Overview


Our financial information for fiscal 2020 is summarized in this Management's
Discussion and Analysis and the 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 and software, 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 considerably 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 substantially lower due generally to the low margins
experienced on the sale of pharmaceutical products.
We operate with a 52-53 week accounting convention with our fiscal year ending
on the last Saturday in April. Fiscal 2020, 2019 and 2018 ended on April 25,
2020, April 27, 2019 and April 28, 2018, respectively, and all years consisted
of 52 weeks. Fiscal 2021 will end on April 24, 2021 and will consist of 52
weeks.
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. Management defines internal
growth as the increase in net sales from period to period, adjusting for
differences in the number of weeks in fiscal years, excluding the impact of
changes in currency exchange rates, and excluding the net sales, for a period of
twelve months following the transaction date, of businesses we have acquired.
Factors Affecting Our Results
COVID-19. The COVID-19 pandemic, including closures and other steps taken by
governmental authorities in response to the virus, has had a significant impact
on our businesses. Through March 2020, sales in our Dental and Animal Health
segments were up year over year. In April 2020, our Dental segment sales were
down approximately 71% and our Animal Health segment sales were down
approximately 9%, as compared to April 2019. In addition, operating expenses
were also down significantly in April 2020, as compared to April 2019, as
certain variable expenses decreased with sales.

Goodwill Impairment. In the fourth quarter of fiscal 2020, we recorded non-cash
pre-tax goodwill impairment charges totaling $675.1 million in our Animal Health
segment ("Goodwill Impairment"), which were not fully tax deductible. The
decrease in the fair value of the Animal Health reporting unit below its
carrying value was mainly the result of a reduction in management's estimates of
future cash flows. Future cash flows were affected by a reduction in future
sales volume and operating margins. The sales volume estimate is a reflection of
recent sales trends we've experienced. Future operating margins are expected to
be lower based on current trends in our markets. These trends are driven by
customer and vendor consolidation. We experienced a further decrease in the fair
value of the Animal Health reporting unit subsequent to our annual goodwill
impairment test, which was caused by additional reductions in management's
estimates of future cash flows, driven by reduced sales volumes, as well as
reduced EBITDA multiples of comparable companies. These estimates and market
multiples were negatively affected by COVID-19. The animal health industry has
experienced a reduction in sales volume as a result of stay at home and shelter
in place orders, as well as a result of meat packing plant closures. Our future
cash flow estimates for this business unit reflect the long-term impact of
COVID-19.

Receivables Securitization Program. In fiscal 2019 and fiscal 2020, we entered
into receivables purchase agreements with MUFG Bank, Ltd. ("MUFG"). Under these
agreements, MUFG acts as an agent to facilitate the
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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 initial transaction in
fiscal 2019 was a sale of $237.6 million of net receivables. From this sale, we
received $171.0 million of cash. The proceeds from the initial sale were
primarily used to reduce debt. The transaction in fiscal 2020 reduced our net
receivables by $120.1 million and increased cash by $29.0 million as of January
25, 2020. As of April 25, 2020, the maximum available under the receivables
purchase agreements was $200.0 million, of which $200.0 million was utilized.
The DPP receivable was $117.3 million as of April 25, 2020.

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 consolidated statements of cash flows, with a
corresponding reduction to net cash provided by operating activities within the
consolidated statements of cash flows.

Gain on Investment. We recorded a pre-tax gain of $34.3 million related to one
of our investments ("Gain on Investment") in fiscal 2020. This gain was based on
the selling price of preferred stock in this investment that is similar to the
preferred stock we own, and was adjusted for differences in liquidation
preferences.
Early Repayment of Debt. In fiscal 2020, we repaid certain indebtedness totaling
$373.8 million ("Early Repayment of Debt"). As a result, we recorded a pre-tax
non-cash charge of $9.0 million during fiscal 2020. This charge relates to the
January 2014 forward interest rate swap agreement and accelerated amortization
of debt issuance costs.
Fiscal 2020 U.S. Attorney's Office Legal Reserve. We incurred costs and expenses
of $58.3 million ("Fiscal 2020 U.S. Attorney's Office Legal Reserve") during the
second quarter of fiscal 2020 related to the then-probable settlement of an
investigation by the U.S. Attorney's Office for the Western District of
Virginia. See "Part I, Item 3. Legal Proceedings" for additional information.
Fiscal 2020 Legal Reserve. We incurred expenses of $17.7 million during the
first quarter of fiscal 2020 related to the settlement of litigation with
SourceOne Dental, Inc.

Fiscal 2019 Legal Reserve. In September 2018, we signed an agreement to settle
the litigation entitled In re Dental Supplies Antitrust Litigation. Under the
terms of the settlement, we paid $28.3 million into escrow upon preliminary
court approval. Such funds were to be released to the settlement fund
administrator upon final court approval of the settlement, which was granted at
the fairness hearing held on June 24, 2019. We established a pre-tax reserve of
$28.3 million during the first quarter of fiscal 2019 to account for the
settlement of this matter.

U.S. Tax Reform. In December 2017, the U.S. government enacted comprehensive tax
legislation commonly referred to as the Tax Act. The Tax Act significantly
revised the future ongoing U.S. federal corporate income tax by, among other
things, lowering U.S. federal corporate tax rates and implementing a territorial
tax system. Effective January 1, 2018, the Tax Act reduced the U.S. federal
corporate tax rate from 35.0% to 21.0%. For our fiscal year ending April 28,
2018, we utilized a blended rate of approximately 30.5%. For fiscal 2018, these
impacts resulted in a provisional discrete net tax benefit of $76.6 million,
which included provisional amounts of $81.9 million of tax benefit on U.S.
deferred tax assets and liabilities, $4.0 million of tax expense for a one-time
transition tax on unremitted foreign earnings and $1.2 million in withholding
taxes paid on current year distributions.
Results of Operations
The following table summarizes our results as a percent of net sales:
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                                                                                      Fiscal Year Ended
                                                               April 25, 2020          April 27, 2019          April 28, 2018
Net sales                                                              100.0  %                100.0  %                100.0  %
Cost of sales                                                           78.2                    78.6                    78.1
Gross profit                                                            21.8                    21.4                    21.9
Operating expenses                                                      19.9                    18.9                    17.9
Goodwill impairment                                                     12.3                       -                       -
Operating (loss) income                                                (10.4)                    2.5                     4.0
Other expense, net                                                      (0.4)                   (0.6)                   (0.7)
(Loss) income before taxes                                             (10.8)                    1.9                     3.3
Income tax (benefit) expense                                            (0.1)                    0.4                    (0.4)

Net (loss) income                                                      (10.7)                    1.5                     3.7
Net loss attributable to noncontrolling interests                          -                       -                       -
Net (loss) income attributable to Patterson Companies, Inc.            (10.7) %                  1.5  %                  3.7  %



Fiscal 2020 Compared to Fiscal 2019
Net sales. Consolidated net sales in fiscal 2020 were $5,490.0 million, a
decrease of 1.5% from $5,574.5 million in fiscal 2019. Foreign exchange rate
changes had an unfavorable impact of 0.4% on fiscal 2020 sales.
Dental segment sales decreased 4.1% to $2,101.9 million in fiscal 2020 from
$2,191.8 million in fiscal 2019. Foreign exchange rate changes had an
unfavorable impact of 0.1% on fiscal 2020 sales. Sales of consumables decreased
6.5%, sales of equipment and software decreased 2.5%, and sales of other
services and products increased 2.2% in fiscal 2020. Dental segment sales were
negatively affected by the COVID-19 pandemic during the fourth quarter of fiscal
2020 due to mandated and recommended closures after the American Dental
Association announced on March 16, 2020 that dentists nationwide postpone
elective procedures in response to the spread of COVID-19 across the country.
Animal Health segment sales decreased 0.5% to $3,336.3 million in fiscal 2020
from $3,354.5 million in fiscal 2019. Foreign exchange rate changes had an
unfavorable impact of 0.6% on fiscal 2020 sales. Sales of certain products
previously recognized on a gross basis were recognized on a net basis during
fiscal 2020, resulting in an estimated 0.3% unfavorable impact to sales. Animal
Health segment sales were also negatively affected by COVID-19 during the fourth
quarter of fiscal 2020. The animal health industry has experienced a reduction
in sales volume as a result of stay at home and shelter in place orders.
Gross profit. Consolidated gross profit margin increased 40 basis points from
the prior year to 21.8%. Gross profit margin rates increased in both the Dental
and Animal Health segment. In addition, a greater percentage of sales came from
our Corporate segment sales, resulting in a higher consolidated gross profit
margin rate.
Operating expenses. Consolidated operating expenses for fiscal 2020 were
$1,094.5 million, a 4.0% increase from the prior year of $1,053.1 million. We
incurred higher operating expenses during fiscal 2020 primarily as a result of
legal fees and settlements in fiscal 2020 being $40.9 million higher than those
incurred in fiscal 2019.
Goodwill impairment. In fiscal 2020, we recorded goodwill impairment charges
totaling $675.1 million in our Animal Health segment.
Operating (loss) income. The consolidated operating loss was $572.1 million in
fiscal 2020, compared to operating income of $137.7 million, or 2.5% of sales,
in fiscal 2019. The change in operating (loss) income from fiscal 2019 was
driven by the Goodwill Impairment and higher legal fees and settlements in
fiscal 2020.
Dental segment operating income was $168.3 million for fiscal 2020, a decrease
of $10.9 million from fiscal 2019. The decrease was driven primarily by lower
net sales, partially offset by lower operating expenses.
Animal Health segment operating loss was $594.7 million for fiscal 2020, as
compared to operating income of $81.5 million for fiscal 2019. The change was
primarily driven by the Goodwill Impairment in fiscal 2020.
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Corporate segment operating loss was $145.7 million for fiscal 2020, as compared
to a loss of $123.0 million for fiscal 2019. The change was driven primarily by
higher legal fees and settlements, partially offset by higher net sales recorded
during fiscal 2020.
Other income (expense), net. Net other expense was $18.3 million in fiscal 2020,
compared to $31.5 million in fiscal 2019. Net other expense was lower during
fiscal 2020 due to the Gain on Investment, partially offset by losses incurred
on interest rate swap agreements we utilize to hedge against interest rate
fluctuations that impact the amount of net sales we record related to our
customer financing contracts. In addition, interest expense was higher in fiscal
2020, driven by the Early Repayment of Debt, partially offset by lower long-term
debt.
Income tax (benefit) expense. For fiscal 2020, the income tax benefit was $1.0
million on a loss before taxes of $590.4 million. The Goodwill Impairment and
the Fiscal 2020 U.S. Attorney's Office Legal Reserve were not fully deductible.
The effective income tax rate for fiscal 2019 was 22.0%.
Net (loss) income attributable to Patterson Companies, Inc. and (loss) earnings
per share. Net loss attributable to Patterson Companies Inc. was $588.4 million
in fiscal 2020, compared to net income attributable to Patterson Companies Inc.
of $83.6 million in fiscal 2019. The loss per diluted share was $6.25 in fiscal
2020, compared to earnings per diluted share of $0.89 in fiscal 2019. Weighted
average diluted shares in fiscal 2020 were 94,154,000, compared to 93,484,000 in
fiscal 2019. The fiscal 2020 and fiscal 2019 cash dividend was $1.04 per common
share.
Fiscal 2019 Compared to Fiscal 2018

See Item 7 in our 2019 Annual Report on Form 10-K filed June 26, 2019.

Liquidity and Capital Resources



Net cash (used in) provided by operating activities was $(243.5) million in
fiscal 2020, compared to $48.2 million in fiscal 2019 and $178.9 million in
fiscal 2018. Net cash used in operating activities in fiscal 2020 was primarily
due to the impact of our Receivables Securitization Program, partially offset by
a reduction in working capital, which was driven mainly by an increase in
accounts payable. The net cash provided by operating activities in fiscal 2019
was primarily driven by a reduction in working capital, partially offset by the
impact of our Receivables Securitization Program. In fiscal 2018, our cash flows
from operating activities were primarily driven by net income.

Net cash provided by investing activities was $499.1 million in fiscal 2020,
compared to $340.7 million in fiscal 2019 and $17.0 million in fiscal 2018.
Collections of deferred purchase price receivables were $540.9 million, $402.4
million and $49.7 million in fiscal 2020, 2019 and 2018, respectively. Capital
expenditures were $41.8 million, $60.7 million and $43.3 million in fiscal 2020,
2019 and 2018, respectively. Capital expenditures in fiscal 2019 included a
$14.9 million investment to convert leased property into owned property. We
expect to use a total of approximately $50 million for capital expenditures in
fiscal 2021.

Net cash used in financing activities in fiscal 2020 was $271.2 million. Uses of
cash consisted primarily of $460.8 million for the retirement of long-term debt
and $100.4 million for dividend payments. In December 2019, we entered into a
$300.0 million senior unsecured term loan facility, as described further below.
Net cash used in financing activities in fiscal 2019 was $355.2 million. Uses of
cash consisted primarily of $249.5 million for the retirement of long-term debt
and $99.5 million for dividend payments. Net cash used in financing activities
in fiscal 2018 was $230.2 million. Uses of cash consisted primarily of $164.8
million for the retirement of long-term debt, $99.2 million for dividend
payments and $87.5 million for share repurchases. In March 2018, we issued
fixed-rate senior notes with an aggregate principal amount of $150.0 million,
due fiscal 2028. The proceeds were used to repay $150.0 million of senior notes
that came due in March 2018, which is included in the $164.8 million of debt
retirement noted above.

In fiscal 2020, a quarterly cash dividend of $0.26 per share was paid throughout
the year. We currently expect to pay quarterly cash dividends in the future, but
any future dividend payments will be subject to approval by our Board of
Directors, which will depend on our earnings, capital requirements, operating
results and financial condition, as well as applicable law, regulatory
constraints, industry practice and other business considerations that our Board
considers relevant. We are also subject to various financial covenants under our
debt agreements including the maintenance of leverage and interest coverage
ratios. The terms of agreements governing debt that we may incur
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in the future may also contain similar covenants. Accordingly, there can be no
assurance that we will pay dividends in the future at the same rate or at all.
In fiscal 2017, we entered into an amended credit agreement ("Amended Credit
Agreement"), consisting of a $295.1 million term loan and a $750.0 million
revolving line of credit. In March 2019, we permanently reduced the capacity
under the revolving line of credit to $500.0 million. Interest on borrowings is
variable and is determined as a base rate plus a spread. This spread, as well as
a commitment fee on the unused portion of the facility, is based on our leverage
ratio, as defined in the Amended Credit Agreement. During the quarter ended
October 26, 2019, we repaid the remaining $81.6 million outstanding under the
unsecured term loan. As of April 25, 2020, no amount was outstanding under the
Amended Credit Agreement unsecured term loan or revolving line of credit. At
April 27, 2019, $87.1 million was outstanding under the Amended Credit Agreement
unsecured term loan at an interest rate of 3.73%, and no amount was outstanding
under the Amended Credit Agreement revolving line of credit. The term loan and
revolving line of credit mature no later than January 2022.

In December 2019, we entered into a senior unsecured term loan facility
agreement (the "Term Facility Agreement"), consisting of a $300.0 million term
loan. Interest on borrowings is variable and is determined as a base rate plus a
spread. This spread is based on our leverage ratio, as defined in the Term
Facility Agreement. The proceeds were used to repay certain existing
indebtedness, pay fees and expenses incurred in connection with the Term
Facility Agreement, and finance our ongoing working capital and other general
corporate purposes. The Term Facility will mature no later than December 20,
2022. As of April 25, 2020, $300.0 million was outstanding under the Term
Facility at an interest rate of 1.87%.

During the quarter ended January 25, 2020, we repaid certain indebtedness totaling $373.8 million. See Note 6 to the Consolidated Financial Statements for additional details on the repayments.

On March 13, 2018, the Board of Directors authorized a $500 million share repurchase program through March 13, 2021. As of April 25, 2020, $500 million remains available under the current repurchase authorization.



We have $77.9 million in cash and cash equivalents as of April 25, 2020, of
which $46.8 million is in foreign bank accounts. See Note 11 to the Consolidated
Financial Statements for further information regarding our intention to
permanently reinvest these funds. Included in cash and cash equivalents as of
April 25, 2020 is $21.8 million of cash collected from previously sold customer
financing arrangements that have not yet been settled with the third party. See
Note 7 to the Consolidated Financial Statements for further information. We
expect funds used in operations, the collection of deferred purchase price
receivables, existing cash balances and credit availability under existing debt
facilities will be sufficient to meet our working capital needs and to finance
our business over the next fiscal year.

In May 2020, we requested draws on our Amended Credit Agreement revolving line
of credit, resulting in a total of $450 million outstanding under the revolving
credit facility, representing 90% of the full amount available. The Company
elected to drawdown the revolving line of credit to increase its cash position
and provide financial flexibility in light of current economic conditions and
uncertainties arising in connection with the COVID-19 pandemic. The proceeds are
being used for working capital and other general corporate purposes.

As part of our broad-based effort to respond to the COVID-19 pandemic, we
implemented cost reduction measures, including base salary reductions for
employees at the level of manager through our executive officers of between 10%
and 35% during the period from May 1, 2020 through July 31, 2020.
We expect to continue to obtain liquidity from the sale of equipment finance
contracts. Patterson sells a significant portion of our finance contracts (see
below) to a commercial paper funded conduit managed by a third party bank, and
as a result, commercial paper is indirectly an important source of liquidity for
Patterson. Patterson is allowed to participate in the conduit due to the quality
of our finance contracts and our financial strength. Cash flows could be
impaired if our financial strength diminishes to a level that precluded us from
taking part in this facility or other similar facilities. Also, market
conditions outside of our control could adversely affect the ability for us to
sell the contracts.
Customer Financing Arrangements
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-
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sponsored program, equipment purchased by creditworthy customers may be financed
up to a maximum of $1 million. We generally sell our customers' financing
contracts to outside financial institutions in the normal course of our
business. We currently have two arrangements under which we sell these
contracts.
First, we operate under an agreement to sell a portion of our equipment finance
contracts to commercial paper conduits with MUFG Bank, Ltd. ("MUFG") serving as
the agent. We utilize PDC Funding, a consolidated, wholly owned subsidiary, to
fulfill a requirement of participating in the commercial paper conduit. We
receive the proceeds of the contracts upon sale to MUFG. The capacity under the
agreement with MUFG at April 25, 2020 was $525 million.
Second, we maintain an agreement with Fifth Third Bank ("Fifth Third") whereby
Fifth Third purchases customers' financing contracts. PDC Funding II, a
consolidated, wholly owned subsidiary, sells financing contracts to Fifth Third.
We receive the proceeds of the contracts upon sale to Fifth Third. The capacity
under the agreement with Fifth Third at April 25, 2020 was $100 million.
Our financing business is described in further detail in Note 8 to the
Consolidated Financial Statements.
Contractual Obligations
A summary of our contractual obligations as of April 25, 2020 follows (in
thousands):
                                                      Payments due by year
                                            Less than                                      More than
                              Total          1 year        1-3 years       3-5 years        5 years
Long-term debt principal   $ 591,250       $      -       $ 400,750       $ 150,500       $ 40,000
Long-term debt interest       59,834         16,158          26,684          12,444          4,548
Operating leases              84,919         33,195          41,710           9,137            877
Total                      $ 736,003       $ 49,353       $ 469,144       $ 172,081       $ 45,425


As of April 25, 2020 our gross liability for uncertain tax positions, including
interest and penalties, was $13.7 million. We are not able to reasonably
estimate the amount by which the liability will increase or decrease over an
extended period of time or whether a cash settlement of the liability will be
required. Therefore, these amounts have been excluded from the schedule of
contractual obligations.
For a more complete description of our contractual obligations, see Notes 7 and
11 to the Consolidated Financial Statements.
Outlook

The COVID-19 pandemic and measures taken in response thereto have had a
significant impact on our businesses. In March 2020, based upon the
recommendations of the American Dental Association, the American Veterinary
Medical Association and such organizations' state-level counterparts, various
dental and veterinary offices announced that they were performing only emergency
or limited procedures, and rescheduled wellness exams and other elective
procedures. In addition, many states and countries imposed restrictions on
business operations to protect public health. As of June 2020, these measures
have been lifted in some areas that we serve, sometimes subject to social
distancing and capacity restrictions. However, future closures may be mandated
or recommended by health authorities in some states, cities, or counties
depending on the progress of the pandemic. In addition, even if dental and
veterinary offices are open for business in their area, some consumers may
continue to delay elective visits. In addition, the pandemic has also negatively
impacted consumer spending and business spending habits due to increased
unemployment and economic uncertainty, all of which may become heightened
concerns upon a second wave of infection or future developments. The animal
health industry has also experienced a reduction in sales volume as a result of
stay at home and shelter in place orders, as well as due to meat packing plant
closures.
We cannot accurately estimate how long and to what extent COVID-19 will continue
to impact our business. Although we have experienced reduced demand, we are
unable to predict how significantly the pandemic will reduce future demand for
services provided by dentists and veterinarians, the effect of such decreased
demand on the demand for the dental and companion animal products and services
we distribute, or the impact of the pandemic on the overall healthcare
infrastructure and economic outlook in the United States, Canada or the United
Kingdom.
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In addition to the impact on procedure volumes, we are experiencing and may
experience other disruptions as a result of the COVID-19 pandemic. For example,
disruptions or potential disruptions include restrictions on the ability of our
personnel to travel and access customers for sales, service and other support;
supplier disruptions; and additional government requirements to "shelter at
home" or other incremental mitigation efforts that may further impact our
capacity to sell and service the products we distribute. Furthermore, the
economic effects of the pandemic and other governmental actions could reduce the
demand for food animal products, thereby adversely affecting our production
animal supply business. The total impact of these disruptions could have a
material impact on our financial condition, cash flows and results of
operations. However, we continue to believe in the long-term fundamentals of our
business and our compelling value proposition to customers.

Working Capital Management
The following table summarizes our average accounts receivable days sales
outstanding and average annual inventory turnover for the past three fiscal
years:

                                               Fiscal Year Ended
                            April 25, 2020       April 27, 2019      April 28, 2018
Days sales outstanding               29.1                36.5                53.1
Inventory turnover                    5.4                 5.3                 5.2



Foreign Operations

We derive foreign sales from Dental operations in Canada, and Animal Health
operations in Canada and the U.K. Fluctuations in currency exchange rates have
not significantly impacted earnings, as these fluctuations impact sales, cost of
sales and operating expenses. However, changes in exchange rates adversely
affected net sales by $21.9 million and $24.3 million in fiscal 2020 and 2019,
respectively, while they positively impacted net sales by $29.5 million in
fiscal 2018. Changes in currency exchange rates are a risk accompanying foreign
operations, but this risk is not considered material with respect to our
consolidated operations.
Critical Accounting Policies and Estimates
Patterson has adopted various accounting policies to prepare our consolidated
financial statements in accordance with accounting principles generally accepted
in the U.S. Management believes that our policies are conservative and our
philosophy is to adopt accounting policies that minimize the risk of adverse
events having a material impact on recorded assets and liabilities. However, the
preparation of financial statements requires the use of estimates and judgments
regarding the realization of assets and the settlement of liabilities based on
the information available to management at the time. Changes subsequent to the
preparation of the financial statements in economic, technological and
competitive conditions may materially impact the recorded values of Patterson's
assets and liabilities. Therefore, the users of the financial statements should
read all the notes to the Consolidated Financial Statements and be aware that
conditions currently unknown to management may develop in the future. This may
require a material adjustment to a recorded asset or liability to consistently
apply to our significant accounting principles and policies that are discussed
in Note 1 to the Consolidated Financial Statements. The financial performance
and condition of Patterson may also be materially impacted by transactions and
events that we have not previously experienced and for which we have not been
required to establish an accounting policy or adopt a generally accepted
accounting principle.
Revenue Recognition - Revenues are generated from the sale of consumable
products, equipment and support, software and support, technical service parts
and labor, and other sources. Revenues are recognized when or as performance
obligations are satisfied. Performance obligations are satisfied when the
customer obtains control of the goods or services.
Consumable, equipment, software and parts sales are recorded upon delivery,
except in those circumstances where terms of the sale are FOB shipping point, in
which case sales are recorded upon shipment. Technical service labor is
recognized as it is provided. Revenue derived from equipment and software
support is recognized ratably over the period in which the support is provided.
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In addition to revenues generated from the distribution of consumable products
under arrangements (buy/sell agreements) where the full market value of the
product is recorded as revenue, we earn commissions for services provided under
agency agreements. The agency agreement contrasts to a buy/sell agreement in
that we do not have control over the transaction, as we do not have the primary
responsibility of fulfilling the promise of the good or service and we do not
bill or collect from the customer in an agency relationship. Commissions under
agency agreements are recorded when the services are provided.
Estimates for returns, damaged goods, rebates, loyalty programs and other
revenue allowances are made at the time the revenue is recognized based on the
historical experience for such items. The receivables that result from the
recognition of revenue are reported net of related allowances. We maintain a
valuation allowance based upon the expected collectability of receivables held.
Estimates are used to determine the valuation allowance and are based on several
factors, including historical collection data, economic trends and credit
worthiness of customers. Receivables are written off when we determine the
amounts to be uncollectible, typically upon customer bankruptcy or non-response
to continuous collection efforts. The portions of receivable amounts that are
not expected to be collected during the next twelve months are classified as
long-term.
Patterson has a relatively large, dispersed customer base and no single customer
accounts for more than 10% of consolidated net sales. In addition, the equipment
sold to customers under finance contracts generally serves as collateral for the
contract and the customer provides a personal guarantee as well.
Net sales do not include sales tax as we are considered a pass-through conduit
for collecting and remitting sales tax.
Patterson Advantage Loyalty Program - Patterson Dental provides a point-based
awards program to qualifying customers involving the issuance of "Patterson
Advantage dollars" which can be used toward equipment and technology purchases.
Patterson Advantage dollars earned during a program year expire one year after
the end of the program year. The cost and corresponding liability associated
with the program is recognized as contra-revenue. As of April 25, 2020, we
believe we have sufficient experience with the program to reasonably estimate
the amount of Patterson Advantage dollars that will not be redeemed and thus
have recorded a liability for 92.0% of the maximum potential amount that could
be redeemed. We recognize the expected breakage amount as revenue in proportion
to the pattern of rights exercised by the customer, and we recognize the
estimated value of unused Patterson Advantage dollars as redemptions occur.
Breakage recognized was immaterial to all periods presented.
Inventory and Reserves - Inventory consists primarily of merchandise held for
sale and is stated at the lower of cost or market. Cost is determined using the
last-in, first-out ("LIFO") method for all inventories, except for foreign
inventories and manufactured inventories, which are valued using the first-in,
first-out ("FIFO") method. We continually assess the valuation of inventories
and reduce the carrying value of those inventories that are obsolete or in
excess of forecasted usage to estimated realizable value. Estimates are made of
the net realizable value of such inventories based on analyses and assumptions
including, but not limited to, historical usage, future demand and market
requirements.
Goodwill and Other Indefinite-Lived Intangible Assets - Goodwill represents the
excess of cost over the fair value of identifiable net assets of businesses
acquired. Impairment testing for goodwill is done at the reporting unit level,
with all goodwill assigned to a reporting unit. We have two reporting units as
of April 25, 2020; Dental and Animal Health. Our Corporate reportable segment's
assets and liabilities, and net sales and expenses, are allocated to the two
reporting units. We assess goodwill for impairment annually and whenever an
event occurs or circumstances change that would indicate that the carrying
amount may be impaired. Any goodwill impairment is measured as the amount by
which a reporting unit's carrying value exceeds its fair value, not to exceed
the carrying value of goodwill.

The determination of fair value involves uncertainties because it requires
management to make assumptions and to apply judgment to estimate industry and
economic factors and the profitability of future business strategies. Patterson
conducts impairment testing based on current business strategy in light of
present industry and economic conditions, as well as future expectations.
Additionally, in assessing goodwill for impairment, the reasonableness of the
implied control premium is considered based on market capitalizations and recent
market transactions.

Our indefinite-lived intangible asset is a trade name, which is assessed for
impairment by comparing the carrying value of the asset with its fair value. If
the carrying value exceeds fair value, an impairment loss is recognized in an
amount equal to the excess. The determination of fair value involves
assumptions, including projected revenues and gross profit levels, as well as
consideration of any factors that may indicate potential impairment.
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In connection with the preparation of these financial statements in the fourth
quarter of fiscal 2020, management completed its annual goodwill and other
indefinite-lived intangible asset impairment tests using the beginning of our
fiscal 2020 fourth quarter as the valuation date. We determined that there was
no impairment of our indefinite-lived intangible asset. Our annual goodwill
impairment test resulted in no impairment to the Dental reporting unit's
goodwill, and a $269.0 million non-cash pre-tax impairment charge of our Animal
Health reporting unit's goodwill.

The decrease in the fair value of the Animal Health reporting unit below its
carrying value was mainly the result of a reduction in management's estimates of
future cash flows. Future cash flows were affected by a reduction in future
sales volume and operating margins. The sales volume estimate is a reflection of
recent sales trends we've experienced. Future operating margins are expected to
be lower based on current trends in our markets. These trends are driven by
customer and vendor consolidation.

Subsequent to the annual test being completed and in connection with the
preparation of these financial statements, we experienced events and
circumstances that indicated that the carrying amount of goodwill may be further
impaired. These events and circumstances included a decline in our projected
future earnings and a sustained decrease in our share price. As such, we tested
our goodwill for impairment as of the beginning of our fiscal April 2020. This
test resulted in no impairment to the Dental reporting unit's goodwill, and a
$406.1 million non-cash pre-tax impairment charge of our Animal Health reporting
unit's goodwill.

The decrease in the fair value of the Animal Health reporting unit subsequent to
the annual goodwill impairment test was caused by additional reductions in
management's estimates of future cash flows, driven by reduced sales volumes, as
well as reduced EBITDA multiples of comparable companies. These estimates and
market multiples were negatively affected by COVID-19. The animal health
industry has experienced a reduction in sales volume as a result of stay at home
and shelter in place orders, as well as a result of meat packing plant closures.
Our future cash flow estimates for this business unit reflect the long-term
impact of COVID-19.

As of April 25, 2020, our Animal Health reporting unit had no remaining goodwill
as a result of the total goodwill impairment charges recorded in fiscal 2020 of
$675.1 million.
Long-Lived Assets - Long-lived assets, including definite-lived intangible
assets, are evaluated for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable through
the estimated undiscounted future cash flows derived from such assets. Our
definite-lived intangible assets primarily consist of customer relationships,
trade names and trademarks. When impairment exists, the related assets are
written down to fair value using level 3 inputs, as discussed further in Note 9
to the Consolidated Financial Statements.
Related Party Transactions - We have interests in a number of entities that are
accounted for using the equity method. During fiscal 2020, 2019 and 2018 we made
purchases of $94.2 million, $87.9 million and $84.2 million from these entities,
respectively. During fiscal 2020, 2019 and 2018, we recorded net sales of $110.3
million, $74.5 million and $19.7 million to these entities, respectively.
Income Taxes - We are subject to income taxes in the U.S. and numerous foreign
jurisdictions. Significant judgments are required in determining the
consolidated provision for income taxes. Changes in interpretation of the Tax
Act could create potential added uncertainties.
During the ordinary course of business, there are many transactions and
calculations for which the ultimate tax determination is uncertain. As a result,
we recognize tax liabilities based on estimates of whether additional taxes and
interest will be due. These tax liabilities are recognized when, despite our
belief that our tax return position is supportable, we believe that certain
positions may not be fully sustained upon review by tax authorities. We believe
that our accruals for tax liabilities are adequate for all open audit years
based on our assessment of many factors including past experience and
interpretations of tax law. This assessment relies on estimates and assumptions
and may involve a series of complex judgments about future events. To the extent
that the final tax outcome of these matters is different than the amounts
recorded, such differences will impact income tax expense in the period in which
such determination is made and could materially affect our financial results.
Valuation allowances are established for deferred tax assets if, after
assessment of available positive and negative evidence, it is more likely than
not that the deferred tax asset will not be fully realized.
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Self-insurance - Patterson is self-insured for certain losses related to general
liability, product liability, automobile, workers' compensation and medical
claims. We estimate our liabilities based upon an analysis of historical data
and actuarial estimates. While current estimates are believed reasonable based
on information currently available, actual results could differ and affect
financial results due to changes in the amount or frequency of claims, medical
cost inflation or other factors. Historically, actual results related to these
types of claims have not varied significantly from estimated amounts.
Stock-based Compensation - We recognize stock-based compensation based on
certain assumptions including inputs within valuation models, estimated
forfeitures and estimated performance outcomes. These assumptions require
subjective judgment and changes in the assumptions can materially affect fair
value estimates. Management assesses the assumptions and methodologies used to
estimate forfeitures and to calculate estimated fair value of stock-based
compensation on a regular basis. Circumstances may change, and additional data
may become available over time, which could result in changes to these
assumptions and methodologies and thereby materially impact the fair value
determination or estimates of forfeitures. If factors change and we employ
different assumptions, the amount of compensation expense associated with
stock-based compensation may differ significantly from what was recorded in the
current period.

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