Overview


Our financial information for fiscal 2021 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 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 operate with a 52-53 week accounting convention with our fiscal year ending
on the last Saturday in April. Fiscal 2021, 2020 and 2019 ended on April 24,
2021, April 25, 2020 and April 27, 2019, respectively, and all years consisted
of 52 weeks. Fiscal 2022 will end on April 30, 2022 and will consist of 53
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 net sales adjusted to exclude the impact of foreign currency and
changes in product selling relationships. 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 significant fluctuations in currency rates.
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. As part of our broad-based effort to respond to the COVID-19
pandemic, we implemented cost reduction measures, including temporary salary
reductions, furloughs and reduced work hours across our workforce during the
period from May 1, 2020 through July 31, 2020. Within our Dental segment, the
effect became less significant during the first quarter of fiscal 2021, as
dental offices began opening for elective procedures. In addition, we recorded
increased sales of infection control products during fiscal 2021, but also
absorbed higher levels of inventory adjustments as market prices fluctuated
throughout the fiscal year. The disruptions we experienced in our production
animal business as a result of the pandemic became less significant after the
first quarter of fiscal 2021.

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 reflected recent
sales trends we had experienced. Future operating margins were expected to be
lower based on then-current trends in our markets. These trends were 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. In fiscal 2020, the animal
health industry experienced a reduction in sales volume as a result
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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 in fiscal
2020 reflected the long-term impact of COVID-19.
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 consolidated statements of cash flows, with a
corresponding reduction to net cash (used in) 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
litigation with the U.S. Attorney's Office for the Western District of Virginia,
which were recorded within operating expenses in the consolidated statements of
operations and other comprehensive income in our Corporate segment. The
settlement amount was fully paid in fiscal 2020.
Fiscal 2020 Legal Reserve. We incurred expenses of $17.7 million ("Fiscal 2020
SourceOne Dental Legal Reserve") during the first quarter of fiscal 2020 related
to the settlement of litigation with SourceOne Dental, Inc., which were recorded
within operating expenses in the consolidated statements of operations and other
comprehensive income in our Corporate segment. The settlement amount was fully
paid in fiscal 2020.
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, at which time the settlement amount
became fully paid. We established a pre-tax reserve of $28.3 million in fiscal
2019 to account for the settlement of this matter.
Results of Operations
The following table summarizes our results as a percent of net sales:

Fiscal Year Ended


                                                              April 24, 2021          April 25, 2020          April 27, 2019
Net sales                                                             100.0  %                100.0  %                100.0  %
Cost of sales                                                          79.6                    78.2                    78.6
Gross profit                                                           20.4                    21.8                    21.4
Operating expenses                                                     16.8                    19.9                    18.9
Goodwill impairment                                                       -                    12.3                       -
Operating income (loss)                                                 3.6                   (10.4)                    2.5
Other expense, net                                                     (0.2)                   (0.4)                   (0.6)
Income (loss) before taxes                                              3.4                   (10.8)                    1.9
Income tax expense (benefit)                                            0.8                    (0.1)                    0.4

Net income (loss)                                                       2.6                   (10.7)                    1.5
Net loss attributable to noncontrolling interests                         -                       -                       -
Net income (loss) attributable to Patterson Companies, Inc.             2.6  %                (10.7) %                  1.5  %


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Fiscal 2021 Compared to Fiscal 2020
Net sales. Consolidated net sales in fiscal 2021 were $5,912.1 million, an
increase of 7.7% from $5,490.0 million in fiscal 2020. Foreign exchange rate
changes had a favorable impact of 0.5% on fiscal 2021 sales. Sales of certain
products previously recognized on a gross basis were recognized on a net basis
during fiscal 2021, resulting in an estimated 1.0% unfavorable impact to sales.
This change in revenue recognition was driven by changes in contractual terms
with certain suppliers.
Dental segment sales increased 10.7% to $2,327.0 million in fiscal 2021 from
$2,101.9 million in fiscal 2020. Foreign exchange rate changes had a favorable
impact of 0.3% on fiscal 2021 sales. Sales of consumables increased 15.2%, sales
of equipment and software increased 7.9%, and sales of value-added services and
other decreased 0.5% in fiscal 2021. While Dental segment sales were negatively
affected by the COVID-19 pandemic during fiscal 2021, we recorded increased
sales of infection control products during this period compared to fiscal 2020
within consumable sales.
Animal Health segment sales increased 6.7% to $3,560.0 million in fiscal 2021
from $3,336.3 million in fiscal 2020. Foreign exchange rate changes had a
favorable impact of 0.7% on fiscal 2021 sales. Sales of certain products
previously recognized on a gross basis were recognized on a net basis during
fiscal 2021, resulting in an estimated 1.7% unfavorable impact to sales. This
change in revenue recognition was driven by changes in contractual terms with
certain suppliers. Sales were higher in fiscal 2021 as compared to fiscal 2020,
driven by increased sales in our companion animal business.
Gross profit. Consolidated gross profit margin decreased 140 basis points from
the prior year to 20.4%. Gross profit margin rates decreased in both the Dental
and Animal Health segment. Our Dental segment rate was negatively impacted by
inventory adjustments related to infection control products, as well as a higher
LIFO reserve in fiscal 2021 as compared to fiscal 2020. The LIFO reserve expense
recorded in fiscal 2021 in our Dental segment was approximately $12.0 million.
Our Animal Health segment rate was negatively impacted by lower transactional
margins as compared to fiscal 2020.
Operating expenses. Consolidated operating expenses for fiscal 2021 were $992.5
million, a 9.3% decrease from the prior year of $1,094.5 million. We incurred
lower operating expenses during fiscal 2021 primarily as a result of lower legal
fees and settlements, travel expenses and personnel costs. Lower personnel costs
were driven by our implementation of temporary salary reductions, furloughs and
reduced work hours across our workforce during the period from May 1, 2020
through July 31, 2020.
Goodwill impairment. In fiscal 2020, we recorded goodwill impairment charges
totaling $675.1 million in our Animal Health segment.
Operating income (loss). Consolidated operating income was $210.6 million in
fiscal 2021, compared to an operating loss of $572.1 million in fiscal 2020. The
change in operating income (loss) from fiscal 2020 was driven by the Goodwill
Impairment, as well as lower legal fees and settlements, travel expenses and
personnel costs incurred in fiscal 2021.
Dental segment operating income was $201.2 million for fiscal 2021, an increase
of $32.9 million from fiscal 2020. The increase was primarily driven by higher
net sales, as well as lower personnel costs and travel expenses, during fiscal
2021.
Animal Health segment operating income was $88.1 million for fiscal 2021, as
compared to an operating loss of $594.7 million for fiscal 2020. The change was
primarily driven by the Goodwill Impairment in fiscal 2020 and higher net sales
in fiscal 2021.
Corporate segment operating loss was $78.8 million for fiscal 2021, as compared
to a loss of $145.7 million for fiscal 2020. The change was driven primarily by
lower legal fees and settlements during fiscal 2021, as well as lower customer
financing net sales.
Other income (expense), net. Net other expense was $10.7 million in fiscal 2021,
compared to $18.3 million in fiscal 2020. The difference in other income
(expense) was primarily driven by the Gain on Investment recorded during fiscal
2020, partially offset by higher interest expense incurred during fiscal 2020,
which was driven by the Early Repayment of Debt during fiscal 2020. In addition,
we incurred lower losses on our interest rate swap agreements during fiscal
2021.
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Income tax expense (benefit). The effective income tax rate for fiscal 2021 was
22.4%. In 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 in fiscal 2020.
Net income (loss) attributable to Patterson Companies, Inc. and earnings (loss)
per share. Net earnings attributable to Patterson Companies Inc. was $156.0
million in fiscal 2021, compared to a net loss attributable to Patterson
Companies Inc. of $588.4 million in fiscal 2020. Earnings per diluted share were
$1.61 in fiscal 2021, compared to a loss per diluted share of $6.25 in fiscal
2020. Weighted average diluted shares in fiscal 2021 were 96.7 million, compared
to 94.2 million in fiscal 2020. The fiscal 2021 and fiscal 2020 cash dividend
declared was $1.04 per common share.
Fiscal 2020 Compared to Fiscal 2019
See Item 7 in our 2020 Annual Report on Form 10-K filed June 24, 2020.
Liquidity and Capital Resources
Net cash used in operating activities was $730.5 million in fiscal 2021,
compared to $243.5 million in fiscal 2020. Net cash provided by operating
activities was $48.2 million in fiscal 2019. Net cash used in operating
activities in fiscal 2021 was primarily due to the impact of our Receivables
Securitization Program, as well as an increase in accounts payable. 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. 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.
Net cash provided by investing activities was $810.7 million in fiscal 2021,
compared to $499.1 million in fiscal 2020 and $340.7 million in fiscal 2019.
Collections of deferred purchase price receivables were $834.0 million, $540.9
million and $402.4 million in fiscal 2021, 2020 and 2019, respectively. Capital
expenditures were $25.8 million, $41.8 million and $60.7 million in fiscal 2021,
2020 and 2019, 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 2022.
Net cash used in financing activities in fiscal 2021 was $22.6 million, driven
by $75.2 million for dividend payments, partially offset by $53.0 million
attributed to draws on our revolving line of credit. 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.
In fiscal 2021, a quarterly cash dividend of $0.26 per share was declared
throughout the year. In fiscal 2021, dividends were declared each quarter, with
payment occurring in the subsequent quarter. We currently expect to declare and
pay quarterly cash dividends in the future, but any future dividends 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 in the future may also contain similar
covenants. Accordingly, there can be no assurance that we will declare and 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 was
variable and was determined as a base rate plus a spread. This spread, as well
as a commitment fee on the unused portion of the facility, was 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.
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 was variable and was determined as a base rate plus
a spread. This spread was based on our leverage ratio, as defined in the Term
Facility Agreement. The
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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 was set
to 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%.
In fiscal 2021, we entered into an amendment, restatement and consolidation of
the Amended Credit Agreement and the Term Facility Agreement with various
lenders, including MUFG Bank, Ltd, as administrative agent. This amended and
restated credit agreement (the "Credit Agreement"), dated February 16, 2021,
consists of a $700.0 million revolving credit facility and a $300.0 million term
loan facility, and will mature no later than February 2024. We used the
facilities to refinance and consolidate the Amended Credit Agreement and the
Term Facility Agreement, pay the fees and expenses incurred therewith, and
finance our ongoing working capital and other general corporate purposes.
As of April 24, 2021, $300.0 million was outstanding under the Credit Agreement
term loan at an interest rate of 1.36%, and $53.0 million was outstanding under
the Credit Agreement revolving credit facility at an interest rate of 1.34%.
On March 16, 2021, our Board of Directors approved a new share repurchase
authorization for up to $500 million of our company's common stock through March
16, 2024, replacing the March 2018 share repurchase authorization for up to $500
million of common stock which had expired and under which no repurchases had
been made. As of April 24, 2021, $500 million remains available under the
current repurchase authorization.
We have $143.2 million in cash and cash equivalents as of April 24, 2021, of
which $86.1 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 24, 2021 is $36.8 million of cash collected from previously sold customer
financing arrangements that have not yet been settled with the third party. See
Note 4 to the Consolidated Financial Statements for further information.
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 next fiscal year.
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-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 24, 2021 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 24, 2021 was $100 million.
Our financing business is described in further detail in Note 4 to the
Consolidated Financial Statements.
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Contractual Obligations
A summary of our contractual obligations as of April 24, 2021 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      $ 100,750      $ 333,000      $ 117,500      $  40,000
Long-term debt interest       49,378         16,158         23,067          7,121          3,032
Operating leases              84,879         34,304         40,690          8,557          1,328
Total                      $ 725,507      $ 151,212      $ 396,757      $ 133,178      $  44,360


As of April 24, 2021 our gross liability for uncertain tax positions, including
interest and penalties, was $12.9 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 9 and
10 to the Consolidated Financial Statements.
Outlook
The COVID-19 pandemic and measures taken in response thereto have had, and may
continue to have, a significant impact on our businesses. Beginning in March
2020, across our markets authorities implemented numerous measures to try to
contain the virus, such as travel bans and restrictions, quarantines, shelter in
place orders, and business shutdowns, and continued to implement such measures
as new waves of infection developed. These measures had negative impacts on
consumer spending and business spending habits, that adversely impacted our
financial results and the financial results of our customers, suppliers and
business partners during fiscal 2021, and are expected to continue to have
negative impacts into fiscal 2022.
In our markets of the U.S., Canada, and the UK, restrictive measures have now
been lifted or are expected to be lifted soon, sometimes subject to social
distancing and capacity restrictions, due to the rapid pace of vaccination and
improving local case rates. However, other areas around the world continue to
suffer. Concerns remain that our markets could see a resurgence of cases
triggering another shutdown, for example due to the emergence of a variant not
effected by existing vaccines. In addition, COVID-19 continues to have a
material effect on the macroeconomic environment, and there is continued
uncertainty around its duration and ultimate impact.
We cannot accurately estimate how long and to what extent COVID-19 will continue
to impact our business. Although we have experienced reduced demand in certain
areas of our business, 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.
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:
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                                                   Fiscal Year Ended
                            April 24, 2021             April 25, 2020       April 27, 2019
Days sales outstanding           25.9                       29.1                 36.5
Inventory turnover                6.1                        5.4                  5.3


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 positively
impacted net sales by $28.4 million in fiscal 2021, while they adversely
affected net sales by $21.9 million and $24.3 million in fiscal 2020 and 2019,
respectively. 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.
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.
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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 24, 2021, 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 89.0% 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 24, 2021; 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.
In connection with the preparation of these financial statements in the fourth
quarter of fiscal 2021, management completed its annual goodwill and other
indefinite-lived intangible asset impairment tests using the beginning of our
fiscal 2021 fourth quarter as the valuation date. We determined that there was
no impairment of either goodwill or our indefinite-lived intangible asset.
In connection with the preparation of our fiscal 2020 Form 10-K 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 reflected recent
sales trends we had experienced. Future operating margins were expected to be
lower based on then-current trends in our markets. These trends were driven by
customer and vendor consolidation.
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Subsequent to the annual test being completed and in connection with the
preparation of our fiscal 2020 Form 10-K in the fourth quarter of fiscal 2020,
we experienced events and circumstances that indicated that the carrying amount
of goodwill may have been 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. In fiscal 2020, the
animal health industry 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 in fiscal
2020 reflected 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 6
to the Consolidated Financial Statements.
Development Costs of Software to be Sold - At the end of each fiscal quarter, we
compare the unamortized capitalized costs of software to be sold to its net
realizable value. If the unamortized amount exceeds the net realizable value, an
impairment is recorded for this amount of that asset shall be written off. If
the unamortized capitalized costs are less than the net realizable value of that
asset, then there is no impairment.
Related Party Transactions - We have interests in a number of entities that are
accounted for using the equity method. During fiscal 2021, 2020 and 2019 we made
purchases of $110.2 million, $94.2 million and $87.9 million from these
entities, respectively. During fiscal 2021, 2020 and 2019, we recorded net sales
of $93.6 million, $110.3 million and $74.5 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.
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
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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.
Subsequent Events
During the first quarter of fiscal 2022, we entered into an agreement to sell a
portion of one of our investments, which we expect to close in the first quarter
of fiscal 2022. We expect to receive cash proceeds of approximately $54.0
million, and to record a pre-tax gain of approximately $28.0 million in other
income, net in our consolidated statements of operations and other comprehensive
income (loss) as a result of this transaction. Also related to this transaction,
we expect to record a non-cash gain in the first quarter of fiscal 2022 related
to the remaining portion of this investment.

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