UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________________________________________________________

FORM 10-Q

____________________________________________________________


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

FOR THE QUARTERLY PERIOD ENDED ~~January~~July 25, 2020.


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

Commission File No. 0-20572

__________________________________________________________

PATTERSON COMPANIES, INC.

(Exact Name of Registrant as Specified in Its Charter)

____________________________________________________________


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

(651) 686-1600

(Registrant’s Telephone Number, Including Area Code)

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


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

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

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

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

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

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

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

As of ~~February~~August 27, 2020, there were ~~95,806,000~~96,354,000 shares of Common Stock of the registrant issued and outstanding.

Table of Contents

PATTERSON COMPANIES, INC.

INDEX

Table of Contents

PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PATTERSON COMPANIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

(Unaudited)


		January 25, 2020		April 27, 2019			July 25, 2020		April 25, 2020
ASSETS	ASSETS					ASSETS
Current assets:	Current assets:					Current assets:
Cash and cash equivalents	Cash and cash equivalents	$	106,169	$	95,646	Cash and cash equivalents	$	119,561	$	77,944
Receivables, net of allowance for doubtful accounts		451,255		582,094
Receivables, net of allowance for doubtful accounts of $5,900 and $5,123						Receivables, net of allowance for doubtful accounts of $5,900 and $5,123	372,317		416,523
Inventory	Inventory	866,313		761,018		Inventory	700,535		812,194
Prepaid expenses and other current assets	Prepaid expenses and other current assets	268,937		165,605		Prepaid expenses and other current assets	267,714		236,104
Total current assets	Total current assets	1,692,674		1,604,363		Total current assets	1,460,127		1,542,765
Property and equipment, net	Property and equipment, net	306,687		305,790		Property and equipment, net	300,041		303,725
Operating lease right-of-use assets		83,302		—
Operating lease right-of-use assets, net						Operating lease right-of-use assets, net	77,515		79,021
Long-term receivables, net	Long-term receivables, net	172,232		113,081		Long-term receivables, net	241,602		214,915
Goodwill		816,642		816,226
Goodwill, net						Goodwill, net	139,197		138,724
Identifiable intangibles, net	Identifiable intangibles, net	323,700		351,153		Identifiable intangibles, net	305,005		313,505
Other non-current assets	Other non-current assets	118,315		78,656		Other non-current assets	122,709		122,695
Total assets	Total assets	$	3,513,552	$	3,269,269	Total assets	$	2,646,196	$	2,715,350
LIABILITIES AND STOCKHOLDERS’ EQUITY	LIABILITIES AND STOCKHOLDERS’ EQUITY					LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:	Current liabilities:					Current liabilities:
Accounts payable	Accounts payable	$	802,610	$	648,418	Accounts payable	$	549,715	$	862,093
Accrued payroll expense	Accrued payroll expense	88,687		73,665		Accrued payroll expense	86,614		68,385
Other accrued liabilities	Other accrued liabilities	183,613		129,654		Other accrued liabilities	175,255		113,714
Operating lease liabilities	Operating lease liabilities	31,547		—		Operating lease liabilities	31,200		30,706
Current maturities of long-term debt		—		23,975

Borrowings on revolving credit	Borrowings on revolving credit	95,000		—		Borrowings on revolving credit	136,000		0
Total current liabilities	Total current liabilities	1,201,457		875,712		Total current liabilities	978,784		1,074,898
Long-term debt	Long-term debt	587,455		725,341		Long-term debt	588,011		587,766
Non-current operating lease liabilities	Non-current operating lease liabilities	53,413		—		Non-current operating lease liabilities	47,806		49,854
Other non-current liabilities	Other non-current liabilities	199,259		187,709		Other non-current liabilities	176,857		166,388
Total liabilities	Total liabilities	2,041,584		1,788,762		Total liabilities	1,791,458		1,878,906
Stockholders’ equity:	Stockholders’ equity:					Stockholders’ equity:
Common stock, $0.01 par value: 600,000 shares authorized; 95,792 and 95,272 shares issued and outstanding		958		953
Common stock, $0.01 par value: 600,000 shares authorized; 96,256 and 95,947 shares issued and outstanding						Common stock, $0.01 par value: 600,000 shares authorized; 96,256 and 95,947 shares issued and outstanding	963		959
Additional paid-in capital	Additional paid-in capital	145,045		131,460		Additional paid-in capital	152,317		146,606
Accumulated other comprehensive loss	Accumulated other comprehensive loss	(77,807)		(88,269)		Accumulated other comprehensive loss	(84,190)		(97,039)
Retained earnings	Retained earnings	1,433,163		1,483,496		Retained earnings	799,587		799,652
Unearned ESOP shares	Unearned ESOP shares	(31,929)		(50,381)		Unearned ESOP shares	(16,061)		(16,061)
Total Patterson Companies, Inc. stockholders' equity	Total Patterson Companies, Inc. stockholders' equity	1,469,430		1,477,259		Total Patterson Companies, Inc. stockholders' equity	852,616		834,117
Noncontrolling interests	Noncontrolling interests	2,538		3,248		Noncontrolling interests	2,122		2,327
Total stockholders’ equity	Total stockholders’ equity	1,471,968		1,480,507		Total stockholders’ equity	854,738		836,444
Total liabilities and stockholders’ equity	Total liabilities and stockholders’ equity	$	3,513,552	$	3,269,269	Total liabilities and stockholders’ equity	$	2,646,196	$	2,715,350

See accompanying notes

Table of Contents

PATTERSON COMPANIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF ~~INCOME~~OPERATIONS

AND OTHER COMPREHENSIVE INCOME

(In thousands, except per share amounts)

(Unaudited)


		Three Months Ended						Nine Months Ended							Three Months Ended
		January 25, 2020		January 26, 2019		January 25, 2020		January 26, 2019			July 25, 2020		July 27, 2019
Net sales	Net sales	$	1,456,155	$	1,396,745	$	4,203,550	$	4,137,817	Net sales	$	1,245,837	$	1,328,651
Cost of sales	Cost of sales	1,144,325		1,097,236		3,300,172		3,259,569		Cost of sales	992,021		1,038,597
Gross profit	Gross profit	311,830		299,509		903,378		878,248		Gross profit	253,816		290,054
Operating expenses	Operating expenses	268,014		254,146		861,034		787,155		Operating expenses	215,944		273,380
Operating income	Operating income	43,816		45,363		42,344		91,093		Operating income	37,872		16,674
Other income (expense):	Other income (expense):									Other income (expense):
Other income, net	Other income, net	2,307		1,427		34,493		8,621		Other income, net	2,034		31,917
Interest expense	Interest expense	(16,584)		(9,172)		(34,320)		(29,849)		Interest expense	(6,691)		(8,690)
Income before taxes	Income before taxes	29,539		37,618		42,517		69,865		Income before taxes	33,215		39,901
Income tax expense	Income tax expense	6,567		6,564		23,087		14,674		Income tax expense	9,013		10,094

Net income	Net income	22,972		31,054		19,430		55,191		Net income	24,202		29,807
Net loss attributable to noncontrolling interests	Net loss attributable to noncontrolling interests	(255)		(171)		(710)		(447)		Net loss attributable to noncontrolling interests	(205)		(235)
Net income attributable to Patterson Companies, Inc.	Net income attributable to Patterson Companies, Inc.	$	23,227	$	31,225	$	20,140	$	55,638	Net income attributable to Patterson Companies, Inc.	$	24,407	$	30,042
Earnings per share attributable to Patterson Companies, Inc.:	Earnings per share attributable to Patterson Companies, Inc.:									Earnings per share attributable to Patterson Companies, Inc.:

Basic	Basic	$	0.25	$	0.34	$	0.21	$	0.60	Basic	$	0.26	$	0.32

Diluted	Diluted	$	0.24	$	0.33	$	0.21	$	0.60	Diluted	$	0.25	$	0.32
Weighted average shares:	Weighted average shares:									Weighted average shares:
Basic	Basic	94,267		92,818		94,052		92,677		Basic	95,189		93,795
Diluted	Diluted	95,021		93,653		94,828		93,347		Diluted	95,843		94,623
Dividends declared per common share	Dividends declared per common share	$	0.26	$	0.26	$	0.78	$	0.78	Dividends declared per common share	$	0.26	$	0.26
Comprehensive income:	Comprehensive income:									Comprehensive income:
Net income	Net income	$	22,972	$	31,054	$	19,430	$	55,191	Net income	$	24,202	$	29,807
Foreign currency translation gain (loss)	Foreign currency translation gain (loss)	2,619		3,184		5,434		(9,676)		Foreign currency translation gain (loss)	12,589		(3,799)
Cash flow hedges, net of tax	Cash flow hedges, net of tax	6,627		548		7,735		1,649		Cash flow hedges, net of tax	260		554
Comprehensive income	Comprehensive income	$	32,218	$	34,786	$	32,599	$	47,164	Comprehensive income	$	37,051	$	26,562

See accompanying notes

Table of Contents

PATTERSON COMPANIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)


		Common Stock					Additional Paid-in Capital		Accumulated Other Comprehensive Loss		Retained Earnings		Unearned ESOP Shares		Non-controlling Interests				Total	Common Stock						Additional Paid-in Capital		Accumulated Other Comprehensive Loss				Retained Earnings				Unearned ESOP Shares				Non-controlling Interests	Total
		Shares	Amount																					Shares																		Non-controlling Interests	Total
Balance at April 28, 2018		94,756	$	948	$	103,776	$	(74,974)	$	1,497,766	$	(65,726)	$	—	$	1,461,790
Balance at April 27, 2019																	Balance at April 27, 2019	95,272		$	953	$	131,460	$	(88,269)	$	1,483,496			$	(50,381)			$	3,248			$	1,480,507
Foreign currency translation	Foreign currency translation	—	—		—		(9,320)		—		—		—		(9,320)		Foreign currency translation	—		—		—		(3,799)		—		—				—				(3,799)
Cash flow hedges	Cash flow hedges	—	—		—		549		—		—		—		549		Cash flow hedges	—		—		—		554		—		—				—				554
Net income (loss)	Net income (loss)	—	—		—		—		(4,456)		—		(53)		(4,509)		Net income (loss)	—		—		—		—		30,042		—				(235)				29,807
Dividends declared	Dividends declared	—	—		—		—		(24,327)		—		—		(24,327)		Dividends declared	—		—		—		—		(24,856)		—				—				(24,856)
Common stock issued and related tax benefits	Common stock issued and related tax benefits	90	1		1,676		—		—		—		—		1,677		Common stock issued and related tax benefits	198		2		(5,371)		—		—		—				—				(5,369)

Stock based compensation	Stock based compensation	—	—		3,232		—		—		—		—		3,232		Stock based compensation	—		—		6,634		—		—		—				—				6,634
ESOP activity	ESOP activity	—	—		—		—		—		14,004		—		14,004		ESOP activity	—		—		—		—		—		18,452				—				18,452
Increase from asset acquisition		—	—		—		—		—		—		4,000		4,000
Balance at July 28, 2018		94,846	949		108,684		(83,745)		1,468,983		(51,722)		3,947		1,447,096

Adoption of ASU 2016-02																	Adoption of ASU 2016-02	—		—		—		—		1,447		—				—				1,447
Adoption of ASU 2018-02																	Adoption of ASU 2018-02	—		—		—		(2,707)		2,707		—				—				—
Balance at July 27, 2019																	Balance at July 27, 2019	95,470		955		132,723		(94,221)		1,492,836		(31,929)				3,013				1,503,377
Foreign currency translation	Foreign currency translation	—	—		—		(3,540)		—		—		—		(3,540)		Foreign currency translation	—		—		—		6,614		—		—				—				6,614
Cash flow hedges	Cash flow hedges	—	—		—		552		—		—		—		552		Cash flow hedges	—		—		—		554		—		—				—				554
Net income (loss)	Net income (loss)	—	—		—		—		28,869		—		(223)		28,646		Net income (loss)	—		—		—		—		(33,129)		—				(220)				(33,349)
Dividends declared	Dividends declared	—	—		—		—		(24,495)		—		—		(24,495)		Dividends declared	—		—		—		—		(24,874)		—				—				(24,874)
Common stock issued and related tax benefits	Common stock issued and related tax benefits	104	1		1,034		—		—		—		—		1,035		Common stock issued and related tax benefits	245		2		731		—		—		—				—				733

Stock based compensation	Stock based compensation	—	—		6,394		—		—		—		—		6,394		Stock based compensation	—		—		5,569		—		—		—				—				5,569

Balance at October 27, 2018		94,950	950		116,112		(86,733)		1,473,357		(51,722)		3,724		1,455,688
Balance at October 26, 2019																	Balance at October 26, 2019	95,715		957		139,023		(87,053)		1,434,833		(31,929)				2,793				1,458,624
Foreign currency translation	Foreign currency translation	—	—		—		3,184		—		—		—		3,184		Foreign currency translation	—		—		—		2,619		—		—				—				2,619
Cash flow hedges	Cash flow hedges	—	—		—		548		—		—		—		548		Cash flow hedges	—		—		—		6,627		—		—				—				6,627
Net income (loss)	Net income (loss)	—	—		—		—		31,225		—		(171)		31,054		Net income (loss)	—		—		—		—		23,227		—				(255)				22,972
Dividends declared	Dividends declared	—	—		—		—		(24,528)		—		—		(24,528)		Dividends declared	—		—		—		—		(24,897)		—				—				(24,897)
Common stock issued and related tax benefits	Common stock issued and related tax benefits	214	2		2,193		—		—		—		—		2,195		Common stock issued and related tax benefits	77		1		463		—		—		—				—				464

Stock based compensation	Stock based compensation	—	—		4,556		—		—		—		—		4,556		Stock based compensation	—		—		5,559		—		—		—				—				5,559

Balance at January 26, 2019		95,164	952		122,861		(83,001)		1,480,054		(51,722)		3,553		1,472,697
Balance at January 25, 2020																	Balance at January 25, 2020	95,792		958		145,045		(77,807)		1,433,163		(31,929)				2,538				1,471,968
Foreign currency translation	Foreign currency translation	—	—		—		(5,907)		—		—		—		(5,907)		Foreign currency translation	—		—		—		(19,496)		—		—				—				(19,496)
Cash flow hedges	Cash flow hedges	—	—		—		639		—		—		—		639		Cash flow hedges	—		—		—��		264		—		—				—				264
Net income (loss)	Net income (loss)	—	—		—		—		27,990		—		(305)		27,685		Net income (loss)	—		—		—		—		(608,586)		—				(211)				(608,797)
Dividends declared	Dividends declared	—	—		—		—		(24,548)		—		—		(24,548)		Dividends declared	—		—		—		—		(24,925)		—				—				(24,925)
Common stock issued and related tax benefits	Common stock issued and related tax benefits	108	1		3,096		—		—		—		—		3,097		Common stock issued and related tax benefits	155		1		(3,613)		—		—		—				—				(3,612)

Stock based compensation	Stock based compensation	—	—		5,503		—		—		—		—		5,503		Stock based compensation	—		—		5,174		—		—		—				—				5,174
ESOP activity	ESOP activity	—	—		—		—		—		1,341		—		1,341		ESOP activity	—		—		—		—		—		15,868				—				15,868
Balance at April 27, 2019		95,272	$	953	$	131,460	$	(88,269)	$	1,483,496	$	(50,381)	$	3,248	$	1,480,507
Balance at April 25, 2020																	Balance at April 25, 2020	95,947		$	959	$	146,606	$	(97,039)	$	799,652	$	(16,061)			$	2,327			$	836,444

See accompanying notes

Table of Contents

PATTERSON COMPANIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)


		Common Stock					Additional Paid-in Capital		Accumulated Other Comprehensive Loss		Retained Earnings		Unearned ESOP Shares		Non-controlling Interests				Total	Common Stock						Additional Paid-in Capital		Accumulated Other Comprehensive Loss		Retained Earnings		Unearned ESOP Shares		Non-controlling Interests	Total
		Shares	Amount																					Shares												Non-controlling Interests	Total
Balance at April 27, 2019		95,272	$	953	$	131,460	$	(88,269)	$	1,483,496	$	(50,381)	$	3,248	$	1,480,507
Foreign currency translation		—	—		—		(3,799)		—		—		—		(3,799)
Cash flow hedges		—	—		—		554		—		—		—		554
Net income (loss)		—	—		—		—		30,042		—		(235)		29,807
Dividends declared		—	—		—		—		(24,856)		—		—		(24,856)
Common stock issued and related tax benefits		198	2		(5,371)		—		—		—		—		(5,369)

Stock based compensation		—	—		6,634		—		—		—		—		6,634
ESOP activity		—	—		—		—		—		18,452		—		18,452

Adoption of ASU 2016-02		—	—		—		—		1,447		—		—		1,447
Adoption of ASU 2018-02		—	—		—		(2,707)		2,707		—		—		—
Balance at July 27, 2019		95,470	955		132,723		(94,221)		1,492,836		(31,929)		3,013		1,503,377
Balance at April 25, 2020																	Balance at April 25, 2020	95,947		$	959	$	146,606	$	(97,039)	$	799,652	$	(16,061)	$	2,327	$	836,444
Foreign currency translation	Foreign currency translation	—	—		—		6,614		—		—		—		6,614		Foreign currency translation	—		—		—		12,589		—		—		—		12,589
Cash flow hedges	Cash flow hedges	—	—		—		554		—		—		—		554		Cash flow hedges	—		—		—		260		—		—		—		260
Net income (loss)	Net income (loss)	—	—		—		—		(33,129)		—		(220)		(33,349)		Net income (loss)	—		—		—		—		24,407		—		(205)		24,202
Dividends declared	Dividends declared	—	—		—		—		(24,874)		—		—		(24,874)		Dividends declared	—		—		—		—		(24,472)		—		—		(24,472)
Common stock issued and related tax benefits	Common stock issued and related tax benefits	245	2		731		—		—		—		—		733		Common stock issued and related tax benefits	309		4		(899)		—		—		—		—		(895)

Stock based compensation	Stock based compensation	—	—		5,569		—		—		—		—		5,569		Stock based compensation	—		—		6,610		—		—		—		—		6,610

Balance at October 26, 2019		95,715	957		139,023		(87,053)		1,434,833		(31,929)		2,793		1,458,624
Foreign currency translation		—	—		—		2,619		—		—		—		2,619
Cash flow hedges		—	—		—		6,627		—		—		—		6,627
Net income (loss)		—	—		—		—		23,227		—		(255)		22,972
Dividends declared		—	—		—		—		(24,897)		—		—		(24,897)
Common stock issued and related tax benefits		77	1		463		—		—		—		—		464

Stock based compensation		—	—		5,559		—		—		—		—		5,559
Balance at July 25, 2020																	Balance at July 25, 2020	$	96,256	$	963	$	152,317	$	(84,190)	$	799,587	$	(16,061)	$	2,122	$	854,738

Balance at January 25, 2020		95,792	$	958	$	145,045	$	(77,807)	$	1,433,163	$	(31,929)	$	2,538	$	1,471,968

See accompanying notes

Table of Contents

PATTERSON COMPANIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


		Nine Months Ended							Three Months Ended
		January 25, 2020		January 26, 2019			July 25, 2020		July 27, 2019
Operating activities:	Operating activities:					Operating activities:
Net income	Net income	$	19,430	$	55,191	Net income	$	24,202	$	29,807

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Adjustments to reconcile net income to net cash used in operating activities:						Adjustments to reconcile net income to net cash used in operating activities:
Depreciation	Depreciation	33,995		33,317		Depreciation	10,562		11,335
Amortization	Amortization	27,897		29,108		Amortization	9,305		9,297

Investment gain	Investment gain	(34,334)		—		Investment gain	0		(34,334)

Non-cash employee compensation	Non-cash employee compensation	28,661		22,282		Non-cash employee compensation	9,583		10,234
Accelerated amortization of costs on early repayment of debt		8,984		—

Deferred consideration in securitized receivables	Deferred consideration in securitized receivables	(359,329)		(308,592)		Deferred consideration in securitized receivables	(139,466)		(105,697)
Change in assets and liabilities, net of acquired		105,740		245,038
Change in assets and liabilities						Change in assets and liabilities	(143,994)		34,134

Net cash provided by (used in) operating activities		(168,956)		76,344
Net cash used in operating activities						Net cash used in operating activities	(229,808)		(45,224)
Investing activities:	Investing activities:					Investing activities:
Additions to property and equipment	Additions to property and equipment	(32,872)		(33,926)		Additions to property and equipment	(6,439)		(8,901)
Collection of deferred purchase price receivables	Collection of deferred purchase price receivables	359,329		308,592		Collection of deferred purchase price receivables	139,466		105,697

Other investing activities	Other investing activities	—		2,875		Other investing activities	396		0

Net cash provided by investing activities	Net cash provided by investing activities	326,457		277,541		Net cash provided by investing activities	133,423		96,796
Financing activities:	Financing activities:					Financing activities:
Dividends paid	Dividends paid	(75,522)		(74,731)		Dividends paid	0		(25,538)

Proceeds from issuance of long-term debt		300,000		—
Debt issuance costs		(3,300)		—

Payments on long-term debt	Payments on long-term debt	(460,840)		(244,010)		Payments on long-term debt	0		(5,533)
Draw on revolving credit	Draw on revolving credit	95,000		13,000		Draw on revolving credit	136,000		0
Other financing activities	Other financing activities	(3,319)		6,228		Other financing activities	(722)		(5,085)
Net cash used in financing activities		(147,981)		(299,513)
Net cash provided by (used in) financing activities						Net cash provided by (used in) financing activities	135,278		(36,156)
Effect of exchange rate changes on cash	Effect of exchange rate changes on cash	1,003		75		Effect of exchange rate changes on cash	2,724		(1,281)
Net change in cash and cash equivalents	Net change in cash and cash equivalents	10,523		54,447		Net change in cash and cash equivalents	41,617		14,135
Cash and cash equivalents at beginning of period	Cash and cash equivalents at beginning of period	95,646		62,984		Cash and cash equivalents at beginning of period	77,944		95,646
Cash and cash equivalents at end of period	Cash and cash equivalents at end of period	$	106,169	$	117,431	Cash and cash equivalents at end of period	$	119,561	$	109,781

Supplemental disclosure of non-cash investing activity:						Supplemental disclosure of non-cash investing activity:
Retained interest in securitization transactions						Retained interest in securitization transactions	$	201,861	$	87,710

See accompanying notes

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PATTERSON COMPANIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars, except per share amounts, and shares in thousands)

(Unaudited)

Note 1. General

Basis of Presentation

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly the financial position of Patterson Companies, Inc. (referred to herein as "Patterson" or in the first person notations "we," "our," and "us") as of ~~January~~July 25, 2020, and our results of operations and cash flows for the periods ended ~~January~~July 25, 2020 and ~~January 26,~~July 27, 2019. Such adjustments are of a normal recurring nature. The results of operations for the three ~~and nine~~ months ended ~~January~~July 25, 2020 are not necessarily indicative of the results to be expected for any other interim period or for the year ending April ~~25, 2020.~~24, 2021. These financial statements should be read in conjunction with the financial statements included in our ~~2019~~2020 Annual Report on Form 10-K filed on June ~~26, 2019.~~24, 2020.

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 entity 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 9.7.

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~~first quarter of fiscal ~~2020~~2021 and ~~2019~~2020 represents the 13 weeks ended ~~January~~July 25, 2020 and the 13 weeks ended ~~January 26,~~July 27, 2019, respectively. ~~The nine months ended January 25, 2020 and January 26, 2019 each included 39 weeks.~~ Fiscal ~~2020~~2021 will include 52 weeks and fiscal ~~2019~~2020 included 52 weeks.

Other Income, Net

Other income, net consisted of the following:


		Three Months Ended						Nine Months Ended							Three Months Ended
		January 25, 2020		January 26, 2019		January 25, 2020		January 26, 2019			July 25, 2020		July 27, 2019
Gain on investment	Gain on investment	$	—	$	—	$	34,334	$	4,477	Gain on investment	$	0	$	34,334
Loss on interest rate swap agreements	Loss on interest rate swap agreements	(485)		—		(6,048)		—		Loss on interest rate swap agreements	(1,195)		(3,785)
Other	Other	2,792		1,427		6,207		4,144		Other	3,229		1,368
Other income, net	Other income, net	$	2,307	$	1,427	$	34,493	$	8,621	Other income, net	$	2,034	$	31,917

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 ~~$2,040~~$80 and ~~$177~~$171 for the three months ended ~~January~~July 25, 2020 and ~~January 26,~~July 27, 2019, respectively. ~~The income tax expense related to cash flow hedges was $2,382 and $534 for the nine months ended January 25, 2020 and January 26, 2019, respectively.~~

Earnings Per Share ("EPS")

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~~Earnings Per Share~~

The following table sets forth the computation of the weighted average shares outstanding used to calculate basic and diluted ~~earnings per share ("EPS"):~~EPS:


		Three Months Ended			Nine Months Ended				Three Months Ended
		January 25, 2020	January 26, 2019	January 25, 2020	January 26, 2019		July 25, 2020	July 27, 2019
Denominator for basic EPS – weighted average shares	Denominator for basic EPS – weighted average shares	94,267	92,818	94,052	92,677	Denominator for basic EPS – weighted average shares	95,189	93,795
Effect of dilutive securities – stock options, restricted stock and stock purchase plans	Effect of dilutive securities – stock options, restricted stock and stock purchase plans	754	835	776	670	Effect of dilutive securities – stock options, restricted stock and stock purchase plans	654	828
Denominator for diluted EPS – weighted average shares	Denominator for diluted EPS – weighted average shares	95,021	93,653	94,828	93,347	Denominator for diluted EPS – weighted average shares	95,843	94,623

Potentially dilutive securities representing ~~2,790 and 2,921~~2,630 shares for the three ~~and nine~~ months ended ~~January~~July 25, 2020 ~~respectively,~~ and ~~1,853 and 1,764~~2,151 shares for the three ~~and nine~~ months ended ~~January 26,~~July 27, 2019 ~~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~~July 25, 2020 and April ~~27, 2019~~25, 2020 were ~~$2,149~~$612 and ~~$0,~~$1,586, 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~~July 25, 2020 and April ~~27, 2019,~~25, 2020, contract liabilities of ~~$23,554~~$22,444 and ~~$22,004~~$21,205 were reported in other accrued liabilities, respectively. During the three months ended July 25, 2020, we recognized $5,455 of the amount previously deferred at April 25, 2020.

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~~respectively. During the nine months ended January 25, 2020, we recognized $18,490 of the amount previously deferred at April 27, 2019.~~

Recently Issued Accounting Pronouncements

In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)," which requires lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by most leases, as well as requires additional qualitative and quantitative disclosures. We adopted the new guidance in the first quarter of fiscal 2020 on a modified retrospective basis through a cumulative-effect adjustment to the beginning retained earnings in the period of adoption. We elected the transition package of practical expedients provided within the guidance, which eliminated the requirements to reassess lease identification, lease classification and initial direct costs for leases commenced before the effective date. We elected not to separate lease from non-lease components and to exclude short-term leases from our consolidated balance sheets.

The impact of adopting the new lease standard primarily relates to the recognition of a lease right-of-use (“ROU”) asset and current and non-current lease liabilities on the condensed consolidated balance sheets. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As we cannot readily determine the rate implicit in most of our leases, we use an incremental borrowing rate determined by country of lease origin based on the anticipated lease term as determined at commencement date in determining the present value of lease payments.

The new lease standard resulted in the recognition of lease ROU assets and liabilities of $86,046 and $88,333 as of April 28, 2019. In addition, $1,447 of net deferred gains on sale-leaseback transactions that existed as of April 27, 2019 were derecognized from our condensed consolidated balance sheet, with the offsetting impact being an adjustment to retained earnings as of April 28, 2019. The adoption of the guidance did not have a material impact on our condensed consolidated statements of income and other comprehensive income or condensed consolidated statements of cash flows as of the adoption date. Under the transition method of adoption, comparative information was not restated, but will continue to be reported under the standards in effect for those periods.

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments-Credit Losses (Topic 326),” which requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. We ~~plan to adopt~~adopted the new guidance in the first quarter of fiscal ~~2021. We are currently evaluating the~~2021, and it did not have a material impact ~~of adopting this pronouncement.~~

In February 2018, the FASB issued ASU No. 2018-02, "Income Statement-Reporting Comprehensive Income (Topic 220) Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income," which will allow a reclassification from accumulated other comprehensive income to retained earnings for the tax effects that are stranded in accumulated other comprehensive income as a result of tax reform. This standard also requires certain disclosures about stranded tax effects. We adopted ASU No. 2018-02 in the first quarter of fiscal 2020 and applied it in the period of adoption. As a result of the adoption, $2,707 was reclassified from accumulated other comprehensive loss to retained earnings in the first quarter of fiscal 2020.on our condensed consolidated financial statements.

Note 2. Receivables Securitization Program

~~In the first quarter of fiscal 2019 and the third quarter of fiscal 2020, we entered into Receivables Purchase Agreements~~We are party to certain receivables purchase agreements (the “Receivables Purchase Agreements”) with MUFG Bank, Ltd. ("MUFG") (f.k.a. The Bank of Tokyo-Mitsubishi UFJ, Ltd.)~~. Under these agreements,~~, under which MUFG acts as an agent to facilitate the sale of certain Patterson receivables (the “Receivables”) to certain unaffiliated financial institutions (the “Purchasers”). The sale of these receivables is accounted for as a sale of assets under the provisions of ASC 860, Transfers and Servicing. We utilize PDC Funding III and PDC Funding IV to facilitate the sale to fulfill requirements within the agreement. We use a daily unit of account for these Receivables.

~~Sales of Receivables occur daily and are settled with the Purchasers on a monthly basis.~~ The proceeds from the sale of these Receivables comprise a combination of cash and a deferred purchase price (“DPP”) receivable. The DPP receivable is ultimately realized by Patterson following the collection of the underlying Receivables sold to the Purchasers. The amount available under the Receivables Purchase Agreements fluctuates over time based on the total amount of eligible Receivables generated during the normal course of business, with maximum availability of $200,000 as of ~~January 25, 2020. As of January~~July 25, 2020, ~~$200,000~~ of ~~the amount available under the Receivables Purchase Agreements~~which $200,000 was utilized.

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We have no retained interests in the transferred Receivables, other than our right to the DPP receivable and collection and administrative service fees. We consider the fees received adequate compensation for services rendered, and accordingly have recorded no servicing asset or liability. The DPP receivable is recorded at fair value within the condensed consolidated balance sheets within prepaid expenses and other current assets. The DPP receivable was ~~$159,409~~$155,563 as of ~~January~~July 25, 2020 and ~~$57,238~~$117,327 as of April ~~27, 2019.~~25, 2020. The difference between the carrying amount of the Receivables and the sum of the cash and fair value of the DPP receivable received at time of transfer is recognized as a gain or loss on sale of the related Receivables. We recorded a loss on sale of Receivables within operating expenses in the condensed consolidated statements of ~~income~~operations and other comprehensive income of ~~$1,468~~$2,386 and ~~$5,013 during the three and nine months ended January 25, 2020, respectively, and $2,719 and $5,590 during the three and nine months ended January 26, 2019, respectively.~~

~~Note 3. Leases~~

We lease certain warehouses, office space, vehicles and equipment. Leases with an initial term of 12 months or less are not recorded on the condensed consolidated balance sheets. We recognize lease expense for these leases on a straight-line basis over the lease term. We do not separate lease and non-lease components, and instead account for each lease and non-lease component associated with that lease as a single lease component. Some leases include one or more options to renew. The exercise of renewal options is at our sole discretion. Our lease agreements do not contain significant residual value guarantees, restrictions or covenants.

~~Total lease cost for the three and nine months ended January 25, 2020 was $9,258 and $27,222, respectively, which includes variable lease costs and short-term lease costs, which are immaterial.~~

~~The following table presents future maturities of lease liabilities:~~

Remainder of 2020 $ 9,395
2021 32,291
2022 24,865
2023 14,419
2024 6,429
After 2024 2,609
Total lease payments 90,008
Less: imputed interest (5,048)
Present value of lease liabilities $ 84,960

~~The following tables present other supplemental information related to leases:~~

~~Nine months ended~~

~~January 25, 2020~~

~~Cash paid for amounts included in the measurement of operating lease liabilities~~

~~28,322~~

~~Lease assets obtained in exchange for new operating lease liabilities~~

~~22,854~~

~~January 25, 2020~~

~~Weighted-average remaining lease term - operating leases~~

~~3.20 years~~

~~Weighted-average discount rate - operating leases~~

~~3.61~~

~~Note 4. Debt~~

~~Our long-term debt consists of the following:~~

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Carrying Value
Interest Rate January 25, 2020 April 27, 2019
Senior notes due fiscal 2022⁽¹⁾
3.59 % $ 100,750 $ 165,000
Senior notes due fiscal 2024⁽¹⁾
3.74 % 33,000 100,000
Senior notes due fiscal 2025 ⁽²⁾
3.48 % 117,500 250,000
Senior notes due fiscal 2028 ⁽³⁾
3.79 % 40,000 150,000
Term loan due fiscal 2022 ⁽⁴⁾
3.73 % — 87,091
Term loan due fiscal 2023 ⁽⁵⁾
3.41 % 300,000 —
Less: Deferred debt issuance costs (3,795) (2,775)
Total debt 587,455 749,316
Less: Current maturities of long-term debt — (23,975)
Long-term debt $ 587,455 $ 725,341

⁽¹⁾~~Issued in December 2011.~~

⁽²⁾~~Issued in March 2015.~~

⁽³⁾~~Issued in March 2018.~~

⁽⁴⁾~~Issued in June 2015, amended in January 2017.~~

⁽⁵⁾~~Issued in December 2019. Interest rate is LIBOR plus 1.75% as of January 25, 2020.~~

~~Future principal payments due, based on stated contractual maturities for our long-term debt, are as follows as of January 25, 2020:~~

Fiscal Year
Remainder of 2020 $ —
2021 —
2022 100,750
2023 300,000
2024 33,000
Thereafter 157,500
Total $ 591,250

In fiscal 2017, we entered into an amended credit agreement ("Amended Credit Agreement"), consisting of a $295,075 term loan and a $750,000 revolving line of credit. In March 2019, we permanently reduced the capacity under the revolving line of credit to $500,000. 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. The term loan and revolving credit facilities were initially set to mature no later than January 2022. During the quarter ended October 26, 2019, we repaid the remaining $81,558 outstanding under the unsecured term loan. As of January 25, 2020, $95,000 was outstanding under the Amended Credit Agreement revolving line of credit at an interest rate of 3.1%. At April 27, 2019, $87,091 was outstanding under the Amended Credit Agreement unsecured term loan at an interest rate of 3.7%, and 0 amount was outstanding under the Amended Credit Agreement revolving line of credit.

In December 2019, we entered into a senior unsecured term loan facility agreement (the “Term Facility Agreement”), consisting of a $300,000 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 January 25, 2020, $300,000 was outstanding under the Term Facility at an interest rate of 3.4%.

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During the three months ended January 25, 2020, we repaid certain indebtedness totaling $373,750. The changes to the senior notes due between fiscal 2022 and fiscal 2028 shown in the table above reflect the aggregate $373,750 repaid. As a result, we recorded a pre-tax non-cash charge of $8,984$1,478 during the three months ended ~~January~~July 25, ~~2020. This charge relates to~~2020 and July 27, 2019, respectively. Our retained interest in securitization transactions during the ~~January 2014 forward interest rate swap agreement~~three months ended July 25, 2020 and ~~accelerated amortization of debt issuance costs.~~

~~We are subject to various financial covenants under our debt agreements including the maintenance of leverage~~July 27, 2019 totaled $185,350 and interest coverage ratios. In the event of our default, any outstanding obligations may become due and payable immediately. We were in compliance with the covenants under our debt agreements as of January 25, 2020.$86,235, respectively.

Note 5.3. Customer Financing

As a convenience to our customers, we offer several different financing alternatives, including a third party program and a Patterson-sponsored program. For the third party program, we act as a facilitator between the customer and the third party financing entity with no on-going involvement in the financing transaction. Under the Patterson-sponsored program, equipment purchased by creditworthy customers may be financed up to a maximum of $1,000. We generally sell our customers’ financing contracts to outside financial institutions in the normal course of our business. These financing arrangements are accounted for as a sale of assets under the provisions of ASC 860, Transfers and Servicing. We currently have 2 arrangements under which we sell these contracts. We use a monthly unit of account for these financing contracts.

First, we operate under an agreement to sell a portion of our equipment finance contracts to commercial paper conduits with MUFG serving as the agent. We utilize PDC Funding to fulfill a requirement of participating in the commercial paper conduit. We receive the proceeds of the contracts upon sale to MUFG. At least 9.5% 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~~July 25, 2020 was $525,000.

Second, we maintain an agreement with Fifth Third Bank ("Fifth Third") whereby Fifth Third purchases customers’ financing contracts. PDC Funding II sells its financing contracts to Fifth Third. We receive the proceeds of the contracts upon sale to Fifth Third. At least ~~11.0%~~20.0% 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 Fifth Third. The capacity under the agreement with Fifth Third at ~~January~~July 25, 2020 was $100,000.

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

The portion of the purchase price for the receivables held by the conduits is deemed a DPP receivable, which is paid to the applicable special purpose entity 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 on sale of the related receivables and recorded in net sales in the condensed consolidated statements of ~~income~~operations and other comprehensive income. Expenses incurred related to customer financing activities are recorded in operating expenses in our condensed consolidated statements of ~~income~~operations and other comprehensive income.

During the three months ended ~~January~~July 25, 2020 and ~~January 26,~~July 27, 2019, we sold ~~$143,203~~$50,070 and ~~$107,715 of contracts under these arrangements, respectively. During the nine months ended January 25, 2020 and January 26, 2019, we sold $244,827 and $195,738~~$66,303 of contracts under these arrangements, respectively. In net sales in the condensed consolidated statements of ~~income~~operations and other comprehensive income, we recorded a loss of $342 and a gain of ~~$11,272 and $6,641~~$7,346 during the three months ended ~~January~~July 25, 2020 and January 26, 2019, respectively, related to these contracts sold. In net sales in the condensed consolidated statements of income and other comprehensive income, we recorded a gain of $22,168 and $11,866 during the nine months ended January 25, 2020 and January 26,July 27, 2019, respectively, related to these contracts sold.

Included in cash and cash equivalents in the condensed consolidated balance sheets are ~~$34,934~~$28,615 and ~~$34,016~~$21,830 as of ~~January~~July 25, 2020 and April ~~27, 2019,~~25, 2020, 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 ~~$67,208~~$20,675 and ~~$48,559~~$21,391 as of ~~January~~July 25, 2020 and April ~~27, 2019,~~25, 2020, respectively, of finance contracts we have not yet sold. A total of ~~$577,851~~$617,503 of finance contracts receivable sold under the arrangements was

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outstanding at ~~January~~July 25, 2020. The DPP receivable under the arrangements was ~~$178,428~~$252,178 and ~~$121,657~~$228,019 as of ~~January~~July 25, 2020 and April 25, 2020, respectively. Our retained interest in securitization transactions during the three months ended July 25, 2020 and July 27, 2019 totaled $16,511 and $1,475, respectively. Since the internal financing program began in 1994, bad debt write-offs have amounted to less than 1% of the loans originated.

The arrangements require us to maintain a minimum current ratio and maximum leverage ratio. We were in compliance with those covenants at ~~January~~July 25, 2020.

Note 6.4. Derivative Financial Instruments

We are a party to certain offsetting and identical interest rate cap agreements entered into to fulfill certain covenants of the equipment finance contract sale agreements. The interest rate cap agreements also provide a credit enhancement feature for the financing contracts sold by PDC Funding and PDC Funding II to the commercial paper conduit.

The interest rate cap agreements are canceled and new agreements are entered into periodically to maintain consistency with the dollar maximum of the sale agreements and the maturity of the underlying financing contracts. As of ~~January~~July 25, 2020, PDC Funding had purchased an interest rate cap from a bank with a notional amount of $525,000 and a maturity date of July 2027. We sold an identical interest rate cap to the same bank. As of ~~January~~July 25, 2020, PDC Funding II had purchased an interest rate cap from a bank with a notional amount of $100,000 and a maturity date of November ~~2026.~~2027. We sold an identical interest rate cap to the same bank.

These interest rate cap agreements do not qualify for hedge accounting treatment and, accordingly, we record the fair value of the agreements as an asset or liability and the change as income or expense during the period in which the change occurs.

In January 2014, we entered into a forward interest rate swap agreement with a notional amount of $250,000 and accounted for it as a cash flow hedge, in order to hedge interest rate fluctuations in anticipation of refinancing the 5.17% senior notes due March 25, 2015. These notes were repaid on March 25, 2015 and replaced with new $250,000 3.48% senior notes due March 24, 2025. A cash payment of $29,003 was made in March 2015 to settle the interest rate swap. This amount is recorded in other comprehensive income (loss), net of tax, and is recognized as interest expense over the life of the related debt. During the three months ended January 25, 2020, we repaid certain indebtedness, resulting in accelerating a portion of this interest expense and recording a pre-tax non-cash charge of $8,134 during the three months ended January 25, 2020. See Note 4 for additional information.

We utilize forward interest rate swap agreements to hedge against interest rate fluctuations that impact the amount of net sales we record related to our customer financing contracts. These interest rate swap agreements do not qualify for hedge accounting treatment and, accordingly, we record the fair value of the agreements as an asset or liability and the change as income or expense during the period in which the change occurs.

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As of April ~~27, 2019,~~25, 2020, the remaining notional amount for ~~these~~ interest rate swap agreements was ~~$553,719,~~$634,029, with the latest maturity date in fiscal ~~2026.~~2027. During the ~~nine~~three months ended ~~January~~July 25, 2020, we entered into forward interest rate swap agreements with a notional amount of ~~$221,460.~~$62,072. As of ~~January~~July 25, 2020, the remaining notional amount for ~~all outstanding~~ interest rate swap agreements was ~~$639,616,~~$627,388, with the latest maturity date in fiscal ~~2027.~~2028.

Net cash payments of ~~$1,375~~$2,828 and $122 were made during the ~~nine~~three months ended ~~January~~July 25, 2020 and July 27, 2019, respectively, to settle a portion of our liabilities related to ~~these~~ interest rate swap agreements. These payments are reflected as cash outflows in the condensed consolidated statements of cash flows within net cash ~~provided by (used in)~~used in operating activities.

The following presents the fair value of derivative instruments included in the condensed consolidated balance sheets:

Derivative type Classification January 25, 2020 April 27, 2019
Assets:
Interest rate contracts Other non-current assets $ 152 $ 380
Liabilities:
Interest rate contracts Other accrued liabilities 2,823 1,034
Interest rate contracts Other non-current liabilities 4,905 2,160
Total liability derivatives $ 7,728 $ 3,194

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Derivative type	Classification	July 25, 2020		April 25, 2020
Assets:
Interest rate contracts	Other non-current assets	$	160	$	204
Liabilities:
Interest rate contracts	Other accrued liabilities	5,977		6,789
Interest rate contracts	Other non-current liabilities	12,196		13,060
Total liability derivatives		$	18,173	$	19,849

The following tables present the pre-tax effect of derivative instruments on the condensed consolidated statements of operations and other comprehensive income:

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

Three Months Ended

Nine Months Ended

Three Months Ended

Derivatives in cash flow hedging relationships

Income statement location

January 25, 2020

January 26, 2019

January 25, 2020

January 26, 2019

Derivatives in cash flow hedging relationships

Statements of operations location

July 25, 2020

July 27, 2019

Interest rate contracts

Interest expense

(8,667)

(725)

(10,117)

(2,183)

Interest rate contracts

Interest expense

(340)

(725)

Amount of Gain (Loss) Recognized in Income on Derivatives

Three Months Ended

Nine Months Ended

Three Months Ended

Derivatives not designated as hedging instruments

Income statement location

January 25, 2020

January 26, 2019

January 25, 2020

January 26, 2019

Derivatives not designated as hedging instruments

Statements of operations location

July 25, 2020

July 27, 2019

Interest rate contracts

Other income, net

(485)

(284)

(6,048)

(284)

Interest rate contracts

Other income, net

(1,195)

(3,785)

There were 0 gains or losses recognized in other comprehensive income (loss) on cash flow hedging derivatives during the three ~~and nine~~ months ended ~~January~~July 25, 2020 or ~~January 26,~~July 27, 2019.

We recorded 0 ineffectiveness during the three ~~and nine~~ month periods ended ~~January~~July 25, 2020 and ~~January 26,~~July 27, 2019. As of ~~January~~July 25, 2020, the estimated pre-tax portion of accumulated other comprehensive loss that is expected to be reclassified into earnings over the next twelve months is $1,363, which will be recorded as an increase to interest expense.

Note 7.5. Fair Value Measurements

Fair value is the price at which an asset could be exchanged in a current transaction between knowledgeable, willing parties. The fair value hierarchy of measurements is categorized into one of three levels based on the lowest level of significant input used:

Level 1 - Quoted prices in active markets for identical assets and liabilities at the measurement date.

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Level 2 - Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3 - Unobservable inputs for which there is little or no market data available. These inputs reflect management’s assumptions of what market participants would use in pricing the asset or liability.

Our hierarchy for assets and liabilities measured at fair value on a recurring basis is as follows:


		January 25, 2020															July 25, 2020
		Total		Level 1		Level 2		Level 3			Total		Level 1		Level 2		Level 3
Assets:	Assets:									Assets:
Cash equivalents	Cash equivalents	$	2,096	$	2,096	$	—	$	—	Cash equivalents	$	2,609	$	2,609	$	0	$	0
DPP receivable - receivables securitization program	DPP receivable - receivables securitization program	159,409		—		—		159,409		DPP receivable - receivables securitization program	155,563		0		0		155,563
DPP receivable - customer financing	DPP receivable - customer financing	178,428		—		—		178,428		DPP receivable - customer financing	252,178		0		0		252,178
Derivative instruments	Derivative instruments	152		—		152		—		Derivative instruments	160		0		160		0
Total assets	Total assets	$	340,085	$	2,096	$	152	$	337,837	Total assets	$	410,510	$	2,609	$	160	$	407,741
Liabilities:	Liabilities:									Liabilities:
Derivative instruments	Derivative instruments	$	7,728	$	—	$	7,728	$	—	Derivative instruments	$	18,173	$	0	$	18,173	$	0

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		April 27, 2019															April 25, 2020
		Total		Level 1		Level 2		Level 3			Total		Level 1		Level 2		Level 3
Assets:	Assets:									Assets:
Cash equivalents	Cash equivalents	$	19,529	$	19,529	$	—	$	—	Cash equivalents	$	3,391	$	3,391	$	0	$	0
DPP receivable - receivables securitization program	DPP receivable - receivables securitization program	57,238		—		—		57,238		DPP receivable - receivables securitization program	117,327		0		0		117,327
DPP receivable - customer financing	DPP receivable - customer financing	121,657		—		—		121,657		DPP receivable - customer financing	228,019		0		0		228,019
Derivative instruments	Derivative instruments	380		—		380		—		Derivative instruments	204		0		204		0
Total assets	Total assets	$	198,804	$	19,529	$	380	$	178,895	Total assets	$	348,941	$	3,391	$	204	$	345,346
Liabilities:	Liabilities:									Liabilities:
Derivative instruments	Derivative instruments	$	3,194	$	—	$	3,194	$	—	Derivative instruments	$	19,849	$	0	$	19,849	$	0

Cash equivalents – We value cash equivalents at their current market rates. The carrying value of cash equivalents approximates fair value and maturities are less than three months.

DPP receivable - receivables securitization program – We value this DPP receivable based on a discounted cash flow analysis using unobservable inputs, which include the estimated timing of payments and the credit quality of the underlying creditor. Significant changes in any of the significant unobservable inputs in isolation would not result in a materially different fair value estimate. The interrelationship between these inputs is insignificant.

DPP receivable - customer financing – We value this DPP receivable based on a discounted cash flow analysis using unobservable inputs, which include a forward yield curve, the estimated timing of payments and the credit quality of the underlying creditor. Significant changes in any of the significant unobservable inputs in isolation would not result in a materially different fair value estimate. The interrelationship between these inputs is insignificant.

Derivative instruments – Our derivative instruments consist of interest rate cap agreements and interest rate swaps. These instruments are valued using inputs such as interest rates and credit spreads.

Certain assets are measured at fair value on a non-recurring basis. These assets are not measured at fair value on an ongoing basis, but are subject to fair value adjustments under certain circumstances. We adjust the carrying value of our non-marketable equity securities to fair value when observable transactions of identical or similar securities occur, or due to an impairment.

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During the ~~nine~~three months ended ~~January 25, 2020,~~July 27, 2019, we recorded a pre-tax gain of $34,334 related to one of our investments in other income, net in our condensed consolidated statements of ~~income~~operations and other comprehensive income. 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. As of ~~January~~both July 25, 2020 and April ~~27, 2019,~~25, 2020, this investment had a carrying value of ~~$51,628 and $17,294, respectively.~~$51,628. There were 0 fair value adjustments to such assets during the ~~nine~~three months ended ~~January 26, 2019.~~July 25, 2020.

Our debt is not measured at fair value in the condensed consolidated balance sheets. The estimated fair value of our debt as of ~~January~~July 25, 2020 and April ~~27, 2019~~25, 2020 was ~~$605,122~~$613,809 and ~~$758,121,~~$601,856, respectively, as compared to a carrying value of ~~$587,455~~$588,011 and ~~$749,316~~$587,766 at ~~January~~July 25, 2020 and April ~~27, 2019,~~25, 2020, respectively. The fair value of debt was measured using a discounted cash flow analysis based on expected market based yields (i.e., Level 2 inputs).

The carrying amounts of receivables, net of allowances, accounts payable, and certain accrued and other current liabilities approximated fair value at ~~January~~July 25, 2020 and April ~~27, 2019.~~25, 2020.

Note 8.6. Income Taxes

The effective income tax rate for the three months ended ~~January~~July 25, 2020 was ~~22.2%~~27.1% compared to ~~17.4%~~25.3% for the three months ended ~~January 26,~~July 27, 2019. The increase in the rate was primarily due to the impacts of certain one-time adjustments reflected in the prior year quarter.

The effective income tax rate for the nine months ended January 25, 2020 was 54.3% compared to 21.0% for the nine months ended January 26, 2019. The current period rate was adversely impacted by the $58,300 pre-tax expense recorded in the three months ended October 26, 2019 related to the probable settlement of litigation with the U.S. Attorney's Office for the Western District of Virginia, as these costs and expenses are not fully deductible. See Note 12 for additional information.

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Note 9.7. Technology Partner Innovations, LLC ("TPI")

In ~~the first quarter of~~ fiscal 2019, we entered into an agreement with Cure Partners to form ~~Technology Partner Innovations, LLC (TPI),~~TPI, which ~~is launching~~offers a ~~new~~ cloud-based practice management software, ~~NaVetor.~~NaVetor, to its customers. Patterson and Cure Partners each contributed net assets of $4,000 to form TPI. We ~~have~~ determined that TPI is a variable interest entity, and we consolidate the results of operations of TPI as we have concluded that we are the primary beneficiary of TPI. During the three months ended ~~January~~July 25, 2020 and ~~January 26,~~July 27, 2019, net loss attributable to the noncontrolling interest was ~~$255~~$205 and ~~$171, respectively. During the nine months ended January 25, 2020 and January 26, 2019, net loss attributable to the~~$235, respectively, resulting in noncontrolling ~~interest was $710 and $447, respectively. Noncontrolling~~ interests of $2,122 on the condensed consolidated balance sheets at ~~January~~July 25, ~~2020 were $2,538.~~2020.

Note ~~10.~~8. Segment and Geographic Data

We present 3 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, dental laboratories, institutions, and other healthcare professionals throughout North America. Animal Health is a leading, full-line distributor in North America and the U.K. of animal health products, services and technologies to both the production-animal and companion-pet markets. Our Corporate segment is comprised of general and administrative expenses, including home office support costs in areas such as information technology, finance, legal, human resources and facilities. In addition, customer financing and other miscellaneous sales are reported within Corporate results. Corporate assets consist primarily of cash and cash equivalents, accounts receivable, property and equipment and long-term receivables. We evaluate segment performance based on operating income. The costs to operate the fulfillment centers are allocated to the operating units based on the through-put of the unit.

The following tables present information about our reportable segments:

Three Months Ended Nine Months Ended
January 25, 2020 January 26, 2019 January 25, 2020 January 26, 2019
Consolidated net sales
United States $ 1,217,291 $ 1,170,446 $ 3,491,053 $ 3,440,533
United Kingdom 152,367 141,877 455,185 446,234
Canada 86,497 84,422 257,312 251,050
Total $ 1,456,155 $ 1,396,745 $ 4,203,550 $ 4,137,817
Dental net sales
United States $ 570,639 $ 529,522 $ 1,528,422 $ 1,478,552
Canada 55,950 50,211 163,906 149,761
Total $ 626,589 $ 579,733 $ 1,692,328 $ 1,628,313
Animal Health net sales
United States $ 634,371 $ 631,407 $ 1,934,421 $ 1,940,594
United Kingdom 152,367 141,877 455,185 446,234
Canada 30,547 34,211 93,406 101,289
Total $ 817,285 $ 807,495 $ 2,483,012 $ 2,488,117
Corporate net sales
United States $ 12,281 $ 9,517 $ 28,210 $ 21,387
Total $ 12,281 $ 9,517 $ 28,210 $ 21,387

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Three Months Ended Nine Months Ended
January 25, 2020 January 26, 2019 January 25, 2020 January 26, 2019
Consolidated net sales
Consumable $ 1,091,571 $ 1,079,566 $ 3,315,759 $ 3,327,214
Equipment and software 270,325 234,251 612,167 563,269
Value-added services and other 94,259 82,928 275,624 247,334
Total $ 1,456,155 $ 1,396,745 $ 4,203,550 $ 4,137,817
Dental net sales
Consumable $ 300,406 $ 294,708 $ 905,540 $ 902,753
Equipment and software 252,874 217,649 566,750 520,292
Value-added services and other 73,309 67,376 220,038 205,268
Total $ 626,589 $ 579,733 $ 1,692,328 $ 1,628,313
Animal Health net sales
Consumable $ 791,165 $ 784,858 $ 2,410,219 $ 2,424,461
Equipment and software 17,451 16,602 45,417 42,977
Value-added services and other 8,669 6,035 27,376 20,679
Total $ 817,285 $ 807,495 $ 2,483,012 $ 2,488,117
Corporate net sales
Value-added services and other $ 12,281 $ 9,517 $ 28,210 $ 21,387
Total $ 12,281 $ 9,517 $ 28,210 $ 21,387


	Three Months Ended
	July 25, 2020		July 27, 2019
Consolidated net sales
United States	$	1,034,872	$	1,090,715
United Kingdom	149,392		149,414
Canada	61,573		88,522
Total	$	1,245,837	$	1,328,651
Dental net sales
United States	$	397,460	$	444,642
Canada	32,835		56,494
Total	$	430,295	$	501,136
Animal Health net sales
United States	$	634,023	$	636,097
United Kingdom	149,392		149,414
Canada	28,738		32,028
Total	$	812,153	$	817,539
Corporate net sales
United States	$	3,389	$	9,976
Total	$	3,389	$	9,976

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Three Months Ended Nine Months Ended
January 25, 2020 January 26, 2019 January 25, 2020 January 26, 2019
Operating income (loss)
Dental $ 48,822 $ 51,120 $ 135,458 $ 128,587
Animal Health 13,438 15,033 51,236 56,096
Corporate (18,444) (20,790) (144,350) (93,590)
Consolidated operating income $ 43,816 $ 45,363 $ 42,344 $ 91,093


	Three Months Ended
	July 25, 2020		July 27, 2019¹
Consolidated net sales
Consumable	$	1,044,981	$	1,095,184
Equipment and software	129,377		142,533
Value-added services and other	71,479		90,934
Total	$	1,245,837	$	1,328,651
Dental net sales
Consumable	$	256,603	$	303,474
Equipment and software	112,963		125,684
Value-added services and other	60,729		71,978
Total	$	430,295	$	501,136
Animal Health net sales
Consumable	$	788,378	$	791,710
Equipment and software	16,414		16,849
Value-added services and other	7,361		8,980
Total	$	812,153	$	817,539
Corporate net sales
Value-added services and other	$	3,389	$	9,976
Total	$	3,389	$	9,976

¹ Certain sales were reclassified between categories to conform to the current period presentation.


		January 25, 2020		April 27, 2019			Three Months Ended
Total assets
							July 25, 2020		July 27, 2019

Operating income (loss)						Operating income (loss)
Dental	Dental	$	749,074	$	641,721	Dental	$	37,769	$	34,004
Animal Health	Animal Health	2,224,069		2,156,723		Animal Health	17,399		19,624
Corporate	Corporate	540,409		470,825		Corporate	(17,296)		(36,954)
Total assets		$	3,513,552	$	3,269,269
Consolidated operating income						Consolidated operating income	$	37,872	$	16,674


	July 25, 2020		April 25, 2020
Total assets
Dental	$	748,001	$	704,216
Animal Health	1,345,259		1,485,284
Corporate	552,936		525,850
Total assets	$	2,646,196	$	2,715,350

Note ~~11.~~9. Accumulated Other Comprehensive Loss ("AOCL")

The following table summarizes the changes in AOCL as of ~~January~~July 25, 2020:

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		Cash Flow Hedges		Currency Translation Adjustment		Total			Cash Flow Hedges		Currency Translation Adjustment		Total
AOCL at April 27, 2019		$	(10,830)	$	(77,439)	$	(88,269)
AOCL at April 25, 2020								AOCL at April 25, 2020	$	(5,538)	$	(91,501)	$	(97,039)
Other comprehensive loss before reclassifications	Other comprehensive loss before reclassifications	—		5,434		5,434		Other comprehensive loss before reclassifications	0		12,589		12,589
Amounts reclassified from AOCL	Amounts reclassified from AOCL	5,028		—		5,028		Amounts reclassified from AOCL	260		0		260
AOCL at January 25, 2020		$	(5,802)	$	(72,005)	$	(77,807)
AOCL at July 25, 2020								AOCL at July 25, 2020	$	(5,278)	$	(78,912)	$	(84,190)

The amounts reclassified from AOCL during the ~~nine~~three months ended ~~January~~July 25, 2020 include gains and losses on cash flow hedges, net of taxes of ~~$2,382.~~$80. The impact to the condensed consolidated statements of ~~income~~operations and other comprehensive income was an increase to interest expense of ~~$10,117~~$340 for the ~~nine~~three months ended ~~January~~July 25, 2020, which includes $8,134 of expense related to the early repayment of debt discussed further in Note 4. In addition, due to the adoption of ASU No. 2018-02, $2,707 was reclassified from AOCL to retained earnings in the first quarter of fiscal 2020. ~~See Note 1 for additional information.~~

Note ~~12.~~10. Legal Proceedings

From time to time, we become involved in lawsuits, administrative proceedings, government subpoenas, and government investigations (which may, in some cases, involve our entering into settlement agreements or consent decrees), relating to antitrust, commercial, environmental, product liability, intellectual property, regulatory, employment discrimination, securities, and other matters, including matters arising out of the ordinary course of business. The results of any legal proceedings cannot be predicted with certainty because such matters are inherently uncertain. Significant damages or penalties may be sought in some matters, and some matters may require years to resolve.

We accrue for these matters when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Unless otherwise noted, with respect to the specific legal proceedings and claims described below, the amount or range or possible losses is not reasonably estimable. Adverse outcomes in some or all of these matters may result in significant monetary damages or injunctive relief against us that could adversely affect our ability to conduct our business. There also exists the possibility of a material adverse effect on our financial statements for the period in which the effect of an unfavorable outcome becomes probable and reasonably estimable.

On August 31, 2012, Archer and White Sales, Inc. (“Archer”) filed a complaint against Henry Schein, Inc. as well as Danaher Corporation and its subsidiaries Instrumentarium Dental, Inc., Dental Equipment, LLC, Kavo Dental Technologies, LLC and Dental Imaging Technologies Corporation (collectively, the “Danaher Defendants”) in the U.S. District Court for the Eastern District of Texas, Civil Action No. 2:12-CV-00572-JRG, styled as an antitrust action under Section 1 of the Sherman Act, and the Texas Free Enterprise Antitrust Act. Archer alleges a conspiracy between Henry Schein, an unnamed company and the Danaher Defendants to terminate or limit Archer’s distribution rights. On August 1, 2017, Archer filed an amended complaint, adding Patterson Companies, Inc. and Benco Dental Supply Company as defendants, and alleging that Henry Schein, Patterson, Benco and non-defendant Burkhart Dental Supply Company, Inc. conspired to pressure and agreed to enlist their common suppliers, including the Danaher Defendants, to join a price-fixing conspiracy and boycott by reducing the distribution territory of, and eventually terminating, Archer. Archer seeks injunctive relief, and damages in an amount to be proved at trial, to be trebled with interest and costs, including attorneys’ fees, jointly and severally. On June 25, 2018, the U.S. Supreme Court granted certiorari to review an arbitration issue raised by the Danaher Defendants, thereby continuing the case stay implemented in March 2018. On October 29, 2018, the Supreme Court heard oral arguments. On January 8, 2019, the Supreme Court issued its published decision vacating the judgment of the U.S. Court of Appeals for the Fifth Circuit and remanded the case to the Fifth Circuit for further proceedings on a second arbitration issue consistent with the Supreme Court’s opinion. The Fifth Circuit heard oral arguments on May 1, 2019. On August 14, 2019, the Fifth Circuit affirmed the District Court’s finding that the arbitration provision does not apply to this litigation. On January 15, 2020, we reached an agreement in principle to settle with Archer. The agreement in principle is subject to execution of a definitive settlement agreement.

On August 17, 2017, IQ Dental Supply, Inc. (“IQ Dental”) filed a complaint in the U.S District Court for the Eastern District of New York, entitled IQ Dental Supply, Inc. v. Henry Schein, Inc., Patterson Companies, Inc. and Benco Dental Supply Company, Case No. 2:17-cv-4834. Plaintiff alleges that it is a distributor of dental supplies and equipment, and sells dental products through an online dental distribution platform operated by SourceOne Dental, Inc. IQ Dental alleges, among other things, that defendants conspired to suppress competition from IQ Dental and SourceOne for the marketing, distribution and sale of dental supplies and equipment in the United States, and that defendants unlawfully agreed with one another to boycott dentists, manufacturers and state dental associations that

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deal with, or considered dealing with, plaintiff and SourceOne. Plaintiff claims that this alleged conduct constitutes unreasonable restraint of trade in violation of Section 1 of the Sherman Act, New York’s Donnelly Act and the New Jersey Antitrust Act, and also makes pendant state law claims for tortious interference with prospective business relations, civil conspiracy and aiding and abetting. Plaintiff seeks injunctive relief, compensatory, treble and punitive damages, jointly and severally, and reasonable costs and expenses, including attorneys’ fees and expert fees. On December 21, 2017, the District Court granted defendants motion to dismiss the complaint with prejudice. Plaintiff appealed the District Court’s order. On May 10, 2019, the U.S. Court of Appeals for the Second Circuit affirmed dismissal of IQ Dental's claims that it was injured by an alleged boycott of SourceOne but reversed the District Court on dismissal of IQ Dental's direct boycott claims. The case was remanded to the District Court to proceed in accordance with that opinion. On June 29, 2019, the Second Circuit denied IQ Dental’s petition for rehearing or rehearing en banc. On January 23, 2020, we settled with IQ Dental and the action was dismissed on February 10, 2020.

On March 28, 2018, Plymouth County Retirement System (“Plymouth”) filed a federal securities class action complaint against Patterson Companies, Inc. and its former CEO Scott P. Anderson and former CFO Ann B. Gugino in the U.S. District Court for the District of Minnesota in a case captioned Plymouth County Retirement System v. Patterson Companies, Inc., Scott P. Anderson and Ann B. Gugino,, Case No. 0:~~18-CV-00871~~18-cv-00871 MJD/SER. On November 9, 2018, the complaint was amended to add former CEO James W. Wiltz and former CFO R. Stephen Armstrong as individual defendants. Under the amended complaint, on behalf of all persons or entities that purchased or otherwise acquired Patterson’s common stock between June 26, 2013 and February 28, 2018, Plymouth alleges that Patterson violated federal securities laws by failing to disclose that Patterson’s revenue and earnings were “artificially inflated by Defendants’ illicit, anti-competitive scheme with its purported competitors, Benco and Schein, to prevent the formation of buying groups that would allow its customers who were office-based practitioners to take advantage of pricing arrangements identical or comparable to those enjoyed by large-group customers.” In its class action complaint, Plymouth asserts one count against Patterson for violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder and a second, related count against the individual defendants for violating Section 20(a) of the Exchange Act. Plymouth seeks compensatory damages, pre- and post-judgment interest and reasonable attorneys’ fees and experts’ witness fees and costs. On August 30, 2018, Gwinnett County Public Employees Retirement System and Plymouth County Retirement System, Pembroke Pines Pension Fund for Firefighters and Police Officers, Central Laborers Pension Fund were appointed lead plaintiffs. On January 18, 2019, Patterson and the individual defendants filed a motion to dismiss the amended complaint. On July 25, 2019, the ~~U.S~~U.S. Magistrate Judge issued a report and recommendation that the motion to dismiss be granted in part and denied in part. The report and recommendation, among other things, recommends the dismissal of all claims against individuals defendants Ann B. Gugino, R. Stephen Armstrong and James W. Wiltz. On September 10, 2019, the District Court adopted the Magistrate ~~Judge's~~Judge’s report and recommendation. While the outcome of litigation is inherently uncertain, we believe that the class action complaint is without merit, and we are vigorously defending ourselves in this litigation. We do not anticipate that this matter will have a material adverse effect on our financial statements. Patterson has also received, and responded to, requests under Minnesota Business Corporation Act § 302A.461 to inspect corporate books and records relating to the issues raised in the securities class action complaint and ~~the~~certain antitrust ~~matters discussed above.~~litigation.

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During the first quarter of fiscal 2019, the U.S. Attorney’s Office for the Western District of Virginia (“USAO-WDVA”) informed us that our subsidiary, Animal Health International, Inc., had been designated a target of a criminal investigation. The investigation originally related to Animal Health International’s sales of prescription animal health products to certain persons and/or locations not licensed to receive them in Virginia and Tennessee in violation of federal law. After being contacted by the USAO-WDVA, Patterson retained outside legal counsel and began an internal investigation. Since that time, we produced documents both responsive to grand jury subpoenas and voluntarily. In December 2018, as a result of our internal investigation, we voluntarily advised the USAO-WDVA that some of Animal Health International’s shipments of prescription animal health products were made from a warehouse rather than a pharmacy to end-user customers in the states of Virginia and Tennessee. Thereafter, as part of our internal investigation, we conducted a comprehensive review of Animal Health International’s distribution and licensing practices across all 50 U.S. states. That review identified compliance issues in additional states, which we voluntarily disclosed to the USAO-WDVA in April 2019. Our Board of Directors established a special investigation committee to oversee and conduct the investigation, to review our licensing, dispensing, distribution and related sales practices company-wide, and to report on its findings to the Board and to the USAO-WDVA. As a result of the internal investigation, we modified our licensing, dispensing, distribution and related sales processes company-wide. We ~~have~~ reached an agreement with the USAO-WDVA ~~which we understand will resolve~~that resolved the federal government’s criminal investigation into Animal Health International and other non-compliant licensing, dispensing, distribution and related sales processes disclosed during the investigation. ~~The agreement is subject to court approval.~~ Under the terms of the agreement, Animal Health International ~~has agreed to pay~~paid a total criminal fine and forfeiture of $52,800 ~~which payment was made~~ in the fourth quarter of fiscal 2020, and Animal Health International

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~~has~~ pleaded guilty to ~~a one-count information charging it with~~ a strict-liability misdemeanor offense under the Federal Food, Drug and Cosmetic Act in connection with its failure to comply with federal law relating to the sales of prescription animal health products. In addition, Animal Health International and Patterson ~~have~~ entered into a non-prosecution agreement for other non-compliant licensing, dispensing, distribution and related sales processes disclosed during the investigation and committed to undertake additional compliance program enhancements and provide compliance certifications for the period from the date of signing the non-prosecution agreement through the next three full fiscal years. The sentencing hearing took place on May 4, 2020, and the court entered a one-year probation period for Animal Health International. We recorded a reserve of $58,300 in our Corporate segment for the three and six months ended October 26, 2019 to account for the ~~anticipated~~then-anticipated settlement of this matter and certain related costs and expenses. This matter may continue to divert management’s attention and cause us to suffer reputational harm. We also may be subject to other fines or penalties, equitable remedies (including but not limited to the suspension, revocation or non-renewal of licenses) and litigation. The occurrence of any of these events could adversely affect our business, financial condition and results of operations.

On October 1, 2018, Sally Pemberton filed a stockholder derivative complaint against Patterson Companies, Inc., as a nominal defendant, and the following former and current officers and directors of Patterson: Scott Anderson, Ann Gugino, Mark Walchirk, John Buck, Alex Blanco, Jody Feragen, Sarena Lin, Ellen Rudnick, Neil Schrimsher, Les Vinney, James Wiltz, Paul Guggenheim, David Misiak and Tim Rogan as individual defendants in the U.S. District Court for the District of Minnesota in a case captioned Sally Pemberton v. Scott P. Anderson, et al., Case No. 18-CV-2818 (PJS/HB). Derivatively on behalf of Patterson, plaintiff alleges that Patterson, with Benco and Henry Schein, “engage[d] in a conspiracy in restraint of trade, whereby the companies agreed to refuse to offer discounted prices or otherwise negotiate with GPOs, agreed to fix margins on dental supplies and equipment, agreed not to poach one another’s customers or sales representatives, and agreed to block the entry and expansion of rival distributors." Plaintiff further alleges that the individual defendants failed to disclose Patterson’s alleged “antitrust misconduct” to the public and purportedly caused Patterson to repurchase $412,800 of its own stock at prices that were artificially inflated. In the derivative complaint, plaintiff asserts six counts against the individual defendants for: (i) breach of fiduciary duty; (ii) waste of corporate assets; (iii) unjust enrichment; (iv) violations of Section 14(a) of the Exchange Act; (v) violations of Section 10(b) and Rule 10b-5 of the Exchange Act and (vi) violations of Section 20(a) of the Exchange Act. Plaintiff seeks compensatory damages with pre-judgment and post-judgment interest, costs, disbursements and reasonable attorneys’ fees, experts’ fees, costs and expenses, and an order awarding restitution from the individual defendants and directing Patterson “to take all necessary actions to reform and improve its corporate governance and internal procedures.” On September 10, 2019, the Honorable Patrick J. Schiltz dismissed this action without prejudice because the plaintiff failed to make a pre-suit demand on Patterson’s Board of Directors. On October 31, 2019, Patterson’s Board received a written demand to initiate litigation against its officers and directors based on the claims Ms. Pemberton originally presented in her complaint. Following this demand, and after consultation with legal counsel, effective March 16, 2020, the Board adopted a resolution appointing Professor John Matheson and The Honorable George McGunnigle, retired Judge of Hennepin County District Court, as a special litigation committee pursuant to Minnesota Statutes Section 302A.241. Pursuant to the resolution, the special litigation committee has complete power and authority to investigate the demand, analyze the

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legal rights or remedies of Patterson, determine whether those rights or remedies should be pursued, and respond to Ms. Pemberton on behalf of Patterson.

On August 28, 2018, Kirsten Johnsen filed a stockholder derivative complaint against Patterson Companies, Inc., as a nominal defendant, and the following former and current officers and directors of Patterson: Scott Anderson, Ann Gugino, James Wiltz, John Buck, Jody Feragen, Ellen Rudnick, Les Vinney, Neil Schrimsher, Sarena Lin, Harold Slavkin, Alex Blanco and Mark Walchirk as individual defendants in Hennepin County District Court in a case captioned Kirsten Johnsen v. Scott P. Anderson et al., Case No. 27-CV-18-14315. Derivatively on behalf of Patterson, plaintiff alleges that Patterson “suppressed price competition and maintained supracompetitive prices for dental supplies and equipment by entering into agreements with Henry Schein and Benco to: (i) fix margins for dental supplies and equipment; and (ii) block the entry and expansion of lower-margin, lower-priced, rival dental distributors through threatened and actual group boycotts.” Plaintiff further alleges that the individual defendants failed to disclose Patterson’s alleged “price-fixing scheme” to the public and purportedly “caused Patterson to repurchase over $412,800 worth of its own stock at artificially inflated prices.” In the derivative complaint, plaintiff asserts three counts against the individual defendants for: (i) breach of fiduciary duty; (ii) waste of corporate assets; and (iii) unjust enrichment. Plaintiff seeks compensatory damages, equitable and injunctive relief as permitted by law, costs, disbursements and reasonable attorneys’ fees, accountants’ fees and experts’ fees, costs and expenses, and an order awarding restitution from the individual defendants and directing Patterson “to take all necessary actions to reform and improve its corporate governance and internal procedures.” On February 19, 2019, the Hennepin County District Court ordered this litigation stayed pending resolution of the ~~below-described~~above-described case brought by Sally Pemberton. On September 10, 2019, the Honorable Patrick J. Schiltz dismissed Pemberton without prejudice because the plaintiff failed to make a pre-suit demand on Patterson’s Board of Directors. On November 5, 2019, the defendants in Johnsen moved to dismiss such action based on plaintiff’s failure to make a pre-suit demand or otherwise properly plead demand futility. On December 12, 2019, in light of the outcome in Pemberton, the defendants and Johnsen entered into a stipulation for voluntary dismissal of the Johnsen action, which the court granted on December 13, 2019.

On October 1, 2018, Sally Pemberton filed a stockholder derivative complaint against Patterson Companies, Inc., as a nominal defendant, and the following former and current officers and directors of Patterson: Scott Anderson, Ann Gugino, Mark Walchirk, John Buck, Alex Blanco, Jody Feragen, Sarena Lin, Ellen Rudnick, Neil Schrimsher, Les Vinney, James Wiltz, Paul Guggenheim, David Misiak and Tim Rogan as individual defendants in the U.S. District Court for the District of Minnesota in a case captioned ~~Sally Pemberton v. Scott P. Anderson, et al~~., Case No. 18-CV-2818 (PJS/HB). Derivatively on behalf of Patterson, plaintiff alleges that Patterson, with Benco and Henry Schein, “engage[d] in a conspiracy in restraint of trade, whereby the companies agreed to refuse to offer discounted prices or otherwise negotiate with GPOs, agreed to fix margins on dental supplies and equipment, agreed not to poach one another’s customers or sales representatives, and agreed to block the entry and expansion of rival distributors. Plaintiff further alleges that the individual defendants failed to disclose Patterson’s alleged “antitrust misconduct” to the public and purportedly caused Patterson to repurchase $412,800 of its own stock at prices that were artificially inflated. In the derivative complaint, plaintiff asserts six counts against the individual defendants for: (i) breach of fiduciary duty; (ii) waste of corporate assets; (iii) unjust enrichment; (iv) violations of Section 14(a) of the Exchange Act; (v) violations of Section 10(b) and Rule 10b-5 of the Exchange Act and (vi) violations of Section 20(a) of the Exchange Act. Plaintiff seeks compensatory damages with pre-judgment and post-judgment interest, costs, disbursements and reasonable attorneys’ fees, experts’ fees, costs and expenses, and an order awarding restitution from the individual defendants and directing Patterson “to take all necessary actions to reform and improve its corporate governance and internal procedures.” On September 10, 2019, the Honorable Patrick J. Schiltz dismissed this action without prejudice because the plaintiff failed to make a pre-suit demand onApril 27, 2020, Patterson’s Board ~~of Directors. On October 31, 2019, Patterson’s Board of Directors~~ received a written demand to initiate litigation against its officers and directors based on the claims ~~the plaintiff~~Ms. Johnsen originally presented in her complaint. ~~The~~Effective June 30, 2020, the Board ~~is in~~adopted a resolution expanding the process of creating a Special Litigation Committee to review such demand and determine how to address it. We do not anticipate that this matter will have a material adverse effect on our financial statements.

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On January 29, 2019, a purported class action complaint was filed by R. Lawrence Hatchett, M.D. against Patterson Companies, Inc., Henry Schein, Inc., Benco Dental Supply Company, and unnamed co-conspirators in the U.S. District Court for the Southern District of Illinois. The complaint alleges that membersscope of the ~~proposed class suffered antitrust injury due~~previously constituted special litigation committee to ~~an unlawful boycott, price-fixing~~include this matter.Pursuant to the resolution, the special litigation committee has complete power and authority to investigate the demand, analyze the legal rights or ~~otherwise anticompetitive conspiracy among Schein, Benco~~remedies of Patterson, determine whether those rights or remedies should be pursued, and ~~Patterson. The complaint alleges that the alleged conspiracy overcharged Illinois dental practices, orthodontic practices and dental laboratories~~respond to Ms. Johnsen on ~~their purchase~~behalf of dental supplies, which in turn passed on some or all of such overcharges to members of the class. Subject to certain exclusions, the complaint defines the class as all persons residing in Illinois purchasing and/or reimbursing for dental care provided by independent Illinois dental practices purchasing dental supplies from the defendants, or purchasing from buying groups purchasing these supplies from the defendants, on or after January 29, 2015. The complaint alleges violations of the Illinois Antitrust Act, 740 Ill. Comp. Stat. §§ 10/3(2), 10/7(2), and seeks a permanent injunction, actual damages to be determined at trial, trebled, reasonable attorneys’ fees and costs, and pre- and post-judgment interest. On February 13, 2020, the court granted defendants' motion to dismiss for lack of standing and dismissed the action with prejudice.

In December 2017, the United States Judicial Panel on Multidistrict Litigation consolidated numerous cases filed against an array of defendants by various plaintiffs such as counties, cities, hospitals, Indian tribes and others, alleging claims generally concerning the impacts of widespread opioid abuse. The consolidated multidistrict litigation, captioned ~~In re National Prescription Opiate Litigation~~, MDL No. 2804 (the “MDL”), is pending in the U.S. District Court for the Northern District of Ohio. On July 12, 2018, Bon Secours Health System, Inc., Bon Secours- Richmond Community Hospital, Incorporated, Bon Secours DePaul Medical Center, Inc., Bon Secours- Memorial Regional Medical Center, Inc., Bon Secours- St. Francis Medical Center, Inc., Bon Secours- St. Mary’s Hospital of Richmond, Inc., Bon Secours- Virginia Healthsource, Inc., Chesapeake Hospital Corporation, Mary Immaculate Hospital, Incorporated and Maryview Hospital (collectively, the “MDL Plaintiffs”) filed a complaint in the MDL against 26 manufacturers and wholesale distributors of prescription opiates (the “MDL Defendants”) alleging that the MDL Defendants improperly marketed, sold or distributed prescription opiates. The MDL Plaintiffs’ complaint alleges violations of federal RICO statutes, violations of the Virginia Consumer Protections Act, negligence, negligence per se, wantonness, recklessness, and gross negligence, fraud and public nuisance. The MDL Plaintiffs seek injunctive relief, the imposition of civil penalties, monetary damages, punitive damages, pre- and post-judgment interest and attorneys’ fees and costs. Neither Patterson nor any of its subsidiaries were named as MDL Defendants in the original complaint. On March 15, 2019, the MDL Plaintiffs amended and supplemented their complaint to assert violations of federal RICO statutes against 67 manufacturers and wholesale distributors of prescription opiates (the “Amended MDL Defendants”). NaN of Patterson’s subsidiaries, Patterson Logistics Services, Inc. and Patterson Veterinary Supply, Inc., are named as Amended MDL Defendants. The MDL Plaintiffs allege that the Amended MDL Defendants “breached their legal duties under federal law to monitor, detect, investigate, refuse and report suspicious orders of prescription opiates.” Patterson Logistics Services Inc. and Patterson Veterinary Supply, Inc. were voluntarily dismissed from this action with prejudice on January 9, 2020.Patterson.

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

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

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

This Form 10-Q contains certain “forward-looking statements” within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995, including statements regarding future financial performance, and the objectives and expectations of management. Forward-looking statements often include words such as “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “seeks” or words of similar meaning, or future or conditional verbs, such as “will,” “should,” “could” or “may.” Forward-looking statements are neither historical facts nor assurances of future performance. Instead, ~~they~~such statements, including, but not limited to, our statements regarding business strategy, growth strategy, competitive strengths, productivity and profitability enhancement, competition, new product and service introductions and liquidity and capital resources, are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future ~~conditions.~~ conditions, as well as on assumptions made by and information currently available to management, and involve various risks and uncertainties, some of which are beyond our control.

Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual

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results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not place undue reliance on any of these forward-looking statements.

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Any number of factors could affect our actual results and cause such results to differ materially from those contemplated by any forward-looking statements, including, but not limited to, the following: the effects of the highly competitive dental and animal health supply markets in which we compete; the COVID-19 pandemic and measures taken in response thereto; general economic conditions, including political and economic uncertainty; risks from disruption to our information systems; our ability to comply with restrictive covenants in our amended credit agreement; our dependence on relationships with sales representatives, service technicians and customers; our ability to realize the long-term strategic benefits of our acquisition of Animal Health International; potential disruption of distribution capabilities, including service issues with third-party shippers; our ability to provide our sales force and customers with the latest technology; our dependence on suppliers for the manufacture and supply of the products we sell; material changes in our purchasing relationship with suppliers; the risk that private label sales could adversely affect our ~~sales of other products;~~relationships with suppliers; our dependence on positive perceptions of Patterson’s reputation; risks inherent in acquiring other businesses; the risk that our acquired technology or developed technology might not be successful in maintaining or gaining customers; litigation risks, including new or unanticipated litigation ~~developments;~~developments and new or unanticipated regulatory investigations; changes in consumer preferences; regulatory restrictions; the cyclicality of the livestock market; the outbreak of an infectious disease within the production animal or companion animal population; pressure from animal rights groups; adverse changes in supplier rebates; fluctuations in quarterly financial results; volatility in the price of our stock; risks from the expansion of customer purchasing power; ~~increased competition from third-party online commerce sites;~~increases in over-the-counter sales of companion animal products; the risks inherent in international operations, including currency fluctuations; the effects of health care reform; failure to comply with regulatory requirements and data privacy laws; ~~risks from disruption to our information systems;~~ cyberattacks or other privacy or data security breaches; the risk of the products we sell becoming obsolete or containing undetected errors; volatility in the financial markets; ~~volatility in the price of our common stock;~~ our dependence on our senior management; our dependence on leadership development and succession planning; disruptions from our enterprise resource planning ~~system initiatives; and~~system; risks associated with shareholder activism; the risk of being required to record impairment charges; the risk of audit by tax authorities; risks associated with interest rate ~~fluctuations.~~fluctuations; and the risk that our governing documents and Minnesota law may discourage takeovers and business combinations. The order in which these factors appear should not be construed to indicate their relative importance or priority. We caution that these factors may not be exhaustive, accordingly, any forward-looking statements contained herein should not be relied upon as a prediction of actual results.

You should carefully consider these and other relevant factors, including those risk factors in Part I, Item 1A, (“Risk Factors”) in our most recent Form 10-K, and information which may be contained in our other filings with the U.S. Securities and Exchange Commission, or SEC, when reviewing any forward-looking statement. In light of these risks and uncertainties, there can be no assurance that the forward-looking information will in fact prove to be accurate. Investors should understand it is impossible to predict or identify all such factors or risks. As such, you should not consider the foregoing list, or the risks identified in our SEC filings, to be a complete discussion of all potential risks or uncertainties.

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

OVERVIEW

Our financial information for the first ~~nine~~three months of fiscal ~~2020~~2021 is summarized in this Management’s Discussion and Analysis and the Condensed Consolidated Financial Statements and related Notes. The following background is provided to readers to assist in the review of our financial information.

We present three reportable segments: Dental, Animal Health and Corporate. Dental and Animal Health are strategic business units that offer similar products and services to different customer bases. Dental provides a virtually complete range of consumable dental products, equipment 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

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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 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

~~Receivables Securitization Program.~~COVID-19. InThe COVID-19 pandemic, including closures and other steps taken by governmental authorities in response to the ~~first~~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 quarter ~~of fiscal 2019 and the third quarter of fiscal 2020, we entered into receivables purchase agreements with MUFG Bank, Ltd. ("MUFG"). Under these agreements, MUFG~~

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~~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 initial transaction in the first quarter of 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 the third quarter of fiscal 2020 reduced our net receivables by $120.1 million and increased cash by $29.0 million as of January 25, 2020. As of Januaryended July 25, 2020, as dental offices began opening for elective procedures. In addition, we did record increased sales of personal protective equipment during the ~~maximum available under the receivables purchase agreements was $200.0 million, of which $200.0 million was utilized. The DPP receivable was $159.4 million as of January~~three months ended July 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 activities2020 within the ~~condensed consolidated statements~~Dental segment. We also continue to see disruptions in our production animal business as a result of ~~cash flows, with a corresponding reduction to net cash provided by operating activities within the condensed consolidated statements of cash flows.~~COVID-19.

Gain on Investment. We recorded a pre-tax gain of $34.3 million related to one of our investments ("Gain on Investment") during the first quarter of 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~~. During the three months ended January 25, 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 the three months ended January 25, 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 probable settlement of litigation with the U.S. Attorney's Office for the Western District of Virginia. See "Item 1. Legal Proceedings" for additional information.

Fiscal 2020 SourceOne Dental 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 condensed consolidated statements of operations and other comprehensive income in our Corporate segment.

~~Fiscal 2019 Legal Reserve~~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”). ~~In September 2018, we signed an agreement to settle~~The proceeds from the ~~litigation entitled~~ ~~In re Dental Supplies Antitrust Litigation. Under~~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 ~~terms~~collection of the ~~settlement, we paid $28.3 million into escrow upon preliminary court approval. Such funds are to be released~~underlying Receivables sold to the ~~settlement fund administrator upon final court approval~~Purchasers. The collection of the ~~settlement, which was granted at~~DPP receivable is recognized as an increase to net cash provided by investing activities within the ~~fairness hearing held on June 24, 2019. We established~~condensed consolidated statements of cash flows, with a ~~pre-tax reserve~~corresponding reduction to net cash used in operating activities within the condensed consolidated statements of ~~$28.3 million ("Fiscal 2019 Legal Reserve") during the first quarter of fiscal 2019 to account for the settlement of this matter.~~cash flows.

RESULTS OF OPERATIONS

QUARTER ENDED ~~JANUARY~~JULY 25, 2020 COMPARED TO QUARTER ENDED ~~JANUARY 26,~~JULY 27, 2019

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

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		Three Months Ended							Three Months Ended
		January 25, 2020		January 26, 2019			July 25, 2020		July 27, 2019
Net sales	Net sales	100.0	%	100.0	%	Net sales	100.0	%	100.0	%
Cost of sales	Cost of sales	78.6		78.6		Cost of sales	79.6		78.2
Gross profit	Gross profit	21.4		21.4		Gross profit	20.4		21.8
Operating expenses	Operating expenses	18.4		18.2		Operating expenses	17.4		20.5
Operating income	Operating income	3.0		3.2		Operating income	3.0		1.3
Other income (expense)	Other income (expense)	(1.0)		(0.5)		Other income (expense)	(0.3)		1.7
Income before taxes	Income before taxes	2.0		2.7		Income before taxes	2.7		3.0
Income tax expense	Income tax expense	0.4		0.5		Income tax expense	0.8		0.8
Net income	Net income	1.6		2.2		Net income	1.9		2.2
Net loss attributable to noncontrolling interests	Net loss attributable to noncontrolling interests	—		—		Net loss attributable to noncontrolling interests	—		—
Net income attributable to Patterson Companies, Inc.	Net income attributable to Patterson Companies, Inc.	1.6	%	2.2	%	Net income attributable to Patterson Companies, Inc.	1.9	%	2.2	%

Net Sales. Consolidated net sales for the three months ended ~~January~~July 25, 2020 were ~~$1,456.2~~$1,245.8 million, ~~an increase~~a decrease of ~~4.3%~~6.2% from ~~$1,396.7~~$1,328.7 million for the three months ended ~~January 26,~~July 27, 2019. Foreign exchange rate changes had ~~a favorable~~an unfavorable impact of ~~0.2%~~0.4% on current quarter sales. Sales of certain products previously recognized on a gross basis were recognized on a net basis during the three months ended January 25, 2020, resulting in an estimated 0.2% unfavorable impact to sales.

Dental segment sales for the three months ended ~~January~~July 25, 2020 were ~~$626.6~~$430.3 million, ~~an increase~~a decrease of ~~8.1%~~14.1% from ~~$579.7~~$501.1 million for the three months ended ~~January 26,~~July 27, 2019. Foreign exchange rate changes had ~~a favorable~~an unfavorable impact of ~~0.1%~~0.2% on current quarter sales. Current quarter sales of consumables ~~increased 1.9%~~decreased 15.4%, sales of dental equipment and software ~~increased 16.2%~~decreased 10.1%, ~~aided by the new innovation and promotional programs in the CAD/CAM category,~~ and sales of value-added services and other decreased 15.6%. While Dental segment sales were negatively affected by the COVID-19 pandemic during the three months ended July 25, 2020, we did record increased ~~8.8%.~~sales of personal protective equipment during the three months ended July 25, 2020 within consumable sales.

Animal Health segment sales for the three months ended ~~January~~July 25, 2020 were ~~$817.3~~$812.2 million, ~~an increase~~a decrease of ~~1.2%~~0.7% from ~~$807.5~~$817.5 million for the three months ended ~~January 26,~~July 27, 2019. Foreign exchange rate changes had ~~a favorable~~an unfavorable impact of ~~0.3%~~0.5% on current quarter sales. Sales ~~of certain products previously recognized on a gross basis~~ were ~~recognized on a net basis~~lower during the three months ended ~~January~~July 25, 2020 ~~resulting~~as we experienced reduced sales in ~~an estimated 0.4% unfavorable impact~~our production animal business due to ~~sales.~~disruptions caused by COVID-19, partially offset by increased sales in our companion animal business.

Gross Profit. The consolidated gross profit margin rate for the three months ended ~~January~~July 25, 2020 decreased 140 basis points to 20.4%. The lower rate was primarily driven by an unfavorable shift in the sales mix between our segments. In addition, we recorded a lower gross margin rate in the current quarter in our Animal Health segment, driven by lower transactional margins and lower rebate achievement as compared to the ~~three months~~quarter ended ~~January 26, 2019 was 21.4%.~~July 27, 2019.

Operating Expenses. Consolidated operating expenses for the three months ended ~~January~~July 25, 2020 were ~~$268.0~~$215.9 million, a ~~5.5% increase~~21.0% decrease from the prior year quarter of ~~$254.1~~$273.4 million. We incurred ~~higher~~lower operating expenses during the three months ended ~~January~~July 25, 2020 primarily as a result of ~~higher integration~~lower personnel costs, legal fees and ~~business restructuring~~travel expenses. 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. We expect operating expenses to increase by approximately $20.0 million per quarter going forward as ~~well as higher personnel costs.~~a result of lifting these temporary actions. The consolidated operating expense ratio of ~~18.4% increased 20~~17.4% decreased 310 basis points from the prior year quarter, which was also driven primarily by these same factors.

Operating Income. For the three months ended ~~January~~July 25, 2020, operating income was ~~$43.8~~$37.9 million, or 3.0% of net sales, as compared to operating income of ~~$45.4~~$16.7 million, or ~~3.2%~~1.3% of net sales for the three months ended ~~January 26,~~July 27, 2019. The ~~decrease~~increase in operating income was primarily due to ~~higher integration and business restructuring~~lower operating expenses, ~~and higher personnel costs,~~ partially offset by ~~higher~~lower net sales for the three months ended ~~January~~July 25, 2020.

Dental segment operating income was ~~$48.8~~$37.8 million for the three months ended ~~January~~July 25, 2020, ~~a decrease~~an increase of ~~$2.3~~$3.8 million from the prior year quarter. The ~~decrease in operating income~~increase was primarily due to ~~higher integration and business restructuring~~lower operating expenses, ~~and higher personnel costs,~~ partially offset by ~~higher~~lower net ~~sales in the current quarter.~~sales.

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Animal Health segment operating income was ~~$13.4~~$17.4 million for the three months ended ~~January~~July 25, 2020, a decrease of ~~$1.6~~$2.2 million from the prior year quarter. The decrease was primarily driven by ~~higher integration~~lower net sales and

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~~business restructuring expenses and higher personnel costs in the current quarter,~~ lower gross margins, partially offset by ~~higher gross margins in the current quarter.~~lower operating expenses.

Corporate segment operating loss was ~~$18.4~~$17.3 million and ~~$20.8~~$37.0 million for the three months ended ~~January~~July 25, 2020 and ~~January 26,~~July 27, 2019, respectively. The change was driven primarily by ~~higher net sales recorded~~lower settlement-related expenses and legal fees during the three months ended ~~January~~July 25, 2020, partially offset by ~~higher integration and business restructuring expenses and higher personnel costs.~~lower net sales related to our customer financing contracts.

Other Income (Expense). Net other expense for the three months ended ~~January~~July 25, 2020 was ~~$14.3~~$4.7 million, as compared to ~~$7.7~~net other income of $23.2 million for the three months ended ~~January 26,~~July 27, 2019. Net other ~~expense was higher during~~income for the ~~current quarter due to higher interest expense, which~~three months ended July 27, 2019 was driven by the ~~Early Repayment~~Gain on Investment of ~~Debt.~~$34.3 million.

Income Tax Expense. The effective income tax rate for the three months ended ~~January~~July 25, 2020 was ~~22.2%~~27.1% compared to ~~17.4%~~25.3% for the three months ended ~~January 26,~~July 27, 2019. The increase in the rate was primarily due to the impacts of certain one-time adjustments reflected in the prior year quarter.

Net Income Attributable to Patterson Companies Inc. and Earnings Per Share. Net income attributable to Patterson Companies Inc. for the three months ended ~~January~~July 25, 2020 was ~~$23.2~~$24.4 million, compared to ~~$31.2~~$30.0 million for the three months ended ~~January 26,~~July 27, 2019. Earnings per diluted share were ~~$0.24~~$0.25 in the current quarter compared to ~~$0.33~~$0.32 in the prior year quarter. Weighted average diluted shares outstanding in the current quarter were ~~95.0~~95.8 million, compared to ~~93.7~~94.6 million in the prior year quarter. The current quarter and prior year quarter cash dividend declared was $0.26 ~~per common share.~~

~~NINE MONTHS ENDED JANUARY 25, 2020 COMPARED TO NINE MONTHS ENDED JANUARY 26, 2019~~

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

Nine Months Ended
January 25, 2020 January 26, 2019
Net sales 100.0 % 100.0 %
Cost of sales 78.5 78.8
Gross profit 21.5 21.2
Operating expenses 20.5 19.0
Operating income 1.0 2.2
Other income (expense) — (0.5)
Income before taxes 1.0 1.7
Income tax expense 0.5 0.4
Net income 0.5 1.3
Net loss attributable to noncontrolling interests — —
Net income attributable to Patterson Companies, Inc. 0.5 % 1.3 %

~~Net Sales.~~ Consolidated net sales for the nine months ended January 25, 2020 were $4,203.6 million, a 1.6% increase from $4,137.8 million for the nine months ended January 26, 2019. Foreign exchange rate changes had an unfavorable impact of 0.4% on current period sales.

Dental segment sales for the nine months ended January 25, 2020 were $1,692.3 million, a 3.9% increase from $1,628.3 million for the nine months ended January 26, 2019. Foreign exchange rate changes had an unfavorable impact of 0.1% on current period sales. Current period sales of consumables increased 0.3%, sales of dental equipment and software increased 8.9% to $566.8 million, aided by the new innovation and promotional programs in the CAD/CAM category, and sales of other dental services and products increased 7.2% for the nine months ended January 25, 2020.

Animal Health segment sales for the nine months ended January 25, 2020 were $2,483.0 million, a 0.2% decrease from $2,488.1 million for the nine months ended January 26, 2019. Foreign exchange rate changes had an unfavorable impact of 0.6% on current period sales. Sales of certain products previously recognized on a gross

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~~basis were recognized on a net basis during the nine months ended January 25, 2020, resulting in an estimated 0.4% unfavorable impact to sales.~~

~~Gross Profit~~. The consolidated gross profit margin rate for the nine months ended January 25, 2020 increased 30 basis points from the prior year period to 21.5%. A greater percentage of sales came from our higher margin Dental segment during the nine months ended January 25, 2020, resulting in a higher consolidated gross profit margin rate.

~~Operating Expenses.~~ Consolidated operating expenses for the nine months ended January 25, 2020 were $861.0 million, a 9.4% increase from the prior year period of $787.2 million. We incurred higher operating expenses during the nine months ended January 25, 2020 primarily as a result of legal expenses during the nine months ended January 25, 2020 being $44.9 million higher than those incurred during the nine months ended January 26, 2019. In addition, we incurred higher integration and business restructuring expenses and higher personnel costs during the nine months ended January 25, 2020. The consolidated operating expense ratio of 20.5% increased 150 basis points from the prior year period, which was also driven by these same factors.

~~Operating Income.~~ For the nine months ended January 25, 2020, operating income was $42.3 million, or 1.0% of net sales, as compared to operating income of $91.1 million, or 2.2% of net sales for the nine months ended January 26, 2019. The decrease in operating income was primarily due to higher legal expenses, higher integration and business restructuring expense and higher personnel costs incurred in the nine months ended January 25, 2020, partially offset by higher gross margins.

Dental segment operating income was $135.5 million for the nine months ended January 25, 2020, an increase of $6.9 million from the prior year period. The increase was primarily driven by higher net sales in the current period, partially offset by higher integration and business restructuring expense and higher personnel costs.

Animal Health segment operating income was $51.2 million for the nine months ended January 25, 2020, a decrease of $4.9 million from the prior year period. The decrease was primarily driven by higher integration and business restructuring expense and higher personnel costs.

Corporate segment operating loss was $144.4 million and $93.6 million for the nine months ended January 25, 2020 and January 26, 2019, respectively. The change was driven primarily by higher legal expenses, higher integration and business restructuring expense and higher personnel costs incurred in the nine months ended January 25, 2020.

~~Other Income (Expense).~~ Net other income for the nine months ended January 25, 2020 was $0.2 million, compared to net other expense of $21.2 million for the nine months ended January 26, 2019. Net other income for the nine months ended January 25, 2020 was driven by the Gain on Investment, partially offset by higher interest expense, which was driven by the Early Repayment of Debt.

~~Income Tax Expense~~. The effective income tax rate for the nine months ended January 25, 2020 was 54.3% compared to 21.0% for the nine months ended January 26, 2019. The current period rate was adversely impacted by the Fiscal 2020 U.S. Attorney's Office Legal Reserve, as these costs and expenses are not fully deductible.

~~Net Income Attributable to Patterson Companies Inc. and Earnings Per Share.~~ Net income attributable to Patterson Companies Inc. for the nine months ended January 25, 2020 was $20.1 million, compared to $55.6 million for the nine months ended January 26, 2019. Earnings per diluted share were $0.21 in the current period compared to $0.60 in the prior year period. Weighted average diluted shares outstanding in the current period were 94.8 million, compared to 93.3 million in the prior year period. The current period and prior year period cash dividend was $0.78 per common share.

LIQUIDITY AND CAPITAL RESOURCES

~~For~~We are a party to certain receivables purchase agreements with MUFG Bank, Ltd. ("MUFG"), under which MUFG acts as an agent to facilitate the ~~nine months ended January 25, 2020,~~sale of certain Patterson receivables (the “Receivables”) to certain unaffiliated financial institutions (the “Purchasers”). The proceeds from the sale of these Receivables comprise a combination of cash and a deferred purchase price (“DPP”) receivable. The DPP receivable is ultimately realized by Patterson following the collection of the underlying Receivables sold to the Purchasers. The collection of the DPP receivable is recognized as an increase to net cash provided by investing activities within the condensed consolidated statements of cash flows, with a corresponding reduction to net cash used in operating activities ~~was $169.0 million, compared to net~~within the condensed consolidated statements of cash ~~provided by operating activities of $76.3 million for the nine months ended January 26, 2019.~~ flows.

Net cash used in operating activities was ~~negative during~~$229.8 million and $45.2 million for the ~~nine~~three months ended ~~January~~July 25, 2020 and July 27, 2019, respectively. Net cash used in operating activities for the three months ended July 25, 2020 was primarily due to an increase in working capital, which was driven mainly by a decrease in accounts payable and the impact of our Receivables Securitization ~~Program.~~Program, partially offset by a reduction in inventory and receivables.

Net cash provided by investing activities was ~~$326.5~~$133.4 million and ~~$277.5~~$96.8 million for the ~~nine~~three months ended ~~January~~July 25, 2020 and ~~January 26,~~July 27, 2019, respectively. ~~Net cash flows~~Collections of DPP receivables were $139.5 million and $105.7 million for the ~~nine~~three months ended ~~January~~July 25, 2020 and

July 27,

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~~January 26,~~ 2019, ~~were positive primarily due to the collection of $359.3 million and $308.6 million of DPP receivables,~~ respectively. Capital expenditures were ~~$32.9~~$6.4 million and ~~$33.9~~$8.9 million during the ~~nine~~three months ended ~~January~~July 25, 2020 and ~~January 26,~~July 27, 2019, respectively. We expect to use a total of approximately ~~$45.0~~$50.0 million for capital expenditures in fiscal ~~2020.~~2021.

Net cash ~~used in~~provided by financing activities for the ~~nine~~three months ended ~~January~~July 25, 2020 was ~~$148.0 million. Uses of cash consisted~~$135.3 million, driven primarily of $460.8 million for payments on long-term debt and $75.5 million for dividend payments. In December 2019, we entered into a $300.0 million senior unsecured term loan facility, as described further below. Cash proceeds also include $95.0by $136.0 million attributed to draws on our revolving line of credit. During the three months ended July 25, 2020, we declared a cash dividend of $0.26 per common share, which was paid during the three months ended October 24, 2020. For the ~~nine~~three months ended ~~January 26,~~July 27, 2019, net cash used in financing activities was ~~$299.5~~$36.2 million. Uses of cash consisted primarily of ~~$244.0~~$25.5 million for dividend payments and $5.5 million for payments on long-term ~~debt and $74.7 million for dividend payments, and cash proceeds included $13.0 million attributed to draws on our revolving line of credit.~~debt.

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. The term loan and revolving credit facilities were initially set to mature no later than January 2022. During the quarter ended October 26, 2019, we repaid the remaining $81.6 million outstanding under the unsecured term loan. As of ~~January~~July 25, 2020, ~~$95.0~~$136.0 million was

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outstanding under the Amended Credit Agreement revolving line of credit at an interest rate of ~~3.1%~~1.36%. AtAs of April ~~27, 2019, $87.1 million was outstanding under the Amended Credit Agreement unsecured term loan at an interest rate of 3.7%, and~~25, 2020, no amount was outstanding under the ~~Amended Credit Agreement~~ revolving line of credit.

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 ~~January~~July 25, 2020, $300.0 million was outstanding under the Term Facility at an interest rate of ~~3.4%~~1.43%.

~~During the three months ended January~~ As of April 25, 2020, ~~we repaid certain indebtedness totaling $373.8 million. See Note 4 to~~$300.0 million was outstanding under the ~~Condensed Consolidated Financial Statements for additional details on the repayments.~~Term Facility at an interest rate of 1.87%.

We expect ~~funds generated from operations,~~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 ~~strategic initiatives~~our business over the remainder of fiscal ~~2020.~~2021.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

See Note 1 to the Condensed Consolidated Financial Statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in our exposure to market risk from that disclosed in Item 7A in our ~~2019~~2020 Annual Report on Form 10-K filed June ~~26, 2019.~~24, 2020.

ITEM 4. CONTROLS AND PROCEDURES

Under the supervision and with the participation of our management, including our President and Chief Executive Officer ("CEO") and our Chief Financial Officer ("CFO"), management evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of ~~January~~July 25, 2020. Based upon their evaluation of these disclosure controls and procedures, the CEO and CFO concluded that the disclosure controls and procedures were effective as of ~~January~~July 25, 2020.

There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended ~~January~~July 25, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II—OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On August 17, 2017, IQ Dental Supply, Inc. (“IQ Dental”) filed a complaint in the U.S. District Court for the Eastern District of New York, entitled IQ Dental Supply, Inc. v. Henry Schein, Inc., Patterson Companies, Inc. and Benco Dental Supply Company, Case No. 2:17-CV-4834. Plaintiff alleges that it is a distributor of dental supplies and equipment, and sells dental products through an online dental distribution platform operated by SourceOne Dental, Inc. IQ Dental alleges, among other things, that defendants conspired to suppress competition from IQ Dental and SourceOne for the marketing, distribution and sale of dental supplies and equipment in the United States, and that defendants unlawfully agreed with one another to boycott dentists, manufacturers and state dental associations that deal with, or considered dealing with, plaintiff and SourceOne. Plaintiff claims that this alleged conduct constitutes unreasonable restraint of trade in violation of Section 1 of the Sherman Act, New York’s Donnelly Act and the New Jersey Antitrust Act, and also makes pendant state law claims for tortious interference with prospective business relations, civil conspiracy and aiding and abetting. Plaintiff seeks injunctive relief, compensatory, treble and punitive damages, jointly and severally, and reasonable costs and expenses, including attorneys’ fees and expert fees. On December 21, 2017, the District Court granted defendants motion to dismiss the complaint with prejudice. Plaintiff appealed the District Court’s order. On May 10, 2019, the U.S. Court of Appeals for the Second Circuit affirmed dismissal of IQ Dental's claims that it was injured by an alleged boycott of SourceOne, but reversed the District Court on dismissal of IQ Dental's direct boycott claims. The case was remanded to the District Court to proceed in accordance with that opinion. On June 29, 2019, the Second Circuit denied IQ Dental’s petition for rehearing or rehearing en banc. On January 23, 2020, we settled with IQ Dental and the action was dismissed on February 10, 2020.

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Patterson Companies, Inc., Scott P. Anderson and Ann B. Gugino, Case No. 0:18-cv-00871 MJD/SER. On November 9, 2018, the complaint was amended to add former CEO James W. Wiltz and former CFO R. Stephen Armstrong as individual defendants. Under the amended complaint, on behalf of all persons or entities that purchased or otherwise acquired Patterson’s common stock between June 26, 2013 and February 28, 2018, Plymouth alleges that Patterson violated federal securities laws by failing to disclose that Patterson’s revenue and earnings were “artificially inflated by Defendants’ illicit, anti-competitive scheme with its purported competitors, Benco and Schein, to prevent the formation of buying groups that would allow its customers who were office-based practitioners to take advantage of pricing arrangements identical or comparable to those enjoyed by large-group customers.” In its class action complaint, Plymouth asserts one count against Patterson for violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder and a second, related count against the individual defendants for violating Section 20(a) of the Exchange Act. Plymouth seeks compensatory damages, pre- and post-judgment interest and reasonable attorneys’ fees and experts’ witness fees and costs. On August 30, 2018, Gwinnett County Public Employees Retirement System and Plymouth County Retirement System, Pembroke Pines Pension Fund for Firefighters and Police Officers, Central Laborers Pension Fund were appointed lead plaintiffs. On January 18, 2019, Patterson and the individual defendants filed a motion to dismiss the amended complaint. On July 25, 2019, the U.S. Magistrate Judge issued a report and recommendation that the motion to dismiss be granted in part and denied in part. The report and recommendation, among other things, recommends the dismissal of all claims against individuals defendants Ann B. Gugino, R. Stephen Armstrong and James W. Wiltz. On September 10, 2019, the District Court adopted the Magistrate Judge’s report and recommendation. While the outcome of litigation is inherently uncertain, we believe that the class action complaint is without merit, and we are vigorously defending ourselves in this litigation. We do not anticipate that this matter will have a material adverse effect on our financial statements. Patterson has also received, and responded to, requests under Minnesota Business Corporation Act § 302A.461 to inspect corporate books and records relating to the issues raised in the securities class action complaint and ~~the~~certain antitrust ~~matters discussed above.~~litigation.

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and related sales practices company-wide, and to report on its findings to the Board and to the USAO-WDVA. As a result of the internal investigation, we modified our licensing, dispensing, distribution and related sales processes company-wide. We ~~have~~ reached an agreement with the USAO-WDVA ~~which we understand will resolve~~that resolved the federal government’s criminal investigation into Animal Health International and other non-compliant licensing, dispensing, distribution and related sales processes disclosed during the investigation. ~~The agreement is subject to court approval.~~ Under the terms of the agreement, Animal Health International ~~has agreed to pay~~paid a total criminal fine and forfeiture of $52.8 million ~~which payment was made~~ in the fourth quarter of fiscal 2020, and Animal Health International ~~has~~ pleaded guilty to ~~a one-count information charging it with~~ a strict-liability misdemeanor offense under the Federal Food, Drug and Cosmetic Act in connection with its failure to comply with federal law relating to the sales of prescription animal health products. In addition, Animal Health International and Patterson ~~have~~ entered into a non-prosecution agreement for other non-compliant licensing, dispensing, distribution and related sales processes disclosed during the investigation and committed to undertake additional compliance program enhancements and provide compliance certifications for the period from the date of signing the non-prosecution agreement through the next three full fiscal years. The sentencing hearing took place on May 4, 2020, and the court entered a one-year probation period for Animal Health International. We recorded a reserve of $58.3 million in our Corporate segment for the three and six months ended October 26, 2019 to account for the ~~anticipated~~then-anticipated settlement of this matter and certain related costs and expenses. This matter may continue to divert management’s attention and cause us to suffer reputational harm. We also may be subject to other fines or penalties, equitable remedies (including but not limited to the suspension, revocation or non-renewal of licenses) and litigation. The occurrence of any of these events could adversely affect our business, financial condition and results of operations.

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captioned Kirsten Johnsen v. Scott P. Anderson et al., Case No. 27-CV-18-14315. Derivatively on behalf of Patterson, plaintiff alleges that Patterson “suppressed price competition and maintained supracompetitive prices for dental supplies and equipment by entering into agreements with Henry Schein and Benco to: (i) fix margins for dental supplies and equipment; and (ii) block the entry and expansion of lower-margin, lower-priced, rival dental distributors through threatened and actual group boycotts.” Plaintiff further alleges that the individual defendants failed to disclose Patterson’s alleged “price-fixing scheme” to the public and purportedly “caused Patterson to repurchase over $412.8 million worth of its own stock at artificially inflated prices.” In the derivative complaint, plaintiff asserts three counts against the individual defendants for: (i) breach of fiduciary duty; (ii) waste of corporate assets; and (iii) unjust enrichment. Plaintiff seeks compensatory damages, equitable and injunctive relief as permitted by law, costs, disbursements and reasonable attorneys’ fees, accountants’ fees and experts’ fees, costs and expenses, and an order awarding restitution from the individual defendants and directing Patterson “to take all necessary actions to reform and improve its corporate governance and internal procedures.” On February 19, 2019, the Hennepin County District Court ordered this litigation stayed pending resolution of the below-described case brought by Sally Pemberton. On September 10, 2019, the Honorable Patrick J. Schiltz dismissed ~~Pemberton~~ ~~without prejudice because the plaintiff failed to make a pre-suit demand on Patterson’s Board of Directors. On November 5, 2019, the defendants in~~ ~~Johnsen~~ ~~moved to dismiss such action based on plaintiff’s failure to make a pre-suit demand or otherwise properly plead demand futility. On December 12, 2019, in light of the outcome in~~ ~~Pemberton, the defendants and Johnsen entered into a stipulation for voluntary dismissal of the~~ ~~Johnsen~~ ~~action, which the court granted on December 13, 2019.~~

On October 1, 2018, Sally Pemberton filed a stockholder derivative complaint against Patterson Companies, Inc., as a nominal defendant, and the following former and current officers and directors of Patterson: Scott Anderson, Ann Gugino, Mark Walchirk, John Buck, Alex Blanco, Jody Feragen, Sarena Lin, Ellen Rudnick, Neil Schrimsher, Les Vinney, James Wiltz, Paul Guggenheim, David Misiak and Tim Rogan as individual defendants in the U.S. District Court for the District of Minnesota in a case captioned Sally Pemberton v. Scott P. Anderson, et al., Case No. 18-CV-2818 (PJS/HB). Derivatively on behalf of Patterson, plaintiff alleges that Patterson, with Benco and Henry Schein, “engage[d] in a conspiracy in restraint of trade, whereby the companies agreed to refuse to offer discounted prices or otherwise negotiate with GPOs, agreed to fix margins on dental supplies and equipment, agreed not to poach one another’s customers or sales representatives, and agreed to block the entry and expansion of rival distributors." Plaintiff further alleges that the individual defendants failed to disclose Patterson’s alleged “antitrust misconduct” to the public and purportedly caused Patterson to repurchase $412.8 million of its own stock at prices that were artificially inflated. In the derivative complaint, plaintiff asserts six counts against the individual defendants for: (i) breach of fiduciary duty; (ii) waste of corporate assets; (iii) unjust enrichment; (iv) violations of Section 14(a) of the Exchange Act; (v) violations of Section 10(b) and Rule 10b-5 of the Exchange Act and (vi) violations of Section 20(a) of the Exchange Act. Plaintiff seeks compensatory damages with pre-judgment and post-judgment interest, costs, disbursements and reasonable attorneys’ fees, experts’ fees, costs and expenses, and an order awarding restitution from the individual defendants and directing Patterson “to take all necessary actions to reform and improve its corporate governance and internal procedures.” On September 10, 2019, the Honorable Patrick J. Schiltz dismissed this action without prejudice because the plaintiff failed to make a pre-suit demand on Patterson’s Board of Directors. On October 31, 2019, Patterson’s Board ~~of Directors~~ received a written demand to initiate litigation against its officers and directors based on the claims ~~the plaintiff~~Ms. Pemberton originally presented in her complaint. ~~The Board is in the process of creating a Special Litigation Committee to review such~~Following this demand, and after consultation with legal counsel, effective March 16, 2020, the Board adopted a resolution appointing Professor John Matheson and The Honorable George McGunnigle, retired Judge of Hennepin County District Court, as a special litigation committee pursuant to Minnesota Statutes Section 302A.241. Pursuant to the resolution, the special litigation committee has complete power and authority to investigate the demand, analyze the legal rights or remedies of Patterson, determine ~~how~~whether those rights or remedies should be pursued, and respond to ~~address it. We do not anticipate that this matter will have a material adverse effect~~Ms. Pemberton on ~~our financial statements.~~behalf of Patterson.

On ~~January 29, 2019,~~August 28, 2018, Kirsten Johnsen filed a ~~purported class action~~stockholder derivative complaint ~~was filed by R. Lawrence Hatchett, M.D.~~ against Patterson Companies, Inc., as a nominal defendant, and the following former and current officers and directors of Patterson: Scott Anderson, Ann Gugino, James Wiltz, John Buck, Jody Feragen, Ellen Rudnick, Les Vinney, Neil Schrimsher, Sarena Lin, Harold Slavkin, Alex Blanco and Mark Walchirk as individual defendants in Hennepin County District Court in a case captioned Kirsten Johnsen v. Scott P. Anderson et al., Case No. 27-CV-18-14315. Derivatively on behalf of Patterson, plaintiff alleges that Patterson “suppressed price competition and maintained supracompetitive prices for dental supplies and equipment by entering into agreements with Henry Schein ~~Inc.,~~and Benco ~~Dental Supply Company,~~to: (i) fix margins for dental supplies and ~~unnamed co-conspirators in~~equipment; and (ii) block the ~~U.S. District Court for the Southern District~~entry and expansion of ~~Illinois. The complaint alleges that members of the proposed class suffered antitrust injury due to an unlawful boycott, price-fixing or otherwise anticompetitive conspiracy among Schein, Benco~~lower-margin, lower-priced, rival dental distributors through threatened and ~~Patterson. The complaint~~actual group boycotts.” Plaintiff further alleges that the individual defendants failed to disclose Patterson’s alleged ~~conspiracy overcharged Illinois dental practices, orthodontic practices~~“price-fixing scheme” to the public and ~~dental laboratories on their purchase~~purportedly “caused Patterson to repurchase over $412.8 million worth of ~~dental supplies, which in turn passed on some or all of such overcharges to members of~~its own stock at artificially inflated prices.” In the ~~class. Subject to certain exclusions, the~~derivative complaint, defines the class as all persons residing in Illinois purchasing and/or reimbursing for dental care provided by independent Illinois dental practices purchasing dental supplies from the defendants, or purchasing from buying groups purchasing these supplies from the defendants, on or after January 29, 2015. The complaint alleges violations of the Illinois Antitrust Act, 740 Ill. Comp. Stat. §§ 10/3(2), 10/7(2), and seeks a permanent injunction, actual damages to be determined at trial, trebled, reasonable attorneys’ fees and costs, and pre- and post-judgment interest. On February 13, 2020, the court granted defendants' motion to dismiss for lack of standing and dismissed the action with prejudice.

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Richmond Community Hospital, Incorporated, Bon Secours DePaul Medical Center, Inc., Bon Secours- Memorial Regional Medical Center, Inc., Bon Secours- St. Francis Medical Center, Inc., Bon Secours- St. Mary’s Hospitalplaintiff asserts three counts against the individual defendants for: (i) breach of ~~Richmond, Inc., Bon Secours- Virginia Healthsource, Inc., Chesapeake Hospital Corporation, Mary Immaculate Hospital, Incorporated~~fiduciary duty; (ii) waste of corporate assets; and ~~Maryview Hospital (collectively,~~(iii) unjust enrichment. Plaintiff seeks compensatory damages, equitable and injunctive relief as permitted by law, costs, disbursements and reasonable attorneys’ fees, accountants’ fees and experts’ fees, costs and expenses, and an order awarding restitution from the ~~“MDL Plaintiffs”) filed a complaint in~~individual defendants and directing Patterson “to take all necessary actions to reform and improve its corporate governance and internal procedures.” On February 19, 2019, the MDL against 26 manufacturers and wholesale distributors of prescription opiates (the “MDL Defendants”) alleging that the MDL Defendants improperly marketed, sold or distributed prescription opiates. The MDL Plaintiffs’ complaint alleges violations of federal RICO statutes, violationsHennepin County District Court ordered this litigation stayed pending resolution of the Virginia Consumer Protections Act, negligence, negligence per se, wantonness, recklessness, and gross negligence, fraud and public nuisance. The MDL Plaintiffs seek injunctive relief, the imposition of civil penalties, monetary damages, punitive damages, pre- and post-judgment interest and attorneys’ fees and costs. Neither Patterson nor any of its subsidiaries were named as MDL Defendants in the original complaint.above-described case brought by Sally Pemberton. On ~~March 15,~~September 10, 2019, the ~~MDL Plaintiffs amended~~Honorable Patrick J. Schiltz dismissed Pemberton without prejudice because the plaintiff failed to make a pre-suit demand on Patterson’s Board of Directors. On November 5, 2019, the defendants in Johnsen moved to dismiss such action based on plaintiff’s failure to make a pre-suit demand or otherwise properly plead demand futility. On December 12, 2019, in light of the outcome in Pemberton, the defendants and ~~supplemented their complaint~~Johnsen entered into a stipulation for voluntary dismissal of the Johnsen action, which the court granted on December 13, 2019. On April 27, 2020, Patterson’s Board received a written demand to ~~assert violations~~initiate litigation against its officers and directors based on the claims Ms. Johnsen originally presented in her complaint. Effective June 30, 2020, the Board adopted a resolution expanding the scope of ~~federal RICO statutes against 67 manufacturers~~the previously constituted special litigation committee to include this matter.Pursuant to the resolution, the special litigation committee has complete power and ~~wholesale distributors~~authority to investigate the demand, analyze the legal rights or remedies of ~~prescription opiates (the “Amended MDL Defendants”). Two~~Patterson, determine whether those rights or remedies should be pursued, and respond to Ms. Johnsen on behalf of Patterson’s subsidiaries, Patterson Logistics Services, Inc. and Patterson Veterinary Supply, Inc., are named as Amended MDL Defendants. The MDL Plaintiffs allege that the Amended MDL Defendants “breached their legal duties under federal law to monitor, detect, investigate, refuse and report suspicious orders of prescription opiates.” Patterson Logistics Services, Inc. and Patterson Veterinary Supply, Inc. were voluntarily dismissed from this action with prejudice on January 9, 2020.Patterson.

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

Purchases of Equity Securities by the Issuer

On March 13, 2018, the Board of Directors authorized a $500 million share repurchase program through March 13, 2021. No shares were repurchased under the stock repurchase plan during the ~~third~~first quarter of fiscal ~~2020.~~2021.

In fiscal 2017, we entered into an amended credit agreement (“Amended Credit Agreement”), consisting of a $295.1 million term loan and a $750 million revolving line of credit. In March 2019, we permanently reduced the capacity under the revolving line of credit to $500 million. In fiscal 2020, we entered into a senior unsecured term loan facility agreement (the "Term Loan Facility Agreement"), consisting of a $300 million term loan. The Amended Credit Agreement and the Term Loan Facility Agreement permit us to declare and pay dividends, and repurchase shares, provided that no default or unmatured default exists and that we are in compliance with applicable financial covenants.

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ITEM 6. EXHIBITS


Exhibit No.	Exhibit Description

10.1		~~Loan~~Third Amended and Restated Receivables Purchase Agreement dated as of December 3, 2010, among PDC Funding Company, LLC, as seller, Patterson Companies, Inc., as servicer, the ~~lenders from time to time parties~~conduits party thereto, the financial institutions party thereto, the purchaser agents party thereto, and MUFG Bank, Ltd. (f.k.a. The Bank of Tokyo-Mitsubishi UFJ, Ltd.), as ~~administrative~~ agent, conformed through Eighteenth Amendment dated ~~December 20, 2019 ( incorporated by reference to our Current Report on Form 8-K, filed December 23, 2019 (File No. 000-20572))~~August 7, 2020 (filed herewith).

10.2	Second Amended and Restated Contract Purchase Agreement dated as of July 20, 2020, among PDC Funding Company II, LLC, as seller, Patterson Companies, Inc., as servicer, the purchasers party thereto, and Fifth Third Bank, as agent (filed herewith).

10.3	Receivables Purchase Agreement, dated as of July 24, 2018, by and among Patterson Dental Supply, Inc., as servicer, PDC Funding Company III, LLC, as seller, purchasers from time to time party thereto, and MUFG Bank, Ltd., as agent, conformed through Fifth Amendment, dated August 21, 2020 (filed herewith).

10.4	Receivables Purchase Agreement, dated as of January 15, 2020, by and among Patterson Veterinary Supply, Inc., as servicer, PDC Funding Company IV, LLC, as seller, purchasers from time to time party thereto, and MUFG Bank, Ltd., as agent, ~~(incorporated by reference to our Current Report on Form 8-K, filed January 17,~~conformed through First Amendment, dated August 21, 2020 ~~(File No. 000-20572)).~~

~~10.3~~	Receivables Sale Agreement, dated as of January 15, 2020, by and between Patterson Veterinary Supply, Inc., as seller, and PDC Funding Company IV, LLC, as buyer (incorporated by reference to our Current Report on Form 8-K, filed January 17, 2020 (File No. 000-20572))(filed herewith).

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

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

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

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

101		(Filed Electronically) The following financial information from our Quarterly Report on Form 10-Q for the period ended ~~January~~July 25, 2020, formatted in Inline XBRL (Extensible Business Reporting Language): (i) the condensed consolidated balance sheets, (ii) the condensed consolidated statements of ~~income~~operations and other comprehensive income, (iii) the condensed consolidated statements of changes in stockholders’ equity, (iv) the condensed consolidated statements of cash flows and (v) the notes to the condensed consolidated financial statements.(*)

104		(Filed Electronically) The cover page from our Quarterly Report on Form 10-Q for the period ended ~~January~~July 25, 2020 is formatted in Inline XBRL (Extensible Business Reporting Language).(*)

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

All other items under Part II have been omitted because they are inapplicable or the answers are negative, or were previously reported in the ~~2019~~2020 Annual Report on Form 10-K filed June ~~26, 2019.~~

24, 2020.

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Table of Contents

SIGNATURES

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


		PATTERSON COMPANIES, INC.
		(Registrant)

Dated: ~~March 4,~~September 3, 2020	By:	/s/ Donald J. Zurbay
		Donald J. Zurbay
		Chief Financial Officer and Treasurer
		(Principal Financial Officer and Principal Accounting Officer)

3429


			Page
PART I - FINANCIAL INFORMATION

Item 1- Financial Statements			3

Condensed Consolidated Balance Sheets			3

Condensed Consolidated Statements of ~~Income~~Operations and Other Comprehensive Income			4

Condensed Consolidated Statements of Changes in Stockholders' Equity			5

Condensed Consolidated Statements of Cash Flows			7

Notes to Condensed Consolidated Financial Statements			8

Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations			2219

Item 3 - Quantitative and Qualitative Disclosures about Market Risk			2824

Item 4 - Controls and Procedures			2824

PART II - OTHER INFORMATION

Item 1 - Legal Proceedings			2925

Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds			3227

Item 6 - Exhibits			3328

Signatures			3429


Remainder of 2020	$	9,395
2021	32,291
2022	24,865
2023	14,419
2024	6,429
After 2024	2,609
Total lease payments	90,008
Less: imputed interest	(5,048)
Present value of lease liabilities	$	84,960


			Carrying Value
	Interest Rate		January 25, 2020		April 27, 2019

Senior notes due fiscal 2022⁽¹⁾	3.59	%	$	100,750	$	165,000
Senior notes due fiscal 2024⁽¹⁾	3.74	%	33,000		100,000
Senior notes due fiscal 2025 ⁽²⁾	3.48	%	117,500		250,000
Senior notes due fiscal 2028 ⁽³⁾	3.79	%	40,000		150,000
Term loan due fiscal 2022 ⁽⁴⁾	3.73	%	—		87,091
Term loan due fiscal 2023 ⁽⁵⁾	3.41	%	300,000		—
Less: Deferred debt issuance costs			(3,795)		(2,775)
Total debt			587,455		749,316
Less: Current maturities of long-term debt			—		(23,975)
Long-term debt			$	587,455	$	725,341


Fiscal Year
Remainder of 2020	$	—
2021	—
2022	100,750
2023	300,000
2024	33,000
Thereafter	157,500
Total	$	591,250