standard is effective for annual disclosures in fiscal year 2025 and interim disclosures in fiscal year 2026, with early adoption permitted. We currently are evaluating the impact of adopting this pronouncement.

Note 2. Acquisitions

During the first quarter of fiscal 2024, we used $1,108 to pay a holdback following our acquisition of substantially all of the assets of Miller Vet Holdings, LLC. The payment was due on the 24-month anniversary of the closing date.

Note 3. 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 July 27, 2024, 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 July 27, 2024 and April 27, 2024, the

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fair value of outstanding trade receivables transferred to the Purchasers under the facility and derecognized from the Condensed Consolidated Balance Sheets were $373,714 and $400,626, respectively. Sales of trade receivables under this facility were $861,595 and $916,568, and cash collections from customers on receivables sold were $888,323 and $933,874 during the three months ended July 27, 2024 and July 29, 2023, 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. In operating expenses in the Condensed Consolidated Statements of Operations and Other Comprehensive Income, we recorded losses of $3,509 and $3,424 during the three months ended July 27, 2024 and July 29, 2023, respectively, related to the Receivables.

The following rollforward summarizes the activity related to the DPP receivable:


	Three Months Ended
		July 27, 2024		July 29, 2023
Beginning DPP receivable balance		$	198,827	$	227,946
Non-cash additions to DPP receivable		227,759		216,112
Cash collections on DPP receivable		(254,646)		(233,798)
Ending DPP receivable balance		$	171,940	$	210,260

Note 4. 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 $2,000. We generally sell our customers’ financing contracts to unaffiliated 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 use a monthly unit of account for these financing contracts.

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 July 27, 2024 was $525,000.

We service the financing contracts 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 PDC Funding 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 or loss 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 three months ended July 27, 2024 and July 29, 2023, we sold $78,881 and $83,873 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 $6,681 and a loss of $8,927 during the three months ended July 27, 2024 and July 29, 2023, respectively, related to these contracts sold. Cash collections on financed receivables sold were $86,104 and $66,678 during the three months ended July 27, 2024 and July 29, 2023, respectively. Unamortized discounts of $1,507 and $3,097 were recorded as of July 27, 2024 and April 27, 2024, respectively, which represent subsidies on contracts with below-market interest rates.

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Included in cash and cash equivalents in the Condensed Consolidated Balance Sheets are $31,330 and $33,813 as of July 27, 2024 and April 27, 2024, 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 $12,099 and $74,430 as of July 27, 2024 and April 27, 2024, respectively, of finance contracts we have not yet sold. A total of $583,688 of finance contracts receivable sold under the arrangements was outstanding at July 27, 2024. 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:


	Three Months Ended
		July 27, 2024		July 29, 2023
Beginning DPP receivable balance		$	114,259	$	102,979
Non-cash additions to DPP receivable		24,158		10,845
Cash collections on DPP receivable		(17,188)		(8,215)
Ending DPP receivable balance		$	121,229	$	105,609

The arrangements require us to maintain a minimum current ratio and maximum leverage ratio. We were in compliance with those covenants at July 27, 2024.

Note 5. 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 to the commercial paper conduit.

The interest rate cap 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 July 27, 2024, PDC Funding had purchased an interest rate cap from a bank with a notional amount of $525,000 and a maturity date of July 2032. 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 in fair value 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 in fair value as income or expense during the period in which the change occurs.

As of April 27, 2024, the remaining notional amount for interest rate swap agreements was $565,420, with the latest maturity date in fiscal 2031. During the three months ended July 27, 2024, we entered into forward interest rate swap agreements with a notional amount of $71,587. As of July 27, 2024, the remaining notional amount for interest rate swap agreements was $578,711, with the latest maturity date in fiscal 2032.

Net cash receipts of $3,215 and $3,653 were received during the three months ended July 27, 2024 and July 29, 2023, respectively, to settle a portion of our assets and liabilities related to interest rate swap agreements. These receipts are reflected as cash flows 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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Derivative type	Classification	July 27, 2024		April 27, 2024
Assets:
Interest rate contracts	Prepaid expenses and other current assets	$	3,710	$	5,781
Interest rate contracts	Other non-current assets, net	16,815		21,193
Total asset derivatives		$	20,525	$	26,974
Liabilities:
Interest rate contracts	Other accrued liabilities	$	621	$	259
Interest rate contracts	Other non-current liabilities	13,358		13,198
Total liability derivatives		$	13,979	$	13,457

The following tables present the pre-tax effect of derivative instruments on the Condensed Consolidated Statements of Operations and Other Comprehensive Income:

Amount of Loss Reclassified from Accumulated Other Comprehensive Loss into Income (Effective Portion)

Three Months Ended

Derivatives in cash flow hedging relationships

Statements of operations location

July 27, 2024

July 29, 2023

Interest rate contracts

Interest expense

(341)

Amount of Gain (Loss) Recognized in Income on Derivatives

Three Months Ended

Derivatives not designated as hedging instruments

Statements of operations location

July 27, 2024

July 29, 2023

Interest rate contracts

Other income, net

(3,755)

6,775

There were no gains or losses recognized in other comprehensive income (loss) on cash flow hedging derivatives during the three months ended July 27, 2024 or July 29, 2023.

We recorded no ineffectiveness during the three month periods ended July 27, 2024 and July 29, 2023. As of July 27, 2024, the estimated pre-tax portion of accumulated other comprehensive loss that is expected to be reclassified into earnings over the next twelve months is $909, which will be recorded as an increase to interest expense.

Note 6. 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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	July 27, 2024
	Total		Level 1		Level 2		Level 3
Assets:
Cash equivalents	$	5,131	$	5,131	$	—	$	—
DPP receivable - receivables securitization program	171,940		—		—		171,940
DPP receivable - customer financing	121,229		—		—		121,229
Derivative instruments	20,525		—		20,525		—
Total assets	$	318,825	$	5,131	$	20,525	$	293,169
Liabilities:
Derivative instruments	$	13,979	$	—	$	13,979	$	—


	April 27, 2024
	Total		Level 1		Level 2		Level 3
Assets:
Cash equivalents	$	4,685	$	4,685	$	—	$	—
DPP receivable - receivables securitization program	198,827		—		—		198,827
DPP receivable - customer financing	114,259		—		—		114,259
Derivative instruments	26,974		—		26,974		—
Total assets	$	344,745	$	4,685	$	26,974	$	313,086
Liabilities:
Derivative instruments	$	13,457	$	—	$	13,457	$	—

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.

We have an investment in Vetsource, a commercial partner and leading home delivery provider for veterinarians. The investment was valued based on the selling price of the portion of the investment we sold in the first quarter of fiscal 2022. The carrying value of the investment we owned following this sale was $56,849 and $56,849 as of July 27, 2024 and April 27, 2024, respectively. Concurrent with the sale completed in the first quarter of fiscal 2022, we obtained rights that will allow us, under certain circumstances, to require another shareholder of Vetsource to purchase our remaining shares. The carrying value of this put option, which is subject to a floor, as of July 27, 2024 is $25,757, and is reported within investments in our Condensed Consolidated Balance Sheets. Concurrent with obtaining this put option, we also granted rights to the same Vetsource shareholder that would allow such shareholder, under certain circumstances, to require us to sell our remaining shares at fair value. In the first quarter of fiscal 2025, the three-month exercise window opened for the option that could require Patterson to sell its

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investment in Vetsource. There were no fair value adjustments to such assets during the three months ended July 27, 2024.

Our debt is not measured at fair value in the Condensed Consolidated Balance Sheets. The estimated fair value of our debt as of July 27, 2024 and April 27, 2024 was $449,140 and $448,287, respectively, as compared to a carrying value of $451,028 and $451,661 at July 27, 2024 and April 27, 2024, 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 July 27, 2024 and April 27, 2024.

Note 7. Income Taxes

The effective income tax rate for the three months ended July 27, 2024 was 23.6% compared to 23.3% for the three months ended July 29, 2023. The change in the rate was primarily due to larger excess tax benefits on stock compensation in the prior year quarter, offset by an income tax reserve adjustment in the current year quarter.

The Organization for Economic Cooperation and Development (“OECD”) has published a framework to implement a global minimum income tax rate of 15% through its Base Erosion and Profit Shifting Pillar Two project (“BEPS Pillar Two”). This new legislation became effective in certain countries where the Company operates starting in fiscal 2025. We continue to evaluate the impact of this new legislation. At this time, we do not expect the impact of this legislation to be material to our effective tax rate.

Note 8. 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. We have 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. Since TPI was formed, there have been no changes in ownership interests. No additional net assets were contributed during the three months ended July 27, 2024 or fiscal year ended April 27, 2024. As of July 27, 2024, we had noncontrolling interests of $512 on our Condensed Consolidated Balance Sheets.

Net loss attributable to the noncontrolling interest was $76 and $104 for the three months ended July 27, 2024 and July 29, 2023, respectively.

Note 9. 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, 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.

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The following table provides a breakdown of sales by geographic region:


	Three Months Ended
	July 27, 2024		July 29, 2023
Consolidated net sales
United States	$	1,261,866	$	1,291,371
United Kingdom	195,046		191,611
Canada	84,830		93,763
Total	$	1,541,742	$	1,576,745
Dental net sales
United States	$	498,957	$	510,250
Canada	51,400		57,050
Total	$	550,357	$	567,300
Animal Health net sales
United States	$	753,937	$	782,666
United Kingdom	195,046		191,611
Canada	33,430		36,713
Total	$	982,413	$	1,010,990
Corporate net sales
United States	$	8,972	$	(1,545)
Total	$	8,972	$	(1,545)

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The following table provides a breakdown of sales by categories of products and services:


	Three Months Ended
	July 27, 2024		July 29, 2023
Consolidated net sales
Consumable	$	1,278,413	$	1,315,725
Equipment	159,286		163,971
Value-added services and other	104,043		97,049
Total	$	1,541,742	$	1,576,745
Dental net sales
Consumable	$	344,117	$	352,047
Equipment	133,858		137,549
Value-added services and other	72,382		77,704
Total	$	550,357	$	567,300
Animal Health net sales
Consumable	$	934,296	$	963,678
Equipment	25,428		26,422
Value-added services and other	22,689		20,890
Total	$	982,413	$	1,010,990
Corporate net sales
Value-added services and other	$	8,972	$	(1,545)
Total	$	8,972	$	(1,545)

The following table provides a breakdown of operating income (loss) by reportable segment:


	Three Months Ended
	July 27, 2024		July 29, 2023





Operating income (loss)
Dental	$	27,058	$	38,670
Animal Health	25,367		29,693
Corporate	(23,056)		(30,141)
Total	$	29,369	$	38,222

The following table provides a breakdown of total assets by reportable segment:


	July 27, 2024		April 27, 2024
Total assets
Dental	$	911,350	$	913,478
Animal Health	1,611,533		1,568,413
Corporate	351,875		414,841
Total	$	2,874,758	$	2,896,732

Note 10. Accumulated Other Comprehensive Loss ("AOCL")

The following table summarizes the changes in AOCL during the three months ended July 27, 2024:

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	Cash Flow Hedges		Currency Translation Adjustment		Total
AOCL at April 27, 2024	$	(1,370)	$	(88,545)	$	(89,915)
Other comprehensive loss before reclassifications	—		3,181		3,181
Amounts reclassified from AOCL	261		—		261
AOCL at July 27, 2024	$	(1,109)	$	(85,364)	$	(86,473)

The amounts reclassified from AOCL during the three months ended July 27, 2024 include gains and losses on cash flow hedges, net of taxes of $80. The impact to the Condensed Consolidated Statements of Operations and Other Comprehensive Income was an increase to interest expense of $341 for the three months ended July 27, 2024.

Note 11. 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, putative class actions under the California Labor Code Private Attorneys General Act, and other matters, including matters arising out of the ordinary course of business, including securities litigation. 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. Adverse outcomes 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 May 23, 2024, Plaintiff Monica Mehring and Mehring Family Dentistry (together, “Plaintiffs”) filed a class action complaint against Patterson Companies Inc. “doing business as Patterson Dental,” UnitedHealth Group and its subsidiaries Change Healthcare and Optum Inc. (collectively, the “Defendants”) in a case captioned Dr. Monica Mehring et al. v. Patterson Companies, Inc. et al., Case No. 4:24-cv-3147 (N.D. Cal. May 23, 2024) (the “Class Action Complaint”). The Class Action Complaint alleges that as a result of Defendants’ failure to implement robust cybersecurity controls, “a group of cybercriminals were able to infiltrate Defendants’ computer networks and steal for ransom confidential health data and source code among other things (‘Data Breach’).” Notwithstanding the Class Action Complaint’s generic reference to “Defendants,” Plaintiffs describe the Data Breach as UnitedHealth Group’s February 21, 2024 discovery that a suspected nation-state associated cyber security threat actor had gained access to some of the Change Healthcare information technology systems. Plaintiffs allege that as a direct result of the Data Breach, they were unable to submit claims through Patterson-supplied Eaglesoft software and, to date, have been unable to receive payments for claims submitted on February 20, 2024. While Plaintiffs assert that they use Eaglesoft to access Change Healthcare and Optum software to “integrate processing, prescriptions, billing and insurance,” the Class Action Complaint does not allege that Eaglesoft or any of Patterson’s IT systems or computer networks were accessed by any threat actor or were otherwise the subject of the alleged Data Breach. Notwithstanding the foregoing, Plaintiffs assert the following causes of action against all Defendants: negligence; “negligent interference with prospective economic advantage;” negligence per se; breach of implied contract; “breach of covenant of good faith and fair dealing;” and unjust enrichment. Plaintiffs purport to bring each claim on behalf of a nationwide class defined as: (i) “[a]ll healthcare providers in the United States whose use of Change Healthcare’s and Optum’s services were disrupted by the [D]ata [B]reach occurring in February 2024”; and (ii) “[a]ll healthcare providers in the United States whose use of Patterson Dental’s Eaglesoft’s services were disrupted by the [D]ata [B]reach occurring in February 2024.” Plaintiffs separately seek to certify a Delaware statewide class defined as: (i) “[a]ll healthcare providers in the state of Delaware whose use of Change Healthcare’s and Optum’s services were disrupted by the [D]ata [B]reach occurring in February 2024”; and (ii) “[a]ll healthcare providers in the state of Delaware whose use of Patterson Dental’s Eaglesoft’s services were disrupted by the [D]ata [B]reach occurring in February 2024.” 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.

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Note 12. Subsequent Event

During the second quarter of fiscal 2025, we acquired Infusion Concepts Limited, a U.K. market leader in the supply of high-performance infusion, drainage and critical care products that benefit the veterinary profession and their animal patients. This strategic purchase expands the portfolio with high-quality products for veterinary customers. The base purchase price at closing, net of cash acquired, was £4,278, or approximately $5,500, and was funded with existing cash. This includes a holdback of £1,120, which will be paid in part on the 15-month anniversary of the closing date with the remainder on the 24-month anniversary of the closing date.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

The U.S. Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements to encourage companies to provide prospective information, so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those disclosed in the statement.

This Form 10-Q contains certain “forward-looking statements” within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995, including statements regarding future financial performance, and the objectives and expectations of management. Forward-looking statements often include words such as “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “seeks” or words of similar meaning, or future or conditional verbs, such as “will,” “should,” “could” or “may.” Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions.

Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not place undue reliance on any of these forward-looking statements.

Any number of factors could affect our actual results and cause such results to differ materially from those contemplated by any forward-looking statements, including, but not limited to, the following: our dependence on suppliers to manufacture and supply substantially all of the products we sell; potential disruption of distribution capabilities, including service issues with third-party shippers; our dependence on relationships with sales representatives and service technicians to retain customers and develop business; risks of selling private label products, including the risk of adversely affecting our relationships with suppliers; adverse changes in supplier rebates or other purchasing incentives; the risk of technological and market obsolescence for the products we sell; the risk of failing to innovate and develop new and enhanced software and e-services products; our dependence on positive perceptions of Patterson’s reputation; risks associated with illicit human use of pharmaceutical products we distribute; risks inherent in acquiring and disposing of assets or other businesses and risks inherent in integrating acquired businesses; turnover or loss of key personnel or highly skilled employees; risks associated with information systems, software products and cyber-security attacks; risks inherent in our growing use of AI systems to automate processes and analyze data; adverse impacts of wide-spread public health concerns as we experienced with the COVID-19 pandemic and may experience in the future; risks related to climate change; our ability to comply with restrictive covenants and other limits in our credit agreement; the risk that our governing documents and Minnesota law may discourage takeovers and business combinations; the effects of the highly competitive dental and animal health supply markets in which we compete; the effects of consolidation within the dental and animal health supply markets; risks from the formation or expansion of GPOs, provider networks and buying groups that may place us at a competitive disadvantage; exposure to the risks of the animal production business, including changing consumer demand, the cyclical livestock market, weather conditions, the availability of natural resources and other factors outside our control, and the risks of the companion animal business, including the possibility of disease adversely affecting the pet population; exposure to the risks of the health care industry, including changes in demand due to political, economic and regulatory influences and other factors outside our control; increases in over-the-counter sales and e-commerce options; risks of litigation and government inquiries and investigations, including the diversion of management’s attention, the cost of defending against such actions, the possibility of damage awards or settlements, fines or penalties, or equitable remedies (including but not limited

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to the revocation of or non-renewal of licenses) and inherent uncertainty; failure to comply with health care fraud or other laws and regulations; change and uncertainty in the health care industry; failure to comply with existing or future U.S. or foreign laws and regulations including those governing the distribution of pharmaceuticals and controlled substances; failure to comply with evolving data privacy laws and regulations; tax legislation; risks inherent in international operations, including currency fluctuations; and uncertain macro-economic conditions, including inflationary pressures.

The order in which these factors appear should not be construed to indicate their relative importance or priority. We caution that these factors may not be exhaustive, accordingly, any forward-looking statements contained herein should not be relied upon as a prediction of actual results.

You should carefully consider these and other relevant factors, including those risk factors in Part I, Item 1A (“Risk Factors”) in our most recent Form 10-K, and information which may be contained in our other filings with the U.S. Securities and Exchange Commission, or SEC, when reviewing any forward-looking statement.

Investors should understand it is impossible to predict or identify all such factors or risks. As such, you should not consider the foregoing list, or the risks identified in our SEC filings, to be a complete discussion of all potential risks or uncertainties.

Any forward-looking statement made in this Form 10-Q is based only on information currently available to us and speaks only as of the date on which it is made. We do not undertake any obligation to release publicly any revisions to any forward-looking statements whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise.

OVERVIEW

Our financial information for the first three months of fiscal 2025 is summarized in this Management’s Discussion and Analysis and the Condensed Consolidated Financial Statements and related Notes. The following background is provided to readers to assist in the review of our financial information.

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, turnkey digital solutions and value-added services to dentists and dental laboratories 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.

Operating margins of the animal health business are lower than the dental business. While operating expenses run at a lower rate in the animal health business when compared to the dental business, gross margins in the animal health business are lower due generally to the low margins experienced on the sale of pharmaceutical products.

We believe there are several important aspects of our business that are useful in analyzing it, including: (1) growth in the various markets in which we operate; (2) internal growth; (3) growth through acquisition; and (4) continued focus on controlling costs and enhancing efficiency. To measure internal performance, we exclude the impact of foreign currency, contributions from recent acquisitions, and differences in the number of weeks in fiscal periods from net sales. Foreign currency impact represents the difference in results that is attributable to fluctuations in currency exchange rates the company uses to convert results for all foreign entities where the functional currency is not the U.S. dollar. The company calculates the impact as the difference between the current period results translated using the current period currency exchange rates and using the comparable prior period’s currency exchange rates. The company believes the disclosure of net sales changes in constant currency provides useful supplementary information to investors in light of fluctuations in currency rates.

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FACTORS AFFECTING OUR RESULTS

Macro-economic conditions. We are impacted by various conditions that create uncertainty in our macro-economic environment. Cost inflation and rising interest rates may affect our customer's willingness to invest in capital equipment and could impact our customers' volume of purchases. Interest expense on variable rate indebtedness increased due to rising interest rates. Cost inflation increased certain operating costs, and Patterson has implemented price increases in response; however, cost inflation did not materially impact our net results of operations. We continue to monitor recovery from the disruption of the COVID-19 pandemic. The deflationary impacts on PPE have softened as the supply chain and demand for PPE stabilized.

Receivables Securitization Program. We are a party to certain receivables purchase agreements with MUFG Bank, Ltd. ("MUFG"), 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 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 collection of the DPP receivable is recognized as an increase to net cash provided by investing activities within the Condensed Consolidated Statements of Cash Flows, with a corresponding reduction to net cash used in operating activities within the Condensed Consolidated Statements of Cash Flows.

Change Healthcare cyber attack. Change Healthcare, a subsidiary of UnitedHealth Group and the largest clearinghouse for medical claims in the U.S., was the subject of a cyberattack in February 2024, which resulted in many dental practices being unable to process insurance claims. Many of our practice management software solutions incorporated a fee-based integration with Change Healthcare for claims management. During the outage, Patterson suspended payment for that service, which impacted the net sales and gross profit of our Dental segment. This outage negatively impacted our business in the fourth quarter of fiscal 2024, continues to affect our business, and has generated litigation. We onboarded a new provider that has a variety of capabilities including, without limitation, insurance claim reimbursement assistance. We have filed a claim with our business interruption insurance provider for losses incurred related to this attack and are actively pursuing reimbursement under our policy coverage.

RESULTS OF OPERATIONS

QUARTER ENDED July 27, 2024 COMPARED TO QUARTER ENDED July 29, 2023

The following table summarizes our results as a percent of net sales:


	Three Months Ended
	July 27, 2024		July 29, 2023
Net sales	100.0	%	100.0	%
Cost of sales	79.7		79.8
Gross profit	20.3		20.2
Operating expenses	18.4		17.8
Operating income	1.9		2.4
Other income (expense)	(0.7)		0.2
Income before taxes	1.2		2.6
Income tax expense	0.3		0.6
Net income	0.9		2.0
Net loss attributable to noncontrolling interests	—		—
Net income attributable to Patterson Companies, Inc.	0.9	%	2.0	%

Net Sales. Consolidated net sales for the three months ended July 27, 2024 were $1,541.7 million, a decrease of 2.2% from $1,576.7 million for the three months ended July 29, 2023. Foreign exchange rate changes had an unfavorable impact of 0.1% on current quarter net sales.

Dental segment net sales for the three months ended July 27, 2024 were $550.4 million, a decrease of 3.0% from $567.3 million for the three months ended July 29, 2023. Foreign exchange rate changes had an unfavorable impact of 0.2% on current quarter net sales. Current quarter net sales of consumables decreased 2.3%, net sales of

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equipment decreased 2.7%, and net sales of value-added services and other decreased 6.8%. The decrease in net sales of value-added services was primarily due to the negative impact of the cybersecurity attack on Change Healthcare.

Animal Health segment net sales for the three months ended July 27, 2024 were $982.4 million, a decrease of 2.8% from $1,011.0 million for the three months ended July 29, 2023. Foreign exchange rate changes had no significant impact on current quarter net sales. Current quarter net sales of consumables decreased 3.0%, net sales of equipment decreased 3.8%, and net sales of value-added services and other increased 8.6%.

Gross Profit. The consolidated gross profit margin rate for the three months ended July 27, 2024 increased 10 basis points to 20.3%. The increase in gross margin rate was primarily driven by the Corporate segment. The Corporate segment gross profit included the favorable impacts of interest rate changes on our customer financing portfolio in the current quarter. This interest rate impact was partially offset by a loss on associated interest rate swap agreements, which is reflected in other income, net in our Condensed Consolidated Statements of Operations and Other Comprehensive Income. Excluding the favorable impacts of interest rate changes on our customer financing portfolio, gross margin rates declined in our Dental and Animal Health businesses as compared to the prior year quarter.

Operating Expenses. Consolidated operating expenses for the three months ended July 27, 2024 were $283.2 million, a 0.9% increase from the prior year quarter of $280.8 million. The consolidated operating expense ratio of 18.4% increased 60 basis points from the prior year quarter. The increase in operating expenses was driven primarily by investments in technology.

Operating Income. For the three months ended July 27, 2024, operating income was $29.4 million, or 1.9% of net sales, as compared to $38.2 million, or 2.4% of net sales for the three months ended July 29, 2023. The decrease in operating income was driven primarily by lower net sales and gross margins and, to a lesser extent, continued investments in technology.

Dental segment operating income was $27.1 million and $38.7 million for the three months ended July 27, 2024 and July 29, 2023, respectively. The decrease in operating income was primarily due to lower net sales as compared to the prior year quarter and investments in technology.

Animal Health segment operating income was $25.4 million and $29.7 million for the three months ended July 27, 2024, and July 29, 2023, respectively. The decrease in operating income was primarily driven by lower sales as compared to the prior year quarter, partially offset by expense management initiatives.

Corporate segment operating loss was $23.1 million and $30.1 million for the three months ended July 27, 2024 and July 29, 2023, respectively. The change was primarily attributable to an increase in favorable impacts of interest rate changes on our customer financing portfolio in the current year quarter, partially offset by an increase in operating expenses. This interest rate impact was partially offset by a loss on associated interest rate swap agreements, which is reflected in other income, net in our Condensed Consolidated Statements of Operations and Other Comprehensive Income.

Other Income (Expense). Net other income (expense) reflected expense of $11.5 million and $2.4 million for the three months ended July 27, 2024 and July 29, 2023, respectively. The change was primarily due to a loss on interest rate swaps of $3.8 million during the three months ended July 27, 2024 compared to a gain of $6.8 million in the prior year quarter. An increase in interest expense also contributed to the change, driven by an increase in total debt outstanding as compared to the prior year quarter.

Income Tax Expense. The effective income tax rate for the three months ended July 27, 2024 was 23.6%, compared to 23.3% for the three months ended July 29, 2023. The change in the rate was primarily due to larger excess tax benefits on stock compensation in the prior year quarter, offset by an income tax reserve adjustment in the current year quarter.

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Net Income Attributable to Patterson Companies, Inc. and Earnings Per Share. Net income attributable to Patterson Companies, Inc. for the three months ended July 27, 2024 was $13.7 million, compared to $31.2 million for the three months ended July 29, 2023. Earnings per diluted share were $0.15 in the current quarter compared to $0.32 in the prior year quarter. Weighted average diluted shares outstanding in the current quarter were 88.6 million, compared to 96.2 million in the prior year quarter. The current quarter and prior year quarter cash dividend declared was $0.26 per common share.

LIQUIDITY AND CAPITAL RESOURCES

Net cash used in operating activities was $285.0 million and $253.4 million for the three months ended July 27, 2024 and July 29, 2023, respectively. Net cash used in operating activities for the three months ended July 27, 2024 was primarily driven by the impact of our Receivables Securitization Program, an increase in working capital and a reduction to net income as compared to the prior year period.

Net cash provided by investing activities was $258.3 million and $223.8 million for the three months ended July 27, 2024 and July 29, 2023, respectively. Collections of DPP receivables were $271.8 million and $242.0 million for the three months ended July 27, 2024 and July 29, 2023, respectively. Capital expenditures were $13.5 million and $17.1 million during the three months ended July 27, 2024 and July 29, 2023, respectively. We expect to use a total of approximately $60.0 million for capital expenditures in fiscal 2025.

Net cash provided by financing activities for the three months ended July 27, 2024 was $58.8 million, driven by $134.0 million attributed to draws on our revolving line of credit, partially offset by $50.0 million for share repurchases and $23.3 million for dividend payments. Net cash used in financing activities for the three months ended July 29, 2023 was $23.1 million, driven primarily by dividend payments of $25.4 million and share repurchases of $29.5 million, partially offset by $31.0 million attributed to draws on our revolving line of credit.

In fiscal 2021, we entered into an amendment, restatement and consolidation of certain credit agreements with various lenders, including MUFG Bank, Ltd, as administrative agent. This amended and restated credit agreement (the “Credit Agreement”) consisted of a $700.0 million revolving credit facility and a $300.0 million term loan facility, and was set to mature no later than February 2024.

In the second quarter of fiscal 2023, we amended and restated the Credit Agreement (the “Amended Credit Agreement”). The Amended Credit Agreement consists of a $700.0 million revolving credit facility and a $300.0 million term loan facility, and will mature no later than October 2027. We used the Amended Credit Agreement facilities to refinance and consolidate the Credit Agreement, and pay the fees and expenses incurred therewith. We expect to use the Amended Credit Agreement to finance our ongoing working capital needs and for other general corporate purposes.

As of July 27, 2024, $294.8 million was outstanding under the Amended Credit Agreement term loan at an interest rate of 6.45%, and $320.0 million was outstanding under the Amended Credit Agreement revolving credit facility at an interest rate of 6.43%. As of April 27, 2024, $295.5 million was outstanding under the Credit Agreement term loan at an interest rate of 6.54%, and $186.0 million was outstanding under the Credit Agreement revolving credit facility at an interest rate of 6.53%.

We expect the collection of deferred purchase price receivables, existing cash balances and credit availability under existing debt facilities, less our funds used in operations, will be sufficient to meet our working capital needs and to finance our business over the remainder of fiscal 2025.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

See Note 1 to the Condensed Consolidated Financial Statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in our exposure to market risk from that disclosed in Item 7A in our 2024 Annual Report on Form 10-K filed June 18, 2024.

ITEM 4. CONTROLS AND PROCEDURES

Under the supervision and with the participation of our management, including our President and Chief Executive Officer ("CEO") and our Chief Financial Officer ("CFO"), management evaluated the effectiveness of the design and

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operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of July 27, 2024. Based upon their evaluation of these disclosure controls and procedures, the CEO and CFO concluded that the disclosure controls and procedures were effective as of July 27, 2024.

There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended July 27, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II—OTHER INFORMATION

ITEM 1. 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. Adverse outcomes 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.

See Note 11 to the Condensed Consolidated Financial Statements appearing in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information.

ITEM 1A. RISK FACTORS

There have been no material changes to the risk factors disclosed in Part I, Item 1A, “Risk Factors” in our 2024 Annual Report on Form 10-K for the fiscal year ended April 27, 2024.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Purchases of Equity Securities by the Issuer

On March 11, 2024, the Board of Directors authorized a $500 million share repurchase program through March 16, 2027. As of July 27, 2024 there was $450.0 million remaining under the stock repurchase program.

The following table presents activity under the stock repurchase program during the first quarter of fiscal 2025.


	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
April 28, 2024 to May 25, 2024	1,939,890	$	25.77	1,939,890	$	450,000,014
May 26, 2024 to June 22, 2024	—	—		—	450,000,014
June 23, 2024 to July 27, 2024	—	—		—	450,000,014
	1,939,890	$	25.77	1,939,890	$	450,000,014

Our Credit Agreement permits us to declare and pay dividends, and repurchase shares, provided that no default or unmatured default exists and that we are in compliance with applicable financial covenants.

ITEM 5. OTHER INFORMATION

Insider Trading Arrangements

A significant portion of the compensation of our executive officers is delivered in the form of equity awards, including restricted stock units, performance units and non-qualified stock options. All of these awards contain vesting requirements related to service, with performance units also requiring satisfaction of certain performance criteria to obtain a payout. This compensation design is intended to align executive compensation with the performance experienced by our shareholders. Following delivery of shares of our common stock under such equity awards, once any applicable service- or performance-based vesting standards have been satisfied, our executive officers from time to time engage in the open-market sale of some of those shares for diversification or other personal reasons. Our executive officers may also engage from time to time in other transactions involving our securities.

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Transactions in our securities by our directors and officers are required to be made in accordance with our Securities Trading and Information Disclosure Policy (our “Insider Trading Policy”), which, among other things, requires that the transactions be in accordance with applicable U.S. federal securities laws that prohibit trading while in possession of material nonpublic information. Rule 10b5-1 under the Exchange Act provides an affirmative defense that enables directors and officers to prearrange transactions in the company’s securities in a manner that avoids concerns about initiating transactions while in possession of material nonpublic information. Our Insider Trading Policy permits our directors and officers to enter into trading plans designed to comply with Rule 10b5-1.

In addition, our directors and officers are required to maintain an ownership of the company’s common stock with a value equal to at least a multiple of their annual base salary (5x annual salary for our Chief Executive Officer and 3x annual salary for all direct reports to our Chief Executive Officer) or their annual cash retainer (5x annual cash retainer for non-employee directors).

During the three months ended July 27, 2024, none of the company’s directors or officers (as defined in Rule 16a-1(f) of the Exchange Act) adopted, modified or terminated a Rule 10b5-1 trading arrangement and none of the company’s directors or officers (as defined in Rule 16a-1(f) of the Exchange Act) adopted, modified or terminated a non-Rule 10b5-1 trading arrangement (as such terms are defined in Item 408 of Regulation S-K of the Securities Act of 1933, as amended).

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ITEM 6. EXHIBITS


Exhibit No.						Exhibit Description

10.1						Transition and Separation Agreement by and between Patterson Companies, Inc. and Tim E. Rogan, dated May 10, 2024 (incorporated by reference to our Current Report on Form 8-K, filed May 10, 2024 (File No. 000-20572)).

10.2						Third Amended and Restated Receivables Purchase Agreement dated as of December 3, 2010, among PDC Funding Company, LLC, as seller, Patterson Companies, Inc., as servicer, the conduits party thereto, the financial institutions party thereto, the purchaser agents party thereto, and MUFG Bank, Ltd. (f.k.a. The Bank of Tokyo-Mitsubishi UFJ, Ltd.), as agent, conformed through Amendment 27, dated July 26, 2024 (filed herewith).







31.1						Certification of the Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2						Certification of the Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1						Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2						Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101						(Filed Electronically) The following financial information from our Quarterly Report on Form 10-Q for the period ended July 27, 2024, formatted in Inline XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations and Other Comprehensive Income, (iii) the Condensed Consolidated Statements of Changes in Stockholders’ Equity, (iv) the Condensed Consolidated Statements of Cash Flows and (v) the Notes to the Condensed Consolidated Financial Statements.(*)

104						(Filed Electronically) The cover page from our Quarterly Report on Form 10-Q for the period ended July 27, 2024 is formatted in Inline XBRL (Extensible Business Reporting Language).(*)

(*) The Inline XBRL related information in Exhibits 101 and 104 to this Quarterly Report on Form 10-Q shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability of that section and shall not be incorporated by reference into any filing or other document pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing or document.

All other items under Part II have been omitted because they are inapplicable or the answers are negative, or were previously reported in the 2024 Annual Report on Form 10-K filed June 18, 2024.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		PATTERSON COMPANIES, INC.
		(Registrant)

Dated: August 28, 2024	By:	/s/ Kevin M. Barry
		Kevin M. Barry
		Chief Financial Officer
		(Principal Financial Officer and Principal Accounting Officer)

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Date	Price Target	Rating	Analyst
2/29/2024	$34.00 → $28.00	Overweight → Neutral	Piper Sandler
2/26/2024	$36.00	Outperform	Leerink Partners
5/13/2022	$36.00	Outperform	Credit Suisse
3/3/2022	$30.00 → $32.00	Equal-Weight	Morgan Stanley
1/31/2022	$30.00	Equal-Weight	Morgan Stanley
10/1/2021	$38.00	Outperform	Credit Suisse

SEC Form 10-Q filed by Patterson Companies Inc.

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