General

9 Months Ended

Jan. 29, 2022

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 January 29, 2022, and our results of operations and cash flows for the periods ended January 29, 2022 and January 23, 2021. Such adjustments are of a normal recurring nature. The results of operations for the three and nine months ended January 29, 2022 are not necessarily indicative of the results to be expected for any other interim period or for the year ending April 30, 2022. These financial statements should be read in conjunction with the financial statements included in our 2021 Annual Report on Form 10-K filed on June 23, 2021.

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 outside 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 third quarter of fiscal 2022 and 2021 represents the 13 weeks ended January 29, 2022 and the 13 weeks ended January 23, 2021, respectively. The nine months ended January 29, 2022 and January 23, 2021 included 40 and 39 weeks, respectively. Fiscal 2022 will include 53 weeks and fiscal 2021 included 52 weeks.

Other Income, Net

Other income, net consisted of the following:


	Three Months Ended				Nine Months Ended
	January 29, 2022		January 23, 2021		January 29, 2022		January 23, 2021
Gain (loss) on interest rate swap agreements	$	3,688	$	145	$	5,805	$	(635)
Investment income and other	2,498		4,178		8,608		10,215
Other income, net	$	6,186	$	4,323	$	14,413	$	9,580

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 January 29, 2022 and January 23, 2021, respectively. The income tax expense related to cash flow hedges was $241 and $241 for the nine months ended January 29, 2022 and January 23, 2021, 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:


	Three Months Ended		Nine Months Ended
	January 29, 2022	January 23, 2021	January 29, 2022	January 23, 2021
Denominator for basic EPS – weighted average shares	97,471	95,734	97,213	95,472
Effect of dilutive securities – stock options, restricted stock and stock purchase plans	1,083	1,219	1,237	907
Denominator for diluted EPS – weighted average shares	98,554	96,953	98,450	96,379

Potentially dilutive securities representing 828 shares and 758 shares for the three and nine months ended January 29, 2022, respectively, and 638 shares and 1,207 shares for the three and nine months ended January 23, 2021, respectively, 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, 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, current and forecasted 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.

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 January 29, 2022 and April 24, 2021 were $632 and $2,491, 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 January 29, 2022 and April 24, 2021, contract liabilities of $24,104 and $23,526 were reported in other accrued

liabilities, respectively. During the nine months ended January 29, 2022, we recognized $18,703 of the amount previously deferred at April 24, 2021.

Recently Issued Accounting Pronouncements

In March 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” and in January 2021 issued ASU No. 2021-01, “Reference Rate Reform (Topic 848): Scope”. These ASUs provide temporary optional expedients and exceptions to existing guidance on contract modifications and hedge accounting to facilitate the market transition from existing reference rates, such as LIBOR which is being phased out beginning at the end of 2021, to alternate reference rates. These standards were effective upon issuance. We are evaluating the optional relief guidance provided within these ASUs, and are reviewing our debt securities, derivative instruments and customer financing contracts that currently utilize LIBOR as the reference rate.