Customer Financing

9 Months Ended

Jan. 27, 2024

As a convenience to our customers, we offer several different financing alternatives, including a third party program and a Patterson-sponsored program. For the third party program, we act as a facilitator between the customer and the third party financing entity with no on-going involvement in the financing transaction. Under the Patterson-sponsored program, equipment purchased by creditworthy customers may be financed up to a maximum of $2,000. We generally sell our customers’ financing contracts to an outside financial institution in the normal course of our business. These financing arrangements are accounted for as a sale of assets under the provisions of ASC 860, Transfers and Servicing. We use a monthly unit of account for these financing contracts.

The portion of the purchase price for the receivables held by the conduits is deemed a DPP receivable, which is paid to the applicable special purpose entity, PDC Funding or PDC Funding II, as payments on the customers’ financing contracts are collected by Patterson from customers. The difference between the carrying amount of the receivables sold under these programs and the sum of the cash and fair value of the DPP receivable received at time of transfer is recognized as a gain or loss on sale of the related receivables and recorded in net sales in the condensed consolidated statements of operations and other comprehensive income. Expenses incurred related to customer financing activities are recorded in operating expenses in our condensed consolidated statements of operations and other comprehensive income.

Historically, we maintained two arrangements under which we sell these contracts.

We operate under an agreement to sell our equipment finance contracts to commercial paper conduits with MUFG serving as the agent. We utilize PDC Funding to fulfill a requirement of participating in the commercial paper conduit. We receive the proceeds of the contracts upon sale to MUFG. At least 15.0% of the proceeds are held by the conduit as security against eventual performance of the portfolio. This percentage can be greater and is based upon certain ratios defined in the agreement with MUFG. The capacity under the agreement with MUFG at January 27, 2024 was $575,000.

We formerly maintained an agreement with Fifth Third Bank ("Fifth Third") whereby Fifth Third purchased customers’ financing contracts. PDC Funding II sold its financing contracts to Fifth Third. We received the proceeds of the contracts upon sale to Fifth Third. At least 15.0% of the proceeds were held by the conduit as security against eventual performance of the portfolio.

During the first quarter of fiscal 2024, Fifth Third sold and assigned the remaining purchased customer financing contracts to the facility in which MUFG is the agent. We transferred and assigned the related DPP receivable of $15,400 from PDC Funding II to PDC Funding, and the DPP counterparty changed from Fifth Third to MUFG. We

amended our agreement with MUFG as agent and expanded capacity under that agreement from $525,000 to $575,000. We thereby ended our agreement with Fifth Third.

We service the financing contracts for which we are paid a servicing fee. The servicing fees we receive are considered adequate compensation for services rendered. Accordingly, no servicing asset or liability has been recorded.

During the nine months ended January 27, 2024 and January 28, 2023, we sold $197,712 and $205,140 of contracts under these arrangements, respectively. In net sales in the condensed consolidated statements of operations and other comprehensive income, we recorded gains of $9,117 and $2,417 during the three months ended January 27, 2024 and January 28, 2023, respectively, related to these contracts sold. In net sales in the condensed consolidated statements of operations and other comprehensive income, we recorded losses of $3,763 and $5,051 during the nine months ended January 27, 2024 and January 28, 2023, respectively, related to these contracts sold. Cash collections on financed receivables sold were $211,827 and $238,091 during the nine months ended January 27, 2024 and January 28, 2023, respectively.

Included in cash and cash equivalents in the condensed consolidated balance sheets are $27,771 and $33,072 as of January 27, 2024 and April 29, 2023, respectively, which represent cash collected from previously sold customer financing contracts that have not yet been settled. Included in current receivables in the condensed consolidated balance sheets are $54,177 and $77,646 as of January 27, 2024 and April 29, 2023, respectively, of finance contracts we have not yet sold. A total of $563,242 of finance contracts receivable sold under the arrangements was outstanding at January 27, 2024. Since the internal financing program began in 1994, bad debt write-offs have amounted to less than 1% of the loans originated.

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


	Nine Months Ended
		January 27, 2024		January 28, 2023
Beginning DPP receivable balance		$	102,979	$	125,332
Non-cash additions to DPP receivable		41,495		39,426
Collection of DPP receivable		(29,655)		(55,291)
Ending DPP receivable balance		$	114,819	$	109,467

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