Patterson Companies
Annual Report 2022

Plain-text annual report

2022 Annual Report WE STRENGTHEN THE PEOPLE WHO KEEP US AND OUR ANIMALS HEALTHY LETTER TO SHAREHOLDERS Fiscal 2022 was another year of strong financial performance and business success for Patterson Companies. While navigating the continuing impact of the COVID-19 pandemic and ongoing supply chain challenges, we achieved both top and bottom-line growth, drove operating margin expansion, and continued to return cash to our shareholders. This success was the result of our team’s disciplined focus, the attractive end markets we serve, and the comprehensive value we provide to our customers. • Our consistent execution across the entire company, aided by ongoing investments to drive productivity and better serve our customers, delivered total company internal sales1 growth for the year of 9 percent. • Through expense discipline and improved product mix, we achieved adjusted operating margin expansion in each of our two business segments, which resulted in full year consolidated adjusted operating margin of 4.4 percent, an improvement of 20 basis points over the prior year. • Patterson delivered fiscal 2022 GAAP earnings of $2.06 per diluted share and adjusted earnings2 of $2.27 per diluted share, exceeding fiscal 2021 adjusted EPS by 19 percent. Dental In fiscal 2022, Patterson Dental achieved internal sales growth of nearly 6 percent, a testament to our clear focus to support our customers and deliver value to dental practices across all sizes and practice models. • Our consumables growth of 6 percent in fiscal 2022 reflects the ongoing investments Patterson has made to strengthen our field sales and support teams and to expand our product portfolio. • We also drove momentum in equipment sales as we grew nearly 8 percent in fiscal 2022 over the prior year. While supply chain constraints presented challenges, our team continued to live up to their reputation as an indispensable partner for dentists investing in their practices. 19% Adjusted EPS growth in fiscal 20222 We believe the long-term prospects of the dental market remain attractive. In addition to the demographics of an aging population seeking greater dental care, the ongoing modernization of dental practices is expected to drive investments by dentists in new technology and practice management software. Also, we believe the direct link between a patient's oral health and overall health will continue to drive patient engagement with their dentist. Looking ahead, we remain confident in the depth and experience of our team, our competitive position, and the • As part of our balanced capital allocation strategy, we passion we have to serve our customers. returned approximately $136 million to shareholders through cash dividends and share repurchases. Animal Health 9% Internal sales growth in fiscal 20221 Patterson’s Animal Health business delivered internal sales growth of 12 percent in fiscal 2022 over the prior year. This strong financial performance reflects the breadth of our presence across the entire animal health market, which drives loyalty with our customers as well as our manufacturer partners. 1 The term “internal sales” represents net sales adjusted for the effects of currency translation, changes in product selling relationships, contributions from recent acquisitions and the extra week of selling results in the first quarter of fiscal 2022. 2See page 4 of this document for Reconciliation of GAAP to non-GAAP Measures. 3Total Shareholder Return for Fiscal 2020 – 2022 calculated using fiscal year end dates of April 27, 2019, to April 30, 2022. 2 • Our Companion Animal business achieved internal sales growth of 15 percent in fiscal 2022 as our team capitalized on the strong fundamentals driving increased pet spending. • We drove internal sales growth in our Production Animal business of nearly 9 percent in fiscal 2022 as our strategic approach has strengthened our 61% Three-year total shareholder return from fiscal 2020 – 20223 promoting diversity to further strengthen our inclusive culture and providing advancement opportunities for competitive position across all channels and species. all employees. We believe the long-term trends of the companion animal market also remain attractive, with increased pet ownership and spending expected to drive continued growth. In the production animal market, the global demand for protein remains healthy, and we expect producers will continue to prioritize the health of their animals and work closely with Patterson as their trusted partner to ensure herd health and improve operational efficiency. Living our values I am incredibly proud of the talented Patterson team for the way we served our customers and shareholders during fiscal 2022. Our strong culture is centered on living our values of being Passionate, Focused, People- The year ahead As we look to fiscal 2023, we expect the challenging macroeconomic environment will have an impact on our customers and our business. However, we are confident in our durable business model, our resilient end markets, and our strong track record of successfully navigating external challenges while continuing to drive value for our customers, our shareholders and all key stakeholders. Thank you for your support and interest in Patterson Companies. First and committed to Always Advancing. This enables Mark Walchirk our team members to deliver results in the right way President and Chief Executive Officer July 15, 2022 and to serve all stakeholders that are vital to our continued success. We support our communities through the Patterson Foundation, which donates to various charitable organizations throughout the U.S. and Canada, and we offer our Volunteer Time Off program to support our employees who volunteer in their communities. We strive to be an exceptional employer dedicated to our Environmental, Social and Governance efforts. For example, we recently joined the Science Based Target Initiative, and we are implementing green initiatives and environmentally friendly practices to reduce waste and the use of precious resources. We are also committed to 17% Three-year compounded adjusted EPS growth from fiscal 2020 – 20222 3 FINANCIAL SUMMARY (Dollars in thousands, except per share amounts) Net sales Gross profit Operating income (loss) Net income (loss) attributable to Patterson Companies, Inc. Diluted earnings (loss) per share attributable to Patterson Companies, Inc. Cash and cash equivalents Working capital Total assets Total long-term debt Stockholders’ equity Fiscal year ended $5,912,066 $5,490,011 April 30, 2022 April 24, 2021 April 25, 2020 $6,499,405 1,289,087 157,002 203,210 1,203,130 155,981 210,607 1,197,410 (588,446) (572,119) $    2.06 $ 1.61 $  142,014 $ 143,244 663,353 2,741,630 488,554 1,042,635 2,751,511 526,263 964,671 487,545 $ (6.25) $ 77,944 467,867 2,715,350 587,766 836,444 RECONCILIATION OF GAAP TO NON-GAAP MEASURES The following reconciliation of GAAP to non-GAAP measures table is provided to adjust reported GAAP measures, namely net income (loss) attributable to Patterson Companies, Inc., and diluted earnings (loss) per share, for the impact of deal amortization, integration and business restructuring expenses, legal reserves, inventory donation charges, accelerated debt-related costs, gains on investments and goodwill impairment, along with the related tax effects of these items. Management believes that these non-GAAP measures may provide a helpful representation of the Company’s performance, and enable comparison of financial results between periods where certain items may vary independent of business performance. These non-GAAP financial measures are presented solely for informational and comparative purposes and should not be regarded as a replacement for corresponding, similarly captioned, GAAP measures. Fiscal year ended (Dollars in thousands, except per share amounts) April 30, 2022 April 24, 2021 April 25, 2020 Net income (loss) attributable to Patterson Companies, Inc. – GAAP Deal amortization Integration and business restructuring expenses Legal reserves Inventory donation charges Accelerated debt-related costs Gains on investments Goodwill impairment Net income attributable to Patterson Companies, Inc. – non-GAAP $203,210 28,822 3,184 27,540 36,886 – (75,913) – $223,729 Legal reserves Deal amortization Inventory donation charges Integration and business restructuring expenses Diluted earnings (loss) per share attributable to Patterson Companies, Inc. – GAAP $   2.06 0.29 0.03 0.28 0.37 – (0.77) – Diluted earnings per share attributable to Patterson Companies, Inc. – non-GAAP* $   2.27 Accelerated debt-related costs Gains on investments Goodwill impairment $155,981 $(588,446) 28,210 28,208 817 – – – – – 11,591 74,141 – 7,457 (25,983) 640,627 $185,008 $ 147,595 $ 1.61 $ (6.25) 0.29 0.01 0.30 0.12 – – – – – 0.78 – 0.08 (0.27) 6.74 $ 1.91 $ 1.55 Operating income (loss) as a % of sales – GAAP Operating income as a % of sales – non-GAAP    2.4% 4.4% 3.6% (10.4%) 4.2% 4.3% *May not sum due to rounding and difference in weighted average shares used to calculate diluted earnings (loss) per share. Forward-looking statements made in this report are subject to the cautionary statements in the Company’s Form 10-K, filed with the Securities and Exchange Commission on June 29, 2022, under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” 4 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ☒ ☐ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended April 30, 2022 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File No. 0-20572 PATTERSON COMPANIES, INC. (Exact name of registrant as specified in its charter) Minnesota (State or other jurisdiction of incorporation or organization) 41-0886515 (I.R.S. Employer Identification No.) 1031 Mendota Heights Road St. Paul, Minnesota 55120 (Address of principal executive offices including Zip Code) Registrant’s telephone number, including area code: (651) 686-1600 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 Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x 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 x 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 x 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. Large accelerated filer Smaller reporting company x Accelerated filer ☐ Emerging growth company ☐ ☐ Non-accelerated filer ☐ 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 has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report ☒ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x The aggregate market value of voting common equity held by non-affiliates, computed by reference to the price at which the common equity was last sold as of the last business day of the registrant's most recently completed second fiscal quarter (October 30, 2021) was approximately $3,016,000,000 (For purposes of this calculation all of the registrant’s executive officers and directors are deemed affiliates.) As of June 21, 2022, there were 96,740,000 shares of Common Stock of the registrant issued and outstanding. Portions of the registrant’s definitive proxy statement to be filed pursuant to Regulation 14A within 120 days after the registrant’s fiscal year-end of April 30, 2022 are incorporated by reference into Part III. Documents Incorporated By Reference FORM 10-K INDEX PART I Item 1. BUSINESS Item 1A. RISK FACTORS Item 1B. UNRESOLVED STAFF COMMENTS Item 2. Item 3. Item 4. PART II Item 5. Item 6. Item 7. PROPERTIES LEGAL PROCEEDINGS MINE SAFETY DISCLOSURES MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES [RESERVED] MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Item 8. Item 9. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Item 9A. CONTROLS AND PROCEDURES Item 9B. OTHER INFORMATION Item 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS PART III Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Item 11. EXECUTIVE COMPENSATION Item 12. Item 13. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES PART IV Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES Item 16. FORM 10-K SUMMARY SCHEDULE II SIGNATURES 2 Page 3 3 18 29 29 30 30 31 31 32 33 42 44 74 75 75 75 76 76 76 76 76 76 77 77 80 81 82 Item 1. BUSINESS Forward-Looking Statements PART I 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. Certain information of a non-historical nature contained in Items 1, 2, 3 and 7 of this Form 10-K includes “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, 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, 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 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. Any number of factors could affect our actual results and cause such results to differ materially from those contemplated by any forward-looking statements. Reference is made to “Risk Factors” in Item 1A and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of this Form 10-K, for a discussion of certain factors that could cause actual operating results to differ materially from those expressed in any forward-looking statements. In light of these risks and uncertainties, there can be no assurance that the forward-looking information will in fact prove to be accurate. 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 and information which may be contained in this Form 10-K and in our other filings with the U.S. Securities and Exchange Commission, or SEC, when reviewing any forward-looking statement. Investors should understand it is impossible to predict or identify all such factors or risks. As such, you should not consider 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-K 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. General Patterson Companies, Inc. is a value-added specialty distributor serving the U.S. and Canadian dental supply markets and the U.S., Canadian and U.K. animal health supply markets. Patterson operates through its two strategic business units, Patterson Dental and Patterson Animal Health, offering similar products and services to different customer bases. Each business has a strong competitive position, serves a highly fragmented market that offers consolidation opportunities and offers relatively low-cost consumable supplies, which makes our value-added business proposition highly attractive to our customers. We believe that we have a strong brand identity as a value- added, full-service distributor with broad product and service offerings, having begun distributing dental supplies in 1877. 3 Impacts of COVID-19 The COVID-19 pandemic, including closures and other steps taken by governmental authorities in response to the virus, has had a significant impact on our businesses. In March 2020, based upon the recommendations of the American Dental Association, the American Veterinary Medical Association and such organizations’ state-level counterparts, various dental and veterinary offices announced that they were performing only emergency or limited procedures, and rescheduled wellness exams and other elective procedures. In addition, many states and countries imposed restrictions on business operations to protect public health. Finally, the pandemic disrupted meat packing operations, which impacted our Animal Health segment. In response, management adapted our business practices with respect to employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences. Management also took proactive steps with respect to our liquidity position and near-term cost structure, including through incremental borrowings on our revolving credit facility to increase cash, reduction of non-critical capital expenditures, executive, board, and other senior-level employee compensation reductions, employee furloughs, discretionary spending deferrals and the deferral of payroll taxes under the CARES Act. In our markets of the U.S., Canada, and the UK, restrictive measures have now been lifted or are expected to be lifted soon, sometimes subject to social distancing and capacity restrictions, due to the rapid pace of vaccination and improving local case rates. However, other areas around the world continue to suffer. Concerns remain that our markets could see a resurgence of cases triggering another shutdown, for example due to the emergence of a variant not effected by existing vaccines. In addition, COVID-19 continues to have a material effect on the macroeconomic environment, and there is continued uncertainty around its duration and ultimate impact. Refer to Part I, Item 1A, “Risk Factors,” and Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” within this Annual Report for further information on the impacts to our business and results of operations, our dividends, liquidity and debt arrangements, and associated risks and uncertainties. Business Overview The following table sets forth consolidated net sales (in millions) by segment. Dental Animal Health Corporate Consolidated net sales Fiscal Year Ended April 30, 2022 April 24, 2021 April 25, 2020 $ $ 2,516 $ 2,327 $ 3,983 — 3,560 25 6,499 $ 5,912 $ 2,102 3,336 52 5,490 Our strategically located fulfillment centers enable us to better serve our customers and increase our operating efficiency. This infrastructure, together with broad product and service offerings at competitive prices, and a strong commitment to customer service, enables us to be a single source of supply for our customers’ needs. Our infrastructure also allows us to provide convenient ordering and rapid, accurate and complete order fulfillment. Electronic commerce solutions have become an integral part of dental and animal health supply and distribution relationships. Our distribution business is characterized by rapid technological developments and intense competition. The continuing advancement of online commerce requires us to cost-effectively adapt to changing technologies, to enhance existing services and to develop and introduce a variety of new services to address the changing demands of consumers and our customers on a timely basis, particularly in response to competitive offerings. We believe that our tradition of reliable service, our name recognition and large customer base built on solid customer relationships, position us well to participate in this significant aspect of the distribution business. We continue to explore methods to improve and expand our Internet presence and capabilities, including our online commerce offerings and our use of various social media outlets. Patterson became publicly traded in 1992 and is a corporation organized under the laws of the state of Minnesota. We are headquartered in St. Paul, Minnesota. Our principal executive offices are located at 1031 Mendota Heights Road, St. Paul, Minnesota 55120, and our telephone number is (651) 686-1600. Unless the context specifically requires otherwise, the terms the “Company,” “Patterson,” “we,” “us” and “our” mean Patterson Companies, Inc., a Minnesota corporation, and its consolidated subsidiaries. 4 The Specialty Distribution Markets We Serve We provide manufacturers with cost effective logistics and high-caliber sales professionals to access a geographically diverse customer base, which is critical to the supply chain for the markets we serve. We provide our customers with an array of value-added services, a dedicated and highly skilled sales team, and a broad selection of products through a single channel, thereby helping them efficiently manage their ordering process. Due in part to the inability of our customers to store and manage large quantities of supplies at their locations, the distribution of supplies and small equipment has been characterized by frequent, small-quantity orders, and a need for rapid, reliable and substantially-complete order fulfillment. Supplies and small equipment are generally purchased from more than one distributor, with one generally serving as the primary supplier. We believe that consolidation within the industry will continue as distributors, particularly those with limited financial, operating and marketing resources, seek to combine with larger companies that can provide growth opportunities. This consolidation also may continue to result in distributors seeking to acquire companies that can enhance their current product and service offerings or provide opportunities to serve a broader customer base. Dental Supply Market The dental supply market we serve consists of geographically dispersed and highly fragmented dental practices. Customers range in size from sole practitioners to large group practices, often called Dental Service Organizations ("DSO's"). According to the American Dental Association and the Canadian Dental Association, there are approximately 202,000 dentists practicing in the U.S. and 21,000 dentists practicing in Canada. We believe the average dental practitioner purchases supplies from more than one supplier. We believe the North American dental supply market continues to experience growth due to an increasing population, an aging population, advances in dentistry, demand for general, preventive and specialty services, increasing demand for new technologies that allow dentists to increase productivity, demand for infection control products, and insurance coverage by dental plans. We support dental professionals through the many stock keeping units (“SKUs”) that we offer, as well as through important value-added services, including equipment and technology installation and service, practice management software, electronic claims processing, financial services, and continuing education, all designed to help make a dental practice more efficient. Animal Health Supply Market The animal health supply market is a mix of production animal supply, which primarily serves food producing animals, consisting of beef and dairy cattle, swine and poultry and other species such as sheep and goats, and companion animal supply, which serves pets, primarily dogs, cats and horses. Similar to the dental supply market, the animal health supply market is highly fragmented and diverse. Our production animal customers include large animal veterinarians, beef producers (cow/calf, stocker and feedlots), dairy producers, poultry producers, swine producers and retail customers. Our companion animal customers are primarily small animal and equine veterinary clinics, including independently owned, corporates and groups. According to the American Veterinary Medical Association, there are more than 70,000 veterinarians in private practice in the U.S. and Canada. Furthermore, there are approximately 20,000 veterinarians in the U.K. practicing in veterinary outlets; however, we believe there has been a shift in the U.K. market toward consolidation of veterinary practices. National Veterinary Services Limited, is the market leader in the U.K. veterinary market, with the highest percentage of buying groups and corporations as customers compared to its competitors, and the highest share position in that country overall. The global animal health supply market continues to experience growth, and we believe that trend will continue for the foreseeable future. We support our animal health customers through the distribution of biologicals, pharmaceuticals, parasiticides, supplies, including our own private label brands, and equipment. We also supply a full portfolio of technologies, software, services and solutions to all segments and channels of our broad customer base. We actively engage in the development, sale and distribution of inventory, accounting and health management systems to enhance customer operating efficiencies and assist our customers in managing risk. Within the companion animal supply market, we anticipate increasing demand for veterinary services due to the following factors: the increasing number of households with companion animals, increased pet adoption rates and increased expenditures on animal health and preventative care, an aging pet population, advancements in animal health products and diagnostic testing, and extensive marketing programs sponsored by companion animal nutrition and pharmaceutical companies. 5 We anticipate the macroeconomic trend of global population growth and corresponding demand for protein will be favorable to the production animal segment in the future. Likewise, the rise in disposable income, especially in developing countries will be a key driver of future growth. However; product sales in the production animal supply market are more likely to be impacted by volatility in the market such as commodity prices, changes in weather patterns, and trends in the general economy. Many factors can influence how long cattle will graze and consequently the number of days an animal is on feed during a finishing phase. Supply and demand dynamics and economic trends can shift the number of animals treated, the timing of when animals are treated, to what extent they are treated and with which products they are treated. Historically, sales in this market have been largely driven by spending on animal health products to improve productivity, weight gain and disease prevention, as well as a growing focus on health and wellness of the animals, safety, and efficiency in livestock production. Competition The distribution industry is highly competitive. It consists principally of national, regional and local full-service distributors. Substantially all of the products we sell are available to customers from a number of suppliers. In addition, our competitors could obtain exclusive rights from manufacturers to market particular products. Some manufacturers also sell directly to end-users, thereby eliminating or reducing our role and that of other distributors. We compete with other distributors, as well as several manufacturers, of dental and animal health products, on the basis of price, breadth of product line, customer service and value-added products and services. To differentiate ourselves from our competition we deploy a strategy of premium customer service with multiple value-added components, a highly qualified and motivated sales force, highly-trained and experienced service technicians, an extensive breadth and mix of products and services, technology solutions allowing customers to easily access our inventory, accurate and timely delivery of product, strategic location of sales offices and fulfillment centers, and competitive pricing. In the U.S. and Canadian dental supply market, we compete against Henry Schein, Inc., Benco Dental Supply Company, Burkhart Dental Supply and hundreds of distributors that operate on a regional or local level, or online. Also, as noted above, some manufacturers sell directly to end users. With regard to our dental practice management software, we compete against numerous offerings, including those from Henry Schein, Inc. and Carestream Dental. In the U.S. and Canadian animal health supply market, our primary competitors are AmerisourceBergen/MWI Animal Health and Covetrus, Inc. We also compete against a number of regional and local animal health distributors, some manufacturers that sell direct to end users and several alternative channel market providers that sell through digital platforms to production animal operators, animal health product retailers and veterinarians. Additionally, major U.S. online e-commerce retailers such as Amazon and Chewy.com are becoming licensed as veterinary mail order pharmacies to offer pharmacy products directly to consumers in all 50 U.S. states. In the animal health practice management market, our primary competitors are IDEXX Laboratories, Inc. and Covetrus, Inc. We face significant competition in the animal health supply market in the U.K., where we compete on the basis of price and customer service with several large competitors, including Covetrus, Inc. and AmerisourceBergen. We also compete directly with pharmaceutical companies who sell certain products or services directly to the customer. Successful distributors are increasingly providing value-added services in addition to the products they have traditionally provided. We believe that to remain competitive we must continue to add value to the distribution channel, while removing unnecessary costs associated with product movement. Significant price reductions by our competitors could result in competitive harm. Any of these competitive pressures may materially adversely affect our operating results. Competitive Strengths We have more than 140 years of experience in distributing products resulting in strong awareness of the Patterson brand. Although further information regarding these competitive strengths is set forth below in the discussion of our two strategic business units, our competitive strengths include: • Broad product and service offerings at competitive prices. We sell approximately 200,000 SKUs to our customers, including many proprietary branded products. We believe that our proprietary branded products and our competitive pricing strategy have generated a loyal customer base that is confident in our brands. Our product offerings include consumables, equipment, software and various technologies. Our value- added services include practice management software, office design, equipment installation and maintenance, and financing. 6 • • Focus on customer relationships and exceptional customer service. Our sales and marketing efforts are designed to establish and solidify customer relationships through personal visits by field sales representatives, interaction via phone with sales representatives, web-based activities including e- commerce and frequent direct marketing, emphasizing our broad product lines, competitive prices and ease of order placement. We focus on providing our customers with exceptional order fulfillment and a streamlined ordering process. Cost-effective purchasing and efficient distribution. We believe that cost-effective purchasing is a key element to maintaining and enhancing our position as a competitive-pricing provider of dental and animal health products. We strive to maintain optimal inventory levels to satisfy customer demand for prompt and complete order fulfillment through our distribution of products from strategically located fulfillment centers. Business Strategy Our objective is to continue to expand as a leading value-added distributor of dental and animal health products and services. To accomplish this, we will apply our competitive strengths in executing the following strategies: • • • Emphasizing our differentiated, value-added, full-service capabilities. We are positioned to meet virtually all of the needs of dental practitioners, veterinarians, production animal operators and animal health product retailers by providing a broad range of consumable supplies, technology, equipment and software and value-added services. We believe our knowledgeable sales representatives can create customer intimacy and loyalty by providing an informational, consultative approach to our customers, linking them to the industries we serve. Our value-added strategy is further supported by our equipment specialists who offer consultation on design, equipment requirements and financing, our service technicians who perform equipment installation, maintenance and repair services, our business development professionals who provide business tools and educational programs to our customers, and our technology advisors who provide guidance on integrating technology solutions. for platforms predominant Using technology to enhance customer service. As part of our commitment to providing superior customer service, we offer our customers easy order placement. Although we offer computerized order entry systems that we believe help establish relationships with new customers and increase loyalty among existing customers, include www.pattersondental.com, ordering www.pattersonvet.com and www.animalhealthinternational.com. The use of these methods of ordering enables our sales representatives to spend more time with existing and prospective customers. Our Internet environment includes order entry, customer support for digital and our proprietary products, customer- loyalty program reports and services, and access to articles and manufacturers’ product information. We also provide real-time customer and sales information to our sales force, managers and vendors via the Internet. In addition, the Patterson Technology Center (“PTC”) differentiates Patterson from our competition by providing deep and thorough expertise in practice management software and other advanced equipment and technology clinical solutions. In addition to trouble-shooting through the PTC’s support center, customers can access various service capabilities offered by the PTC, including electronic claims and statement processing and system back-up capabilities. today Continuing to improve operating efficiencies. We continue to implement programs designed to improve our operating efficiencies and allow for continued sales growth. This strategy includes our continuing investment in management information systems and consolidation and leveraging of fulfillment centers and sales branches between our operating segments. In addition, we have established shared sales branch offices in several locations. • Growing through internal expansion and acquisitions. We intend to continue to grow by hiring established sales representatives, hiring and training skilled sales professionals, opening additional locations as needed, and acquiring other companies in order to enter new, or more deeply penetrate existing, markets, gain access to additional product lines, and expand our customer base. We believe both of our operating segments are well positioned to take advantage of expected continued consolidation in our markets. Dental Segment - Products, Services and Sources of Supply Patterson Dental, one of the two largest distributors of dental products in North America, has operations in the U.S. and Canada. As a full-service, value-added supplier to over 100,000 dental practices, dental laboratories, educational institutions, and community health centers, Patterson Dental provides consumable products (including infection control, restorative materials, and instruments); basic and advanced technology and dental equipment; and 7 innovative practice optimization solutions, including practice management software, e-commerce, revenue cycle management, patient engagement solutions, and clinical and patient education. Patterson Dental sells approximately 100,000 SKUs, of which approximately 3,500 are private-label products sold under the Patterson brand. Patterson Dental also offers customers a range of related services including software and design services, maintenance and repair, and equipment financing. Net sales and operating income were $2.5 billion and $180 million in fiscal 2022, respectively. The following table sets forth the percentage of total sales by the principal categories of products and services offered to our dental segment customers: Consumable Equipment and software Value-added services and other Fiscal Year Ended April 30, 2022 April 24, 2021 April 25, 2020 57 % 32 11 100 % 56 % 31 13 100 % 54 % 32 14 100 % Patterson Dental obtains products from hundreds of vendors, most of which are non-exclusive. While there is generally more than one source of supply for most of the categories of products we sell, the concentration of business with key suppliers is considerable, as consolidation has increased among manufacturers. In fiscal 2022, 2021 and 2020, Patterson Dental's top ten supply vendors accounted for approximately 56%, 57% and 63% of the total cost of sales, respectively. The top vendor accounted for 24%, 25% and 22% of the total cost of sales in fiscal 2022, 2021 and 2020, respectively. Animal Health Segment - Products, Services and Sources of Supply Patterson Animal Health is a leading distributor of animal health products in the U.S., Canada and the U.K. We sell approximately 100,000 SKUs sourced from over 2,000 manufacturers to over 50,000 customers in the highly fragmented animal health supply market. Products we distribute include pharmaceuticals, vaccines, parasiticides, diagnostics, prescription and non-prescription diets, nutritionals, consumable supplies, equipment and software. We offer a private label portfolio of products to veterinarians, producers, and retailers through our Aspen, First Companion and Patterson Veterinary brands. We also provide a range of value-added services to our customers. Within our companion animal supply market, our principal customers are companion-pet and equine veterinarians, veterinary clinics, public and private institutions, and shelters. In our production animal supply market, our principal customers are large animal veterinarians, production animal operators and animal health product retailers. Consumer demand for alternative means of sourcing product through digital platforms is an evolving dynamic in our industry. We provide digital home delivery solutions to allow us to evolve with the market. Net sales and operating income were $4.0 billion and $114 million in fiscal 2022, respectively. The following table sets forth the percentage of total sales by the principal categories of products and services offered to our animal health segment customers: Consumable Equipment and software Value-added services and other Fiscal Year Ended April 30, 2022 April 24, 2021 April 25, 2020 96 % 3 1 100 % 96 % 3 1 100 % 97 % 2 1 100 % Patterson Animal Health obtains products from over 2,000 vendors globally. While Patterson Animal Health makes purchases from many vendors and there is generally more than one source of supply for most of the categories of products, the concentration of business with key vendors is considerable, as consolidation has increased among manufacturers. In fiscal 2022, 2021 and 2020, Patterson Animal Health’s top 10 manufacturers comprised approximately 66%, 70% and 70% of the total cost of sales, respectively, and the single largest supplier comprised approximately 23% in 2022 and 20% of the total cost of sales in 2021 and 2020. 8 Sales, Marketing and Distribution During fiscal 2022, we sold products or services to over 100,000 customers who made one or more purchases during the year. Our customers include dentists, laboratories, institutions, other healthcare professionals, veterinarians, other animal health professionals, production animal operators and animal health product retailers. No single customer accounted for more than 10% of sales during fiscal 2022, and we are not dependent on any single customer or geographic group of customers. We have offices throughout the U.S. and Canada so that we can provide a presence in the market and decision- making near the customer. Patterson Animal Health also has a central office in the U.K. Our offices, or sales branches, are staffed with a complete complement of our capabilities, including sales, customer service and technical service personnel, as well as a local manager who has decision-making authority with regard to customer- related transactions and issues. A primary component of our value-added approach is our professional sales and support organization. Due to the highly-fragmented nature of the markets we serve, we believe that our unique combination of field-based and call- center sales and support teams is critical to reaching potential customers and providing a differentiated customer experience. Our sales representatives play an indispensable and critical role in managing a practice’s supply chain and in introducing new products and technologies. In the U.S. and Canada, customer service representatives in call centers work in tandem with our sales representatives, providing a dual coverage approach for individual customers. In addition to processing orders, customer service representatives are responsible for assisting customers with ordering, informing customers of monthly promotions, and responding to general inquiries. In the U.K., our customer service team is primarily responsible for handling customer inquiries and resolving issues. To assist our customers with their purchasing decisions, we provide a multi-touchpoint shopping experience. From print to digital, this seamless experience is inclusive of products and services information. Patterson offers online and in-print showcases of our expansive merchandise and equipment offerings, including digital imaging and computer-aided design and computer-aided manufacturing ("CAD/CAM") technologies, hand-held and similar instruments, sundries, office design, e-services, repair and support assistance, as well as financial services. We also promote select products and services through publications, including On Target and Advantage in the U.S. and Patterson Post in Canada in our Dental segment, and Insight in the U.S. and The Cube in the U.K. in our Animal Health segment. Additional direct marketing tools that we utilize include customer loyalty programs, social media, and participation in trade shows. We believe that responsive delivery of quality supplies and equipment is key to customer satisfaction. We ship consumable supplies from our strategically located fulfillment centers in the U.S. and Canada. In the U.K., orders are accepted in a centralized fulfillment center and shipped nationwide to one of our depots located throughout the country at which pre-packed orders are sorted by route for delivery to customers. Orders for consumable supplies can be placed through our sales representatives, customer service representatives or electronically 24 hours a day, seven days a week. Rapid and accurate order fulfillment is another principal component of our value-added approach. In order to assure the availability of our broad product lines for prompt delivery to customers, we must maintain sufficient inventories at our fulfillment centers. Purchasing of consumables and standard equipment is centralized, and our purchasing department uses a real-time perpetual inventory system to manage inventory levels. Our inventory consists mostly of consumable supply items and pharmaceutical products. Geographic Information For information on revenues and long-lived assets of our segments by geographic area, see Note 14 to the Consolidated Financial Statements. Seasonality and Other Factors Affecting Our Business and Quarterly Results Our business in general is not seasonal; however, there are some products that typically sell more often during the winter or summer season. In any given month, unusual weather patterns (e.g., unusually hot or cold weather) could impact the sales volumes of these products, either positively or negatively. In addition, we experience fluctuations in quarterly earnings. As a result, we may fail to meet or exceed the expectations of securities analysts and investors, 9 which could cause our stock price to decline. Quarterly results may be materially adversely affected by a variety of factors, including: • • • • • • • • • • • • • • • • • • • • • • • • • • timing and amount of sales and marketing expenditures; timing of pricing changes offered by our suppliers; timing of the introduction of new products and services by our suppliers; changes in or availability of supplier contracts or rebate programs; supplier rebates based upon attaining certain growth goals; changes in the way suppliers introduce or deliver products to market; costs of developing new applications and services; our ability to correctly identify customer needs and preferences and predict future needs and preferences; uncertainties regarding potential significant breaches of data security or disruptions of our information technology systems; regulatory actions, or government regulation generally; loss of sales representatives; costs related to acquisitions and/or integrations of technologies or businesses; costs associated with our self-insured insurance programs; general market and economic conditions, as discussed in Item 1A: Risk Factors, including pandemic, macro-economic conditions, increased fuel and energy costs, consumer confidence, as well as conditions specific to the supply and distribution industry and related industries; our success in establishing or maintaining business relationships; difficulties of manufacturers in developing and manufacturing products; product demand and availability, or product recalls by manufacturers; exposure to product liability and other claims in the event that the use of the products we sell results in injury; increases in shipping costs or service issues with our third-party shippers; fluctuations in the value of foreign currencies; goodwill impairment; changes in interest rates; restructuring costs; the adoption or repeal of legislation; changes in accounting principles; and litigation or regulatory judgments, fines, forfeitures, penalties, equitable remedies, expenses or settlements. Governmental Regulation We strive to be compliant with the applicable laws, regulations and guidance described below, and believe we have effective compliance programs and other controls in place to ensure substantial compliance. However, compliance is not guaranteed either now or in the future, as certain laws, regulations and guidance may be subject to varying and evolving interpretations that could affect our ability to comply, as well as future changes, additions and enforcement approaches, including political changes. President Biden’s administration (the “Biden Administration”) has indicated that it will be more aggressive in its pursuit of alleged violations of law, and it has revoked certain guidance that would have limited governmental use of informal agency guidance to pursue potential violations, as well as that it was more prepared to pursue individuals for corporate law violations, including an aggressive approach to anti-corruption activities. Changes to applicable laws, regulations and guidance described below, as well as related administrative or judicial interpretations, may require us to update or revise our operations, services, marketing practices, and compliance programs and controls, and may impose additional and unforeseen costs on us, pose new or previously immaterial risks to us, or may otherwise have a material adverse effect on our business. Operating, Security and Licensure Standards Our dental and animal health supply businesses involve the distribution, importation, exportation, marketing and sale of, and third party payment for, pharmaceuticals and medical devices, and in this regard, we are subject to extensive local, state, federal and foreign governmental laws and regulations applicable to the distribution of 10 pharmaceuticals and medical devices. Among the U.S. federal laws applicable to us are the Controlled Substances Act, the Federal Food, Drug, and Cosmetic Act, as amended (the “FDC Act”), and Section 361 of the Public Health Service Act, as well as laws regulating the billing of and reimbursement from government programs, such as Medicare and Medicaid, and from commercial payers. We are also subject to comparable foreign regulations. The FDC Act, the Controlled Substances Act, their implementing regulations, and similar foreign laws generally regulate the introduction, manufacture, advertising, marketing and promotion, sampling, pricing and reimbursement, labeling, packaging, storage, handling, returning or recalling, reporting, and distribution of, and record keeping for, pharmaceuticals and medical devices shipped in interstate commerce, and states may similarly regulate such activities within the state. Furthermore, Section 361 of the Public Health Service Act, which provides authority to prevent the introduction, transmission, or spread of communicable diseases, serves as the legal basis for the U.S. Food and Drug Administration’s (“FDA”) regulation of human cells, tissues and cellular and tissue-based products, also known as “HCT/P products.” The federal Drug Quality and Security Act of 2013 brought about significant changes with respect to pharmaceutical supply chain requirements. Title II of this measure, known as the Drug Supply Chain Security Act (“DSCSA”), is being phased in over a period of 10 years, and is intended to build a national electronic, interoperable system by November 27, 2023, that will identify and trace certain prescription drugs as they are distributed in the U.S. The law’s track and trace requirements applicable to manufacturers, wholesalers, repackagers and dispensers (e.g., pharmacies) of prescription drugs took effect in January 2015, and continues to be implemented. The DSCSA product tracing requirements replace the former FDA drug pedigree requirements and pre-empt certain state requirements that are inconsistent with, more stringent than, or in addition to, the DSCSA requirements. The DSCSA also establishes certain requirements for the licensing and operation of prescription drug wholesalers and third party logistics providers (“3PLs”), and includes the eventual creation of national wholesaler and 3PL licenses in cases where states do not license such entities. The DSCSA requires that wholesalers and 3PLs distribute drugs in accordance with certain standards regarding the recordkeeping, storage and handling of prescription drugs. The DSCSA requires wholesalers and 3PLs to submit annual reports to the FDA, which include information regarding each state where the wholesaler or 3PL is licensed, the name and address of each facility and contact information. According to FDA guidance, states are pre-empted from imposing any licensing requirements that are inconsistent with, less stringent than, directly related to, or covered by the standards established by federal law in this area. Current state licensing requirements concerning wholesalers will remain in effect until the FDA issues new regulations as directed by the DSCSA. The Food and Drug Administration Amendments Act of 2007 and the Food and Drug Administration Safety and Innovation Act of 2012 amended the FDC Act to require the FDA to promulgate regulations to implement a unique device identification (“UDI”) system. The UDI rule phased in the implementation of the UDI regulations, generally beginning with the highest-risk devices (i.e., Class III medical devices) and ending with the lowest-risk devices. Most compliance dates were reached as of September 24, 2018, with a final set of requirements for low-risk devices being reached on September 24, 2022, which will complete the phase in. However, in May 2021, the FDA issued an enforcement policy stating that it does not intend to object to the use of legacy identification numbers on device labels and packages for finished devices manufactured and labeled prior to September 24, 2023. The UDI regulations require “labelers” to include unique device identifiers (“UDIs”), with a content and format prescribed by the FDA and issued under a system operated by an FDA-accredited issuing agency, on the labels and packages of medical devices (including, but not limited to, certain software that qualifies as a medical device under FDA rules), and to directly mark certain devices with UDIs. The UDI regulations also require labelers to submit certain information concerning UDI-labeled devices to the FDA, much of which information is publicly available on an FDA database, the Global Unique Device Identification Database. The UDI regulations and subsequent FDA guidance regarding the UDI requirements provide for certain exceptions, alternatives and time extensions. For example, the UDI regulations include a general exception for Class I devices exempt from the Quality System Regulation (other than record-keeping and complaint files). Regulated labelers include entities such as device manufacturers, repackagers, reprocessors and relabelers that cause a device’s label to be applied or modified, with the intent that the device will be commercially distributed without any subsequent replacement or modification of the label, and include certain of our businesses. Under the Controlled Substances Act, as a distributor of controlled substances, we are required to obtain and renew annually registrations for our facilities from the U.S. Drug Enforcement Administration (“DEA”) permitting us to handle controlled substances. We are also subject to other statutory and regulatory requirements relating to the storage, sale, marketing, handling and distribution of such drugs, in accordance with the Controlled Substances Act and its implementing regulations, and these requirements have been subject to heightened enforcement activity in 11 recent times. We are subject to inspection by the DEA. There have also been increasing efforts by various levels of government globally to regulate the pharmaceutical distribution system in order to prevent the introduction of counterfeit, adulterated or misbranded pharmaceuticals into the distribution system. Certain of our businesses are also required to register for permits and/or licenses with, and comply with operating and security standards of, the DEA, the FDA, the U.S. Department of Health and Human Services, and various state boards of pharmacy, state health departments and/or comparable state agencies as well as comparable foreign agencies, and certain accrediting bodies depending on the type of operations and location of product distribution, manufacturing or sale. These businesses include those that distribute, manufacture and/or repackage prescription pharmaceuticals and/or medical devices and/or HCT/P products, or own pharmacy operations, or install, maintain or repair equipment. In addition, Section 301 of the National Organ Transplant Act, and a number of comparable state laws, impose civil and/or criminal penalties for the transfer of certain human tissue (for example, human bone products) for valuable consideration, while generally permitting payments for the reasonable costs incurred in procuring, processing, storing and distributing that tissue. We are also subject to foreign government regulation of such products. The DEA, the FDA and state regulatory authorities have broad inspection and enforcement powers, including the ability to suspend or limit the distribution of products by our fulfillment centers, seize or order the recall of products and impose significant criminal, civil and administrative sanctions for violations of these laws and regulations. Foreign regulations subject us to similar foreign enforcement powers. Furthermore, compliance with legal requirements has required and may in the future require us to delay product release, sale or distribution, or institute voluntary recalls of, or other corrective action with respect to, products we sell, each of which could result in regulatory and enforcement actions, financial losses and potential reputational harm. Our customers are also subject to significant federal, state, local and foreign governmental regulation, which may affect our interactions with customers, including the design and functionality of the products we distribute. Certain of our businesses are subject to various additional federal, state, local and foreign laws and regulations, including with respect to the sale, transportation, storage, handling and disposal of hazardous or potentially hazardous substances, and safe working conditions. In addition, certain of our businesses must operate in compliance with a variety of burdensome and complex billing and record keeping requirements in order to substantiate claims for payment under federal, state and commercial healthcare reimbursement programs. Certain of our businesses also maintain contracts with governmental agencies and are subject to certain regulatory requirements specific to government contractors. As disclosed in our prior periodic reports, our subsidiary Animal Health International was the subject of an investigation by the U.S. Attorney’s Office for the Western District of Virginia, which resulted in Animal Health International pleading guilty to a strict-liability misdemeanor offense in connection with its failure to comply with federal law relating to the sales of prescription animal health products, and a total criminal fine and forfeiture of $52.8 million. In addition, Animal Health International and Patterson 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 through fiscal 2023. 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. Antitrust and Consumer Protection The U.S. federal government, most U.S. states and many foreign countries have antitrust laws that prohibit certain types of conduct deemed to be anti-competitive, as well as consumer protection laws that seek to protect consumers from improper business practices. At the U.S. federal level, the Federal Trade Commission oversees enforcement of these types of laws, and states have similar government agencies. Violations of antitrust or consumer protection laws may result in various sanctions, including criminal and civil penalties. Private plaintiffs also may bring, and have brought, civil lawsuits against us in the U.S. for alleged antitrust violations, including claims for treble damages. The Biden Administration has indicated increased antitrust enforcement and has been more aggressive in enforcement actions. Health Care Fraud Certain of our businesses are subject to federal and state (and similar foreign) health care fraud and abuse, referral and reimbursement laws and regulations with respect to their operations. Some of these laws, referred to as “false claims laws,” prohibit the submission or causing the submission of false or fraudulent claims for reimbursement to 12 federal, state and other health care payers and programs. Other laws, referred to as “anti-kickback laws,” prohibit soliciting, offering, receiving or paying remuneration in order to induce the referral of a patient or ordering, purchasing, leasing or arranging for or recommending ordering, purchasing or leasing, of items or services that are paid for by federal, state and other health care payers and programs. Several states apply their false claims and anti-kickback laws to all payers, including goods and services paid for directly by consumers. Certain additional state and federal laws, such as the federal Physician Self-Referral Law, commonly known as the “Stark Law,” prohibit physicians and other health professionals from referring a patient to an entity with which the physician (or family member) has a financial relationship, for the furnishing of certain designated health services (for example, durable medical equipment and medical supplies), unless an exception applies. Violations of anti-kickback laws or the Stark Law may be enforced as violations of the federal False Claims Act. The fraud and abuse laws and regulations have been subject to heightened enforcement activity over the past few years, and significant enforcement activity has been the result of “relators,” who serve as whistleblowers by filing complaints in the name of the U.S. (and, if applicable, particular states) under applicable false claim laws. Under the federal False Claims Act, relators can be entitled to receive up to 30% of the total recoveries. Penalties under fraud and abuse laws may be severe, including treble damages and substantial civil penalties under the federal False Claims Act, as well as potential loss of licenses and the ability to participate in federal and state health care programs, criminal penalties, or imposition of a corporate compliance monitor which could have a material adverse effect on our business. Also, these measures may be interpreted or applied by a prosecutorial, regulatory or judicial authority in a manner that could require us to make changes in our operations or incur substantial defense and settlement expenses. Even unsuccessful challenges by regulatory authorities or private relators could result in reputational harm and the incurring of substantial costs. Most states have adopted similar state false claims laws, and these state laws have their own penalties which may be in addition to federal False Claims Act penalties, as well as other fraud and abuse laws. With respect to measures of this type, the U.S. government (among others) has expressed concerns about financial relationships between suppliers on the one hand and dentists on the other. As a result, we regularly review and revise our marketing practices as necessary to facilitate compliance. We are also subject to certain U.S. and foreign laws and regulations concerning the conduct of our foreign operations, including the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act and other anti-bribery laws and laws pertaining to the accuracy of our internal books and records, which have been the focus of increasing enforcement activity globally in recent years. While we believe that we are substantially compliant with applicable fraud and abuse laws and regulations, and have adequate compliance programs and controls in place to ensure substantial compliance, we cannot predict whether changes in applicable law, or interpretation of laws, or changes in our services or marketing practices in response to changes in applicable law or interpretation of laws, or failure to comply with applicable law, could have a material adverse effect on our business. Affordable Care Act and Other Insurance Reform The U.S. Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act (as amended, the “ACA”) increased federal oversight of private health insurance plans and included a number of provisions designed to reduce Medicare expenditures and the cost of health care generally, to reduce fraud and abuse, and to provide access to increased health coverage. The ACA also materially expanded the number of individuals in the U.S. with health insurance. The ACA has faced frequent legal challenges, including litigation seeking to invalidate and Congressional action seeking to repeal some of or all of the law or the manner in which it has been implemented. In 2012, the U.S. Supreme Court, in upholding the constitutionality of the ACA and its individual mandate provision requiring that people buy health insurance or else face a penalty, simultaneously limited ACA provisions requiring Medicaid expansion, making such expansion a state-by-state decision. In addition, one of the major political parties in the U.S. remains committed to seeking the ACA's legislative repeal, but legislative efforts to do so have previously failed to pass both chambers of Congress. Under President Trump's administration, a number of administrative actions were taken to materially weaken the ACA, including, without limitation, by permitting the use of less robust plans with lower coverage and eliminating "premium support" for insurers providing policies under the ACA. The Tax Cuts and Jobs Act enacted in 2017 (the "Tax Act"), which contains a broad range of tax reform provisions that impact the individual and corporate tax rates, international tax provisions, income tax add back provisions and deductions, also effectively repealed the ACA's individual mandate by zeroing out the penalty for non-compliance. In the most recent ACA litigation, the federal Fifth Circuit Court of Appeals found the individual mandate to be unconstitutional, and returned the case to the District Court for the Northern District of Texas for consideration of whether the remainder of the ACA could survive the excision of the individual mandate. The Fifth Circuit's decision was appealed to the U.S. Supreme Court. The Supreme Court issued a decision on June 17, 2021. Without reaching the merits of the case, the Supreme Court held that the plaintiffs in the case did not have standing to challenge the ACA. Any outcomes of future cases that change the 13 ACA, in addition to future legislation, regulation, guidance and/or executive orders that do the same, could have a significant impact on the U.S. healthcare industry. For instance, the American Rescue Plan Act of 2021 enhanced premium tax credits, which has resulted in an expansion of the number of people covered under the ACA. These changes are time-limited, with some enhancements in place for 2021 only and others available through the end of 2022. The continued uncertain status of the ACA affects our ability to plan. An ACA provision, generally referred to as the Physician Payment Sunshine Act or Open Payments Program (the “Sunshine Act”), has imposed reporting and disclosure requirements for drug and device manufacturers and distributors with regard to payments or other transfers of value made to certain practitioners (including physicians, dentists and teaching hospitals), and for such manufacturers and distributors and for group purchasing organizations, with regard to certain ownership interests held by covered recipients in the reporting entity. The Centers for Medicare and Medicaid Services (“CMS”) publishes information from these reports on a publicly available website, including amounts transferred and physician, dentist, teaching hospital and non-practitioner identities. The Sunshine Act pre-empts similar state reporting laws, although we or our subsidiaries may also be required to report under certain state transparency laws that address circumstances not covered by the Sunshine Act, and some of these state laws, as well as the federal law, can be unclear. We are also subject to foreign regulations requiring transparency of certain interactions between suppliers and their customers. In the U.S., government actions to seek to increase health-related price transparency may also affect our business. Our compliance with these rules imposes additional costs on us. In addition, recently there has been increased scrutiny on drug pricing and concurrent efforts to control or reduce drug costs by Congress, the President, executive branch agencies and various states, including that several related bills have been introduced at the federal level. Such legislation, if enacted, could have the potential to impose additional costs on our business. As a result of political, economic and regulatory influences, the health care distribution industry in the U.S. is under intense scrutiny and subject to fundamental changes. We cannot predict what further reform proposals, if any, will be adopted, when they may be adopted, or what impact they may have on us. Regulated Software; Electronic Health Records The FDA has become increasingly active in addressing the regulation of computer software and digital health products intended for use in health care settings. The 21st Century Cures Act (the “Cures Act”), signed into law in December 2016, among other things, amended the medical device definition to exclude certain software from FDA regulation, including clinical decision support software that meets certain criteria. In September 2019, the FDA issued a suite of guidance documents on digital health products, which incorporated applicable Cures Act standards, including regarding the types of clinical decision support tools and other software that are exempt from regulation by the FDA as medical devices, and continues to issue new guidance in this area. Certain of our software and related products support practice management, and it is possible that the FDA or foreign government authorities could determine that one or more of our products is a medical device, which could subject us or one or more of our businesses to substantial additional requirements with respect to these products. In addition, certain of our practice management products include electronic information technology systems that store and process personal health, clinical, financial and other sensitive information of individuals. These information technology systems may be vulnerable to breakdown, wrongful intrusions, data breaches and malicious attack, which could require us to expend significant resources to eliminate these problems and address related security concerns, and could involve claims against us by private parties and/or governmental agencies. For example, we are directly or indirectly subject to numerous and evolving federal, state, local and foreign laws and regulations that protect the privacy and security of such information, such as the privacy and security provisions of the federal Health Insurance Portability and Accountability Act of 1996, as amended, and implementing regulations (“HIPAA”), the Controlling the Assault of Non-Solicited Pornography and Marketing Act, the Telephone Consumer Protection Act of 1991, Section 5 of the Federal Trade Commission Act, the California Privacy Act (“CCPA”), and the California Privacy Rights Act (“CPRA”) that becomes effective on January 1, 2023. Laws and regulations relating to privacy and data protections are continually evolving and subject to potentially differing interpretations. These requirements may not be harmonized, may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another or may conflict with other rules or our practices. Our businesses’ failure to comply with these laws and regulations could expose us to breach of control claims, substantial fines, penalties and other liabilities and expenses, costs for remediation and harm to our reputation. Also, evolving laws and regulations in this area 14 could restrict the ability of our customers to obtain, use or disseminate patient information, or could require us to incur significant additional costs to re-design our products to reflect these legal requirements, which could have a material adverse effect on our operations. Other health information standards, such as regulations under HIPAA, establish standards regarding electronic health data transmissions and transaction code set rules for specific electronic transactions, such as transactions involving claims submissions to third party payers. Certain of our electronic practice management products must meet these requirements. Failure to abide by these and other electronic health data transmission standards could expose us to breach of contract claims, substantial fines, penalties and other liabilities and expenses, costs for remediation and harm to our reputation. Also, the European Parliament and the Council of the European Union adopted the pan-European General Data Protection Regulation (“GDPR”), effective from May 2018, which increased privacy rights for individuals in Europe, including individuals who are our customers, suppliers, and employees. The GDPR extended the scope of responsibilities for data controllers and data processors, and generally imposes increased requirements and potential penalties on companies that offer goods or services to individuals who are located in Europe (“Data Subjects”) or monitor their behavior (including by companies based outside of Europe). Noncompliance can result in penalties of up to the greater of EUR 20 million, or 4% of global company revenues, and Data Subjects may seek damages. Individual member states may impose additional requirements and penalties regarding certain matters such as employee personal data. With respect to the personal data it protects, the GDPR requires, among other things, company accountability, consents from Data Subjects or other acceptable legal basis to process the personal data, breach notifications within 72 hours, data integrity and security, and fairness and transparency regarding the storage, use or other processing of the personal data. The GDPR also provides rights to Data Subjects relating notably to information, access, modification, erasure and transporting of the personal data. In the U.S., the CCPA, which increases the privacy protections afforded California residents, became effective in January 2020. The CCPA generally requires companies, such as us, to institute additional protections regarding the collection, use and disclosure of certain personal information of California residents. Compliance with the new obligations imposed by the CCPA depends in part on how particular regulators interpret and apply them. Regulations were released in August 2020, there remains some uncertainty about how the CCPA will be interpreted by the courts and enforced by the regulators. If we fail to comply with the CCPA or if regulators assert that we have failed to comply with the CCPA, we may be subject to certain fines or other penalties and litigation, any of which may negatively impact our reputation, require us to expend significant resources, and harm our business. Furthermore, California voters approved the CPRA in November 2020, which will amend and expand the CCPA, including by providing consumers with additional rights with respect to their personal information, and creating a new state agency to enforce the CCPA and the CPRA. The CPRA will come into effect on January 1, 2023, applying to information collected by business on or after January 1, 2022. Other states, as well as the federal government, have increasingly considered the adoption of similarly expansive personal privacy laws, backed by significant civil penalties for non-compliance. Virginia and Colorado were both successful in passing privacy legislation in 2021, becoming effective on January 1, 2023 and July 1, 2023, respectively. While we believe we have substantially compliant programs and controls in place to comply with the GDPR, CCPA and CPRA requirements, our compliance with data privacy and cybersecurity laws is likely to impose additional costs on us, and we cannot predict whether the interpretations of the requirements, or changes in our practices in response to new requirements or interpretations of the requirements, could have a material adverse effect on our business. We also sell products and services that health care providers, such as dentists, use to store and manage patient dental records. These customers, and we, are subject to laws, regulations and industry standards, such as HIPAA and the Payment Card Industry Data Security Standards, which require the protection of the privacy and security of those records, and our products may also be used as part of these customers’ comprehensive data security programs, including in connection with their efforts to comply with applicable privacy and security laws. Perceived or actual security vulnerabilities in our products or services, or the perceived or actual failure by us or our customers who use our products or services to comply with applicable legal or contractual data privacy or security requirements, may not only cause us significant reputational harm, but may also lead to claims against us by our customers and/or governmental agencies and involve substantial fines, penalties and other liabilities and expenses and costs for remediation. Various federal initiatives involve the adoption and use by health care providers of certain electronic health care records systems and processes. Moreover, in order to satisfy our customers, and comply with evolving legal 15 requirements, our products may need to incorporate increasingly complex functionality, such as with respect to reporting and information blocking. Although we believe we are positioned to accomplish this, the effort may involve increased costs, and our failure to implement product modifications, or otherwise satisfy applicable standards, could have a material adverse effect on our business. E-Commerce Electronic commerce solutions have become an integral part of traditional health care supply and distribution relationships. Our distribution business is characterized by rapid technological developments and intense competition. The continuing advancement of online commerce requires us to cost-effectively adapt to changing technologies, to enhance existing services and to develop and introduce a variety of new services to address the changing demands of consumers and our customers on a timely basis, particularly in response to competitive offerings. Through our proprietary, technologically based suite of products, we offer customers a variety of competitive alternatives. We believe that our tradition of reliable service, our name recognition and large customer base built on solid customer relationships, position us well to participate in this significant aspect of the distribution business. We continue to explore ways and means to improve and expand our Internet presence and capabilities, including our online commerce offerings and our use of various social media outlets. International Transactions U.S. and foreign import and export laws and regulations require us to abide by certain standards relating to the importation and exportation of products. We also are subject to certain laws and regulations concerning the conduct of our foreign operations, including the Foreign Corrupt Practices Act, the U.K. Bribery Act and other anti-bribery laws and laws pertaining to the accuracy of our internal books and records, as well as other types of foreign requirements similar to those imposed in the U.S. There can be no assurance that laws and regulations that impact our business or laws and regulations as they apply to our customers’ practices will not have a material adverse effect on our business. As a result of political, economic and regulatory influences, the health care distribution industry in the U.S. is under intense scrutiny and subject to fundamental changes. We cannot predict what further reform proposals, if any, will be adopted, when they may be adopted, or what impact they may have on us. See “Item 1A. Risk Factors” for a discussion of additional burdens, risks and regulatory developments that may affect our results of operations and financial condition. Proprietary Rights We hold trademarks relating to the “Patterson®” name and logo, as well as certain other trademarks. Our U.S. trademark registrations have 10-year terms, and may be renewed for additional 10-year terms. We intend to protect our trademarks to the fullest extent practicable. Human Capital People are the most important part of Patterson. Our employees are the reason we can confidently say we offer Trusted Expertise, Unrivaled Support to our customers every day. As of April 30, 2022, we had approximately 7,700 full-time employees, of which approximately 6,300 were employed in the U.S. 16 Our culture is driven by our purpose, vision, and values: As a people-first organization, the overall well-being of our team is important to us. Patterson’s total reward philosophy is to provide market competitive pay and a range of benefit choices designed to meet our employees’ needs, reward for individual and business performance, and drive shareholder value. We support our employees’ health with medical, dental and vision plans, wellness programs to encourage healthy lifestyles and parental leave for new mothers, fathers and domestic partners. Patterson supports employees’ financial well-being with matching 401K contributions, company-paid short-term disability insurance, and educational offerings throughout the year. Our diverse talent acquisition programming includes a focus and commitment to hiring military personnel (both current and inactive). We recognize that the skills developed in the military are highly valuable and beneficial to Patterson, which is why we partner with more than 16 military organizations to find this top talent. We also partner with Minnesota organizations that introduce high school students from underserved communities into the workplace with internships in IT and other corporate functions, and we have a robust college internship program to establish a pipeline of future talent and give students real-world experience. To support the progression and career development of our employees, we offer multiple training and development opportunities including on-demand courses, facilitator-led programs, mentoring relationships, tuition reimbursement and leadership development programs. We have implemented targeted development programs for senior leadership as well as emerging leaders in the organization. In addition, Patterson’s Environmental Health and Safety (EHS) team promotes employee safety and environmental awareness through foundational systems and activities, including safety training courses. We are passionate about taking action to support the communities in which we serve. We provide opportunities for and encourage employees to support local charitable organizations through volunteerism (including volunteer time off), team building, and donation and matching programs. In addition, the Patterson Foundation has donated millions of dollars to dental and animal health nonprofit organizations in order to increase access to oral health care and increase the availability of assistance dogs to veterans, first responders and individuals with disabilities. Quarterly grants are awarded with a preference to organizations where our employees volunteer and those our employees value in their communities. We believe that a diverse and inclusive workforce makes our company stronger, and we encourage our teams to bring their authentic selves to Patterson every day. Our UNITES team is a volunteer-led initiative that has driven various diversity and inclusion efforts, including the launch of employee-led affinity groups for our LGBTQA and under-represented employee populations. Acting on the recommendation of the affinity groups, Patterson will add Martin Luther King, Jr. Day as a company-paid holiday in 2023 in recognition of this important day to honor the 17 sacrifices he made for racial equality. Patterson has several programs in place to support the advancement of women in the workplace, both internally and in the industries we serve. Patterson has launched an enterprise-wide Inclusive Leader program that all leaders will participate in by the end of 2023. As of April 30, 2022, 42.0% of our U.S. workforce and 38.9% of our management was female. In addition, as of that date, 23.8% of our U.S. workforce and 16.1% of our management was ethnically diverse. To protect our employees and reduce the spread of COVID-19 in our communities during the pandemic, we implemented numerous guidelines and safety protocols. Every team member who could work remotely did so, and we implemented tools and resources to support our team members’ health and financial well-being by providing paid time off for those who were quarantined or those who needed to support distance learning for school-age children. During the pandemic, we expanded our medical plan to cover COVID-related health care and extended paid time off to provide additional time for recovery and quarantine, as needed. We also continued to offer services through our Employee Assistance Program and introduced an online tutoring program to assist parents with students who were impacted by COVID. Available Information We make available free of charge through our website, www.pattersoncompanies.com, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, statements of beneficial ownership of securities on Forms 3, 4 and 5 and amendments to these reports and statements filed or furnished pursuant to Section 13(a) and Section 16 of the Securities Exchange Act of 1934 as soon as reasonably practicable after such materials are electronically filed with, or furnished to, the U.S. Securities and Exchange Commission, or SEC. This material may be accessed by visiting the Investor Relations section of our website. In addition, the SEC maintains an Internet website at www.sec.gov, where the above information can be viewed. Information relating to our corporate governance, including our Code of Conduct, and information concerning executive officers, Board of Directors and Board committees, and transactions in Patterson securities by directors and officers, is available on or through our website, www.pattersoncompanies.com in the Investor Relations section. Information maintained on the website is not being included as part of this Annual Report on Form 10-K. Item 1A. RISK FACTORS We believe that the following risks could have a material adverse impact on our business, reputation, financial results, financial condition and/or the trading price of our common stock. In addition, our business operations could be affected by factors that are not presently known to us or that we currently consider not to be material to our operations, so you should not consider the risks disclosed in this section to necessarily represent a complete statement of all risks and uncertainties. The order in which these factors appear does not necessarily reflect their relative importance or priority. COMPANY RISKS The COVID-19 pandemic and measures taken in response thereto had, and may continue to have, adverse effects on our results of operations and our financial condition, and the full impact of the pandemic will depend on future developments, which are uncertain and cannot be predicted. Global health concerns relating to the COVID-19 pandemic have had, and may continue to have, an unprecedented impact on the macroeconomic environment. Beginning in March 2020, across our markets authorities implemented numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter in place orders, and business shutdowns, and continued to implement such measures as new waves of infection developed. These measures had negative impacts on consumer spending and business spending habits that adversely impacted our financial results and the financial results of our customers, suppliers and business partners. Even after the COVID-19 pandemic has begun to subside, we may again experience material adverse impacts to our business, results of operations and cash flows as a result of, among other things, its global economic impact, including any recession that may occur in the future, or a prolonged period of economic slowdown or reluctance of dental patients and veterinary customers to return for elective care. 18 Actual and potential impacts on us from the COVID-19 pandemic include, but are not limited to: • • • • • • • Interruptions in the operations of industries in which the products we distribute are used. Our fiscal 2021 results were adversely affected by mandated and voluntary restrictions on the operations of dental and veterinary offices across the U.S., Canada and the UK to limit the spread of COVID-19 beginning in March 2020, along with consumers delaying elective visits even when offices were open. These restrictions have eased across our markets, but continuing economic uncertainty remains. In addition, the interruptions in meatpacking operations that occurred due to the pandemic factored into the full goodwill impairment of the animal health business in fiscal 2020. We have also been affected by, and may continue to be affected by, disruptions in the swine market. Limited supply of the personal protective equipment (PPE) necessary for dental practice and veterinary care of companion animals followed by related inventory write down. Supply chain disruptions for PPE and an increased demand for these products initially resulted in backorders of PPE and a potential scarcity in raw materials to make PPE, causing substantial price increases. We had to prepay suppliers in order to obtain PPE for resale to our customers, and as manufacturing caught up to increased demand for PPE, prices dropped, impacting our margins and requiring us to write down certain inventory. Reduction in peoples’ ability and willingness to be in public. Consumer behavior was materially changed by mandates and recommendations designed to slow and limit the transmission of COVID-19 (including business closures and restrictions, stay-at-home and similar measures), beginning in March 2020. While such restrictions have largely lifted, consumer behavior remains uncertain and will depend on the actual and potential for additional resurgences of COVID-19. Risks of remote work. Most of our corporate employees shifted abruptly to working remotely under stay-at- home orders imposed in March 2020, and many of our corporate employees continue to work remotely for at least a portion of their work hours. Our utilization of remote work arrangements for corporate employees could expose us to continuing cybersecurity risk. Refocusing management resources. Mitigating the effects of COVID-19 has required, and will likely continue to require, the investment of time and resources across our company, and may delay certain strategic and other plans which could materially adversely affect our business. Reputational risk associated with response to COVID-19. If we do not respond appropriately to additional resurgences of COVID-19, or if customers do not perceive our response to be adequate, we could suffer damage to our reputation and our brands, which could materially adversely affect our business. Interruptions in manufacturing or distribution of products we distribute. Outbreaks in the communities in which we operate could affect our ability to operate our distribution activities, and our suppliers could experience similar manufacturing interruptions. The impact of COVID-19 may also exacerbate other risks discussed below, any of which could have a material adverse impact on us. Uncertain macro-economic conditions, including inflationary pressure, could materially adversely affect demand for dental and animal health products and services, thereby materially adversely affecting our results of operations. Uncertain macro-economic conditions that affect the economy and the economic outlook of the United States and other parts of the world in which we operate could materially adversely affect our business, results of operations and financial condition. In particular, recessionary or inflationary conditions and depressed levels of consumer and commercial spending may also cause dental and animal health customers to reduce, modify, delay or cancel plans to purchase the products and services we distribute and may cause suppliers to reduce their output or change their terms of sale. Increased fuel and energy costs (for example, the price of gasoline) may adversely affect consumer confidence and, thereby, reduce dental office visits. In addition, the average interest rate in our contract portfolio may not increase at the same rate as interest rate markets, resulting in a reduction of gain on the contract sales as compared to the gain that would be realized if the average interest rate in our portfolio were to increase at a more similar rate to the interest rate markets. 19 Customer retention and business development depend heavily on our relationships with our sales representatives and service technicians, who interact directly with our customers, and the technological products and services we offer. The inability to attract or retain qualified employees, particularly sales representatives and service technicians who relate directly with our customers, or our inability to build or maintain relationships with customers in the dental and animal health markets, may have an adverse effect on our business. Due to the specialized nature of many of the products and services we distribute, generally only highly qualified and trained personnel have the necessary skills to market such products and provide such services. These individuals develop relationships with our customers that could be damaged if these employees are not retained. We face intense competition for the hiring of these professionals, we have experienced and are likely to continue to experience challenges in recruiting those with technical expertise, and many professionals in the field that may otherwise be attractive candidates for us to hire may be bound by non-competition agreements or other restrictive covenants with our competitors. Any failure on our part to hire, train and retain a sufficient number of qualified professionals would damage our business. Due to generational and other trends in the dental and animal health industries, our customer base is increasingly interested in having the latest technologies to manage their business. In order to effectively offer solutions that keep pace with rapidly changing technologies and customer expectations, we must acquire, develop or offer new technology products and solutions. If we fail to accurately anticipate and meet our customers’ needs through the acquisition, development or distribution of new products, technologies and service offerings, if we fail to adequately protect our intellectual property rights, if the products we distribute and services we provide are not widely accepted or if current or future offerings fail to meet applicable regulatory requirements, we could lose customers to our competitors, which could materially and adversely affect our business, results of operations and financial condition. In addition, if technology investments do not achieve the intended results, we may write-off the investments, and we face the risk of claims from system users that the systems failed to produce the intended result or negatively affected the operation of our customers’ businesses. Any such claims could be expensive and time-consuming to defend, cause us to lose customers and associated revenue, divert management’s attention and resources, or require us to pay damages. Disruption to our distribution capabilities, including service issues with our third-party shippers, could materially adversely affect our results. Weather, natural disaster, fire, terrorism, pandemic, strikes, civil unrest, geopolitical events or other reasons could impair our ability to distribute products and conduct our business. If we are unable to manage effectively such events if they occur, there could be a material adverse effect on our business, results of operations and financial condition. Similarly, increases in service costs or service issues with our third-party shippers, including strikes or other service interruptions, could cause our operating expenses to rise and materially adversely affect our ability to deliver products on a timely basis. We ship almost all of our orders through third-party delivery services, and often times bear the cost of shipment. Our ability to provide same-day shipping and next-day delivery is an integral component of our business strategy and any significant increase in shipping rates or service interruptions could adversely impact our business, results of operations and financial condition. We are dependent on our suppliers and exposed to the risks of their businesses, because we generally do not manufacture the products we sell. We obtain substantially all of the products we distribute from third parties. If a supplier is unable to deliver product in a timely and efficient manner, whether due to financial difficulty, natural disaster, pandemic, the failure to comply with applicable government requirements or other reasons, we could experience lost sales. We have experienced, and may continue to experience, disruptions in the supply chains for third-party manufacturing of certain products we distribute, including delays in obtaining or inability to obtain raw materials, the inflated price of product inputs, disruptions in operations of logistics service providers and the resulting delays in shipments. This may have a material adverse impact on our financial results if our customers are unwilling to accept such delays. Our cost of goods also may be adversely impacted by unanticipated price increases due to factors such as inflation, including wage inflation, or to supply restrictions beyond our control or the control of our suppliers. If current suppliers fail to supply sufficient goods or materials to us on a timely basis, or at all, we could experience inventory shortages and disruptions in our distribution of products. In addition, there is considerable concentration within our animal health and dental businesses with a few key suppliers. A portion of the products we distribute is sourced, directly or indirectly, from countries outside the U.S. including China. Political or financial instability, increased tariffs, restrictions on trade, currency exchange rates, 20 labor unrest, pandemic or other events could slow distribution activities, affect foreign trade beyond our control and adversely affect our results of operations. We generally do not have long-term contracts with our suppliers, so they may be discontinued or changed abruptly. Changes in the structure of purchasing relationships might include changing from a “buy/sell” to an agency relationship (or the reverse), or changing the method in which products are taken to market, including the possibility of creating or expanding a direct sales force or otherwise reducing their reliance on third-party distribution channels. Certain manufacturers of the products we distribute also engage in direct sales to customers. An extended interruption in the supply of products would have an adverse effect on our results of operations, and a reduction in our role as a value-added service provider would result in reduced margins on product sales. The products we sell are subject to market and technological obsolescence; our software products may contain undetected errors or bugs when released. Some of the products we distribute are subject to technological obsolescence outside of our control, since we do not manufacture the majority of the products we sell. If our customers discontinue purchasing a given product, we might have to record expense related to the diminution in value of inventories we have in stock, and depending on the magnitude, that expense could adversely impact our operating results. Our software and applicable e-services products, like software products generally, may contain undetected errors or bugs when introduced, or as new versions are released. Any such defective software may result in increased expenses related to the software and could adversely affect our relationships with the customers using such software, as well as our reputation. We do not have any patents on our software or e-services, and rely upon copyright, trademark and trade secret laws, as well as contractual and common-law protections. We cannot provide assurance that such legal protections will be available, adequate or enforceable in a timely manner to protect our software or e-services products. The failure of our software and applicable e-services products to remain competitive could materially adversely affect our business, results of operations and financial condition. In addition, the cost to replace any such defective products may not generate a commensurate benefit. Adverse changes in supplier rebates or other purchasing incentives could negatively affect our business. The terms on which we purchase or sell products from many suppliers of animal health products may entitle us to receive a rebate or other purchasing incentive based on the attainment of certain growth goals. Suppliers may reduce or eliminate rebates or incentives offered under their programs, or increase the growth goals or other conditions we must meet to earn rebates or incentives to levels that we cannot achieve. Increased competition either from generic or equivalent branded products could result in us failing to earn rebates or incentives that are conditioned upon achievement of growth goals. Additionally, factors outside of our control, such as customer preferences, consolidation of suppliers or supply issues, can have a material impact on our ability to achieve the growth goals established by our suppliers, which may reduce the amount of rebates or incentives we receive. The occurrence of any of these events could have an adverse impact on our results of operations. Sales of private label products entail additional risks, including the risk that such sales could adversely affect our relationships with suppliers. We offer certain private label products that are available exclusively from us. The sale of such products subjects us to the risks generally encountered by entities that source, market and sell private label products, including but not limited to potential product liability risks, mandatory or voluntary product recalls, potential supply chain and distribution chain disruptions, and potential intellectual property infringement risks. Any failure to adequately address some or all of these risks could have an adverse effect on our business, results of operations and financial condition. In addition, an increase in the sales of our private label products may negatively affect our sales of products owned by our suppliers which, consequently, could adversely impact certain of our supplier relationships. Our ability to locate qualified, economically stable suppliers who satisfy our requirements, and to acquire sufficient products in a timely and effective manner, is critical to ensuring, among other things, that customer confidence is not diminished. As a distribution company, any failure to develop sourcing relationships with a broad and deep supplier base could adversely affect our financial performance and erode customer loyalty. 21 Patterson’s continued success is substantially dependent on positive perceptions of Patterson’s reputation. One of the reasons why customers choose to do business with Patterson and why employees choose Patterson as a place of employment is the reputation that Patterson has built over many years. To be successful in the future, Patterson must continue to preserve, grow and leverage the value of Patterson’s brand. Reputational value is based in large part on perceptions of subjective qualities. Even an isolated incident, or the aggregate effect of individually insignificant incidents, can erode trust and confidence, particularly if they result in adverse publicity, governmental investigations or litigation, and as a result, could tarnish Patterson’s brand and lead to adverse effects on our business, results of operations and financial condition. Maintaining consistent product quality, competitive pricing, and availability of our private label products is essential to developing and maintaining customer loyalty and brand awareness. These products often have higher margins than national brand products. If one or more of these brands experience a loss of consumer acceptance or confidence, our sales and gross margin could be adversely affected. Risks inherent in asset or business acquisitions and dispositions could offset the anticipated benefits of such transactions, and we may face difficulty in efficiently and effectively integrating acquired businesses. As a part of our business strategy, we acquire and dispose of assets and businesses in the ordinary course and may continue acquiring and disposing of assets and businesses in the future. These transactions can involve a number of risks and challenges, any of which could cause significant operating inefficiencies and adversely affect our growth and profitability, and may not result in the benefits and revenue growth we expect. Acquisition risks and challenges include underperformance relative to our expectations and the price paid for the acquisition; unanticipated demands on our management and operational resources; difficulty in integrating personnel, operations and systems; retention of customers of the combined businesses; assumption of contingent liabilities; acquisition-related earnings charges; and acquisition-related cybersecurity risks. Additionally, when we decide to sell assets or a business, we may encounter difficulty in finding buyers or executing alternative exit strategies on acceptable terms in a timely manner, which could delay the accomplishment of our strategic objectives. Alternatively, we may dispose of assets or a business at a price or on terms that are less than we had anticipated. Dispositions may also involve continued financial involvement in a divested business, such as through continuing equity ownership, transition service agreements, guarantees, indemnities or other current or contingent financial obligations. Under these arrangements, performance by the acquired or divested business, or other conditions outside our control, could affect our future financial results. As we operate through two strategic business units, we consolidate the distribution, information technology, human resources, financial and other administrative functions of those business units jointly to meet their needs while addressing distinctions in the individual markets of those segments. We may not be able to do so effectively and efficiently. Our ability to continue to make acquisitions will depend upon our success in identifying suitable targets, which requires substantial judgment in assessing their values, strengths, weaknesses, liabilities and potential profitability, as well as the availability of suitable candidates at acceptable prices, whether restrictions are imposed by anti-trust or other regulations, and compliance with the terms and conditions of our credit agreement. In addition, to the extent we acquire technology, manufacturing or other businesses ancillary to our core distribution operations, any such newly acquired business may require the investment of additional capital and significant involvement of our senior management to integrate such business with our operations, which could place a strain on our management, other personnel, resources and systems. Our credit agreements contain restrictive covenants and additional limits and our other debt instruments contain cross-default provisions, which limit our business and financing activities. The covenants under our credit agreements impose restrictions on our business and financing activities, subject to certain exceptions or the consent of our lenders, including, among other things, limits on our ability to incur additional debt, create liens, enter into certain merger, acquisition and divestiture transactions, pay dividends and engage in transactions with affiliates. The credit agreements contain certain customary affirmative covenants, including requirements that we maintain a maximum consolidated leverage ratio and a minimum consolidated interest coverage ratio, pursuant to which we may be affected by changes in interest rates, and customary events of 22 default. The terms of agreements governing debt that we may incur in the future may also contain similar covenants. Our ability to comply with these covenants may be adversely affected by events beyond our control, including economic, financial and industry conditions. A breach of the credit agreement covenants may result in an event of default, which could allow our lenders to terminate the commitments under the credit agreement, declare all amounts outstanding under the credit agreement, together with accrued interest, to be immediately due and payable, and exercise other rights and remedies, and, through cross-default provisions, would entitle our other lenders to accelerate their loans. If this occurs, we may not be able to refinance the accelerated indebtedness on acceptable terms, or at all, or otherwise repay the accelerated indebtedness. In addition, borrowings under certain of our debt instruments are made at variable rates of interest and expose us to interest rate volatility. Interest rates increased during the fourth quarter of fiscal 2022. If interest rates continue to increase, our debt service obligations on certain of our variable rate indebtedness will increase even though the amount borrowed remains the same, and our net income and cash flows, including cash available for servicing our indebtedness, will correspondingly decrease. Turnover or loss of key personnel or highly skilled employees, including executive officers, could disrupt our operations and any inability to attract and retain qualified personnel could harm our business. Our future success depends partly on the continued service of our highly qualified and well-trained key personnel, including executive officers. Any unplanned turnover or our failure to develop an adequate succession plan for key positions could reduce our institutional knowledge base and erode our competitive advantage. While our Board of Directors and management actively monitor our succession plans and processes for our executive leadership team, our business could be adversely impacted if we lose key personnel unexpectedly. Competition for senior management is intense and we may not be successful in attracting and retaining key personnel. In addition, factors including reduced employment pools have contributed to increased labor shortages and employee turnover within our organization. These trends have led to, and could in the future lead to, increased costs, such as increased overtime to meet demand and increased wage rates to attract and retain employees. A prolonged labor shortage, lack of skilled labor, increased turnover or labor inflation could materially adversely affect our business, results of operations and financial condition. Our governing documents, other documents to which we are a party, and Minnesota law may discourage takeovers and business combinations that our shareholders might consider to be in their best interests. Anti-takeover provisions of our articles of incorporation, bylaws, and Minnesota law could diminish the opportunity for shareholders to participate in acquisition proposals at a price above the then-current market price of our common stock. For example, while we have no present plans to issue any preferred stock, our Board of Directors, without further shareholder approval, may issue up to approximately 30 million shares of undesignated preferred stock and fix the powers, preferences, rights and limitations of such class or series, which could adversely affect the voting power of our common stock. Further, as a Minnesota corporation, we are subject to provisions of the Minnesota Business Corporation Act regarding “control share acquisitions” and “business combinations.” We may also, in the future, consider adopting additional anti-takeover measures. In addition, certain equity plans predating our 2015 Omnibus Incentive Plan provide for acceleration of awards thereunder upon a change in control or other events of acceleration, as defined in those plans. The foregoing, and any future anti-takeover measures adopted by us, may, in certain circumstances, delay, deter or prevent takeover attempts and other changes in control of our company not approved by our Board of Directors. Our business and operations are subject to risks related to climate change. The long-term effects of global climate change present both physical risks (such as extreme weather conditions or rising sea levels) and transition risks (such as regulatory or technology changes), which are expected to be widespread and unpredictable. These changes could over time affect, for example, the availability and cost of products, commodities and energy (including utilities), which in turn may impact our ability to procure goods or services required for the operation of our business at the quantities and levels we require. In addition, certain of our operations and facilities are in locations that may be impacted by the physical risks of climate change, and we face the risk of losses incurred as a result of physical damage to distribution or fulfillment centers of our third-party suppliers, loss or spoilage of inventory and business interruption caused by such events. Insurance may not be available or cost effective for the coverage limits needed. 23 INDUSTRY RISKS The dental and animal health supply markets are highly competitive and consolidating, and we may not be able to compete successfully. Our competitors include national, regional and local full-service distributors, mail-order distributors and Internet- based businesses. Some of our competitors have greater resources than we do, or operate through different sales and distribution models that could allow them to compete more successfully. Most of the products we distribute are available from multiple sources, and our customers tend to have relationships with several different distributors who can fulfill their orders. If any of our competitors are more successful with respect to any key competitive factor such as technological advances or low-cost business models with the ability to operate at high gross margins, our sales and profitability could be adversely affected. Increased competition from any supplier of dental or animal health products could adversely impact our financial results. Additional competitive pressure could arise from, among other things, limited demand growth or a significant number of additional competitive products or services being introduced into a particular market, the emergence of new competitors, the unavailability of products, price reductions by competitors, and the ability of competitors to capitalize on their economies of scale. Manufacturers also could increase their efforts to sell directly to end-users and thereby eliminate or reduce the role of distributors. These suppliers could sell their products at lower prices and maintain a higher gross margin on product sales than we can. In addition, our ability to deliver market growth is challenged by an animal health product mix that is weighted toward lower growth, lower margin parts of the value chain. Consolidation has increased among manufacturers as well as distributors, which could cause the industry to become more competitive as greater economies of scale are achieved by competitors, or as competitors with lower cost business models are able to offer lower prices but retain high gross margin. In addition, in recent years there has also been a trend towards consolidation in the industries that buy the products and services we distribute, including the consolidation of dental practices into larger clinics and dental service organizations, the consolidation of veterinary practices as well as producers, and the formation of group purchasing organizations, provider networks and buying groups designed to leverage volume discounts. We also face pricing pressure from branded pharmaceutical manufacturers which could adversely affect our sales and profitability. We may be unable to anticipate and effectively respond to competitive change, and our failure to compete effectively may limit and/or reduce our revenue, profitability and cash flow. Our animal health segment is exposed to the risks of the production animal business, including changes in consumer demand for food animal products, the cyclical livestock market, weather conditions and the availability of natural resources, and other factors outside our control, as well as risks of the companion animal business, including the possibility of disease adversely affecting the pet population. Demand for our production animal health products can be negatively influenced by factors including: weather conditions (including those that may be related to climate change), varying weather patterns and weather-related pressures from pests; changes in consumer preferences away from food animal products, including increased promotions and publicity for food products containing plant-based protein; supply chain disruptions including due to cyberattack, or actions by animal rights activists; and outbreaks of diseases affecting animals, any of which could reduce herd sizes or affect consumer preferences. Reductions in herd size would ultimately decrease the demand for the products we distribute, including micro feed ingredients, animal health products, and dairy sanitation solutions, as well as the development and implementation of systems for feed, health, information and production animal management. In addition, there has been consumer concern and consumer activism with respect to additives (including, without limitation, antibiotics and growth promotants) used in the production of animal products, including growing consumer sentiment for proteins and dairy products produced without the use of antibiotics or other products intended to increase animal production. These concerns have resulted in increased regulation and changing market demand. If there is an increased public perception that consumption of food derived from animals that utilize additives we distribute poses a risk to human health, there may be a further decline in the production of those food products and, in turn, our sales of those products. Furthermore, regulatory restrictions and bans could result in the removal from market of products in these categories, which would adversely affect the sales and could materially affect the results of operations from our animal health segment. Farm animal producers depend on the availability of natural resources, including large supplies of fresh water. Their animals’ health and their ability to operate could be adversely affected if they experience a shortage of fresh water due to human population growth or floods, droughts or other weather conditions. In the event of adverse weather 24 conditions or a shortage of fresh water, veterinarians or farm animal producers may purchase less of our products. Further, heat waves may cause stress in animals and lead to increased vulnerability to disease, reduced fertility rates and reduced milk production. Droughts may threaten pasture and feed supplies by reducing the quality and amount of forage available to grazing livestock, while climate change may increase the prevalence of parasites and diseases that affect farm animals. Veterinary hospitals and practitioners depend on visits from the animals under their care. Veterinarians’ patient volume and ability to operate could be adversely affected if there is a reduction in the companion animal population, such as due to disease outbreak. The formation or expansion of group purchasing organizations (“GPOs”), provider networks and buying groups may place us at a competitive disadvantage. The formation or expansion of GPOs, provider networks and buying groups may shift purchasing decisions to entities or persons with whom we do not have a historical relationship and may threaten our ability to compete effectively, which could in turn negatively impact our financial results. As a full-service distributor with business service capabilities, we cannot guarantee that we will be able to successfully compete with price-oriented distribution models that more readily enable the pricing typically demanded by those with significant purchasing power. Increases in over-the-counter sales of and e-commerce options for companion animal products, or sales of companion animal products from non-veterinarian sources, could adversely affect our business. Companion animal health products are becoming increasingly available to consumers at competitive prices from sources other than veterinarians, including human health product pharmacies, Internet pharmacies and big-box retailers, and consumers are increasingly seeking such alternatives sources of supply for their companion animal health products. Additionally, major U.S. online e-commerce retailers such as Amazon and Chewy.com are becoming licensed as veterinary mail order pharmacies to offer pharmacy products directly to consumers in all 50 U.S. states. Even where prescriptions must be written by a veterinarian, companion animal owners may shift to these services for home delivery. In addition, companion animal owners may substitute human health products for animal-health products if they deem human health products to be acceptable, lower-cost alternatives. Decreased emphasis on veterinary visits, and increased consumer choice through familiar e-commerce retailers could reduce demand for veterinarian-based services and have a material adverse impact on our business. The continued advancement of online commerce by third parties will require us to cost-effectively adapt to changing technologies, to enhance existing services and to differentiate our business (including with additional value-added services) to address changing demands of consumers and our customers on a timely basis. The emergence of such competition and our inability to anticipate and effectively respond to shifts in consumer traffic patterns and direct-to- consumer buying trends on a timely basis could have a material adverse effect on our business. REGULATORY AND LITIGATION RISKS Change and uncertainty in the health care industry could materially adversely affect our business. Laws and regulations affecting the health care industry in the U.S., including the ACA, have changed and may continue to change the landscape in which our industry operates. Foreign government authorities may also adopt reforms of their health systems. We cannot predict what further reform proposals, if any, will be adopted, when they may be adopted, or what impact they may have on us. The Biden Administration has indicated that it will be more aggressive in its pursuing alleged violations of law, and it has revoked certain guidance that would have limited governmental use of informal agency guidance to pursue such violations. In recent years, there has been increasing scrutiny on drug pricing and concurrent efforts to control or reduce drug costs by Congress, the President, and various states, including several bills that have been introduced on a federal level. Such legislation, if enacted, could have the potential to impose additional costs on our business. One provision of the ACA, the Sunshine Act, requires us to collect and report detailed information regarding certain financial relationships we have with covered recipients, including physicians, dentists, teaching hospitals and certain other non-physician practitioners. We may also be required to report under certain state transparency laws that address circumstances not covered by the Sunshine Act, and some of these state laws, as well as the federal law, can be unclear. We are also subject to foreign regulations requiring transparency of certain interactions between 25 suppliers and their customers. Our compliance with these rules imposes additional costs on us. In the U.S., government actions to seek to increase health-related price transparency may also affect our business. Failure to comply with existing and future U.S. and foreign laws and regulatory requirements, including those governing the distribution of pharmaceuticals and controlled substances, could subject us to claims or otherwise harm our business. Our business is subject to requirements under various local, state, federal and international laws and regulations applicable to the sale and distribution of, and third-party payment for, pharmaceuticals and medical devices, and human cells, tissue and cellular and tissue-based products (“HCT/P products”) and animal feed and supplements. Among other things, such laws, and the regulations promulgated thereunder: • • • • • • • • • • • • regulate the introduction, manufacture, advertising, marketing and promotion, sampling, pricing and reimbursement, labeling, packaging, storage, handling, returning or recalling, reporting, and distribution of, and record keeping for drugs, HCT/P products and medical devices, including requirements with respect to unique medical device identifiers; subject us to inspection by the U.S. Food and Drug Administration (“FDA”) and the U.S. Drug Enforcement Administration (the “DEA”) and similar state authorities; regulate the storage, transportation and disposal of certain products that are considered hazardous materials; regulate the distribution and storage of pharmaceuticals and controlled substances; require us to advertise and promote our drugs and devices in accordance with applicable FDA requirements; require registration with the FDA and the DEA and various state agencies; require record keeping and documentation of transactions involving drug products; require us to design and operate a system to identify and report suspicious orders of controlled substances to the DEA; require us to manage returns of products that have been recalled and subject us to inspection of our recall procedures and activities; impose on us reporting requirements if a pharmaceutical, HCT/P product or medical device causes serious illness, injury or death; require manufacturers, wholesalers, repackagers and dispensers of prescription drugs to identify and trace certain prescription drugs as they are distributed; require the licensing of prescription drug wholesalers and third-party logistics providers; and • mandate compliance with standards for the recordkeeping, storage and handling of prescription drugs, and associated reporting requirements. There also have been increasing efforts by Congress and state and federal agencies, including state boards of pharmacy, departments of health, and the FDA, to regulate the pharmaceutical distribution system. The failure to comply with any of these laws and regulations, or new interpretations of existing laws and regulations, or the enactment of any new or additional laws and regulations, could materially adversely affect our business. If it is determined that we have not complied with these laws, we are potentially subject to penalties including warning letters, substantial civil and criminal fines and penalties, mandatory recall of product, seizure of product and injunction, consent decrees, and suspension or limitation of product sale and distribution, all of which could have a material adverse effect on our business. If we enter into settlement agreements to resolve allegations of non- compliance, we could be required to make settlement payments or be subject to civil and criminal penalties, including fines and the loss of licenses. Non-compliance with government requirements could also adversely affect our ability to participate in federal and state government health care programs, such as Medicare and Medicaid, and damage our reputation. We remain subject to compliance certification obligations through fiscal 2023 as required by the non-prosecution agreement that was entered into in connection with the investigation of our subsidiary Animal Health International by the U.S. Attorney’s Office for the Western District of Virginia. This investigation resulted in Animal Health International pleading guilty to a strict liability misdemeanor offense in connection with its failure to comply with federal law relating to the sales of prescription animal health products, and a total criminal fine and forfeiture of $52.8 million. In the course of our business, 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 26 any of these events may divert management's attention, cause us to suffer reputational harm and adversely affect our business, financial condition and results of operations. If we fail to comply with laws and regulations relating to health care fraud or other laws and regulations, we could suffer penalties or be required to make significant changes to our operations, which could materially adversely affect our business. We are subject to federal and state (and similar foreign) health care fraud and abuse, referral and reimbursement laws and regulations, including those referred to as “false claims laws” and “anti-kickback” laws. Health care fraud measures may implicate, for example, our relationships with pharmaceutical manufacturers, our pricing and incentive programs for physician and dental practices, and our practice management products that offer billing- related functionality. Failure to comply with fraud and abuse laws and regulations could result in significant civil and criminal penalties and costs, including treble damages and substantial civil penalties under the federal False Claims Act as well as potential loss of licenses and the ability to participate in federal and state health care programs, criminal penalties, or imposition of a corporate compliance monitor, which could have a material adverse effect on our business. Also, these measures may be interpreted or applied by a prosecutorial, regulatory or judicial authority in a manner that could require us to make changes in our operations or incur substantial defense and settlement expenses. Even unsuccessful challenges by regulatory authorities or private regulators could result in reputational harm and the incurring of substantial costs. Most states have adopted similar state false claims laws, and these state laws have their own penalties which may be in addition to federal False Claims Act penalties, as well as other fraud and abuse laws. In addition, many of these laws are vague or indefinite and have not been interpreted by the courts, and have been subject to frequent modification and varied interpretation by prosecutorial and regulatory authorities, increasing the risk of noncompliance. We are subject to a variety of litigation that could adversely affect our business, results of operations and financial condition. We are subject to a variety of litigation incidental to our business, including product liability claims, intellectual property claims, employment claims, commercial disputes, governmental inquiries and investigations, and other matters arising out of the ordinary course of our business, including securities litigation. From time to time we are named as a defendant in cases as a result of our distribution of products. Additionally, purchasers of private-label products may seek recourse directly from us, rather than the ultimate product manufacturer, for product-related claims. Another potential risk we face in the distribution of products is liability resulting from counterfeit or tainted products infiltrating the supply chain. In addition, some of the products that we transport and sell are considered hazardous materials. The improper handling of such materials or accidents involving the transportation of such materials could subject us to liability or legal action that could harm our reputation. Defending against such claims may divert our resources and management’s attention over lengthy periods of time, may be expensive, and may require that we pay substantial monetary awards or settlements, pay fines or penalties, or become subject to equitable remedies (including but not limited to the revocation of or non-renewal of licenses) that could materially and adversely affect our business, results of operations and financial condition. A successful claim brought against us in excess of available insurance or not covered by insurance or indemnification agreements, or any claim that results in significant adverse publicity against us, could have a material adverse effect on our business and our reputation. Furthermore, the outcome of litigation is inherently uncertain. If we fail to comply with the evolving laws and regulations relating to the confidentiality of sensitive personal information or standards in electronic health records or transmissions, we could be required to make significant changes to our products, or incur substantial fines, penalties or other liabilities. Our practice management products and services include electronic information technology systems that store and process personal health, clinical, financial and other sensitive information of individuals. Both we and our customers are subject to numerous and evolving laws, regulations and industry standards, such as HIPAA and the Payment Card Industry Data Security Standards, which require the protection of the privacy and security of those records. Furthermore, our products may be used as part of our customers’ comprehensive data security programs, including in connection with their efforts to comply with applicable privacy and security laws. We are also subject to non- healthcare-specific requirements of the countries and states in which we operate which govern the handling, storage, use and protection of personal information, such as the California Consumer Privacy Act, or CCPA, which is a state statute intended to enhance privacy rights and consumer protection for residents of California, the 27 California Privacy Rights Act, or CPRA, that will become effective on January 1, 2023, and the pan-European General Data Protection Regulation, or GDPR. In addition, the FDA has become increasingly active in addressing the regulation of computer software intended for use in health care settings, and has developed and continues to develop policies on regulating clinical decision support tools and other types of software as medical devices. Certain of our software and related products support practice management, and it is possible that the FDA or foreign government authorities could determine that one or more of our products is a medical device, which could subject us or one or more of our businesses to substantial additional requirements, costs and potential enforcement actions or liabilities for noncompliance with respect to these products. Both in the U.S. and abroad, these laws and regulations continue to evolve and remain subject to significant change. In addition, the application and interpretation of these laws and regulations are often uncertain. If we fail to comply with such laws and regulations, we could be required to make significant changes to our products or services, or incur substantial fines, penalties, or other liabilities. The costs of compliance with, and the other burdens imposed by, new or existing laws or regulatory actions may prevent us from selling the products or services we distribute, or increase the costs of doing so, and may affect our decision to distribute such products or services. Also, evolving laws and regulations in this area could restrict the ability of our customers to obtain, use or disseminate patient information, or could require us to incur significant additional costs to conform to these legal requirements, either of which could have a material adverse effect on our operations. In addition, the products and services we distribute may be vulnerable to breakdown, wrongful intrusions, data breaches and malicious attack. Perceived or actual security vulnerabilities in these products or services, or the perceived or actual failure by us or our customers who use these products or services to comply with applicable legal or contractual data privacy or security requirements, may not only cause reputational harm and loss of business, but may also lead to claims against us by our customers and/or governmental agencies and involve substantial damages, fines, penalties and other liabilities and expenses and costs for remediation. Tax legislation could materially adversely affect our financial results and tax liabilities. We are subject to the tax laws and regulations of the United States federal, state and local governments, as well as foreign jurisdictions which are extremely complex and subject to varying interpretations. From time to time, various legislative initiatives may be proposed that could materially adversely affect our tax positions. There can be no assurance that our effective tax rate will not be materially adversely affected by legislation resulting from these initiatives. In addition, although we believe that our historical tax positions are sound and consistent with applicable laws, regulations and existing precedent, there can be no assurance that our tax positions will not be challenged by relevant tax authorities or that we would be successful in any such challenge. Our international operations are subject to inherent risks that could adversely affect our operating results. There are a number of risks inherent in foreign operations, including the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act, complex regulatory requirements, staffing and management complexities, import and export costs, other economic factors and political considerations, all of which are subject to unanticipated changes. Our foreign operations also expose us to foreign currency fluctuations. Because our financial statements are denominated in U.S. dollars, changes in currency exchange rates between the U.S. dollar and other currencies will have an impact on our income. Currency exchange rate fluctuations may adversely affect our results of operations and financial condition. Furthermore, we generally do not hedge translation exposure with respect to foreign operations. GENERAL RISKS Risks generally associated with information systems, software products and cybersecurity attacks could adversely affect our results of operations. We rely on information systems (“IS”) in our business to obtain, rapidly process, analyze and store customer, product, supplier, and employee data to conduct our business. We also work to update our IS, such as our enterprise resource planning software. However, our IS are vulnerable to natural disasters, power losses, computer viruses, telecommunication failures, cybersecurity threats, and other problems. We increasingly rely upon server- and Internet-based technologies to run our business and to store our data and our customers’ data, which depend 28 on continuous Internet access and may carry additional cybersecurity risks relative to those posed by legacy technologies. From time to time, we have had to address non-material security incidents. There can be no assurance that we will not experience security incidents in the future. Despite our efforts to ensure the integrity of our systems, as cyber threats evolve and become more difficult to detect and successfully defend against, one or more cyber threats might defeat the measures that we or our vendors take to anticipate, detect, avoid or mitigate such threats. Data breaches and any unauthorized access or disclosure of our information could compromise our intellectual property and expose sensitive business information. Cyber-attacks could also cause us to incur significant remediation costs, disrupt key business operations, and divert attention of management. Further, our suppliers, our customers, including purchasers of our software products, and other market participants are similarly subject to information system and cybersecurity risk, and a material disruption in their business could result in reduced revenue for us. For example, in June 2021 a ransomware attack on Brazil-based JBS SA, the world’s largest meat company by sales, took a significant portion of U.S. beef and pork processing offline, disrupting markets. In addition, compliance with evolving privacy and information security laws and standards may result in significant additional expense due to increased investment in technology and the development of new operational processes. We could be subject to liability if we fail to comply with these laws and standards, fail to protect information, or fail to respond appropriately to an incident or misuse of information, including use of information for unauthorized marketing purposes. Our business, results of operations and cash flows could be adversely affected if our IS or the software products we sell are interrupted, damaged by an unforeseen event, experience cybersecurity attack, or fail for any extended period of time. Disaster recovery plans, where in place, might not adequately protect us in the event of an IS failure. Despite any precautions we take, damage from fire, floods, hurricanes, power loss, telecommunications failures, computer viruses, break-ins and similar events at our various computer facilities could result in interruptions in the flow of data to our servers. We may need to expend additional resources in the future to continue to protect against, or to address problems caused by, any business interruptions or data security breaches. Item 1B. UNRESOLVED STAFF COMMENTS None. Item 2. PROPERTIES We own our principal executive offices in St. Paul, Minnesota, and the majority of our distribution facilities. Leases of other distribution and administrative facilities generally are on a long-term basis, expiring at various times, with options to renew for additional periods. Most sales offices are leased for varying and usually shorter periods, with or without renewal options. We believe our properties are in good operating condition and are suitable for the purposes for which they are being used. Patterson Logistics Services The majority of assets we use to distribute product are owned and operated by Patterson Logistics Services, Inc. (“PLSI”), a wholly-owned subsidiary, which operates the distribution function for the benefit of our dental and animal health segments in the U.S. PLSI also advises on the operations of our fulfillment centers outside of the U.S., but these properties are not owned by PLSI. As of April 30, 2022, PLSI operated the following 13 fulfillment centers (seven primary centers) totaling 1.0 million square feet: • • • two dental fulfillment centers (Hawaii and Texas); four animal health fulfillment centers (Alabama, Colorado and Texas (two)); and seven fulfillment centers that distribute dental and animal health products (California, Florida, Indiana, Iowa, Pennsylvania, South Carolina and Washington). Approximately 90% of the PLSI fulfillment center space is owned. 29 Dental The Dental segment is headquartered in our principal executive offices, and maintains sales and administrative offices at approximately 55 locations across 39 states in the U.S. and 10 locations in Canada, the majority of which are leased. Operations in Canada are supported by fulfillment centers located in Quebec and Alberta. In addition, this segment operates the Patterson Technology Center, a 100,000 square-foot facility in Illinois. Animal Health In addition to the locations operated by PLSI, Patterson Animal Health has approximately 100 properties located in the U.S., Canada and the U.K., the majority of which are leased. In the U.S., these properties are in 82 locations across 28 states, and comprise fulfillment centers, storage locations, sales and administrative offices, retail stores and call centers. In Canada, operations are supported by two fulfillment centers located in Alberta and Ontario. The segment’s operations in the U.K. are supported by a primary distribution facility in Stoke-on-Trent and an additional 10 depots used as secondary distribution points and 3 laboratory sites throughout the U.K. The headquarters for this segment are located in a leased office in Colorado. Item 3. LEGAL PROCEEDINGS For a discussion of Legal Proceedings, see Note 17 - Litigation of the Notes to the Consolidated Financial Statements included under Item 8. Item 4. MINE SAFETY DISCLOSURES Not applicable. 30 PART II Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Market Information Patterson’s common stock trades on the NASDAQ Global Select Market® under the symbol “PDCO.” Holders On June 21, 2022, the number of holders on record of common stock was 1,675. The transfer agent for Patterson’s common stock is EQ Shareowner Services, 1110 Centre Pointe Curve, Suite 101, Mendota Heights, Minnesota 55120, telephone: (800) 468-9716. Dividends In fiscal 2022, a quarterly cash dividend of $0.26 per share was declared throughout the year. In fiscal 2022, dividends were declared each quarter, with payment occurring in the subsequent quarter. We currently expect to declare and pay quarterly cash dividends in the future, but any future dividends will be subject to approval by our Board of Directors, which will depend on our earnings, capital requirements, operating results and financial condition, as well as applicable law, regulatory constraints, industry practice and other business considerations that our Board considers relevant. We are also subject to various financial covenants under our debt agreements including the maintenance of leverage and interest coverage ratios. The terms of agreements governing debt that we may incur in the future may also contain similar covenants. Accordingly, there can be no assurance that we will declare and pay dividends in the future at the same rate or at all. Purchases of Equity Securities by the Issuer On March 16, 2021, the Board of Directors authorized a $500 million share repurchase program through March 16, 2024. The following table presents activity under the stock repurchase plan during the fourth quarter of fiscal 2022. Total Number of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Dollar Value of Shares That May Yet Be Purchased Under the Plan January 30, 2022 to February 26, 2022 February 27, 2022 to March 26, 2022 March 27, 2022 to April 30, 2022 — $ — 1,032,416 1,032,416 $ — — 33.90 33.90 — $ 500,000,000 — 500,000,000 1,032,416 465,000,000 1,032,416 $ 465,000,000 31 Performance Graph The graph below compares the cumulative total shareholder return on $100 invested at the market close on April 29, 2017, through April 30, 2022, with the cumulative return over the same time period on the same amount invested in the S&P 500, the S&P Mid-Cap 400 and the S&P 500 Healthcare Index. We are transitioning to the S&P Mid-Cap 400 as our broad market index because it is the index against which our performance is compared to determine cumulative rTSR modifiers for our performance units. Fiscal Year Ending 4/29/2017 4/28/2018 4/27/2019 4/25/2020 4/24/2021 4/30/2022 100.00 100.00 100.00 100.00 55.11 114.20 110.92 112.68 53.21 128.28 117.60 122.19 39.35 126.28 94.04 141.16 89.19 189.21 168.97 177.03 84.82 189.68 155.94 189.57 Patterson Companies, Inc. S&P 500 S&P Mid-Cap 400 S&P 500 Healthcare Index Item 6. [RESERVED] 32 DOLLARSCOMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURNPatterson Companies, Inc.S&P 500S&P Mid-Cap 400S&P 500 Healthcare Index4/29/20174/28/20184/27/20194/25/20204/24/20214/30/2022050100150200250 Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview Our financial information for fiscal 2022 is summarized in this Management’s Discussion and Analysis and the Consolidated Financial Statements and related Notes. The following background is provided to readers to assist in the review of our financial information. We present three reportable segments: Dental, Animal Health and Corporate. Dental and Animal Health are strategic business units that offer similar products and services to different customer bases. Dental provides a virtually complete range of consumable dental products, equipment and software, turnkey digital solutions and value-added services to dentists and dental laboratories throughout North America. Animal Health is a leading, full- line distributor in North America and the U.K. of animal health products, services and technologies to both the production-animal and companion-pet markets. Our Corporate segment is comprised of general and administrative expenses, including home office support costs in areas such as information technology, finance, legal, human resources and facilities. In addition, customer financing and other miscellaneous sales are reported within Corporate results. Operating margins of the animal health business are lower than the dental business. While operating expenses run at a lower rate in the animal health business when compared to the dental business, gross margins in the animal health business are lower due generally to the low margins experienced on the sale of pharmaceutical products. We operate with a 52-53 week accounting convention with our fiscal year ending on the last Saturday in April. Fiscal 2022 ended on April 30, 2022 and consisted of 53 weeks. Fiscal 2021 and 2020 ended on April 24, 2021 and April 25, 2020, respectively, and both consisted of 52 weeks. Fiscal 2023 will end on April 29, 2023 and will consist of 52 weeks. We believe there are several important aspects of our business that are useful in analyzing it, including: (1) growth in the various markets in which we operate; (2) internal growth; (3) growth through acquisition; and (4) continued focus on controlling costs and enhancing efficiency. Management defines internal growth as net sales adjusted to exclude the impact of foreign currency, changes in product selling relationships and contributions from recent acquisitions. Foreign currency impact represents the difference in results that is attributable to fluctuations in currency exchange rates the company uses to convert results for all foreign entities where the functional currency is not the U.S. dollar. The company calculates the impact as the difference between the current period results translated using the current period currency exchange rates and using the comparable prior period’s currency exchange rates. The company believes the disclosure of net sales changes in constant currency provides useful supplementary information to investors in light of significant fluctuations in currency rates. Factors Affecting Our Results COVID-19. The COVID-19 pandemic, including closures and other steps taken by governmental authorities in response to the virus, has had a significant impact on our businesses. As part of our broad-based effort to respond to the COVID-19 pandemic, we implemented cost reduction measures, including temporary salary reductions, furloughs and reduced work hours across our workforce during the period from May 1, 2020 through July 31, 2020. Within our Dental segment, supply chain disruptions for PPE and an increased demand for these products initially resulted in backorders of PPE and a potential scarcity in raw materials to make PPE, causing substantial price increases. We had to prepay suppliers in order to obtain PPE for resale to our customers, and as manufacturing caught up to increased demand for PPE, prices dropped, impacting our margins and requiring us to write down certain inventory. However, in the Dental Segment, the effect became less significant during the first quarter of fiscal 2021, as dental offices began opening for elective procedures. In addition, we recorded increased sales of infection control products starting in the first quarter of fiscal 2021 within the Dental segment. The disruptions we experienced in our production animal business as a result of the pandemic became less significant after the first quarter of fiscal 2021. Gains on Vetsource Investment. In fiscal 2022, we sold a portion of our investment in Vetsource, with a carrying value of $25.8 million, for $56.8 million. We recorded a pre-tax gain of $31.0 million in gains on investments in our consolidated statements of operations and other comprehensive income (loss) as a result of this sale. The cash received of $56.8 million is reported within investing activities in our consolidated statements of cash flows. We also recorded a pre-tax non-cash gain of $31.0 million to reflect the increase in the carrying value of the remaining 33 portion of our investment in Vetsource, which was based on the selling price of the portion of the investment we sold for $56.8 million. This gain was recorded in gains on investments in our consolidated statements of operations and other comprehensive income (loss). Concurrent with the sale, we obtained rights that will allow us, under certain circumstances, to require another shareholder of Vetsource to purchase our remaining shares. We recorded a pre- tax non-cash gain of $25.8 million in gains on investments in our consolidated statements of operations and other comprehensive income (loss) as a result of this transaction. The aggregate gains on investments of $87.8 million are reported within operating activities in our consolidated statements of cash flows. Concurrent with obtaining this put option, we also granted rights to the same Vetsource shareholder that would allow such shareholder, under certain circumstances, to require us to sell our remaining shares at fair value. Gain on Vets Plus Investment. In fiscal 2022, we sold a portion of our investment in Vets Plus with a carrying value of $4.0 million for $17.1 million. We recorded a pre-tax gain of $13.1 million in gains on investments in our consolidated statements of operations and other comprehensive income (loss) as a result of this sale. This $13.1 million pre-tax gain is reported within operating activities in our consolidated statements of cash flows. The cash received of $17.1 million is reported within investing activities in our consolidated statements of cash flows. Fiscal 2022 Legal Reserve. On August 27, 2021, we signed a memorandum of understanding to settle the federal securities class action complaint described in Note 17 to the Consolidated Financial Statements. Under the terms of the settlement, Patterson agreed to pay $63.0 million to resolve the case. Although we agreed to settle this matter, we expressly deny the allegations of the complaint and all liability. Our insurers consented to the settlement and contributed an aggregate of $35.0 million to fund the settlement and to reimburse us for certain costs and expenses of the litigation. As a result of the foregoing, we recorded a pre-tax reserve of $63.0 million in other accrued liabilities in the consolidated balance sheets in our Corporate segment during the first quarter of fiscal 2022 related to the probable settlement of this litigation (the "Fiscal 2022 Legal Reserve"). During the first quarter of fiscal 2022, we also recorded a receivable of $27.0 million in prepaid expenses and other current assets in the consolidated balance sheets in our Corporate segment related to probable insurance recoveries, which amount was paid into the litigation settlement escrow as required by the memorandum of understanding. The net expense of $36.0 million was recorded in operating expenses in our consolidated statements of operations and other comprehensive income (loss). We recorded a gain of $8.0 million during the second quarter of fiscal 2022 in our Corporate segment to account for our receipt of carrier reimbursement of previously expended fees and costs. The parties filed a stipulation of settlement during the second quarter of fiscal 2022. On February 3, 2022, the District Court entered an order preliminarily approving the settlement and directing the claims administrator to mail a notice of settlement and claim form to all class members. On June 9, 2022, the District Court held a final settlement hearing to determine whether the settlement should be approved. On June 10, 2022, the District Court entered an order granting final approval to the settlement. Inventory Donation Charges. In fiscal 2022, we committed to donate certain personal protective equipment to charitable organizations to assist with COVID-19 recovery efforts. We recorded a charge of $49.2 million within cost of sales in our consolidated statements of operations and other comprehensive income (loss) as a result ("Inventory Donation Charges") in the first quarter of fiscal 2022. These charges were driven by our intention to not sell these products, but rather to donate them to charitable organizations. Of the $49.2 million expense recorded, $47.2 million and $2.0 million was recorded within our Dental and Animal Health segments, respectively. Goodwill Impairment. In fiscal 2020, we recorded non-cash pre-tax goodwill impairment charges totaling $675.1 million in our Animal Health segment ("Goodwill Impairment"), which were not fully tax deductible. The decrease in the fair value of the Animal Health reporting unit below its carrying value was mainly the result of a reduction in management’s estimates of future cash flows. Future cash flows were affected by a reduction in future sales volume and operating margins. The sales volume estimate reflected recent sales trends we had experienced. Future operating margins were expected to be lower based on then-current trends in our markets. These trends were driven by customer and vendor consolidation. We experienced a further decrease in the fair value of the Animal Health reporting unit subsequent to our annual goodwill impairment test, which was caused by additional reductions in management’s estimates of future cash flows, driven by reduced sales volumes, as well as reduced EBITDA multiples of comparable companies. These estimates and market multiples were negatively affected by COVID-19. In fiscal 2020, the animal health industry experienced a reduction in sales volume as a result of stay at home and shelter in place orders, as well as a result of meat packing plant closures. Our future cash flow estimates for this business unit in fiscal 2020 reflected the long-term impact of COVID-19. Gain on Investment. We recorded a pre-tax gain of $34.3 million related to one of our investments ("Gain on Investment") in fiscal 2020. This gain was based on the selling price of preferred stock in this investment that is similar to the preferred stock we own, and was adjusted for differences in liquidation preferences. 34 Early Repayment of Debt. In fiscal 2020, we repaid certain indebtedness totaling $373.8 million ("Early Repayment of Debt"). As a result, we recorded a pre-tax non-cash charge of $9.0 million during fiscal 2020. This charge relates to the January 2014 forward interest rate swap agreement and accelerated amortization of debt issuance costs. Fiscal 2020 U.S. Attorney's Office Legal Reserve. We incurred costs and expenses of $58.3 million ("Fiscal 2020 U.S. Attorney's Office Legal Reserve") in fiscal 2020 related to the then-probable settlement of litigation with the U.S. Attorney's Office for the Western District of Virginia, which were recorded within operating expenses in the consolidated statements of operations and other comprehensive income (loss) in our Corporate segment. The settlement amount was fully paid in fiscal 2020. Fiscal 2020 Legal Reserve. We incurred expenses of $17.7 million ("Fiscal 2020 SourceOne Dental Legal Reserve") in fiscal 2020 related to the settlement of litigation with SourceOne Dental, Inc., which were recorded within operating expenses in the consolidated statements of operations and other comprehensive income (loss) in our Corporate segment. The settlement amount was fully paid in fiscal 2020. Receivables Securitization Program. We are a party to certain receivables purchase agreements with MUFG Bank, Ltd. ("MUFG"), under which MUFG acts as an agent to facilitate the sale of certain Patterson receivables (the “Receivables”) to certain unaffiliated financial institutions (the “Purchasers”). The proceeds from the sale of these Receivables comprise a combination of cash and a deferred purchase price (“DPP”) receivable. The DPP receivable is ultimately realized by Patterson following the collection of the underlying Receivables sold to the Purchasers. The collection of the DPP receivable is recognized as an increase to net cash provided by investing activities within the consolidated statements of cash flows, with a corresponding reduction to net cash used in operating activities within the consolidated statements of cash flows. Results of Operations The following table summarizes our results as a percent of net sales: Net sales Cost of sales Gross profit Operating expenses Goodwill impairment Operating income (loss) Other income (expense), net Income (loss) before taxes Income tax expense (benefit) Net income (loss) Net loss attributable to noncontrolling interests Net income (loss) attributable to Patterson Companies, Inc. Fiscal 2022 Compared to Fiscal 2021 Fiscal Year Ended April 30, 2022 April 24, 2021 April 25, 2020 100.0 % 80.2 19.8 17.4 — 2.4 1.7 4.1 1.0 3.1 — 3.1 % 100.0 % 79.6 20.4 16.8 — 3.6 (0.2) 3.4 0.8 2.6 — 2.6 % 100.0 % 78.2 21.8 19.9 12.3 (10.4) (0.4) (10.8) (0.1) (10.7) — (10.7) % Net sales. Consolidated net sales in fiscal 2022 were $6,499.4 million, an increase of 9.9% from $5,912.1 million in fiscal 2021. Sales were positively impacted by an estimated 1.9% due to the extra week of results in the current year. Foreign exchange rate changes had a favorable impact of 0.7% on fiscal 2022 sales. Sales of certain products previously recognized on a gross basis were recognized on a net basis during fiscal 2022. This change in revenue recognition was driven by changes in contractual terms with certain suppliers in our Animal Health segment. The impact of this change in revenue recognition for certain products was partially offset by the impact of the acquisition of substantially all of the assets of Miller Vet on sales for fiscal 2022, resulting in a net decrease in sales of approximately 1.8%. 35 Dental segment sales increased 8.1% to $2,516.1 million in fiscal 2022 from $2,327.0 million in fiscal 2021. Sales were positively impacted by an estimated 1.8% due to the extra week of results in the current year. Foreign exchange rate changes had a favorable impact of 0.5% on fiscal 2022 sales. Sales of consumables increased 8.4%, sales of equipment and software increased 9.5%, and sales of value-added services and other increased 3.4% in fiscal 2022. Dental segment sales growth in fiscal 2022 was driven by a recovery in the Dental end markets, compared to sales in fiscal 2021, which were negatively affected by the COVID-19 pandemic when dental offices were closed for elective procedures, particularly during the first quarter of our fiscal 2021. Animal Health segment sales increased 11.9% to $3,982.9 million in fiscal 2022 from $3,560.0 million in fiscal 2021. Sales were positively impacted by an estimated 2.0% due to the extra week of results in the current year. Foreign exchange rate changes had a favorable impact of 0.8% on fiscal 2022 sales. Sales of certain products previously recognized on a gross basis were recognized on a net basis during fiscal 2022. This change in revenue recognition was driven by changes in contractual terms with certain suppliers. The impact of this change in revenue recognition for certain products was partially offset by the impact of the acquisition of substantially all of the assets of Miller Vet on sales for fiscal 2022, resulting in a net decrease in Animal Health segment sales of approximately 3.0%. Sales were higher in fiscal 2022 as compared to fiscal 2021, driven by increased demand across all of our animal health businesses and geographies. Gross profit. Consolidated gross profit margin decreased 60 basis points from the prior year to 19.8%, driven primarily by the impact of the Inventory Donation Charges, unfavorable mix in sales among our segments due to faster growth in our Animal Health segment, and lower net sales in our Corporate segment due to the effect of rising interest rates on our customer financing portfolio. This interest rate impact was partially offset by a gain on associated interest rates swap agreements, which is reflected in other income, net in our consolidated statements of operations and other comprehensive income (loss). Operating expenses. Consolidated operating expenses for fiscal 2022 were $1,132.1 million, a 14.1% increase from the prior year of $992.5 million. We incurred higher operating expenses during fiscal 2022 primarily as a result of higher personnel costs, the impact of the Fiscal 2022 Legal Reserve and higher travel expenses. The higher personnel costs were primarily due to the salary reductions, reduced work hours, and furloughs we implemented as a response to the COVID-19 pandemic during the three months ended July 25, 2020. Travel expenses were higher in fiscal 2022 than in fiscal 2021 primarily due to COVID-19-related restrictions having a more significant impact in fiscal 2021. The consolidated operating expense ratio of 17.4% increased 60 basis points from the prior year period, which was also driven by these same factors. Operating income (loss). Fiscal 2022 operating income was $157.0 million, or 2.4% of net sales, as compared to $210.6 million, or 3.6% of net sales, in fiscal 2021. The decrease in operating income was primarily due to the impact of the Inventory Donation Charges, the Fiscal 2022 Legal Reserve and higher personnel costs. These impacts were partially offset by the growth in sales experienced in fiscal 2022. Dental segment operating income was $180.2 million for fiscal 2022, a decrease of $21.0 million from fiscal 2021. The decrease was primarily driven by the expense associated with the Inventory Donation Charges and higher personnel costs, partially offset by an increase in net sales in fiscal 2022. Animal Health segment operating income was $114.4 million for fiscal 2022, an increase of $26.3 million from fiscal 2021. The increase was primarily driven by higher net sales during fiscal 2022, partially offset by higher personnel costs incurred during fiscal 2022. Corporate segment operating loss was $137.6 million for fiscal 2022, as compared to a loss of $78.8 million for fiscal 2021. The change was primarily driven by the impact of the Fiscal 2022 Legal Reserve, lower customer financing net sales recorded during fiscal 2022, and higher personnel costs incurred during fiscal 2022. The lower customer financing net sales were related to the effect of rising interest rates on our customer financing portfolio. Other income (expense). Net other income was $109.3 million in fiscal 2022, compared to net other expense of $10.7 million in fiscal 2021. The change was primarily driven by the Gains on Vetsource Investment of $87.8 million, the Gain on Vets Plus Investment of $13.1 million and a larger gain on our interest rate swap agreements recorded during fiscal 2022. Income tax expense (benefit). The effective income tax rate for fiscal 2022 was 24.2%, compared to 22.4% for fiscal 2021. The increase was primarily due to provision to return adjustments in the prior year and a geographical shift in earnings, which was partially offset by excess tax benefits associated with stock-based compensation awards. 36 Net income (loss) attributable to Patterson Companies, Inc. and earnings (loss) per share. Net income attributable to Patterson Companies Inc. was $203.2 million in fiscal 2022, compared to $156.0 million in fiscal 2021. Earnings per diluted share were $2.06 in fiscal 2022, compared to $1.61 in fiscal 2021. Weighted average diluted shares in fiscal 2022 were 98.5 million, compared to 96.7 million in fiscal 2021. The fiscal 2022 and fiscal 2021 cash dividend declared was $1.04 per common share. Fiscal 2021 Compared to Fiscal 2020 See Item 7 in our 2021 Annual Report on Form 10-K filed June 23, 2021. Liquidity and Capital Resources Net cash used in operating activities was $981.0 million in fiscal 2022, compared to $730.5 million in fiscal 2021 and $243.5 million in fiscal 2020. Net cash used in operating activities in fiscal 2022 was primarily due to the impact of our Receivables Securitization Program and a net increase in inventory, inclusive of the impact of the $49.2 million Inventory Donation Charges, partially offset by an increase in accounts payable. Net cash used in operating activities in fiscal 2021 was primarily due to the impact of our Receivables Securitization Program, as well as an increase in accounts payable. Net cash used in operating activities in fiscal 2020 was primarily due to the impact of our Receivables Securitization Program, partially offset by a reduction in working capital, which was driven mainly by an increase in accounts payable. Net cash provided by investing activities was $1,239.0 million in fiscal 2022, compared to $810.7 million in fiscal 2021 and $499.1 million in fiscal 2020. Collections of deferred purchase price receivables were $1,213.5 million, $834.0 million and $540.9 million in fiscal 2022, 2021 and 2020, respectively. In fiscal 2022, we recorded cash receipts of $75.9 million from the sale of investments and used $19.8 million to acquire Miller Vet. Capital expenditures were $38.3 million, $25.8 million and $41.8 million in fiscal 2022, 2021 and 2020, respectively. We expect to use a total of approximately $60 million for capital expenditures in fiscal 2023. Net cash used in financing activities in fiscal 2022 was $253.2 million, driven by $101.1 million for dividend payments, $100.8 million for payments on long-term debt, $35.0 million in share repurchases and $24.0 million attributed to payments on our revolving line of credit. Net cash used in financing activities in fiscal 2021 was $22.6 million, driven by $75.2 million for dividend payments, partially offset by $53.0 million attributed to draws on our revolving line of credit. Net cash used in financing activities in fiscal 2020 was $271.2 million. Uses of cash consisted primarily of $460.8 million for the retirement of long-term debt and $100.4 million for dividend payments. In December 2019, we entered into a $300.0 million senior unsecured term loan facility, as described further below. In fiscal 2022 and fiscal 2021, a quarterly cash dividend of $0.26 per share was declared each quarter, with payment occurring in the subsequent quarter. We currently expect to declare and pay quarterly cash dividends in the future, but any future dividends will be subject to approval by our Board of Directors, which will depend on our earnings, capital requirements, operating results and financial condition, as well as applicable law, regulatory constraints, industry practice and other business considerations that our Board considers relevant. We are also subject to various financial covenants under our debt agreements including the maintenance of leverage and interest coverage ratios. The terms of agreements governing debt that we may incur in the future may also contain similar covenants. Accordingly, there can be no assurance that we will declare and pay dividends in the future at the same rate or at all. In fiscal 2021, we entered into an amendment, restatement and consolidation of certain credit agreements with various lenders, including MUFG Bank, Ltd, as administrative agent. This amended and restated credit agreement (the “Credit Agreement”), dated February 16, 2021, consists of a $700.0 million revolving credit facility and a $300.0 million term loan facility, and will mature no later than February 2024. We used the facilities to refinance and consolidate certain credit agreements in existence prior to the Credit Agreement being executed, pay the fees and expenses incurred therewith, and finance our ongoing working capital and other general corporate purposes. As of April 30, 2022, $300.0 million was outstanding under the Credit Agreement term loan at an interest rate of 1.89%, and $29.0 million was outstanding under the Credit Agreement revolving credit facility at an interest rate of 1.54%. As of April 24, 2021, $300.0 million was outstanding under the Credit Agreement term loan at an interest rate of 1.36%, and $53.0 million was outstanding under the Credit Agreement revolving credit facility at an interest rate of 1.34%. On March 16, 2021, our Board of Directors approved a new share repurchase authorization for up to $500 million of our company's common stock through March 16, 2024, replacing the March 2018 share repurchase authorization 37 for up to $500 million of common stock which had expired and under which no repurchases had been made. As of April 30, 2022, $465 million remains available under the current repurchase authorization. We have $142.0 million in cash and cash equivalents as of April 30, 2022, of which $85.8 million is in foreign bank accounts. See Note 12 to the Consolidated Financial Statements for further information regarding our intention to permanently reinvest these funds. Included in cash and cash equivalents as of April 30, 2022 is $39.1 million of cash collected from previously sold customer financing arrangements that have not yet been settled with the third party. See Note 5 to the Consolidated Financial Statements for further information. We expect the collection of deferred purchase price receivables, existing cash balances and credit availability under existing debt facilities, less our funds used in operations, will be sufficient to meet our working capital needs and to finance our business over the next fiscal year. We expect to continue to obtain liquidity from the sale of equipment finance contracts. Patterson sells a significant portion of our finance contracts (see below) to a commercial paper funded conduit managed by a third party bank, and as a result, commercial paper is indirectly an important source of liquidity for Patterson. Patterson is allowed to participate in the conduit due to the quality of our finance contracts and our financial strength. Cash flows could be impaired if our financial strength diminishes to a level that precluded us from taking part in this facility or other similar facilities. Also, market conditions outside of our control could adversely affect the ability for us to sell the contracts. Customer Financing Arrangements As a convenience to our customers, we offer several different financing alternatives, including a third party program and a Patterson-sponsored program. For the third party program, we act as a facilitator between the customer and the third party financing entity with no on-going involvement in the financing transaction. Under the Patterson- sponsored program, equipment purchased by creditworthy customers may be financed up to a maximum of $1 million. We generally sell our customers’ financing contracts to outside financial institutions in the normal course of our business. We currently have two arrangements under which we sell these contracts. First, we operate under an agreement to sell a portion of our equipment finance contracts to commercial paper conduits with MUFG Bank, Ltd. ("MUFG") serving as the agent. We utilize PDC Funding, a consolidated, wholly owned subsidiary, to fulfill a requirement of participating in the commercial paper conduit. We receive the proceeds of the contracts upon sale to MUFG. The capacity under the agreement with MUFG at April 30, 2022 was $525 million. Second, we maintain an agreement with Fifth Third Bank ("Fifth Third") whereby Fifth Third purchases customers’ financing contracts. PDC Funding II, a consolidated, wholly owned subsidiary, sells financing contracts to Fifth Third. We receive the proceeds of the contracts upon sale to Fifth Third. The capacity under the agreement with Fifth Third at April 30, 2022 was $100 million. Our financing business is described in further detail in Note 5 to the Consolidated Financial Statements. Contractual Obligations A summary of our contractual obligations as of April 30, 2022 was as follows (in thousands): Long-term debt principal Long-term debt interest Operating leases Total Total $ 490,500 $ 33,220 75,939 $ 599,659 $ Payments due by year Less than 1 year 1-3 years — $ 450,500 $ 12,541 31,165 43,706 $ 501,074 $ 16,131 34,443 3-5 years More than 5 years — $ 3,032 9,109 12,141 $ 40,000 1,516 1,222 42,738 As of April 30, 2022 our gross liability for uncertain tax positions, including interest and penalties, was $11.5 million. We are not able to reasonably estimate the amount by which the liability will increase or decrease over an extended period of time or whether a cash settlement of the liability will be required. Therefore, these amounts have been excluded from the schedule of contractual obligations. 38 For a more complete description of our contractual obligations, see Notes 10 and 11 to the Consolidated Financial Statements. Working Capital Management The following table summarizes our average accounts receivable days sales outstanding and average annual inventory turnover for the past three fiscal years: Days sales outstanding Inventory turnover Foreign Operations Fiscal Year Ended April 30, 2022 April 24, 2021 April 25, 2020 25.2 6.6 25.9 6.1 29.1 5.4 We derive foreign sales from Dental operations in Canada, and Animal Health operations in Canada and the U.K. Fluctuations in currency exchange rates have not significantly impacted earnings, as these fluctuations impact sales, cost of sales and operating expenses. Changes in exchange rates positively impacted net sales by $41.0 million and $28.4 million in fiscal 2022 and 2021, respectively, while they adversely affected net sales by $21.9 million in fiscal 2020. Changes in currency exchange rates are a risk accompanying foreign operations, but this risk is not considered material with respect to our consolidated operations. Critical Accounting Policies and Estimates Patterson has adopted various accounting policies to prepare our consolidated financial statements in accordance with accounting principles generally accepted in the U.S. Management believes that our policies are conservative and our philosophy is to adopt accounting policies that minimize the risk of adverse events having a material impact on recorded assets and liabilities. However, the preparation of financial statements requires the use of estimates and judgments regarding the realization of assets and the settlement of liabilities based on the information available to management at the time. Changes subsequent to the preparation of the financial statements in economic, technological and competitive conditions may materially impact the recorded values of Patterson’s assets and liabilities. Therefore, the users of the financial statements should read all the notes to the Consolidated Financial Statements and be aware that conditions currently unknown to management may develop in the future. This may require a material adjustment to a recorded asset or liability to consistently apply to our significant accounting principles and policies that are discussed in Note 1 to the Consolidated Financial Statements. The financial performance and condition of Patterson may also be materially impacted by transactions and events that we have not previously experienced and for which we have not been required to establish an accounting policy or adopt a generally accepted accounting principle. Revenue Recognition – Revenues are generated from the sale of consumable products, equipment and support, software and support, technical service parts and labor, and other sources. Revenues are recognized when or as performance obligations are satisfied. Performance obligations are satisfied when the customer obtains control of the goods or services. Consumable, equipment, software and parts sales are recorded upon delivery, except in those circumstances where terms of the sale are FOB shipping point, in which case sales are recorded upon shipment. Technical service labor is recognized as it is provided. Revenue derived from equipment and software support is recognized ratably over the period in which the support is provided. In addition to revenues generated from the distribution of consumable products under arrangements (buy/sell agreements) where the full market value of the product is recorded as revenue, we earn commissions for services provided under agency agreements. The agency agreement contrasts to a buy/sell agreement in that we do not have control over the transaction, as we do not have the primary responsibility of fulfilling the promise of the good or service and we do not bill or collect from the customer in an agency relationship. Commissions under agency agreements are recorded when the services are provided. Estimates for returns, damaged goods, rebates, loyalty programs and other revenue allowances are made at the time the revenue is recognized based on the historical experience for such items. The receivables that result from the recognition of revenue are reported net of related allowances. We maintain a valuation allowance based upon 39 the expected collectability of receivables held. Estimates are used to determine the valuation allowance and are based on several factors, including historical collection data, economic trends and credit worthiness of customers. Receivables are written off when we determine the amounts to be uncollectible, typically upon customer bankruptcy or non-response to continuous collection efforts. The portions of receivable amounts that are not expected to be collected during the next twelve months are classified as long-term. Patterson has a relatively large, dispersed customer base and no single customer accounts for more than 10% of consolidated net sales. In addition, the equipment sold to customers under finance contracts generally serves as collateral for the contract and the customer provides a personal guarantee as well. Net sales do not include sales tax as we are considered a pass-through conduit for collecting and remitting sales tax. Patterson Advantage Loyalty Program – Patterson Dental provides a point-based awards program to qualifying customers involving the issuance of “Patterson Advantage dollars” which can be used toward equipment and technology purchases. Patterson Advantage dollars earned during a program year expire one year after the end of the program year. The cost and corresponding liability associated with the program is recognized as contra- revenue. As of April 30, 2022, we believe we have sufficient experience with the program to reasonably estimate the amount of Patterson Advantage dollars that will not be redeemed and thus have recorded a liability for 88.0% of the maximum potential amount that could be redeemed. We recognize the expected breakage amount as revenue in proportion to the pattern of rights exercised by the customer, and we recognize the estimated value of unused Patterson Advantage dollars as redemptions occur. Breakage recognized was immaterial to all periods presented. Inventory and Reserves – Inventory consists primarily of merchandise held for sale and is stated at the lower of cost or market. Cost is determined using the last-in, first-out ("LIFO") method for all inventories, except for foreign inventories and manufactured inventories, which are valued using the first-in, first-out ("FIFO") method. We continually assess the valuation of inventories and reduce the carrying value of those inventories that are obsolete or in excess of forecasted usage to estimated realizable value. Estimates are made of the net realizable value of such inventories based on analyses and assumptions including, but not limited to, historical usage, future demand and market requirements. Goodwill and Other Indefinite-Lived Intangible Assets – Goodwill represents the excess of cost over the fair value of identifiable net assets of businesses acquired. Impairment testing for goodwill is done at the reporting unit level, with all goodwill assigned to a reporting unit. We have two reporting units as of April 30, 2022; Dental and Animal Health. Our Corporate reportable segment's assets and liabilities, and net sales and expenses, are allocated to the two reporting units. We assess goodwill for impairment annually and whenever an event occurs or circumstances change that would indicate that the carrying amount may be impaired. Any goodwill impairment is measured as the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying value of goodwill. The determination of fair value involves uncertainties because it requires management to make assumptions and to apply judgment to estimate industry and economic factors and the profitability of future business strategies. Patterson conducts impairment testing based on current business strategy in light of present industry and economic conditions, as well as future expectations. Additionally, in assessing goodwill for impairment, the reasonableness of the implied control premium is considered based on market capitalizations and recent market transactions. Our indefinite-lived intangible asset is a trade name, which is assessed for impairment by comparing the carrying value of the asset with its fair value. If the carrying value exceeds fair value, an impairment loss is recognized in an amount equal to the excess. The determination of fair value involves assumptions, including projected revenues and gross profit levels, as well as consideration of any factors that may indicate potential impairment. In connection with the preparation of these financial statements in the fourth quarter of fiscal 2022, management completed its annual goodwill and other indefinite-lived intangible asset impairment tests using the beginning of our fiscal 2022 fourth quarter as the valuation date. We determined that there was no impairment of either goodwill or our indefinite-lived intangible asset. In connection with the preparation of these financial statements in the fourth quarter of fiscal 2021, management completed its annual goodwill and other indefinite-lived intangible asset impairment tests using the beginning of our fiscal 2021 fourth quarter as the valuation date. We determined that there was no impairment of either goodwill or our indefinite-lived intangible asset. 40 In connection with the preparation of our fiscal 2020 Form 10-K in the fourth quarter of fiscal 2020, management completed its annual goodwill and other indefinite-lived intangible asset impairment tests using the beginning of our fiscal 2020 fourth quarter as the valuation date. We determined that there was no impairment of our indefinite-lived intangible asset. Our annual goodwill impairment test resulted in no impairment to the Dental reporting unit’s goodwill, and a $269.0 million non-cash pre-tax impairment charge of our Animal Health reporting unit’s goodwill. The decrease in the fair value of the Animal Health reporting unit below its carrying value was mainly the result of a reduction in management’s estimates of future cash flows. Future cash flows were affected by a reduction in future sales volume and operating margins. The sales volume estimate reflected recent sales trends we had experienced. Future operating margins were expected to be lower based on then-current trends in our markets. These trends were driven by customer and vendor consolidation. Subsequent to the annual test being completed and in connection with the preparation of our fiscal 2020 Form 10-K in the fourth quarter of fiscal 2020, we experienced events and circumstances that indicated that the carrying amount of goodwill may have been further impaired. These events and circumstances included a decline in our projected future earnings and a sustained decrease in our share price. As such, we tested our goodwill for impairment as of the beginning of our fiscal April 2020. This test resulted in no impairment to the Dental reporting unit’s goodwill, and a $406.1 million non-cash pre-tax impairment charge of our Animal Health reporting unit’s goodwill. The decrease in the fair value of the Animal Health reporting unit subsequent to the annual goodwill impairment test was caused by additional reductions in management’s estimates of future cash flows, driven by reduced sales volumes, as well as reduced EBITDA multiples of comparable companies. These estimates and market multiples were negatively affected by COVID-19. In fiscal 2020, the animal health industry experienced a reduction in sales volume as a result of stay at home and shelter in place orders, as well as a result of meat packing plant closures. Our future cash flow estimates for this business unit in fiscal 2020 reflected the long-term impact of COVID-19. As of April 25, 2020, our Animal Health reporting unit had no remaining goodwill as a result of the total goodwill impairment charges recorded in fiscal 2020 of $675.1 million. Long-Lived Assets – Long-lived assets, including definite-lived intangible assets, are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through the estimated undiscounted future cash flows derived from such assets. Our definite-lived intangible assets primarily consist of customer relationships, trade names and trademarks. When impairment exists, the related assets are written down to fair value using level 3 inputs, as discussed further in Note 7 to the Consolidated Financial Statements. Development Costs of Software to be Sold - At the end of each fiscal quarter, we compare the unamortized capitalized costs of software to be sold to its net realizable value. If the unamortized amount exceeds the net realizable value, an impairment is recorded for this amount of that asset shall be written off. If the unamortized capitalized costs are less than the net realizable value of that asset, then there is no impairment. Related Party Transactions – We have interests in a number of entities that are accounted for using the equity method. During fiscal 2022, 2021 and 2020 we made purchases of $128.5 million, $110.2 million and $94.2 million from these entities, respectively. During fiscal 2022, 2021 and 2020, we recorded net sales of $117.3 million, $93.6 million and $110.3 million to these entities, respectively. Income Taxes – We are subject to income taxes in the U.S. and numerous foreign jurisdictions. Significant judgments are required in determining the consolidated provision for income taxes. Changes in tax policy or interpretation of current tax law create potential added uncertainties. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. As a result, we recognize tax liabilities based on estimates of whether additional taxes and interest will be due. These tax liabilities are recognized when, despite our belief that our tax return position is supportable, we believe that certain positions may not be fully sustained upon review by tax authorities. We believe that our accruals for tax liabilities are adequate for all open audit years based on our assessment of many factors including past experience and interpretations of tax law. This assessment relies on estimates and assumptions and may involve a series of complex judgments about future events. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact income tax expense in the period in which such determination is made and could materially affect our financial results. 41 Valuation allowances are established for deferred tax assets if, after assessment of available positive and negative evidence, it is more likely than not that the deferred tax asset will not be fully realized. Self-insurance – Patterson is self-insured for certain losses related to general liability, product liability, automobile, workers’ compensation and medical claims. We estimate our liabilities based upon an analysis of historical data and actuarial estimates. While current estimates are believed reasonable based on information currently available, actual results could differ and affect financial results due to changes in the amount or frequency of claims, medical cost inflation or other factors. Historically, actual results related to these types of claims have not varied significantly from estimated amounts. Stock-based Compensation – We recognize stock-based compensation based on certain assumptions including inputs within valuation models, estimated forfeitures and estimated performance outcomes. These assumptions require subjective judgment and changes in the assumptions can materially affect fair value estimates. Management assesses the assumptions and methodologies used to estimate forfeitures and to calculate estimated fair value of stock-based compensation on a regular basis. Circumstances may change, and additional data may become available over time, which could result in changes to these assumptions and methodologies and thereby materially impact the fair value determination or estimates of forfeitures. If factors change and we employ different assumptions, the amount of compensation expense associated with stock-based compensation may differ significantly from what was recorded in the current period. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market Risk We are exposed to market risk consisting of foreign currency rate fluctuations and changes in interest rates. We are exposed to foreign currency exchange rate fluctuations in our operating statement due to transactions denominated primarily in Canadian Dollars and British Pounds. Although we do not currently have foreign currency hedge contracts, we continually evaluate our foreign currency exchange rate risk and the different mechanisms for use in managing such risk. A hypothetical 10% change in the value of the U.S. dollar in relation to our most significant foreign currency exposures would have changed net sales by approximately $103.7 million for the fiscal year ended April 30, 2022. This amount is not indicative of the hypothetical net earnings impact due to the partially offsetting impact of the currency exchange movements on cost of sales and operating expenses. We estimate that if foreign currency exchange rates changed by 10%, the impact would have been approximately $3.8 million to income (loss) before taxes for the fiscal year ended April 30, 2022. The Credit Agreement consists of a $300.0 million term loan facility and a $700.0 million revolving credit facility, which will mature no later than February 2024. 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 Credit Agreement. Due to the interest rate being variable, fluctuations in interest rates may impact our earnings. Based on our current level of debt, we estimate that a 100 basis point change in interest rates would have a $3.3 million annual impact on our income (loss) before taxes. Our earnings are also affected by fluctuations in short-term interest rates through the investment of cash balances and the practice of selling fixed rate equipment finance contracts under agreements with both a commercial paper conduit and a bank that provide for pricing based on variable interest rates. When considering the exposure under the agreements whereby we sell equipment finance contracts to both a commercial paper conduit and bank, we have the ability to select pricing based on interest rates ranging from 30 day LIBOR up to twelve month LIBOR. In addition, the majority of the portfolio of installment contracts generally turns over in less than 48 months, and we can adjust the rate we charge on new customer contracts at any time. Therefore, in times where the interest rate markets are not rapidly increasing or decreasing, the average interest rate in the portfolio generally moves with the interest rate markets and thus would parallel the underlying interest rate movement of the pricing built into the sale agreements. In calculating the gain on the contract sales, we use an interest rate curve that approximates the maturity period of the then-outstanding contracts. If increases in the interest rate markets occur, the average interest rate in our contract portfolio may not increase at the same rate, resulting in a reduction of gain on the contract sales as compared to the gain that would be realized if the average interest rate in our portfolio were to increase at a more similar rate to the interest rate markets. In fiscal 2019, we entered into forward interest rate swap agreements in order to hedge against interest rate fluctuations that impact the amount of net sales we record related to these contracts. These interest rate swap agreements do not qualify for 42 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. As a result of entering into these interest rate swap agreements, we estimate that a 10% change in interest rates would have less than a $1.0 million annual impact on our income (loss) before taxes. 43 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and the Board of Directors of Patterson Companies, Inc. Opinion on Internal Control Over Financial Reporting We have audited Patterson Companies, Inc. internal control over financial reporting as of April 30, 2022, based on criteria established the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Patterson Companies, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of April 30, 2022, based on the COSO criteria. Internal Control—Integrated Framework issued by in We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the accompanying consolidated balance sheets of Patterson Companies, Inc. (the Company) as of April 30, 2022 and April 24, 2021, the related consolidated statements of operations and other comprehensive income (loss), changes in stockholders' equity and cash flows for each of the three years in the period ended April 30, 2022, and the related notes and the financial statement schedule listed in the Index at Item 15(a)(2) (collectively referred to as the “consolidated financial statements”) and our report dated June 29, 2022 expressed an unqualified opinion thereon. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Ernst & Young LLP Minneapolis, Minnesota June 29, 2022 44 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and the Board of Directors of Patterson Companies, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Patterson Companies, Inc. (the Company) as of April 30, 2022 and April 24, 2021, the related consolidated statements of operations and other comprehensive income (loss), changes in stockholders' equity and cash flows for each of the three years in the period ended April 30, 2022, and the related notes and the financial statement schedule listed in the Index at Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at April 30, 2022 and April 24, 2021, and the results of its operations and its cash flows for each of the three years in the period ended April 30, 2022, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of April 30, 2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated June 29, 2022 expressed an unqualified opinion thereon. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosure to which it relates. 45 Development costs of software to be sold impairment Description of the Matter At April 30, 2022, the Company’s capitalized development costs of software to be sold was $64.5 million. As discussed in Note 1 of the consolidated financial statements, at the end of each fiscal quarter these unamortized capitalized costs of software to be sold are compared to its net realizable value. If the unamortized capitalized costs are less than the net realizable value of that asset, then there is no impairment. Auditing management’s comparison of unamortized capitalized development costs of software to be sold to its net realizable value was complex and highly judgmental due to the significant estimation required in determining the net realizable value of the asset. For software to be sold, the estimate of the net realizable value was sensitive to significant assumptions, such as forecasted revenue and related revenue growth rates, gross margin and operating expenses as a percentage of revenue assumptions, which are affected by expected future market or economic conditions. How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the operating effectiveness of controls over the Company’s process to compare unamortized capitalized costs of software to be sold to its net realizable value, including controls over management’s budgeting and forecasting process used to develop the projected future revenue, gross margins and operating expenses used in the fair value estimates, as well as controls over management’s review of the significant data and assumptions described above. the design and tested To test the estimated fair value of the unamortized capitalized development costs of software to be sold, we performed audit procedures that included, among others, assessing the valuation methodologies used by management and testing the significant assumptions discussed above. We compared the significant assumptions used by management to current industry, market and economic trends, as well as other relevant factors. We assessed the reasonableness of forecasted future revenue by comparing the forecasts to historical software sales results. We also performed sensitivity analyses of significant assumptions to evaluate the significance of changes in the recoverability that would result from changes in assumptions. /s/ Ernst & Young LLP We have served as the Company’s auditor since 1985. Minneapolis, Minnesota June 29, 2022 46 PATTERSON COMPANIES, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except per share amounts) ASSETS Current assets: Cash and cash equivalents Receivables, net of allowance for doubtful accounts of $5,913 and $6,138 Inventory Prepaid expenses and other current assets Total current assets Property and equipment, net Operating lease right-of-use assets, net Long-term receivables, net Goodwill, net Identifiable intangibles, net Investments Other non-current assets, net Total assets LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable Accrued payroll expense Other accrued liabilities Operating lease liabilities Current maturities of long-term debt Borrowings on revolving credit Total current liabilities Long-term debt Non-current operating lease liabilities Deferred income taxes Other non-current liabilities Total liabilities Stockholders’ equity: Common stock, $0.01 par value: 600,000 shares authorized; 96,762 and 96,813 shares issued and outstanding Additional paid-in capital Accumulated other comprehensive loss Retained earnings Total Patterson Companies, Inc. stockholders' equity Noncontrolling interests Total stockholders’ equity Total liabilities and stockholders’ equity See accompanying notes 47 April 30, 2022 April 24, 2021 $ 142,014 $ 143,244 447,162 785,604 304,242 449,235 736,778 286,672 1,679,022 1,615,929 213,140 70,722 138,812 140,630 252,614 139,182 107,508 219,438 77,217 223,970 139,932 279,644 105,522 89,859 $ 2,741,630 $ 2,751,511 $ 681,321 $ 609,264 102,266 173,734 29,348 — 29,000 118,425 175,975 32,252 100,750 53,000 1,015,669 1,089,666 488,554 43,332 120,414 31,026 487,545 48,318 124,491 36,820 1,698,995 1,786,840 968 968 200,520 169,099 (81,516) (62,592) 921,704 1,041,676 959 855,741 963,216 1,455 1,042,635 964,671 $ 2,741,630 $ 2,751,511 PATTERSON COMPANIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME (LOSS) (In thousands, except per share amounts) Net sales Cost of sales Gross profit Operating expenses Goodwill impairment Operating income (loss) Other income (expense): Gains on investments Other income (expense), net Interest expense Income (loss) before taxes Income tax expense (benefit) Net income (loss) Net loss attributable to noncontrolling interests Fiscal Year Ended April 30, 2022 April 24, 2021 April 25, 2020 $ 6,499,405 $ 5,912,066 $ 5,490,011 5,210,318 4,708,936 4,292,601 1,289,087 1,203,130 1,197,410 1,132,085 992,523 1,094,474 — — 675,055 157,002 210,607 (572,119) 101,809 27,731 — 13,608 (20,288) (24,284) 266,254 64,540 201,714 199,931 44,822 155,109 34,334 (10,835) (41,787) (590,407) (1,040) (589,367) (1,496) (872) (921) Net income (loss) attributable to Patterson Companies, Inc. $ 203,210 $ 155,981 $ (588,446) Earnings (loss) per share attributable to Patterson Companies, Inc.: Basic Diluted Weighted average shares: Basic Diluted Dividends declared per common share Comprehensive income (loss) Net income (loss) Foreign currency translation gain (loss) Cash flow hedges, net of tax Comprehensive income (loss) $ $ 2.09 $ 2.06 $ 1.63 $ 1.61 $ (6.25) (6.25) 97,277 98,514 95,599 96,664 $ 1.04 $ 1.04 $ 94,154 94,154 1.04 $ 201,714 $ 155,109 $ (589,367) (19,966) 1,042 33,405 1,042 (14,062) 7,999 $ 182,790 $ 189,556 $ (595,430) See accompanying notes 48  PATTERSON COMPANIES, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (In thousands) Common Stock Number Amount Additional Paid-in Capital Accumulated Other Comprehensive Loss Retained Earnings Unearned ESOP 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 Cash flow hedges Net loss Dividends declared Common stock issued and related tax benefits Stock based compensation ESOP activity Adoption of ASU 2016-02 Adoption of ASU 2018-02 Balance at April 25, 2020 — — — — 675 — — — — — — — — 6 — — — — — — — — (7,790) 22,936 — — — (14,062) 7,999 — — — — — — (2,707) — — (588,446) (99,552) — — — 1,447 2,707 — — — — — — 34,320 — — — — (14,062) 7,999 (921) (589,367) — — — — — — (99,552) (7,784) 22,936 34,320 1,447 — 95,947 959 146,606 (97,039) 799,652 (16,061) 2,327 836,444 Foreign currency translation Cash flow hedges Net income (loss) Dividends declared Common stock issued and related tax benefits Stock based compensation ESOP activity — — — — 866 — — — — — — 9 — — — — — — 1,270 21,223 — 33,405 1,042 — — — — — — — 155,981 (99,892) — — — — — — — — — 16,061 Balance at April 24, 2021 96,813 968 169,099 (62,592) 855,741 Foreign currency translation Cash flow hedges Net income (loss) Dividends declared Common stock issued and related tax benefits Repurchases of common stock Stock based compensation Contribution from noncontrolling interest Balance at April 30, 2022 — — — — — — — — — — — — 981 10 7,616 (1,032) (10) — — — — — 23,805 — (19,966) 1,042 — — — — — — — — 203,210 (102,257) — (34,990) — — — — 33,405 1,042 (872) 155,109 — — — — (99,892) 1,279 21,223 16,061 1,455 964,671 — — (19,966) 1,042 (1,496) 201,714 — — (102,257) 7,626 (35,000) — 23,805 1,000 1,000 — — — — — — — — — 96,762 $ 968 $ 200,520 $ (81,516) $ 921,704 $ — $ 959 $ 1,042,635 See accompanying notes 49 PATTERSON COMPANIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Operating activities: Net income (loss) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation Amortization Gains on investments Goodwill impairment Bad debt expense Non-cash employee compensation Accelerated amortization of debt issuance costs on early retirement of debt Deferred income taxes Non-cash (gains) losses and other, net Change in assets and liabilities: Receivables Inventory Accounts payable Accrued liabilities Other changes from operating activities, net Net cash used in operating activities Investing activities: Additions to property and equipment Acquisitions, net of cash acquired Collection of deferred purchase price receivables Sale of investments Other investing activities Net cash provided by investing activities Financing activities: Dividends paid Repurchases of common stock Proceeds from issuance of long-term debt Debt issuance costs Payments on long-term debt (Payment) draw on revolving credit Other financing activities Net cash used in financing activities Effect of exchange rate changes on cash Net change in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period Supplemental disclosures: Income taxes paid Interest paid Supplemental disclosure of non-cash investing activity: Retained interest in securitization transactions Fiscal Year Ended April 30, 2022 April 24, 2021 April 25, 2020 $ 201,714 $ 155,109 $ (589,367) 44,180 37,812 (101,809) — 2,769 23,805 — (4,718) (1,431) 41,669 37,227 — — 2,559 30,488 — (10,760) 1,318 44,981 37,201 (34,334) 675,055 2,008 37,354 8,984 (31,800) — (1,144,833) (916,694) (540,065) (53,871) 80,904 (27,630) (37,886) 91,193 (268,338) 85,849 19,861 (59,258) 219,613 25,474 (39,390) (980,994) (730,519) (243,544) (38,308) (19,793) (25,788) (41,809) — — 1,213,497 833,958 540,944 75,942 7,690 396 2,097 — — 1,239,028 810,663 499,135 (101,111) (35,000) — — (100,750) (24,000) 7,627 (75,183) (100,442) — — — — 53,000 (462) — 300,000 (3,300) (460,840) — (6,647) (253,234) (22,645) (271,229) (6,030) (1,230) 143,244 7,801 65,300 77,944 142,014 $ 143,244 $ 83,549 $ 48,924 $ 14,633 15,234 (2,064) (17,702) 95,646 77,944 12,021 25,742 $ $ $ 1,122,627 $ 900,578 $ 707,395 See accompanying notes 50 PATTERSON COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 2022 (Dollars, except per share amounts, and shares in thousands) 1. Summary of Significant Accounting Policies Description of Business Patterson Companies, Inc. (referred to herein as “Patterson” or in the first person notations “we,” “our,” and “us”) is a value-added specialty distributor serving the U.S. and Canadian dental supply and the U.S., Canadian and U.K. animal health supply markets. Patterson has three reportable segments: Dental, Animal Health and Corporate. Basis of Presentation The 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 consolidated financial statements also include the assets and liabilities of Technology Partner Innovations, LLC, which is further described in Note 13. Fiscal Year End We operate with a 52-53 week accounting convention with our fiscal year ending on the last Saturday in April. Fiscal 2022 ended on April 30, 2022 and consisted of 53 weeks. Fiscal 2021 and 2020 ended on April 24, 2021 and April 25, 2020, respectively, and both consisted of 52 weeks. Fiscal 2023 will end on April 29, 2023 and will consist of 52 weeks. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents Cash equivalents consist primarily of investments in money market funds and government securities. The maturity of these securities at the time of purchase is 90 days or less. All cash and cash equivalents are classified as available-for-sale and carried at fair value, which approximates cost. Inventory Inventory consists of merchandise held for sale and is stated at the lower of cost or market. The cost of our inventory includes the amount we pay to our suppliers to acquire inventory and freight costs incurred in connection with the delivery of product to our distribution centers and our other locations. Cost is determined using the last-in, first-out ("LIFO") method for all inventories, except for foreign inventories, which are valued using the first-in, first- out ("FIFO") method. Inventories valued at LIFO represented 85% and 83% of total inventories at April 30, 2022 and April 24, 2021, respectively. The accumulated LIFO reserve was $130,959 at April 30, 2022 and $120,775 at April 24, 2021. We believe that inventory replacement cost exceeds the inventory balance by an amount approximating the LIFO reserve. 51 Property and Equipment Property and equipment are stated at cost. Depreciation is calculated on the straight-line method over estimated useful lives of up to 39 years for buildings or the expected remaining life of purchased buildings, the term of the lease for leasehold improvements, 3 to 10 years for computer hardware and software, and 5 to 10 years for furniture and equipment. Goodwill and Other Indefinite-Lived Intangible Assets Goodwill represents the excess of cost over the fair value of identifiable net assets of businesses acquired. Impairment testing for goodwill is done at the reporting unit level, with all goodwill assigned to a reporting unit. We have two reporting units as of April 30, 2022; Dental and Animal Health. Our Corporate reportable segment's assets and liabilities, and net sales and expenses, are allocated to the two reporting units. We assess goodwill for impairment annually and whenever an event occurs or circumstances change that would indicate that the carrying amount may be impaired. Any goodwill impairment is measured as the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying value of goodwill. The determination of fair value involves uncertainties because it requires management to make assumptions and to apply judgment to estimate industry and economic factors and the profitability of future business strategies. Patterson conducts impairment testing based on current business strategy in light of present industry and economic conditions, as well as future expectations. Additionally, in assessing goodwill for impairment, the reasonableness of the implied control premium is considered based on market capitalizations and recent market transactions. Our indefinite-lived intangible asset is a trade name, which is assessed for impairment by comparing the carrying value of the asset with its fair value. If the carrying value exceeds fair value, an impairment loss is recognized in an amount equal to the excess. The determination of fair value involves assumptions, including projected revenues and gross profit levels, as well as consideration of any factors that may indicate potential impairment. In connection with the preparation of these financial statements in the fourth quarter of fiscal 2022, management completed its annual goodwill and other indefinite-lived intangible asset impairment tests using the beginning of our fiscal 2022 fourth quarter as the valuation date. We determined that there was no impairment of either goodwill or our indefinite-lived intangible asset. In connection with the preparation of our fiscal 2021 Form 10-K in the fourth quarter of fiscal 2021, management completed its annual goodwill and other indefinite-lived intangible asset impairment tests using the beginning of our fiscal 2021 fourth quarter as the valuation date. We determined that there was no impairment of either goodwill or our indefinite-lived intangible asset. In connection with the preparation of our fiscal 2020 Form 10-K in the fourth quarter of fiscal 2020, management completed its annual goodwill and other indefinite-lived intangible asset impairment tests using the beginning of our fiscal 2020 fourth quarter as the valuation date. We determined that there was no impairment of our indefinite-lived intangible asset. Our annual goodwill impairment test resulted in no impairment to the Dental reporting unit’s goodwill, and a $269,000 non-cash pre-tax impairment charge of our Animal Health reporting unit’s goodwill. The decrease in the fair value of the Animal Health reporting unit below its carrying value was mainly the result of a reduction in management’s estimates of future cash flows. Future cash flows were affected by a reduction in future sales volume and operating margins. The sales volume estimate reflected recent sales trends we had experienced. Future operating margins are expected to be lower based on then-current trends in our markets. These trends were driven by customer and vendor consolidation. Subsequent to the annual test being completed and in connection with the preparation of our fiscal 2020 Form 10-K in the fourth quarter of fiscal 2020, we experienced events and circumstances that indicated that the carrying amount of goodwill may have been further impaired. These events and circumstances included a decline in our projected future earnings and a sustained decrease in our share price. As such, we tested our goodwill for impairment as of the beginning of our fiscal April 2020. This test resulted in no impairment to the Dental reporting unit’s goodwill, and a $406,055 non-cash pre-tax impairment charge of our Animal Health reporting unit’s goodwill. The decrease in the fair value of the Animal Health reporting unit subsequent to the annual goodwill impairment test was caused by additional reductions in management’s estimates of future cash flows, driven by reduced sales volumes, as well as reduced EBITDA multiples of comparable companies. These estimates and market multiples were negatively affected by COVID-19. In fiscal 2020, the animal health industry experienced a reduction in sales 52 volume as a result of stay at home and shelter in place orders, as well as a result of meat packing plant closures. Our future cash flow estimates for this business unit in fiscal 2020 reflected the long-term impact of COVID-19. As of April 25, 2020, our Animal Health reporting unit had no remaining goodwill as a result of the total goodwill impairment charges recorded in fiscal 2020 of $675,055. Long-Lived Assets Long-lived assets, including definite-lived intangible assets, are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through the estimated undiscounted future cash flows derived from such assets. Our definite-lived intangible assets primarily consist of customer relationships, trade names and trademarks. When impairment exists, the related assets are written down to fair value using level 3 inputs, as discussed further in Note 7. Other Non-current Assets, Net Development costs of software to be sold, net Other Other non-current assets, net April 30, 2022 April 24, 2021 $ $ 64,513 $ 42,995 107,508 $ 68,156 21,703 89,859 During fiscal 2022, 2021 and 2020, we recorded $7,267, $2,346 and $0, respectively, of amortization expense related to the development costs of software to be sold in cost of sales within the consolidated statements of operations and other comprehensive income (loss). Development Costs of Software to be Sold At the end of each fiscal quarter, we compare the unamortized capitalized costs of software to be sold to its net realizable value. If the unamortized amount exceeds the net realizable value, an impairment is recorded for this amount of that asset shall be written off. If the unamortized capitalized costs are less than the net realizable value of that asset, then there is no impairment. Financial Instruments We account for derivative financial instruments under the provisions of Accounting Standards Codification ("ASC") Topic 815, “Derivatives and Hedging.” Our use of derivative financial instruments is generally limited to managing well-defined interest rate risks. We do not use financial instruments or derivatives for any trading purposes. Revenue Recognition Revenues are generated from the sale of consumable products, equipment and support, software and support, technical service parts and labor, and other sources. Revenues are recognized when or as performance obligations are satisfied. Performance obligations are satisfied when the customer obtains control of the goods or services. Consumable, equipment, software and parts sales are recorded upon delivery, except in those circumstances where terms of the sale are FOB shipping point, in which case sales are recorded upon shipment. Technical service labor is recognized as it is provided. Revenue derived from equipment and software support is recognized ratably over the period in which the support is provided. In addition to revenues generated from the distribution of consumable products under arrangements (buy/sell agreements) where the full market value of the product is recorded as revenue, we earn commissions for services provided under agency agreements. The agency agreement contrasts to a buy/sell agreement in that we do not have control over the transaction, as we do not have the primary responsibility of fulfilling the promise of the good or service and we do not bill or collect from the customer in an agency relationship. Commissions under agency agreements are recorded when the services are provided. Estimates for returns, damaged goods, rebates, loyalty programs and other revenue allowances are made at the time the revenue is recognized based on the historical experience for such items. The receivables that result from the recognition of revenue are reported net of related allowances. We maintain a valuation allowance based upon the expected collectability of receivables held. Estimates are used to determine the valuation allowance and are based on several factors, including historical collection data, economic trends and credit worthiness of customers. 53 Receivables are written off when we determine the amounts to be uncollectible, typically upon customer bankruptcy or non-response to continuous collection efforts. The portions of receivable amounts that are not expected to be collected during the next twelve months are classified as long-term. Patterson has a relatively large, dispersed customer base and no single customer accounts for more than 10% of consolidated net sales. In addition, the equipment sold to customers under finance contracts generally serves as collateral for the contract and the customer provides a personal guarantee as well. Net sales do not include sales tax as we are considered a pass-through conduit for collecting and remitting sales tax. Contract Balances Contract balances represent amounts presented in our 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 April 30, 2022 and April 24, 2021 were $134 and $2,491, respectively. Our contract liabilities primarily relate to advance payments from customers, upfront payments for software and support provided over time, and options that provide a material right to customers, such as our customer loyalty programs. At April 30, 2022 and April 24, 2021, contract liabilities of $38,581 and $23,526 were reported in other accrued liabilities, respectively. During the fiscal year ended April 30, 2022, we recognized $20,658 of the amount previously deferred at April 24, 2021. Patterson Advantage Loyalty Program The Dental segment provides a point-based awards program to qualifying customers involving the issuance of “Patterson Advantage dollars” which can be used toward equipment and technology purchases. Patterson Advantage dollars earned during a program year expire one year after the end of the program year. The cost and corresponding liability associated with the program are recognized as contra-revenue. As of April 30, 2022, we believe we have sufficient experience with the program to reasonably estimate the amount of Patterson Advantage dollars that will not be redeemed and thus have recorded a liability for 88.0% of the maximum potential amount that could be redeemed. We recognize the expected breakage amount as revenue in proportion to the pattern of rights exercised by the customer, and we recognize the estimated value of unused Patterson Advantage dollars as redemptions occur. Breakage recognized was immaterial to all periods presented. Freight and Delivery Charges Freight and delivery charges are included in cost of sales in the consolidated statements of operations and other comprehensive income (loss). Advertising We expense all advertising and promotional costs as incurred, except for direct marketing expenses, which are expensed over the shorter of the life of the asset or one year. Total net advertising and promotional expenses were $1,532, $134 and $5,793 for fiscal 2022, 2021 and 2020, respectively. There were no deferred direct-marketing expenses included in the consolidated balance sheets as of April 30, 2022 and April 24, 2021. Related Party Transactions We have interests in a number of entities that are accounted for using the equity method. During fiscal 2022, 2021 and 2020, we made purchases of $128,452, $110,210 and $94,238 from these entities, respectively. During fiscal 2022, 2021 and 2020, we recorded net sales of $117,347, $93,577 and $110,262 to these entities, respectively. Income Taxes The liability method is used to account for income tax expense. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Valuation allowances are established for deferred tax assets if, after assessment of available positive and negative evidence, it is more likely than not that the deferred tax asset will not be fully realized. 54 Self-insurance Patterson is self-insured for certain losses related to general liability, product liability, automobile, workers’ compensation and medical claims. We estimate our liabilities based upon an analysis of historical data and actuarial estimates. While current estimates are believed reasonable based on information currently available, actual results could differ and affect financial results due to changes in the amount or frequency of claims, medical cost inflation or other factors. Historically, actual results related to these types of claims have not varied significantly from estimated amounts. Stock-based Compensation We recognize stock-based compensation expense based on estimated grant date fair values. The grant date fair value of stock options and stock purchases made through our Employee Stock Purchase Plan are estimated using the Black-Scholes option pricing valuation model. The grant date fair value of performance stock units that vest upon meeting certain market conditions is estimated using the Monte Carlo valuation model. These valuations require estimates to be made including expected stock price volatility which considers historical volatility trends, implied future volatility based on certain traded options and other factors. We estimate the expected life of awards based on several factors, including types of participants, vesting schedules, contractual terms and various factors surrounding exercise behavior of different groups. The grant date fair value of time-based restricted stock awards and restricted stock units is calculated based on the closing price of our common stock on the date of grant. Compensation expense for all share-based payment awards is recognized over the requisite service period (or to the date a participant becomes eligible for retirement, if earlier) for awards that are expected to vest. Other Income (Expense), Net Gain (loss) on interest rate swap agreements Investment income and other Other income (expense), net Comprehensive Income (Loss) Fiscal Year Ended April 30, 2022 April 24, 2021 April 25, 2020 $ $ 15,835 $ 11,896 1,151 $ (18,712) 12,457 7,877 27,731 $ 13,608 $ (10,835) Comprehensive income (loss) is computed as net income (loss) plus certain other items that are recorded directly to stockholders’ equity. Significant items included in comprehensive income (loss) 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 hedge losses was $321, $321 and $2,460 for fiscal 2022, 2021 and 2020, respectively. Earnings (Loss) Per Share ("EPS") The amount of basic EPS is computed by dividing net income (loss) attributable to Patterson Companies, Inc. by the weighted average number of outstanding common shares during the period. The amount of diluted EPS is computed by dividing net income (loss) by the weighted average number of outstanding common shares and common share equivalents, when dilutive, during the period. The following table sets forth the denominator for the computation of basic and diluted EPS. There were no material adjustments to the numerator. Denominator for basic EPS – weighted average shares 97,277 95,599 94,154 Effect of dilutive securities – stock options, restricted stock and stock purchase plans Denominator for diluted EPS – weighted average shares 1,237 98,514 1,065 96,664 — 94,154 Fiscal Year Ended April 30, 2022 April 24, 2021 April 25, 2020 55 Potentially dilutive securities representing 772, 1,014 and 2,517 shares for fiscal 2022, 2021 and 2020, respectively, were excluded from the calculation of diluted EPS because their effects were anti-dilutive using the treasury stock method. For the fiscal year ended April 25, 2020, 905 incremental shares related to dilutive securities were not included in the diluted EPS calculation because we reported a loss for this period. Shares related to dilutive securities have an anti-dilutive impact on EPS when a net loss is reported and therefore are not included in the calculation. Recent Accounting Pronouncements The Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” in March 2020 and ASU No. 2021-01, “Reference Rate Reform (Topic 848): Scope” in January 2021. These ASUs provide temporary optional expedients and exceptions to existing guidance on contract modifications and hedge accounting to facilitate the market transition from existing reference rates, such as LIBOR which began to be phased out at the end of 2021, to alternate reference rates. These standards were effective upon issuance. We are evaluating the optional relief guidance provided within these ASUs, and are reviewing our debt securities, derivative instruments and customer financing contracts that currently utilize LIBOR as the reference rate. 2. Acquisitions During the first quarter of fiscal 2022, we acquired substantially all of the assets of Miller Vet Holdings, LLC, a multiregional veterinary distributor, for total cash consideration of $19,793 and liabilities assumed of $6,799. We have included its results of operations in our financial statements since the date of acquisition within our Animal Health segment. This acquisition is expected to grow our presence in the companion animal market and drive increased operating leverage and synergies. As of the acquisition date, we recorded $14,000 of identifiable intangibles, $1,063 of goodwill and net tangible assets of $4,796 in our consolidated balance sheets related to this acquisition. Goodwill, which is deductible for income tax purposes, was reduced by $66 subsequent to the acquisition date as a result of working capital adjustments. The accounting for the acquisition was complete as of April 30, 2022. The acquisition did not materially impact our financial statements, and therefore pro forma results are not provided. 3. Cash and Cash Equivalents Cash and cash equivalents consisted of the following: Cash on hand Money market funds Total April 30, 2022 April 24, 2021 $ 138,828 $ 141,546 3,186 1,698 $ 142,014 $ 143,244 Cash on hand is generally in interest earning accounts. Included in cash and cash equivalents in the consolidated balance sheets are $39,106 and $36,771 as of April 30, 2022 and April 24, 2021, respectively, which represent cash collected from previously sold customer financing contracts that have not yet been settled. See Note 5 for additional information. 4. Receivables Securitization Program 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 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. 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 April 30, 2022, of which $200,000 was utilized. 56 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. As of April 30, 2022 and April 24, 2021, the fair value of outstanding trade receivables transferred to the Purchasers under the facility and derecognized from the consolidated balance sheets were $396,443 and $384,950, respectively. Sales of trade receivables under this facility were $3,643,700, $3,171,456, and $2,068,409, and cash collections from customers on receivables sold were $3,632,145, $3,094,060 and $2,128,394 during the fiscal years ended 2022, 2021 and 2020, respectively. The DPP receivable is recorded at fair value within the consolidated balance sheets within prepaid expenses and other current assets. 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 inclusive of bank fees and allowance for credit losses. In operating expenses in the consolidated statements of operations and other comprehensive income (loss), we recorded a loss of $3,247, $3,338 and $7,242 during fiscal 2022, 2021 and 2020, respectively, related to the Receivables. The following summarizes the activity related to the DPP receivable: Beginning DPP receivable balance Non-cash additions to DPP receivable Cash collections on DPP receivable Ending DPP receivable balance 5. Customer Financing Fiscal Year Ended April 30, 2022 April 24, 2021 April 25, 2020 $ $ 183,999 $ 1,052,938 (1,041,173) 195,764 $ 117,327 $ 768,619 (701,947) 183,999 $ 57,238 552,751 (492,662) 117,327 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 two 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 15.0% of the proceeds are held by the conduit as security against eventual performance of the portfolio. This percentage can be greater and is based upon certain ratios defined in the agreement with MUFG. The capacity under the agreement with MUFG at April 30, 2022 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 15.0% of the proceeds are held by the conduit as security against eventual performance of the portfolio. This percentage can be greater and is based upon certain ratios defined in the agreement with Fifth Third. The capacity under the agreement with Fifth Third at April 30, 2022 was $100,000. 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 consolidated statements of operations and 57 other comprehensive income (loss). Expenses incurred related to customer financing activities are recorded in operating expenses in our consolidated statements of operations and other comprehensive income (loss). During fiscal 2022, 2021 and 2020, we sold $314,732, $369,497 and $357,616 of contracts under these arrangements, respectively. In net sales in the consolidated statements of operations and other comprehensive income (loss), we recorded a loss of $18,379 and $2,048 during fiscal 2022 and 2021, respectively, and a gain of $43,919 during fiscal 2020, related to these contracts sold. Cash collections on financed receivables sold were $426,188, $401,535 and $346,077 during the fiscal years ended 2022, 2021 and 2020, respectively. Included in cash and cash equivalents in the consolidated balance sheets are $39,106 and $36,771 as of April 30, 2022 and April 24, 2021, respectively, which represent cash collected from previously sold customer financing contracts that have not yet been settled. Included in current receivables in the consolidated balance sheets are $58,190 and $50,638 as of April 30, 2022 and April 24, 2021, respectively, of finance contracts we have not yet sold. A total of $575,231 of finance contracts receivable sold under the arrangements was outstanding at April 30, 2022. Since the internal financing program began in 1994, bad debt write-offs have amounted to less than 1% of the loans originated. The following summarizes the activity related to the DPP receivable: Beginning DPP receivable balance Non-cash additions to DPP receivable Cash collections on DPP receivable Ending DPP receivable balance Fiscal Year Ended April 30, 2022 April 24, 2021 April 25, 2020 $ 227,967 $ 228,019 $ 121,657 69,689 131,959 (172,324) (132,011) 154,644 (48,282) $ 125,332 $ 227,967 $ 228,019 The arrangements require us to maintain a minimum current ratio and maximum leverage ratio. We were in compliance with those covenants at April 30, 2022. 6. 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 April 30, 2022, PDC Funding had purchased an interest rate cap from a bank with a notional amount of $525,000 and a maturity date of August 2029. We sold an identical interest rate cap to the same bank. As of April 30, 2022, PDC Funding II had purchased an interest rate cap from a bank with a notional amount of $100,000 and a maturity date of September 2028. 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 in fair value 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. In fiscal 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. See Note 11 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 58 qualify for hedge accounting treatment and, accordingly, we record the fair value of the agreements as an asset or liability and the change in fair value as income or expense during the period in which the change occurs. As of April 24, 2021, the remaining notional amount for interest rate swap agreements was $653,122, with the latest maturity date in fiscal 2028. During fiscal 2022, we entered into forward interest rate swap agreements with a notional amount of $179,818. As of April 30, 2022, the remaining notional amount for interest rate swap agreements was $574,144, with the latest maturity date in fiscal 2029. Net cash payments of $6,770 and $9,373 were made in fiscal 2022 and 2021, respectively, to settle a portion of our liabilities related to these interest rate swap agreements. These payments are reflected as cash outflows in the consolidated statements of cash flows within net cash used in operating activities. The following presents the fair value of derivative instruments included in the consolidated balance sheets: Derivative type Assets: Interest rate contracts Interest rate contracts Total asset derivatives Liabilities: Interest rate contracts Interest rate contracts Total liability derivatives Classification April 30, 2022 April 24, 2021 Prepaid expenses and other current assets Other non-current assets Other accrued liabilities Other non-current liabilities $ $ $ $ 3,875 $ 19,871 23,746 $ — 2,120 2,120 250 $ 10,013 10,263 $ 3,776 7,795 11,571 The following tables present the pre-tax effect of derivative instruments on the consolidated statements of operations and other comprehensive income (loss): Derivatives in cash flow hedging relationships Interest rate contracts Statements of operations Interest expense April 30, 2022 April 24, 2021 April 25, 2020 $ (1,363) $ (1,363) $ (10,458) Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss into Income (Effective Portion) Fiscal Year Ended Amount of Gain (Loss) Recognized in Income on Derivatives Fiscal Year Ended Derivatives not designated as hedging instruments Statements of operations Interest rate contracts Other income, net April 30, 2022 April 24, 2021 April 25, 2020 $ 15,835 $ 1,151 $ (18,712) There were no gains or losses recognized in other comprehensive income (loss) on cash flow hedging derivatives in fiscal 2022, 2021 or 2020. We recorded no ineffectiveness during fiscal 2022, 2021 or 2020. As of April 30, 2022, 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. 7. 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: 59 Level 1 – Quoted prices in active markets for identical assets and liabilities at the measurement date. 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: Assets: Cash equivalents DPP receivable - receivables securitization program DPP receivable - customer financing Derivative instruments Total assets Liabilities: April 30, 2022 Total Level 1 Level 2 Level 3 $ 3,186 $ 3,186 $ — $ — 195,764 125,332 23,746 — — — — — 23,746 195,764 125,332 — $ 348,028 $ 3,186 $ 23,746 $ 321,096 Derivative instruments $ 10,263 $ — $ 10,263 $ — Assets: Cash equivalents DPP receivable - receivables securitization program DPP receivable - customer financing Derivative instruments Total assets Liabilities: April 24, 2021 Total Level 1 Level 2 Level 3 $ 1,698 $ 1,698 $ — $ — 183,999 227,967 2,120 — — — — — 2,120 183,999 227,967 — $ 415,784 $ 1,698 $ 2,120 $ 411,966 Derivative instruments $ 11,571 $ — $ 11,571 $ — 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 60 value of our non-marketable equity securities to fair value when observable transactions of identical or similar securities occur, or due to an impairment. In fiscal 2022, we sold a portion of our investment in Vetsource, with a carrying value of $25,814, for $56,849. We recorded a pre-tax gain of $31,035 in gains on investments in our consolidated statements of operations and other comprehensive income (loss) as a result of this sale. The cash received of $56,849 is reported within investing activities in our consolidated statements of cash flows. In fiscal 2022, we also recorded a pre-tax non-cash gain of $31,035 to reflect the increase in the carrying value of the remaining portion of our investment in Vetsource, which was based on the selling price of the portion of the investment we sold for $56,849. This gain was recorded in gains on investments in our consolidated statements of operations and other comprehensive income (loss). The carrying value of the investment we owned following this sale was $56,849 and $25,814 as of April 30, 2022 and April 24, 2021, respectively. Concurrent with the sale completed in fiscal 2022, we obtained rights that will allow us, under certain circumstances, to require another shareholder of Vetsource to purchase our remaining shares. We recorded a pre-tax non-cash gain of $25,757 in gains on investments in our consolidated statements of operations and other comprehensive income (loss) as a result of this transaction. The carrying value of this put option as of April 30, 2022 is $25,757, and is reported within investments in our consolidated balance sheets. The aggregate gains on investments of $87,827 are reported within operating activities in our consolidated statements of cash flows. Concurrent with obtaining this put option, we also granted rights to the same Vetsource shareholder that would allow such shareholder, under certain circumstances, to require us to sell our remaining shares at fair value. In fiscal 2022, we sold a portion of our investment in Vets Plus with a carrying value of $4,009 for $17,101. We recorded a pre-tax gain of $13,092 in gains on investments in our consolidated statements of operations and other comprehensive income (loss) as a result of this sale. This $13,092 pre-tax gain is reported within operating activities in our consolidated statements of cash flows. The cash received of $17,101 is reported within investing activities in our consolidated statements of cash flows. The carrying value of the investment we owned following this sale was $2,355 and $2,355 as of April 30, 2022 and April 24, 2021, respectively. In fiscal 2020, we recorded a pre-tax gain of $34,334 related to one of our investments in other income, net in our consolidated statements of operations and other comprehensive income (loss). 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 April 25, 2020, this investment had a carrying value of $51,628. There were no fair value adjustments to such assets in fiscal 2021. Our debt is not measured at fair value in the consolidated balance sheets. The estimated fair value of our debt as of April 30, 2022 and April 24, 2021 was $489,777 and $610,811, respectively, as compared to a carrying value of $488,554 and $588,295 at April 30, 2022 and April 24, 2021, 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 April 30, 2022 and April 24, 2021. 8. Goodwill and Other Intangible Assets The changes in the carrying value of goodwill for each of our reportable segments for the fiscal year ended April 30, 2022 were as follows: Dental Animal Health Corporate Total Balance at April 24, 2021 $ 139,932 $ Acquisition Activity Foreign Currency Translation Balance at April 30, 2022 (299) $ 139,633 — — 997 — (299) $ 140,630 — $ 997 — 997 $ — — $ 139,932 $ 61 Balances of other intangible assets, excluding goodwill, were as follows: April 30, 2022 Accumulated Amortization Gross Net Gross April 24, 2021 Accumulated Amortization Net Unamortized - indefinite lived: Trade name $ 12,300 $ — $ 12,300 $ 12,300 $ — $ 12,300 Amortized - definite lived: 181,280 95,903 185,689 37,093 355,685 133,834 159,376 85,221 196,309 48,613 366,969 Customer relationships Trade names and trademarks 132,996 Developed technology and other 22,422 267,344 Total amortized intangible assets Total identifiable intangible assets $ 578,022 $ 325,408 $ 252,614 $ 574,217 $ 294,573 $ 279,644 17,532 240,314 48,225 325,408 49,976 294,573 72,398 561,917 65,757 565,722 With respect to the amortized intangible assets, future amortization expense is expected to approximate $37,357, $36,699, $36,694, $26,884 and $25,491 for fiscal 2023, 2024, 2025, 2026 and 2027, respectively. Actual amounts of amortization expense may differ from estimated amounts due to additional intangible asset acquisitions, changes in foreign currency exchange rates, impairment of intangible assets, accelerated amortization of intangible assets and other events. 9. Property and Equipment Property and equipment consisted of the following: Land Buildings Leasehold improvements Furniture and equipment Computer hardware and software Construction-in-progress (1) Property and equipment, gross Accumulated depreciation Property and equipment, net April 30, 2022 April 24, 2021 $ 11,341 $ 106,957 31,395 187,093 254,205 30,502 621,493 (408,353) 213,140 $ $ 12,014 118,582 31,125 188,594 244,537 17,665 612,517 (393,079) 219,438 (1) Includes $8,585 and $6,326 of unamortized development costs of software to be sold as of April 30, 2022 and April 24, 2021, respectively. 10. 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 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 costs for the fiscal year ended April 30, 2022 and April 24, 2021 were $35,646 and $34,712, respectively, which include variable lease costs and short-term lease costs, which were immaterial. 62 The following table presents future maturities of lease liabilities: 2023 2024 2025 2026 2027 After 2027 Total lease payments Less: imputed interest Present value of lease liabilities The following tables present other supplemental information related to leases: Cash paid for amounts included in the measurement of operating lease liabilities Lease assets obtained in exchange for new operating lease liabilities Weighted-average remaining lease term - operating leases Weighted-average discount rate - operating leases 11. Debt Our long-term debt consisted of the following: $ $ 31,165 21,793 12,650 6,168 2,941 1,222 75,939 (3,259) 72,680 Fiscal Year Ended April 30, 2022 April 24, 2021 $ $ 38,192 $ 31,132 $ 37,054 50,114 April 30, 2022 April 24, 2021 2.98 years 3.06 years 3.10 % 3.31 % Senior notes due fiscal 2022 (1) Senior notes due fiscal 2024 (1) Senior notes due fiscal 2025 (2) Senior notes due fiscal 2028 (3) Term loan due fiscal 2024 (4) Less: Deferred debt issuance costs Total debt Less: Current maturities of long-term debt Long-term debt Interest Rate April 30, 2022 April 24, 2021 Carrying Value 3.59 % $ 3.74 % 3.48 % 3.79 % 1.89 % — $ 33,000 117,500 40,000 300,000 (1,946) 488,554 — $ 488,554 $ 100,750 33,000 117,500 40,000 300,000 (2,955) 588,295 (100,750) 487,545 (1) (2) (3) (4) Issued in December 2011. Issued in March 2015. Issued in March 2018. Issued in December 2019, amended in February 2021. Interest rate is 1-month LIBOR plus 1.13% as of April 30, 2022. 63 Future principal payments due, based on stated contractual maturities for our long-term debt, were as follows as of April 30, 2022: Fiscal Year 2023 2024 2025 2026 2027 Thereafter Total $ — 333,000 117,500 — — 40,000 $ 490,500 In fiscal 2021, we entered into an amendment, restatement and consolidation of certain credit agreements with various lenders, including MUFG Bank, Ltd, as administrative agent. This amended and restated credit agreement (the “Credit Agreement”), dated February 16, 2021, consists of a $700,000 revolving credit facility and a $300,000 term loan facility, and will mature no later than February 2024. We used the facilities to refinance and consolidate certain credit agreements in existence prior to the Credit Agreement being executed, pay the fees and expenses incurred therewith, and finance our ongoing working capital and other general corporate purposes. As of April 30, 2022, $300,000 was outstanding under the Credit Agreement term loan at an interest rate of 1.89% and $29,000 was outstanding under the Credit Agreement revolving credit facility at an interest rate of 1.54%. In fiscal 2020, we repaid certain indebtedness totaling $373,750, and as a result, we recorded a pre-tax non-cash charge of $8,984 in fiscal 2020. This charge relates to the January 2014 forward interest rate swap agreement and accelerated amortization of debt issuance costs. We are subject to various financial covenants under our debt agreements including the maintenance of leverage 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 April 30, 2022. 12. Income Taxes The components of income (loss) before taxes were as follows: Income (loss) before taxes United States International Total April 30, 2022 Fiscal Year Ended April 24, 2021 April 25, 2020 $ $ 225,195 $ 166,251 $ (594,431) 41,059 33,680 4,024 266,254 $ 199,931 $ (590,407) 64 Significant components of income tax expense (benefit) were as follows: Current: Federal Foreign State Total current expense Deferred: Federal Foreign State Total deferred benefit Income tax expense (benefit) Fiscal Year Ended April 30, 2022 April 24, 2021 April 25, 2020 $ $ 46,964 $ 11,968 10,326 69,258 (3,918) (217) (583) (4,718) 64,540 $ 36,836 $ 9,975 8,771 55,582 18,300 7,501 4,959 30,760 (7,529) (362) (2,869) (10,760) 44,822 $ (25,918) 164 (6,046) (31,800) (1,040) On March 27, 2020, the “Coronavirus Aid, Relief and Economic Security (CARES) Act” was signed into law. The CARES Act, among other things, includes provisions relating to refundable employment tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. These benefits did not materially impact the Company’s effective tax rate for the fiscal years ended April 30, 2022, April 24, 2021 or April 25, 2020. Deferred tax assets and liabilities are included in other non-current assets and deferred income taxes on the consolidated balance sheets. Significant components of our deferred tax assets (liabilities) were as follows: Deferred tax assets: Employee compensation and benefits Inventory related items Foreign deferred assets, net Foreign tax credit Lease liability Accrued charitable contributions Other accrued liabilities Other Gross deferred tax assets Less: Valuation allowance Total net deferred tax assets Deferred tax liabilities LIFO reserve Amortizable intangibles Goodwill Property, plant, equipment Lease right-of-use assets Investments Other Total deferred tax liabilities Deferred net long-term income tax liability April 30, 2022 April 24, 2021 1 $ 9,352 $ 9,985 11,812 7,037 14,416 6,559 6,642 5,190 70,993 (18,615) 52,378 12,223 12,250 9,510 7,112 16,153 — 7,331 5,372 69,951 (15,960) 53,991 (20,965) (52,952) (15,727) (38,175) (14,103) (26,449) (3,401) (171,772) (119,394) $ (25,913) (61,023) (13,902) (39,454) (15,547) (16,353) (5,590) (177,782) (123,791) $ 1 Certain amounts were reclassified between categories to conform to the current period presentation. 65 At April 30, 2022, we had a U.S. foreign tax credit asset that will expire in four years. In addition, we have foreign deferred tax assets which would give rise to tax capital losses if triggered in the future. These losses can only be used against capital gain income. At this time, we believe that it is more likely than not that the foreign tax credit and potential capital loss carryforward attributes totaling $18,615 will not be fully utilized prior to expiration. As a result, a full valuation allowance has been established against these assets. With regard to unremitted earnings of foreign subsidiaries generated after December 31, 2017, we do not currently provide for U.S. taxes since we intend to reinvest such undistributed earnings indefinitely outside of the United States. Income tax expense (benefit) varies from the amount computed using the U.S. statutory rate. The reasons for this difference and the related tax effects are shown below. Tax at U.S. statutory rate State tax provision, net of federal benefit Effect of foreign taxes Goodwill impairment Legal settlement ESOP Other permanent differences Other Income tax expense (benefit) Fiscal Year Ended April 30, 2022 April 24, 2021 $ 55,912 $ 41,984 $ 9,176 3,199 — — (2,121) 944 (2,570) 64,540 $ 5,400 2,594 — — (2,286) 808 (3,678) 44,822 $ $ April 25, 2020 (123,987) (466) 7,277 107,999 11,088 (2,393) 1,533 (2,091) (1,040) We have accounted for the uncertainty in income taxes recognized in the financial statements in accordance with ASC Topic 740. This standard clarifies the separate identification and reporting of estimated amounts that could be assessed upon audit. The potential assessments are considered unrecognized tax benefits, because, if it is ultimately determined they are unnecessary, the reversal of these previously recorded amounts will result in a beneficial impact to our financial statements. As of April 30, 2022 and April 24, 2021, Patterson’s gross unrecognized tax benefits were $9,898 and $10,866, respectively. If determined to be unnecessary, these amounts (net of deferred tax assets of $1,786 and $2,055, respectively, related to the tax deductibility of the gross liabilities) would decrease our effective tax rate. The gross unrecognized tax benefits are included in other non-current liabilities on the consolidated balance sheets. A summary of the changes in the gross amounts of unrecognized tax benefits is shown below. Balance at beginning of period Additions for tax positions related to the current year Additions for tax positions of prior years Reductions for tax positions of prior years Statute expirations Settlements Balance at end of period April 30, 2022 April 24, 2021 $ 10,866 $ 1,001 42 (77) (1,527) (407) 9,898 $ $ 11,740 1,264 20 (220) (1,938) — 10,866 We also recognize both interest and penalties with respect to unrecognized tax benefits as a component of income tax expense. As of April 30, 2022 and April 24, 2021, we had recorded $1,583 and $2,026, respectively, for interest and penalties. These amounts are also included in other non-current liabilities on the consolidated balance sheets. These amounts, net of related deferred tax assets, if determined to be unnecessary, would decrease our effective tax rate. During the year ended April 30, 2022, we recorded as part of tax expense $229 related to an increase in our estimated liability for interest and penalties. Patterson files income tax returns, including returns for our subsidiaries, with federal, state, local and foreign jurisdictions. During fiscal 2021, the Internal Revenue Service (“IRS”) concluded an audit of the fiscal year ended 66 April 28, 2018. The IRS has either examined or waived examination for all periods up to and including our fiscal year ended April 28, 2018. In addition to the IRS, periodically, state, local and foreign income tax returns are examined by various taxing authorities. We do not believe that the outcome of these various examinations will have a material adverse impact on our financial statements. 13. Technology Partner Innovations, LLC ("TPI") In fiscal 2019, we entered into an agreement with Cure Partners to form TPI, which offers a cloud-based practice management software, NaVetor, to its customers. Patterson and Cure Partners each contributed net assets of $4,000 to form TPI. We 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. Patterson and Cure Partners each contributed additional net assets of $1,000 during fiscal 2022 to TPI. During fiscal 2022, 2021 and 2020, net loss attributable to the noncontrolling interest was $1,496, $872 and $921, respectively. Since TPI was formed, there have been no changes in ownership interests. As of April 30, 2022, we had noncontrolling interests of $959 on our consolidated balance sheets. 14. Segment and Geographic Data 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, 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 (loss). The costs to operate the fulfillment centers are allocated to the business units based on the through-put of the unit. The following tables present information about our reportable segments and the geographic areas in which we operate: Consolidated net sales United States United Kingdom Canada Total Dental net sales United States Canada Total Animal Health net sales United States United Kingdom Canada Total Corporate net sales United States Total April 30, 2022 Fiscal Year Ended April 24, 2021 April 25, 2020 $ 5,358,489 $ 4,877,070 $ 4,554,345 717,481 423,435 677,910 357,086 608,320 327,346 6,499,405 $ 5,912,066 $ 5,490,011 2,259,579 $ 2,107,521 $ 1,900,539 256,553 219,500 201,383 2,516,132 $ 2,327,021 $ 2,101,922 3,098,511 $ 2,744,498 $ 2,601,970 717,481 166,882 677,910 137,586 608,320 125,963 3,982,874 $ 3,559,994 $ 3,336,253 399 $ 399 $ 25,051 $ 25,051 $ 51,836 51,836 $ $ $ $ $ $ $ 67 Consolidated net sales Consumable Equipment and software Value-added services and other Total Dental net sales Consumable Equipment and software Value-added services and other Total Animal Health net sales Consumable Equipment and software Value-added services and other Total Corporate net sales Value-added services and other Total April 30, 2022 Fiscal Year Ended April 24, 2021 1 April 25, 2020 $ 5,248,040 $ 4,748,416 $ 4,374,829 920,424 330,941 822,063 341,587 749,390 365,792 6,499,405 $ 5,912,066 $ 5,490,011 1,424,677 $ 1,314,236 $ 1,141,189 800,144 291,311 730,928 281,857 677,677 283,056 2,516,132 $ 2,327,021 $ 2,101,922 3,823,363 $ 3,434,180 $ 3,233,640 120,280 39,231 91,135 34,679 71,713 30,900 3,982,874 $ 3,559,994 $ 3,336,253 399 $ 399 $ 25,051 $ 25,051 $ 51,836 51,836 $ $ $ $ $ $ $ 1 Certain sales were reclassified between categories to conform to the current period presentation. Operating income (loss) Dental Animal Health Corporate Consolidated operating income (loss) Depreciation and amortization Dental Animal Health Corporate $ $ $ April 30, 2022 Fiscal Year Ended April 24, 2021 April 25, 2020 180,212 $ 201,244 $ 114,403 (137,613) 88,123 (78,760) 157,002 $ 210,607 $ 168,304 (594,743) (145,680) (572,119) 13,495 $ 7,774 $ 44,561 23,936 45,771 23,004 8,434 49,958 23,790 82,182 Consolidated depreciation and amortization $ 81,992 $ 76,549 $ 68 Property and equipment, net United States United Kingdom Canada Total property and equipment, net Total assets Dental Animal Health Corporate Total assets 15. Stockholders’ Equity Dividends April 30, 2022 April 24, 2021 $ 200,839 $ 209,361 6,045 6,256 2,471 7,606 $ 213,140 $ 219,438 April 30, 2022 April 24, 2021 $ 851,746 $ 863,718 1,459,450 430,434 1,391,892 495,901 $ 2,741,630 $ 2,751,511 The following table presents our declared cash dividends per share on our common stock for the past three years. In fiscal 2022 and 2021, dividends were declared in the period presented and paid in the following quarter. Dividends were declared and paid in the same period during fiscal 2020. Fiscal year 2022 2021 2020 Share Repurchases Quarter 1 2 3 4 $ 0.26 $ 0.26 $ 0.26 $ 0.26 0.26 0.26 0.26 0.26 0.26 0.26 0.26 0.26 During fiscal 2022, we repurchased 1,032 shares of our common stock for $35,000, or an average of $33.90 per share. During fiscal 2021 and 2020, we had no repurchases of shares of our common stock. On March 16, 2021, the Board of Directors authorized a $500,000 share repurchase program through March 16, 2024. As of April 30, 2022, $465,000 remains available under the current repurchase authorization. ESOP In 1990, Patterson’s Board of Directors adopted a leveraged ESOP. In fiscal 1991, under the provisions of the plan and related financing arrangements, Patterson loaned the ESOP $22,000 (the “1990 note”) for the purpose of acquiring its then outstanding preferred stock, which was subsequently converted to common stock. The Board of Directors determines the contribution from the Company to the ESOP annually. The contribution is used to retire a portion of the debt, which triggers a release of shares that are then allocated to the employee participants. Shares of stock acquired by the plan are allocated to each participant who has completed 1000 hours of service during the plan year. In fiscal 2011, the final payment on the 1990 note was made and all remaining shares were released for allocation to participants. In fiscal 2002, Patterson’s ESOP and an ESOP sponsored by the Thompson Dental Company (“Thompson”) were used to facilitate the acquisition and merger of Thompson into Patterson. The net result of this transaction was an additional loan of $12,612 being made to the ESOP and the ESOP acquiring 666 shares of common stock. The loan bore interest at then-current rates, but principal did not begin to amortize until fiscal 2012. Beginning in fiscal 2012 and through fiscal 2020, an annual payment of $200 plus interest was due. In fiscal 2021, a final payment of the outstanding principal and interest balance was due and was made. Of the 666 shares issued in the transaction, 98 were previously allocated to Thompson employees. The remaining 568 shares began to be allocated in fiscal 2004 as interest was paid on the loan. 69 In September 2006, we entered into a third loan agreement with the ESOP and loaned $105,000 (the “2006 note”) for the sole purpose of enabling the ESOP to purchase shares of our common stock. The ESOP purchased 3,160 shares with the proceeds from the 2006 note. Interest on the unpaid principal balance accrued at a rate equal to six- month LIBOR, with the rate resetting semi-annually. Interest payments were not required during the period from and including September 11, 2006 through April 30, 2010. On April 30, 2010, accrued and unpaid interest was added to the outstanding principal balance under the note, with interest thereafter accruing on the increased principal amount. Unpaid interest accruing after April 30, 2010 was due and payable on each successive April 30. In fiscal 2021, a final payment of the outstanding principal and interest balance was made. In fiscal 2012, Patterson contributed $20,214 to the ESOP, which then purchased 844 shares for allocation to the participants. No shares secured by the 2006 note were released prior to fiscal 2011. At April 30, 2022, a total of 9,551 shares of common stock that have been allocated to participants remained in the ESOP and had a fair market value of $293,879. As of April 30, 2022, there were no committed-to-be-released shares and no suspense shares remaining related to the ESOP. Unearned ESOP shares are not considered outstanding for the computation of earnings per share until the shares are committed for release to the participants. During fiscal 2022, 2021 and 2020, the compensation expense recognized related to the ESOP was $0, $9,265 and $14,419, respectively. This compensation expense was computed based on the shares allocated method. In fiscal 2021, we allocated the remaining suspense shares to eligible ESOP participants. We will recognize an income tax deduction on the unearned ESOP shares released. Such deductions will be limited to the ESOP’s original cost to acquire the shares. We will no longer be contributing to the ESOP after fiscal 2021, and instead we have and will be making cash-based 401(k) contributions. Dividends on allocated shares are passed through to the ESOP participants. 16. Stock-based Compensation The consolidated statements of operations and other comprehensive income (loss) for fiscal 2022, 2021 and 2020 include pre-tax (after-tax) stock-based compensation expense of $23,805 ($18,686), $21,223 ($16,387) and $22,935 ($17,789), respectively. Pre-tax expense is included in operating expenses within the consolidated statements of operations and other comprehensive income (loss). As of April 30, 2022, the total unrecognized compensation cost related to non-vested awards was $22,718, and it is expected to be recognized over a weighted average period of approximately 1.3 years. 2015 Omnibus Incentive Plan In September 2015, our shareholders approved the 2015 Omnibus Incentive Plan ("Incentive Plan"), which was most recently amended and restated in September 2021. The aggregate number of shares of common stock that may be issued is 19,500. The Incentive Plan authorizes various award types to be issued under the plan, including stock options, restricted stock awards, restricted stock units, stock appreciation rights, performance awards, non- employee director awards, cash-based awards and other stock-based awards. We issue new shares for stock option exercises, restricted stock award grants and also for vesting of restricted stock units and performance stock units. Awards that expire or are canceled without delivery of shares generally become available for reissuance under the plan. At April 30, 2022, there were 10,515 shares available for awards under the Incentive Plan. As a result of the approval of the Incentive Plan, awards are no longer granted under any prior equity incentive plan, but all outstanding awards previously granted under such prior plans will remain outstanding and subject to the terms of such prior plans. At April 30, 2022, there were 307 shares outstanding under prior plans. Inducement Awards On June 29, 2018, we issued a combination of non-statutory stock options and restricted stock units outside our Incentive Plan to our Chief Financial Officer. The stock option covers 99 shares of our common stock, has an exercise price of $22.67 per share, and has a 10-year term. Such award vested to the extent of one-third of the award on the first anniversary of the date of grant, one-third of the award on the second anniversary of the date of grant, and the remaining one-third of the award on the third anniversary of the date of grant. The restricted stock 70 unit award covers 31 shares of our common stock. Such award vested to the extent of 50% of the award on the first anniversary of the date of grant and the remaining 50% of the award on the second anniversary of the date of grant. Stock Option Awards Stock options granted to employees expire no later than ten years after the date of grant. Awards typically vest over three or five years. The fair value of stock options granted was estimated as of the grant date using a Black-Scholes option-pricing model with the following assumptions: Expected dividend yield Expected stock price volatility Risk-free interest rate Expected life (years) Weighted average grant date fair value per share The following is a summary of stock option activity: Balance as of April 24, 2021 Granted Exercised Canceled Balance as of April 30, 2022 Vested or expected to vest as of April 30, 2022 Exercisable as of April 30, 2022 Fiscal Year Ended April 30, 2022 April 24, 2021 April 25, 2020 3.4 % 38.1 % 1.1 % 6.0 7.97 $ 4.4 % 34.6 % 0.4 % 6.0 4.60 $ 4.7 % 26.8 % 1.8 % 6.0 3.37 $ Number of Options Weighted- Average Exercise Price Aggregate Intrinsic Value 2,697 $ 290 (175) (75) 2,737 $ 2,727 $ 1,707 $ 28.31 30.74 22.76 43.01 28.52 $ 28.53 $ 30.39 $ 15,615 15,557 9,858 The weighted average remaining contractual lives of options outstanding and options exercisable as of April 30, 2022 were 6.8 and 6.0 years, respectively. Related to stock options exercised, the intrinsic value, cash received and tax benefits realized were $1,552, $3,975 and $238, respectively, in fiscal 2022; and $953, $3,399 and $129, respectively, in fiscal 2021. No stock options were exercised in fiscal 2020. Restricted Stock Restricted stock awards and restricted stock units granted to employees generally vest over a three or five year period. Restricted stock awards are also granted to non-employee directors annually and vest over one year. The grant date fair value of restricted stock awards and restricted stock units is based on the closing stock price on the day of the grant. The total fair value of restricted stock awards and restricted stock units that vested in fiscal 2022, 2021 and 2020 was $19,970, $11,672 and $8,788, respectively. 71 The following is a summary of restricted stock award activity: Outstanding at April 24, 2021 Granted Vested Forfeitures Outstanding at April 30, 2022 The following is a summary of restricted stock unit activity: Outstanding at April 24, 2021 Granted Vested Forfeitures Outstanding at April 30, 2022 Performance Unit Awards Restricted Stock Awards Weighted- Average Grant Date Fair Value Shares 54 $ 32 (53) (6) 27 $ 30.63 31.86 30.45 33.29 31.86 Restricted Stock Units Weighted- Average Grant Date Fair Value 25.65 30.79 26.42 26.92 27.24 Shares 1,241 $ 417 (586) (70) 1,002 $ In fiscal 2022, 2021 and 2020, we granted performance unit awards to certain executives which are earned at the end of a three-year period if certain operating goals are met. The number of shares to be received at vesting related to the fiscal 2022 and 2021 awards will be determined by performance measured over three fiscal year periods and ultimately modified by Patterson's total shareholder return ("TSR") relative to the performance of companies in the S&P Midcap 400 Index measured over a three-year period. We estimate the grant date fair value of the TSR awards using the Monte Carlo valuation model. We recognize expense over the requisite service period based on the outcome that is probable for these awards. The total fair value of performance unit awards that vested in fiscal 2021 was $4,227. No performance unit awards vested in fiscal 2022 and 2020. The following is a summary of performance unit award activity at target: Outstanding at April 24, 2021 Granted Vested Forfeitures and cancellations Outstanding at April 30, 2022 Employee Stock Purchase Plan ("ESPP") Performance Unit Awards Weighted- Average Grant Date Fair Value Shares 288 $ 150 — — 438 $ 22.94 29.67 — — 26.14 We sponsor an ESPP under which a total of 9,000 shares have been reserved for purchase by employees. Eligible employees may purchase shares at 85% of the lower of the fair market value of our common stock on the beginning of the annual offering period, or on the end of each quarterly purchase period, which occur on March 31, June 30, September 30 and December 31. The offering periods begin on January 1 of each calendar year and end on December 31 of each calendar year. At April 30, 2022, there were 1,387 shares available for purchase under the ESPP. 72 We estimate the grant date fair value of shares purchased under our ESPP using the Black-Scholes option pricing valuation model with the following assumptions: Expected dividend yield Expected stock price volatility Risk-free interest rate Expected life (years) Weighted average grant date fair value per share 17. Litigation Fiscal Year Ended April 30, 2022 April 24, 2021 April 25, 2020 3.6 % 28.6 % 0.3 % 0.6 6.79 $ 3.6 % 51.7 % 0.1 % 0.6 8.77 $ 5.1 % 34.3 % 1.6 % 0.6 4.98 $ 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 such 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 also may be subject to fines or penalties, and equitable remedies (including but not limited to the suspension, revocation or non-renewal of licenses). 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 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 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 individual 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. On September 28, 2020, the District Court granted plaintiffs’ motion to certify the class, appoint class representatives and appoint class counsel. On October 12, 2020, Patterson and the remaining individual defendant, Mr. Anderson, filed a Rule 23(f) petition for interlocutory appeal of the class certification order with the Eighth Circuit Court of Appeals in which the defendants sought clarification of the standard for rebutting the Basic presumption of class- wide reliance in securities class actions. On October 13, 2020, Patterson and Mr. Anderson filed a motion to stay 73 the underlying proceeding with the District Court pending the possibility of interlocutory appeal. On November 9, 2020, the District Court denied defendants’ motion to stay and on November 12, 2020, the Eighth Circuit Court of Appeals denied defendants’ Rule 23(f) petition. On May 17, 2021, Patterson and Mr. Anderson filed a motion for summary judgment and a motion to exclude plaintiff's expert. On August 27, 2021, we signed a memorandum of understanding to settle this case. Under the terms of the settlement, Patterson agreed to pay $63,000 to resolve the case. Although we agreed to settle this matter, we expressly deny the allegations of the complaint and all liability. Our insurers consented to the settlement and contributed an aggregate of $35,000 to fund the settlement and to reimburse us for certain costs and expenses of the litigation. As a result of the foregoing, we recorded a pre-tax reserve of $63,000 in other accrued liabilities in the condensed consolidated balance sheets in our Corporate segment during the first quarter of fiscal 2022 related to the probable settlement of this litigation. During the first quarter of fiscal 2022, we also recorded a receivable of $27,000 in prepaid expenses and other current assets in the condensed consolidated balance sheets in our Corporate segment related to probable insurance recoveries, which amount was paid into the litigation settlement escrow as required by the memorandum of understanding. The net expense of $36,000 was recorded in operating expenses in our condensed consolidated statements of operations and other comprehensive income. We recorded a gain of $8,000 during the second quarter of fiscal 2022 in our Corporate segment to account for our receipt of carrier reimbursement of previously expended fees and costs. The parties filed a stipulation of settlement during the second quarter of fiscal 2022. On February 3, 2022, the District Court entered an order preliminarily approving the settlement and directing the claims administrator to mail a notice of settlement and claim form to all class members. On June 9, 2022, the District Court held a final settlement hearing to determine whether the settlement should be approved. On June 10, 2022, the District Court entered an order granting final approval to the settlement. 18. Accumulated Other Comprehensive Loss ("AOCL") The following table summarizes the changes in AOCL as of April 30, 2022: AOCL at April 24, 2021 Other comprehensive income before reclassifications Amounts reclassified from AOCL AOCL at April 30, 2022 Cash Flow Hedges Currency Translation Adjustment $ $ (4,496) $ — 1,042 (3,454) $ (58,096) $ (19,966) — (78,062) $ Total (62,592) (19,966) 1,042 (81,516) The amounts reclassified from AOCL during fiscal 2022 represent gains and losses on cash flow hedges, net of taxes of $321. The impact to the consolidated statements of operations and other comprehensive income (loss) was an increase to interest expense of $1,363 for fiscal 2022. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 74 Item 9A. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15 and 15d-15 of the Securities and Exchange Act of 1934 (the “Exchange Act”). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of April 30, 2022. Disclosure controls and procedures are defined by Rules 13a-15(e) and 15d-15(e) of the Exchange Act as controls and other procedures that are designed to ensure that information required to be disclosed by Patterson in reports filed with the SEC under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in reports filed under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Management’s Annual Report on Internal Control Over Financial Reporting The management of Patterson Companies, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control system is designed to provide reasonable assurance to our management and Board of Directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we assessed the effectiveness of our internal control over financial reporting as of April 30, 2022, using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework (2013). Based on this assessment, management has concluded that our internal control over financial reporting was effective as of April 30, 2022. Ernst & Young LLP, the independent registered public accounting firm that audited our consolidated financial statements included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K, has issued an unqualified report on our internal control over financial reporting as of April 30, 2022. /s/ Mark S. Walchirk President and Chief Executive Officer /s/ Donald J. Zurbay Chief Financial Officer The report of our independent registered public accounting firm on internal control over financial reporting is included in Item 8 of this Annual Report on Form 10-K. Changes in Internal Control Over Financial Reporting 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 April 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Item 9B. OTHER INFORMATION None. Item 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS Not applicable. 75 PART III Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Information regarding the directors of Patterson is incorporated herein by reference to the descriptions set forth under the caption “Proposal No. 1 Election of Directors” in Patterson’s Proxy Statement for its Annual Meeting of Shareholders to be held on September 12, 2022 (the “2022 Proxy Statement”). Information regarding executive officers of Patterson is incorporated herein by reference to the information set forth under the caption “Executive Officers” in the 2022 Proxy Statement. Information regarding compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated herein by reference to the information set forth under the caption “Delinquent Section 16(a) Reports” in the 2022 Proxy Statement. The information called for by Item 10, as to the audit committee and the audit committee financial expert, is set forth under the captions “Proposal No. 1 Election of Directors” and “Our Board of Directors and Committees” in the 2022 Proxy Statement and such information is incorporated by reference herein. Code of Ethics We have adopted and published a Code of Conduct, which provides an overview of the laws, regulations, and company policies that apply to our employees and our directors and is intended to comply with applicable NASDAQ Marketplace Rules. Our Code of Conduct is available on our website (www.pattersoncompanies.com) under the section “Investor Relations – Corporate Governance.” We intend to satisfy the disclosure requirement of Form 8-K regarding an amendment to, or waiver from, a provision of our Code of Conduct that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions and that relates to any element of the code of ethics definition enumerated in Item 406(b) of Regulation S- K by posting such information on our website at the address and location specified above. Item 11. EXECUTIVE COMPENSATION Information regarding executive compensation is incorporated herein by reference to the information set forth under the caption “Executive Compensation” in the 2022 Proxy Statement. Information regarding director compensation is incorporated herein by reference to the information set forth under the caption “Non-Employee Director Compensation” in the 2022 Proxy Statement. Information regarding the compensation committee and its report is incorporated herein by reference to the information set forth under the caption “Our Board of Directors and Committees" and "Executive Compensation - Compensation and Human Capital Committee Report” in the 2022 Proxy Statement. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Information regarding securities authorized for issuance under equity compensation plans is incorporated herein by reference to the information set forth under the caption “Equity Compensation Plan Information” in the 2022 Proxy Statement. Information regarding the security ownership of certain beneficial owners and management is incorporated herein by reference to the information set forth under the caption “Security Ownership of Certain Beneficial Owners and Management” in the 2022 Proxy Statement. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE Information regarding transactions with related persons is incorporated herein by reference to the information set forth under the caption “Certain Relationships and Related Transactions” in the 2022 Proxy Statement. Information regarding director independence is incorporated herein by reference to the information set forth under the caption “Our Board of Directors and Committees” in the 2022 Proxy Statement. Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Information relating to principal accounting fees and services and pre-approval policies and procedures is incorporated herein by reference to the information set forth under the caption “Proposal No. 3 Ratification of Selection of Independent Registered Public Accounting Firm – Principal Accountant Fees and Services” in the 2022 Proxy Statement. 76 PART IV Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) 1. Financial Statements. The following Consolidated Financial Statements and supplementary data of Patterson and its subsidiaries are included in Part II, Item 8: Reports of Independent Registered Public Accounting Firm (PCAOB ID: 42) Consolidated Balance Sheets Consolidated Statements of Operations and Other Comprehensive Income (Loss) Consolidated Statement of Changes in Stockholders’ Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements 2. Financial Statement Schedules. The following financial statement schedule is filed herewith: Schedule II – Valuation and Qualifying Accounts Schedules other than that listed above have been omitted because they are not applicable or the required information is included in the financial statements or notes thereto. 3. Exhibits. Exhibit Document Description 3.1 3.2 4.1 4.2 10.1 10.2 10.3 10.4 10.5 Restated Articles of Incorporation (incorporated by reference to our Quarterly Report on Form 10-Q, filed September 9, 2004 (File No. 000-20572)). Amended and Restated Bylaws (incorporated by reference to our Current Report on Form 8-K, filed December 13, 2013 (File No. 000-20572)). Specimen form of Common Stock Certificate (incorporated by reference to our Quarterly Report on Form 10-Q, filed September 9, 2004 (File No. 000-20572)). Description of Securities (incorporated by reference to our Annual Report on Form 10- K, filed June 24, 2020 (File No. 000-20572). Patterson Companies, Inc. Summary of Material Terms of Management Incentive Compensation Plan for Fiscal 2022 (filed herewith).** Patterson Companies, Inc. Amended and Restated Employee Stock Purchase Plan (incorporated by reference to Annex A to our Definitive Schedule 14A (Proxy Statement), filed August 2, 2019 (File No. 000-20572)).** Patterson Dental Company Amended and Restated Employee Stock Ownership Plan, effective May 1, 2001 (incorporated by reference to our Annual Report on Form 10-K, filed July 25, 2002 (File No. 000-20572)).** Deferred Profit Sharing Plan for the Employees of Patterson Dental Canada Inc. (incorporated by reference to our Definitive Proxy Statement, filed July 28, 2008 (File No. 000-20572)).** Patterson Companies, Inc. Amended and Restated Equity Incentive Plan (incorporated by reference to our Definitive Proxy Statement, filed August 7, 2012 (File No. 000-20572)).** 77 10.6 10.7 10.8 10.9 10.10 10.11 10.12 10.13 10.14 10.15 10.16 10.17 10.18 10.19 10.20 10.21 Patterson Companies, Inc. 2014 Sharesave Plan (incorporated by reference to our Definitive Proxy Statement, filed August 5, 2014 (File No. 000-20572)).** Patterson Companies, Inc. Amended and Restated 2015 Omnibus Incentive Plan (incorporated by reference to Annex B to our Definitive Schedule 14A (Proxy Statement), filed July 30, 2021 (File No. 000-20572)).** The Executive Nonqualified Excess Plan (incorporated by reference to our Annual Report on Form 10-K, filed June 24, 2020 (File No. 000-20572)).** Form of Non-Statutory Stock Option Agreement under the Amended and Restated 2015 Omnibus Incentive Plan (incorporated by reference to our Annual Report on Form 10-K, filed June 23, 2021 (File No. 000-20572).** Form of Restricted Stock Unit Agreement for Directors under the Amended and Restated 2015 Omnibus Incentive Plan (incorporated by reference to our Annual Report on Form 10-K, filed June 23, 2021 (File No. 000-20572).** Form of Restricted Stock Unit Agreement for Executive Officers under the Amended and Restated 2015 Omnibus Incentive Plan (incorporated by reference to our Annual Report on Form 10-K, filed June 23, 2021 (File No. 000-20572).** Form of Performance Share Unit Award Agreement under the Amended and Restated 2015 Omnibus Incentive Plan (incorporated by reference to our Annual Report on Form 10-K, filed June 23, 2021 (File No. 000-20572).** Employment Agreement by and between Patterson Companies, Inc. and Mark S. Walchirk, dated October 23, 2017 (incorporated by reference to our Current Report on Form 8-K, filed October 24, 2017 (File No. 000-20572)).** Inducement RSU Award Agreement by and between Patterson Companies, Inc. and Mark S. Walchirk, dated December 1, 2017 (incorporated by reference to our Annual Report on Form 10-K, filed June 27, 2018 (File No. 000-20572)).** Amendment No. 1 to Employment Agreement by and between Patterson Companies, Inc. and Mark S. Walchirk, dated April 17, 2020 (incorporated by reference to our Current Report on Form 8-K, filed April 20, 2020 (File No. 000-20572)).** Offer Letter by and between Patterson Companies, Inc. and Donald J. Zurbay, effective May 17, 2018 (incorporated by reference to our Current Report on Form 8-K, filed May 23, 2018 (File No. 000-20572)).** Form of Inducement, Severance & Change in Control Agreement by and between Patterson Companies, Inc. and Donald J. Zurbay (incorporated by reference to our Current Report on Form 8-K, filed May 23, 2018 (File No. 000-20572)).** Form of Inducement Non Statutory Stock Option Agreement by and between Patterson Companies, Inc. and Donald J. Zurbay (incorporated by reference to our Current Report on Form 8-K, filed May 23, 2018 (File No. 000-20572)).** Form of Inducement RSU Agreement by and between Patterson Companies, Inc. and Donald J. Zurbay (incorporated by reference to our Current Report on Form 8-K, filed May 23, 2018 (File No. 000-20572)).** Inducement, Severance and Change-in-Control Agreement by and between Patterson Companies, Inc. and Eric Shirley, dated February 4, 2019 (incorporated by reference to our Annual Report on Form 10-K, filed June 26, 2019 (File No. 000-20572).** Restrictive Covenants, Severance and Change-in-Control Agreement by and between Patterson Companies, Inc. and Kevin M. Pohlman, dated June 11, 2018 (incorporated by reference to our Current Report on Form 8-K, filed June 12, 2018 (File No. 000-20572)).** 78 10.22 10.23 10.24 10.25 10.26 10.27 10.28 10.29 10.30 10.31 10.32 10.33 Restrictive Covenants, Severance and Change-in-Control Agreement by and between Patterson Companies, Inc. and Les B. Korsh, dated June 11, 2018 (incorporated by reference to our Current Report on Form 8-K, filed June 12, 2018 (File No. 000-20572)).** Inducement, Severance and Change-in-Control Agreement by and between Patterson Companies, Inc. and Andrea Frohning, dated May 21, 2018 (incorporated by reference to our Annual Report on Form 10-K, filed June 26, 2019 (File No. 000-20572).** Inducement, Severance and Change-in-Control Agreement by and between Patterson Companies, Inc. and Tim E. Rogan, dated July 19, 2021 (filed herewith).** Receivables Sale Agreement, dated as May 10, 2002, by and among Patterson Dental Supply, Inc., Webster Veterinary Supply, Inc., and PDC Funding Company, LLC, conformed through Amendment No. 4, dated as of October 9, 2018 (incorporated by reference to our Quarterly Report on Form 10-Q, filed March 6, 2019 (File No. 000-20572)). Amended and Restated Receivables Sales Agreement dated August 12, 2011 by and among Patterson Dental Supply, Inc., Webster Veterinary Supply, Inc. and PDC Funding Company II, LLC (incorporated by reference to our Annual Report on Form 10-K, filed June 24, 2015 (File No. 000-20572)). Note Purchase Agreement, dated December 8, 2011, by and among Patterson Companies, Inc., Patterson Medical Holdings, Inc., Patterson Medical Supply, Inc., Patterson Dental Holdings, Inc., Patterson Dental Supply, Inc., Webster Veterinary Supply, Inc., Webster Management, LP, conformed through Third Amendment, dated April 24, 2020 (incorporated by reference to our Annual Report on Form 10-K, filed June 24, 2020 (File No. 000-20572)). Note Purchase Agreement, dated March 23, 2015, by and among Patterson Companies, Inc., Patterson Medical Holdings, Inc., Patterson Medical Supply, Inc., Patterson Dental Holdings, Inc., Patterson Dental Supply, Inc., Patterson Veterinary Supply, Inc., and Patterson Management, LP, conformed through Second Amendment, dated April 24, 2020 (incorporated by reference to our Annual Report on Form 10-K, filed June 24, 2020 (File No. 000-20572)). Second Amended and Restated Credit Agreement dated as of February 16, 2021, by and among Patterson Companies, Inc., as borrower, MUFG Bank, Ltd., as administrative agent, and certain lenders party thereto (incorporated by reference to our Current Report on Form 8-K, filed February 16, 2021 (File No. 000-20572)). Note Purchase Agreement, dated as of March 29, 2018, among Patterson Companies, Inc., and certain of its named subsidiaries as borrowers, and various private lenders, conformed through Second Amendment, dated April 24, 2020 (incorporated by reference to our Annual Report on Form 10-K, filed June 24, 2020 (File No. 000-20572)). Receivables Sale Agreement, dated as of July 24, 2018, by and between Patterson Dental Supply, Inc., as seller, and PDC Funding Company III, LLC, as buyer (incorporated by reference to our Current Report on Form 8-K, filed July 25, 2018 (File No. 000-20572)). Loan Agreement, dated December 20, 2019, among Patterson Companies, Inc., the lenders from time to time parties thereto, and MUFG Bank Ltd., as administrative agent (incorporated by reference to our Current Report on Form 8-K, filed December 23, 2019 (File No. 000-20572). 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). 79 10.34 10.35 10.36 10.37 21 23 31.1 31.2 32.1 32.2 101 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 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 agent, conformed through Twenty-First Amendment dated August 5, 2021 (incorporated by reference to our Quarterly Report on Form 10-Q, filed September 9, 2021 (File No. 000-20572)). 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, conformed through First Amendment, dated July 19, 2021 (incorporated by reference to our Quarterly Report on Form 10-Q, filed September 9, 2021 (File No. 000-20572)). 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 Eighth Amendment, dated August 20, 2021 (incorporated by reference to our Quarterly Report on Form 10-Q, filed September 9, 2021 (File No. 000-20572)). 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, conformed through Sixth Amendment, dated August 20, 2021 (incorporated by reference to our Quarterly Report on Form 10-Q, filed September 9, 2021 (File No. 000-20572)). Subsidiaries (filed herewith). Consent of Independent Registered Public Accounting Firm (filed herewith). Certification of the Chief Executive Officer pursuant to Rules 13a-4(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). Certification of the Chief Financial Officer pursuant to Rule 13a-4(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). 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 (filed herewith). 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 (filed herewith). (Filed Electronically) The following financial information from our Annual Report on Form 10-K for fiscal 2022, formatted in Inline eXtensible Business Reporting Language (iXBRL): (i) the consolidated balance sheets, (ii) the consolidated statements of operations and other comprehensive income (loss), (iii) the consolidated statements of changes in stockholders’ equity, (iv) the consolidated statements of cash flows and (v) the notes to the consolidated financial statements.(*) (*) The iXBRL related information in Exhibit 101 to this Annual Report on Form 10-K 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. ** Indicates management contract or compensatory plan or agreement. (b) See Index to Exhibits. (c) See Schedule II. Item 16. Form 10-K Summary. None. 80 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS PATTERSON COMPANIES, INC. (In thousands) Balance at Beginning of Period Charged to Costs and Expenses Charged to Other Accounts Deductions Balance at End of Period Year ended April 30, 2022 Deducted from asset accounts: Allowance for doubtful accounts LIFO inventory adjustment Inventory obsolescence reserve Total inventory reserve 6,138 $ $ $ 120,775 $ 29,629 $ 150,404 $ 2,769 $ 10,184 $ 61,647 71,831 $ — $ — $ — — $ 2,994 $ — $ 69,733 69,733 $ 5,913 130,959 21,543 152,502 Year ended April 24, 2021 Deducted from asset accounts: Allowance for doubtful accounts LIFO inventory adjustment Inventory obsolescence reserve Total inventory reserve $ $ 5,123 $ 99,726 $ 25,526 $ 125,252 $ 2,559 $ 21,049 $ 45,761 66,810 $ — $ — $ — — $ 1,544 $ — $ 41,658 41,658 $ 6,138 120,775 29,629 150,404 Year ended April 25, 2020 Deducted from asset accounts: Allowance for doubtful accounts LIFO inventory adjustment Inventory obsolescence reserve Total inventory reserve $ $ 6,772 $ 91,342 $ 10,099 $ 101,441 $ 2,008 $ 8,384 $ 27,405 35,789 $ — $ — $ — — $ 3,657 $ — $ 11,978 11,978 $ 5,123 99,726 25,526 125,252 81 Pursuant to the requirements of section 13 or 15(d) 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. SIGNATURES Dated: June 29, 2022 PATTERSON COMPANIES, INC. By /s/ Mark S. Walchirk Mark S. Walchirk President and Chief Executive Officer, Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ Mark S. Walchirk Mark S. Walchirk /s/ Donald J. Zurbay Donald J. Zurbay /s/ John D. Buck John D. Buck /s/ Alex N. Blanco Alex N. Blanco /s/ Jody H. Feragen Jody H. Feragen /s/ Robert C. Frenzel Robert C. Frenzel /s/ Philip G. McKoy Philip G. McKoy /s/ Ellen A. Rudnick Ellen A. Rudnick /s/ Neil A. Schrimsher Neil A. Schrimsher President and Chief Executive Officer, Director (Principal Executive Officer) Date June 29, 2022 Chief Financial Officer (Principal Financial and Accounting Officer) June 29, 2022 Chairman of the Board June 29, 2022 June 29, 2022 June 29, 2022 June 29, 2022 June 29, 2022 June 29, 2022 June 29, 2022 Director Director Director Director Director Director 82 CORPORATE INFORMATION Corporate Headquarters 1031 Mendota Heights Road St. Paul, MN 55120-1419 651.686.1600 www.pattersoncompanies.com Independent Auditors Ernst & Young LLP Minneapolis, MN Legal Counsel Taft Stettinius & Hollister LLP Minneapolis, MN Stock Transfer Agent EQ Shareowner Services 1110 Centre Pointe Curve, Suite 101 Mendota Heights, MN 55120-4100 1-800-401-1957 Investor Relations Contact John M. Wright Vice President, Investor Relations Annual Meeting The annual meeting of shareholders of Patterson Companies, Inc. will be held virtually at 4:30 p.m., Central Daylight Saving Time, on Monday, September 12, 2022. To attend the annual meeting online, listen to the meeting live, submit questions and vote, please visit www.virtualshareholdermeeting.com/ PDCO2022. Form 10-K A copy of our annual report on Form 10-K is available to shareholders without charge in the investor relations section of the Patterson website (www.pattersoncompanies.com) or by writing to: John M. Wright, Vice President, Investor Relations at the corporate headquarters. Directors John D. Buck ( C, D) Chairman of the Board, Chief Executive Officer Whitefish Ventures, LLC Mark S. Walchirk President and Chief Executive Officer Patterson Companies, Inc. Executive Officers Mark S. Walchirk President and Chief Executive Officer Donald J. Zurbay Chief Financial Officer Andrea L. Frohning Chief Human Resources Officer Alex N. Blanco ( B, C) Former Executive Vice President and Chief Supply Chain Officer Ecolab Inc. Jody H. Feragen ( A, B) Former Executive Vice President and Chief Financial Officer Hormel Foods Corporation Les B. Korsh Chief Legal Officer and Corporate Secretary Kevin M. Pohlman President, Animal Health Tim E. Rogan President, Dental Robert C. Frenzel ( A, D) Chairman, President and Chief Executive Officer Xcel Energy Inc. Philip G. McKoy ( A, C) Chief Information Officer Optum Ellen A. Rudnick ( B, D) Senior Advisor on Entrepreneurship University of Chicago Booth School of Business Neil A. Schrimsher ( B, C, D) President and Chief Executive Officer Applied Industrial Technologies, Inc. (A) Member of Audit and Finance Committee (B) Member of Compensation and Human Capital Committee (C) Member of Compliance Committee (D) Member of Governance and Nominating Committee The paper for this publication is FSC® certified and meets the strict standards of the Forest Stewardship Council®, which promotes environmentally appropriate, socially beneficial and economically viable management of the world’s forests. E Printed on recycled paper. Please recycle. We are PASSIONATE. We are excited about our business and authentic in our motivation. We are FOCUSED. We deliver results the right way. We are clear on our priorities, set high expectations and are accountable for our commitments to our customers and each other. We are PEOPLE-FIRST. We build lasting relationships and invest in our team members, customers and partners. We are ALWAYS ADVANCING. We continually seek fresh ideas and innovative solutions for our business and our customers. We challenge ourselves and strive to become better every day. Patterson Companies, Inc. | 1031 Mendota Heights Road | St. Paul, MN 55120-1419 | 651.686.1600 | pattersoncompanies.com WE ARE PATTERSON

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