FinanceLooker

Excrept from filing document 2024-04-27

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 28 2023 was approximately 2 822 000 000 For purposes of this calculation all of the registrant s executive officers and directors are deemed affiliates
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 27 2024 are incorporated by reference into Part III
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
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
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
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
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
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 25 000 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
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 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
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
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
In the U S and Canadian animal health supply market our primary competitors are Cencora 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 have become licensed as veterinary mail order pharmacies which enables them 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 Cencora MWI Animal Health 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
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
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
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
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
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
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 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
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 predominant platforms for ordering today include www pattersondental com 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
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
We intend to continue to grow by hiring sales representatives hiring and training 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 our operating segments are well positioned to take advantage of expected continued consolidation in our markets
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 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 210 million in fiscal 2024 respectively
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 2024 2023 and 2022 Patterson Dental s top ten supply vendors accounted for approximately 60 58 and 56 of the total cost of sales respectively The top vendor accounted for 22 24 and 24 of the total cost of sales in fiscal 2024 2023 and 2022 respectively
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 of which approximately 2 000 are private label Products are 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 biologicals diagnostics prescription and non prescription diets nutritionals consumable supplies and equipment 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 home delivery solutions to allow us to evolve with the market Net sales and operating income were 4 1 billion and 139 million in fiscal 2024 respectively
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 2024 2023 and 2022 Patterson Animal Health s top 10 manufacturers comprised approximately 66 66 and 66 of the total cost of sales respectively and the single largest supplier comprised approximately 24 24 and 23 in of the total cost of sales 2024 2023 and 2022 respectively
During fiscal 2024 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 2024 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
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
The COVID 19 pandemic had a significant impact on our businesses in fiscal 2021 as we implemented cost reduction measures in response to closures and other steps taken by governmental authorities 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 Within our Dental segment supply chain disruptions and an increased demand for PPE initially resulted in back orders of 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
In our markets of the U S Canada and the UK restrictive measures have now been lifted and the World Health Organization declared an end to the COVID 19 pandemic Concerns remain that our markets could see a resurgence of COVID 19 cases or the emergence of new wide spread public health outbreaks triggering additional impacts on our businesses There is continued uncertainty around the duration and ultimate impact of COVID 19 and other global health concerns
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
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 which could cause our stock price to decline Quarterly results may be materially adversely affected by a variety of factors including
general market and economic conditions as discussed in Item 1A Risk Factors including macro economic conditions increased fuel and energy costs consumer confidence as well as conditions specific to the supply and distribution industry and related industries
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 Additionally our policies and procedures may not always protect us from reckless or criminal acts committed by our employees or our agents When we discover situations of non compliance we seek to remedy them and bring the affected area back into compliance
President Biden s administration the Biden Administration has indicated that it will be more aggressive in its pursuit of alleged violations of law and has revoked certain guidance that would have limited governmental use of informal agency guidance to pursue potential violations and has stated that it is 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 results of operations and financial condition
Federal state and certain foreign governments have also increased enforcement activity in the health care sector particularly in areas of fraud and abuse anti bribery and anti corruption controlled substances handling medical device regulations and data privacy and security standards Our businesses are generally subject to numerous laws and regulations that could impact our financial performance Failure to comply with such laws or regulations could be punishable by criminal or civil sanctions which could materially adversely affect our business
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 pharmaceuticals and medical devices
Certain of our businesses are required to register for permits and or licenses with and comply with operating and security standards and regulations of the U S Food and Drug Administration FDA the U S Department of Agriculture USDA the Environmental Protection Agency EPA the Food Safety Inspection Service FSIS the U S Drug Enforcement Administration DEA the Federal Trade Commission FTC the U S Department of Justice DOJ the Occupational Safety and Health Administration OSHA 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 as defined below own pharmacy operations or install maintain or repair equipment
Generally all animal health pharmaceuticals are subject to pre market review and must be shown to be safe effective and produced by a consistent method of manufacture as defined under the Federal Food Drug and Cosmetic Act as amended the FDC Act
Animal supplements generally are not required to obtain pre market approval from the CVM although they may be treated as food Any substance that is added to or is expected to become a component of animal food must be used in accordance with food additive regulations unless it is generally recognized as safe under the conditions of its intended use Alternatively the FDA may consider animal supplements to be drugs The FDA has agreed to exercise enforcement discretion for such supplements if each such supplement meets certain conditions
Additionally dental and medical devices we sell in the U S are generally classified by the FDA into a category that renders them subject to the same controls that apply to all medical devices including regulations regarding alternation misbranding notification record keeping and good manufacturing practices
The USDA s Center for Veterinary Biologics is responsible for the regulation of animal health vaccines including immunotherapeutics Marketing of imported veterinary biological products in the U S requires a U S Veterinary Biological Product Permit Veterinary biologics are subject to pre market review and must be shown to be pure safe potent and efficacious as defined under the Virus Serum Toxin Act The USDA requires post licensing monitoring of these products
Within the U S pesticide products that are approved by the EPA must also be approved by individual state pesticide authorities before distribution in that state Post approval monitoring of products is required with reports provided to the EPA and some state regulatory agencies
The FDA is authorized to determine the safety of substances including generally recognized as safe substances food additives and color additives as well as prescribe their safe conditions of use However although the FDA has the responsibility for determining the safety of substances the FSIS still retains under the tenets of the Federal Meat Inspection Act and the Poultry Products Inspection Act and their implementing regulations the authority to determine whether new substances and new uses of previously approved substances are suitable for use in meat and poultry products
Distributors 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 recent times
Advertising and promotion of animal health products that are not subject to approval by the CVM may be challenged by the FTC as well as by state attorneys general and by consumers under state consumer protection laws
The FTC will find an advertisement to be deceptive if it contains a representation or omission of fact that is likely to mislead consumers acting reasonably under the circumstances the representation or omission is material and if the advertiser does not possess and rely upon a reasonable basis such as competent and reliable evidence substantiating the claim
We are also subject to foreign trade controls administered by certain U S government agencies including the Bureau of Industry and Security within the Commerce Department Customs and Border Protection within the Department of homeland Security and the U S Department of the Treasury s Office of Foreign Assets Control OFAC
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
Since the U K formally left the EU on January 31 2020 the Veterinary Medicines Directorate VMD became the main regulatory body in the U K responsible for regulating and controlling veterinary pharmaceuticals The U K and the EU reached a trade deal in December 2020 which went into effect in May 2021 The agreement includes regulatory and customs cooperation mechanisms as well as provisions supporting open and fair competition The Northern Ireland protocol which is part of the trade deal requires that VMD follow EU rules in Northern Ireland Laws applying to the rest of the U K could now diverge but currently remain largely aligned
Among the U S federal laws applicable to us are the Controlled Substances Act the FDC Act 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 procurement 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 FDA s 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 was enacted in November 2013 and had a planned phase in schedule over a period of 10 years resulting in a national electronic interoperable system to identify and trace certain prescription drugs as they are distributed in the U S that went into effect on November 27 2023 Those DSCSA requirements that were scheduled to change on November 27 2023 and include requiring trading partners to provide receive and maintain documentation about products and ownership only electronically and not via paper are now subject to a one year stabilization period announced by the FDA through two guidance documents in late August 2023 The FDA is permitting the stabilization period to accommodate an additional year until November 27 2024 to allow trading partners to implement troubleshoot and mature their electronic versus paper interoperable systems during which time the FDA does not intend to take action to enforce the requirements for the interoperable electronic package level product tracing Additionally the FDA announced that it does not intend to take action to enforce the portion of the FDC Act with respect to drug product that is introduced in a transaction into commerce by the product s manufacturer or repackager before November 27 2024 and for subsequent transactions of such product through the product s expiry The FDA states this stabilization period is intended to avoid disruption to the supply chain and ensure continued patient access to drug products as trading partners move towards full implementation of the DSCSA s enhanced drug security requirements The law s track and trace requirements applicable to manufacturers wholesalers third party logistics providers e g trading partners repackagers and dispensers e g pharmacies of prescription drugs took effect in January 2015 and as stated 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 FDA issued a proposed rule establishing wholesaler and 3PL national standards for licensing and other requirements in February 2022 but that rule has not yet been finalized
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 for medical devices 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 completed 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 On July 22 2022 the FDA posted the final guidance regarding the Global Unique Device Identification Database called Unique Device Identification Policy Regarding Compliance Dates for Class I and Unclassified Devices Direct Marketing and Global Unique Device Identification Database Requirements for Certain Devices 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 In addition our animal health business is subject to the Pasteurized Milk Ordinance which is a set of minimum standards established by the FDA for the regulation of the production processing and packaging of Grade A Milk
As a distributor of controlled substances we are required under the Controlled Substances Act to obtain and renew annually registrations for our facilities from the 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 recent times Non controlled substances can also become subject to these controls For example law enforcement agencies are pressing for xylazine which is an FDA approved prescription veterinary tranquilizer found in certain analgesic products we distribute to be listed as a federal controlled substance and several states have already done so which measures are likely to increase our cost of distributing such products 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
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 human organs as defined in the regulations for valuable consideration while generally permitting payments for the reasonable costs incurred in their procurement processing storage and distribution We are also subject to foreign government regulation of such products
Certain of our businesses are subject to various additional federal state local and foreign laws and regulations including with respect to the sale transportation importation storage handling and disposal of hazardous or potentially hazardous substances forever chemicals such as per and polyfluoroalkyl 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 In addition the Toxic Substances Control Act TSCA is a law administered by the EPA through which the EPA evaluates potential risks from new and existing chemicals and acts to address any unreasonable risks chemicals may have on human health and the environment The TSCA
Proposition 65 Prop 65 also known as the Safe Drinking Water and Toxic Enforcement Act of 1986 protects California s drinking water sources from contamination by chemicals known to cause cancer birth defects or other reproductive harm Prop 65 requires businesses to inform Californians about exposures to such chemicals which can be found in products purchased in homes and workplaces or released into the environment Prop 65 also prohibits California businesses from knowingly discharging significant amounts of listed chemicals into sources of drinking water
The Animal Medicinal Drug Use Clarification Act of 1994 AMDUCA permits veterinarians to prescribe extralabel uses of certain approved new animal drugs and approved human drugs for animals under certain conditions Extralabel use refers to the use of an approved drug in a manner that is not in accordance with approved label directions The veterinarians to whom we distribute products generally are subject to the AMDUCA and its implementing regulations
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 our reporting for 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 results of operations and financial condition
Veterinary compounding pharmacies must comply with state and federal laws that govern the relationship between pharmacies and referral sources The U S Federal Anti Kickback Statute AKS imposes criminal penalties against individuals and entities that pay or receive remuneration in return for referring an individual for service paid under a federal health care program Veterinary compounding pharmacies have historically avoided scrutiny under the AKS because no federal programs are involved in veterinary compounding funding However most states have enacted statutes and regulations that mirror the AKS and in some cases are even broader than the AKS
Various states have enacted business and insurance regulations prohibiting referral arrangements that result in the offer or acceptance of any rebate refund commission discount or other consideration as compensation or inducement for referring patients clients or customers These regulations often encompass all health care related professions including pharmacies and veterinary practices
Additionally the promotion of regulated animal health products is controlled by regulations in many countries These rules generally restrict advertising and promotion to those claims and uses that have been reviewed and endorsed by the applicable agency
Our buildings are generally subject to the standards established by the National Fire Protection Association a nonprofit organization established to maintain standards and codes for fire electrical and related building safety
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
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 These laws and regulations govern different interactions including but not limited to those
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 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 care 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 integrity agreement or 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 and other healthcare professionals on the other As a result we regularly review and revise our marketing practices as necessary to facilitate compliance 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
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 An ACA lawsuit decided by 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 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 were 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 Payments 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
Initiatives sponsored by government agencies legislative bodies and the private sector to limit the growth of healthcare expenses generally are ongoing in markets where we do business It is not possible to predict at this time the long term impact of such cost containment measures on our future business
Additionally the regulation of public and private health insurance and benefit programs can affect our business and scrutiny of the healthcare delivery and reimbursement systems in the U S including those related to the importation and reimportation of certain drugs from foreign markets can be expected to continue at both the state and federal levels This process may result in additional legislation and or regulation governing the production delivery or pricing of pharmaceutical products and other healthcare services In addition changes in the interpretations of existing regulations may result in significant additional compliance costs or the discontinuation of our ability to
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
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 guidance document describing the impact of the Cures Act on existing software policies Concurrently the FDA issued draft guidance describing the FDA s approach to clinical decision support software On September 28 2022 the FDA issued final guidance that made several changes to the draft guidance and that provides a more restrictive interpretation of exempt clinical decision support software 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 became effective on January 1 2023 Additionally nearly all other states have passed proposed or are considering comprehensive privacy legislation and privacy bills have been proposed at the federal level that may result in additional legal requirements that impact our business 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 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
The Health Information Technology for Economic and Clinical Health Act HITECH Act strengthened federal privacy and security provisions governing protected health information Among other things the HITECH Act expanded certain aspects of the HIPAA privacy and security rules imposed new notification requirements related to health data security breaches broadened the rights of the U S Department of Health and Human Services HHS to enforce HIPAA and directed HHS to publish more specific security standards In January 2013 the Office for Civil Rights of HHS published the HIPAA omnibus final rule HIPAA Final Rule which amended certain aspects of the HIPAA privacy security and enforcement rules pursuant to the HITECH Act extending certain HIPAA obligations to business associates and their subcontractors Certain components of our business act as business associates within the meaning of HIPAA and are subject to these additional obligations under the HIPAA Final Rule
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 Data Subjects 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 are either established in the EU and process personal data of Data Subjects regardless the Data Subject location or that are not established in the EU but that offer goods or services to Data Subjects in the EU or monitor their behavior in the EU 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 limited matters such as employee personal data With respect to the personal data it protects the GDPR requires among other things controller accountability consents from Data Subjects or another acceptable legal basis to process the personal data notification within 72 hours of a personal data breach where required 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 rectification and erasure of the personal data and the right to object to the processing
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 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 amends and expands the CCPA including by providing consumers with additional rights with respect to their personal information and creating a new state agency the California Privacy Protection Agency to enforce the CCPA and the CPRA The CPRA came into effect on January 1 2023 applying to information collected by business on or after January 1 2022
As noted above 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 While we believe we have substantially compliant programs and controls in place to comply with the GDPR CCPA CPRA and state law 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 Additionally effective September 1 2023 the Office of the Inspector General OIG for HHS issued a final rule implementing civil money penalties for information blocking as established by the Cures Act OIG incorporated regulations published by the Office of the National Coordinator for Health Information Technology of HHS as the basis for enforcing information blocking penalties Each information blocking violation carries up to a 1 million penalty Moreover in order to satisfy our customers and comply with evolving legal 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
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 online presence and capabilities including our online commerce offerings and our use of various social media outlets
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 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 as well as other types of foreign requirements similar to those imposed in the U S These laws and regulations have been the subject of increasing enforcement activity globally in recent years
The Harmonized Tariff Schedule of the United States sets out tariff rates and statistical categories for merchandise imported into the United States The Harmonized Tariff Schedule is based on the international Harmonized System which is the global system of nomenclature applied to most world trade in goods Generally goods that we import are subject to the Harmonized Tariff Schedule
Canada s Forced and Child Labour in Supply Chains Act which became effective in January 2024 seeks to prevent forced and child labor by requiring companies to release board approved reports detailing efforts to prevent and mitigate forced and child labor The Forced and Child Labour in Supply Chains Act requires supply chain diligence and imposes reporting obligations on certain of our subsidiaries
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
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
While overall ESG matters are overseen by the Governance and Nominating Committee the Compensation and Human Capital Committee plays a role in ESG matters related to our human capital practices Our chief human resources officer leads our talent attraction diversity and development programs and reports progress including on opportunities and recruiting metrics to the Compensation and Human Capital Committee One recent highlight was the appointment of an inaugural director of diversity equity and inclusion
As a people first organization the overall well being of our team is important to us Our total rewards philosophy is to provide market competitive pay and a range of benefit choices designed to meet our employees diverse needs reward individual and business performance and drive shareholder value We support our employees health with medical pharmacy dental and vision plans mental health services and wellness programs to encourage healthy lifestyles and parental leave for new parents We support our employees financial well being with matching 401 k contributions life insurance company paid short term disability insurance an employee stock purchase plan ESPP and personal finance educational tools In addition regular employee engagement surveys help us gain insights about how to support talent attraction engagement and retention
We believe that a diverse and inclusive workforce strengthens our company in ways that align with our purpose vision and values At Patterson we seek to foster an environment where individuals from all backgrounds feel valued and respected At a high level our Code of Conduct expresses our commitment to inclusivity and emphasizes the importance of a workplace that is free of discrimination harassment bullying and physical and verbal abuse We aim to enhance our workplace diversity equity and inclusion efforts through leadership development programs employee affinity groups strategic partnerships and inclusive policies and processes Additionally our talent recruitment program includes seeking to consider candidate pools that include among other things individuals from diverse racial and ethnic backgrounds military personnel both current and inactive and early career employees and students We also seek to promote equity inclusion and economic empowerment within our supply chain By partnering with businesses owned by individuals from diverse racial and ethnic backgrounds women veterans LGBTQ individuals and people with disabilities we believe we can help foster a more diverse and inclusive business ecosystem
To support the progression and career development of our employees we offer training and development opportunities to build our employees expertise in leadership inclusive management and creating business solutions Such opportunities include 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 During fiscal year 2024 we achieved approximately 90 participation representing over 800 individuals in our enterprise wide Inclusive Leader program In addition we conduct performance reviews for employees every year achieving an over 90 completion rate in fiscal year 2024
Keeping employees safe and healthy is essential to putting people first and we strive to continue to improve our efforts Our Environmental Health and Safety EHS system is designed to manage risks and maintain focus on employee health and safety and includes compliance audits workplace safety communications and training In particular our EHS team promotes employee safety and environmental awareness through foundational systems and activities such as safety training courses
We recognize that environmental issues can impact our business operations employees and communities and strive to continually track and reduce our environmental impact Our management strategy leverages internal systems processes and tools as well as third party expertise to operate our environmental programs in a planned and documented manner with a focus on continuous improvement As a distributor we work closely with our supply chain partners in an effort to reduce our joint impact on the environment by for example minimizing materials used to ship product to us such as by using thinner right sized boxes and maximizing efficiencies in the packaging of products we ship to our customers which can help minimize our environmental impact
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
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
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
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 inflated price of product inputs disruptions in operations of logistics service providers and resulting delays in shipments Customers may be
unwillingness to accept such delays The suppliers on which we rely also may be adversely affected by a serious breach of their quality assurance or quality control procedures deterioration of their quality image impairment of customer or consumer relationships or failure to adequately protect the relevance of brands and related litigation all of which could impair our ability to obtain product in a timely and efficient manner
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 Our ability or the ability of our suppliers to successfully source materials may be adversely affected by changes in U S laws including trade tariffs on the importation of certain products from China as a result trade tensions between the U S and China We may experience a disruption in the flow of imported product from China or an increase in the cost of those goods attributable to increased tariffs restrictions on trade or other changes in laws and policies governing foreign trade In addition political or financial instability currency exchange rates labor unrest pandemic or other events could slow distribution activities and adversely affect foreign trade beyond our control
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 manufacturers creating or expanding direct sales forces or otherwise reducing their reliance on third party distribution channels We compete with certain manufacturers including some of our own suppliers that sell directly to customers as well as to wholesale distributors and online businesses that compete with price transparency 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
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 an 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 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 We have recently experienced increases in the cost of shipping and it is possible that such cost increases could be material in the future Our ability to provide same day shipping and next day delivery is an integral component of our business strategy
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 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 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 Unanticipated safety quality or efficacy concerns can arise with respect to the products we distribute whether or not scientifically or clinically supported which can lead to product recalls withdrawals or suspended or declining sales as well as product liability and other claims 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
We distribute certain private label products that are manufactured by our suppliers and are available exclusively from us Beyond the risks that normally accompany the distribution of products our sourcing marketing and selling of private label products subject us to incremental risks 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 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 In addition we are exposed to the risk that our competitors or our customers may introduce their own private label generic or low cost products that compete with our products at lower price points In the animal health industry sales of generic products are an increasing percentage of overall animal health sales in certain regions and generic competition may expand further as a result of changes in industry dynamics such as channel expansion customer consolidation increase in the availability and use of pet insurance and the potential for generic competition by established animal health businesses Such products could capture significant market share or decrease market prices overall eroding our sales and margins
The terms on which we purchase or sell products from many suppliers 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 reduced margins and failure to earn rebates or incentives that are conditioned upon achievement of growth goals Also decreases in the market prices of products that we sell could cause customers to demand lower sales prices from us These price reductions could further reduce our margins and profitability on sales with respect to the lower priced products 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 products we sell are subject to market and technological obsolescence and our customers willingness to replace existing equipment depends upon new product introductions by manufacturers which are out of our control
The products we distribute are subject to technological obsolescence outside of our control We depend on suppliers to regularly develop and pour marketing dollars into the launch of new and enhanced products For example during fiscal 2023 one of our primary suppliers of dental equipment did not release any significant product introductions and as a consequence customers who may have replaced existing equipment with new equipment did not do so 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 growth depends on our investment in the development of software and e services products and the market traction achieved by such offerings If we fail to accurately predict future customer needs and preferences or fail to
produce viable software and e services products we may invest heavily in product commercialization that does not lead to significant sales which would adversely affect our profitability Even if we successfully innovate and develop new and enhanced software and e services products we may incur substantial costs in doing so and our profitability may suffer Furthermore our software and e services products also may contain undetected errors or bugs when introduced or as new versions are released Any such defects may result in increased expenses and could adversely affect our reputation and our relationships with the customers using such products We do not have any patents on our software or e services products 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 Our software and e services products may fail to remain competitive and may fail to anticipate market demands for functionality In addition the cost to replace defective products may not generate commensurate benefit
Customers do business with Patterson and employees choose Patterson as a place of employment due to 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 In addition 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
The pharmaceutical products our animal health business sells are approved for use under specific circumstances in specific species Such products could if misused or abused by humans adversely affect human health and safety our reputation and our business For instance xylazine which is an FDA approved prescription veterinary tranquilizer found in certain analgesic products we distribute has been found to be increasingly and illicitly used knowingly or unknowingly by humans frequently in combination with other drugs As a result xylazine has become the subject of regulatory public health legal and political focus Law enforcement agencies are pressing for xylazine to be listed as a federal controlled substance and several states have already done so which measures are likely to increase the cost of distribution of such products Illicit use of such products may increase the risk of regulatory enforcement and civil litigation
As a part of our business strategy we acquire and dispose of assets and businesses in the ordinary course Maintaining or improving our price to earnings ratio of which the market price of our common stock is commonly thought to be a function requires effective execution of our growth strategy including achieving inorganic earnings per share growth Acquisitions and dispositions 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 expected benefits
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 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 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 In addition if 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 The acquisition of businesses in which we lack operational and market experience may be more difficult time consuming or costly than expected Further we may not ultimately strengthen our competitive position or achieve desired synergies as a result of our acquisitions and they could be viewed negatively by our customers securities analysts and investors
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 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 labor inflation and increased overtime to meet demand
We rely on information systems in our business to obtain rapidly process analyze and store customer product supplier and employee data to conduct our business including to among other things maintain and manage systems to facilitate the purchase and distribution of inventory items from numerous distribution centers receive process and ship orders on a timely basis manage accurate billing and collections for our customers process payments to suppliers provide products and services that maintain certain of our customers electronic records and maintain and manage corporate human resources compensation and payroll systems Certain of our information systems store sensitive personal and financial information such as information related to our employees and our third party business partners that is confidential and in some cases subject to privacy laws Our information systems are vulnerable to natural disasters power losses computer viruses telecommunication failures cybersecurity threats and other problems From time to time we have had to address non material security incidents and we expect to experience security incidents in the future Despite our efforts to ensure the integrity of our systems as cybersecurity threats evolve and become more difficult to detect and successfully defend against one or more cybersecurity threats or other events that could impact the security reliability and availability of our systems might defeat the measures that we or our vendors take to anticipate detect avoid or mitigate such threats In addition hardware software or applications developed internally acquired through acquisitions or procured from third parties may contain defects in design or manufacture or other problems that could unexpectedly compromise information security We may also incur substantial costs as we update integrate and enhance our cybersecurity defense systems and those of acquired entities to meet evolving challenges
We take steps designed to detect mitigate and remediate vulnerabilities in our information security systems such as our hardware and or software including that of third parties with whom we work but we may not be able to detect mitigate and remediate all such vulnerabilities For example we have identified certain vulnerabilities in our information systems and we are taking steps designed to mitigate the risks associated with known vulnerabilities Such steps may include increasing monitoring of systems and applying standardized enterprise solutions controls and process Despite our efforts there can be no assurance that these vulnerability mitigation measures will be effective Moreover we may also experience delays in developing and deploying remedial measures and patches designed to address any identified vulnerabilities Vulnerabilities could be exploited and result in a security incident
Data breaches and any unauthorized access or disclosure of our information could compromise our intellectual property and expose sensitive business information Cybersecurity attacks or other similar events that could impact the security reliability and availability of our systems could also cause us to incur significant remediation costs disrupt key business operations adversely impact our financial accounting and reporting of results of operations divert attention of management and adversely impact our results of operation For example in October 2023 a cybersecurity attack on Henry Schein Inc one of our key competitors disrupted its key business operations adversely impacted its financial results for the fourth quarter and full year 2023 diverted the attention of its management caused it to incur significant remediation costs and resulted in litigation
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 February 2024 Change Healthcare a subsidiary of UnitedHealth Group and the largest clearinghouse for medical claims in the U S was the subject of a cyberattack that required it to take offline its computer systems that handle electronic payments and insurance claims This outage negatively impacted our business in the fourth quarter of fiscal 2024 may continue to affect our business and has generated litigation Similar cybersecurity events that disrupt the healthcare system upon which our business relies could adversely affect our business if such disruption is widespread and continues for an extended period of time
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 Cybersecurity attacks in particular are becoming more sophisticated and include but are not limited to malicious software attempts to gain unauthorized access to data and other electronic security breaches that could lead to disruptions in critical systems disruption of our customers operations loss or damage to our data delivery systems corruption of data and increased costs to prevent respond to or mitigate cybersecurity events Cybersecurity attacks against our IT systems or third party providers IT systems such as cloud based systems could result in exposure of confidential information the modification of critical data and or the failure of critical operations Furthermore due to geopolitical tensions and remote and hybrid working conditions the risk of cyber attacks may be elevated With artificial intelligence AI tools threat actors may have additional tools to automate breaches or persistent attacks evade detection or generate sophisticated phishing emails Our use of AI and the use of AI by our business partners may lead to novel cybersecurity risks In addition certain cyber incidents such as advanced persistent threats may remain undetected for an extended period Our technologies systems and networks and those of our customers suppliers and business partners may become the target of cyberattacks or information security breaches
Our information systems or the software products we sell may fail for extended period of time 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 A security breach and or perceived security vulnerabilities in our information systems products or services could also cause significant loss of business and reputational harm and actual or perceived vulnerabilities may lead to claims against us by our customers and or governmental agencies
We have and are continuing to incorporate AI including machine learning in certain of our internal operations and may in the future incorporate AI into certain of our products and services with the intent to enhance their operation and effectiveness For example we have incorporated machine learning into certain of our software to provide AI analysis of dental patient images designed to enhance a dentist s own analysis Flaws biases or malfunctions in these systems could lead to operational disruptions data loss or erroneous decision making impacting our operations financial condition and reputation Ethical and legal challenges may arise including biases or discrimination in AI outcomes non compliance with data protection regulations and lack of transparency The legal and regulatory landscape and industry standards surrounding AI technologies is rapidly evolving and uncertain and compliance may impose significant operational costs and may limit our ability to develop deploy or use AI technologies Furthermore the deployment of AI systems could expose us to increased cybersecurity threats such as data breaches and unauthorized access leading to financial losses legal liabilities and reputational damage We also face competitive risks if we fail to adopt AI or other machine learning technologies in a timely manner
Given our dependence on the willingness of dental patients and veterinary customers to seek elective care our results of operations and financial condition may be negatively impacted by the effects of disease outbreaks epidemics pandemics and similar wide spread public health concerns For example global health concerns relating to the COVID 19 pandemic adversely impacted consumer spending and business spending habits interrupted operation of industries that use the products we distribute caused inventory write downs of personal protective equipment due to demand fluctuations reduced consumer willingness to be in public modified business practices leading to cybersecurity risks and interrupted the manufacturing and distribution of products we distribute each of which adversely impacted our financial results and the financial results of our customers suppliers and business partners We may again experience adverse impacts as a result of the global economic impact of other wide spread public health concerns including any recession that may occur in the future any prolonged period of economic slowdown or reluctance of customers to seek care These factors may also exacerbate the effects of other risks we face
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 In addition the increased focus of federal state and local governments on sustainability may result in new legislation or regulations and customer requirements that could negatively affect us as we may incur additional costs or be required to make changes to our operations in order to comply with any new regulations or customer requirements
New legal or regulatory requirements have and may in the future be enacted to prevent mitigate or adapt to the implications of a changing climate and its effects on the environment These regulations which may differ across jurisdictions could result in our businesses being subject to new or expanded carbon pricing or taxes increased compliance costs restrictions on greenhouse gas emissions investment in new technologies increased greenhouse gas emission disclosure including costs resulting from mandatory or voluntary reporting diligence or disclosure and transparency recurring investments in data gathering and reporting systems upgrades of facilities to meet new building codes and the redesign of utility systems which could increase our operating costs including the cost of electricity and energy Our supply chain would likely be subject to these same transitional risks and would likely pass along any increased manufacturing costs to us In addition we are subject to expanding mandatory and voluntary reporting diligence and disclosure requirements including the recently enacted legislation in California requiring reporting of greenhouse gas emissions and climate risk and potentially the SEC s proposed climate related reporting requirements and similar regulatory requirements in other jurisdictions These evolving regulatory requirements are likely to result in increased costs and complexities of compliance in order to collect measure and report on the relevant climate related information
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 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 covenant breach 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 If interest rates increase again in the future as they did in 2023 our debt service obligations on variable rate indebtedness would again increase
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 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
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 Our failure to compete effectively and or pricing pressures resulting from such competition may adversely impact our business and our expansion into new markets may result in greater than expected risks liabilities and expenses In addition 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 or services 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 price transparency which is further promoted by price aggregators 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 dental and animal health manufacturers and 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 the vertical integration we have seen and expect to continue within the production animal business limits the number of purchasing decision makers we can impact which could also affect our margins 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
In recent years there has also been a trend towards consolidation in the industries that buy the products and services we distribute including dental practices veterinary practices and animal producers and the formation of group purchasing organizations GPOs provider networks and buying groups including dental support organizations DSOs designed to leverage volume discounts The formation or expansion of GPOs provider networks and buying groups including DSOs 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 In addition such organizations may establish direct relationships with manufacturers thereby eliminating or reducing the services historically provided by distributors We expect further expansion of such groups in the future Further 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
Our animal health segment is exposed to the risks of the production animal business including changes in consumer demand 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 and regulations related to food producing animals 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 recent years outbreaks of various diseases including African Swine Fever avian influenza foot and mouth disease bovine spongiform encephalopathy otherwise known as BSE or mad cow disease and porcine epidemic diarrhea virus otherwise known as PEDv have impacted the animal health business The discovery of additional cases of any of these or new diseases may result in additional restrictions on animal proteins reduced herd sizes or reduced demand for animal protein
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 our sales In addition the market for our animal health products could be negatively impacted by the introduction and or market acceptance of newly developed or alternative products which could include products perceived as healthy or holistic
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 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 Furthermore the industry is facing a veterinarian and veterinary technician labor shortage and new regulations permitting non economic and punitive damages for pet owners in case of wrongful death or injury
Aspects of the dental market are impacted by price competition that is driven in part by the consolidation of dental practices innovation and product advancements and the price sensitivity of customers Many dental participants are consolidating to create larger and more integrated provider systems with greater market power We expect additional consolidation in the dental industry in the future As consolidation accelerates the economies of scale of our customers may grow If a customer experiences sizable growth following consolidation it may determine that it no longer needs to rely on us and may reduce its demand for our products and services Some of these large and growing customers may choose to contract directly with suppliers for certain supply categories In addition as customers consolidate these providers may try to use their market power to negotiate price reductions for our products and services Finally consolidation may also result in the acquisition or future development by our customers of products and services that compete with our products and services
Dental and companion animal health products are becoming increasingly available to consumers at competitive prices from sources other than traditional health care supply and distribution sources including human health product pharmacies Internet pharmacies big box retailers and other online e commerce solutions and consumers are increasingly seeking such alternative sources of supply Dental products are readily available from major U S online e commerce retailers such as Amazon and Chewy com that are licensed as veterinary mail order pharmacies which enables them to offer pharmacy products directly to consumers in all 50 U S states If federal regulations were to permit veterinarian client patient relationships to be established virtually which is a focus of lobbyists that appears to be gaining traction we may face additional competitive pressure 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 Furthermore decreased emphasis on veterinary visits and increased consumer choice through e commerce retailers could reduce demand for veterinarian based services The continued advancement of online e 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 We may be unable to anticipate and effectively respond to shifts in consumer traffic patterns and direct to consumer buying trends
We are subject to a variety of litigation incidental to our business including product liability claims intellectual property claims employment claims commercial disputes putative class actions under the California Labor Code Private Attorneys General Act 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 From time to time we also receive and respond to governmental inquiries and investigations including subpoenas for the production of documents Defending against such claims and responding to such governmental inquiries and investigations 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 We may be subject to claims in excess of available insurance or not covered by insurance or indemnification agreements or claims that result in significant adverse publicity Furthermore the outcome of litigation is inherently uncertain
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 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
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 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 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 tissues 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 procurement 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 and may require reporting of certain pricing data
If we acquire a manufacturing business we will be subject to new regulatory risks attendant to manufacturing For example animal pharmaceuticals and supplements are subject to regulatory approval and ongoing continuous review by the FDA and other regulatory authorities Gaining approval for new products may require potentially costly post marketing follow up studies to monitor the safety and efficacy of the approved product Noncompliance or failure to receive or maintain or delays in receiving such clearance or approvals may hurt our competitiveness and have other material adverse consequences on our business In addition animal pharmaceuticals and supplements are subject to extensive and ongoing regulatory requirements by the FDA and other regulatory authorities with regard to labeling packaging adverse event reporting storage advertising promotion and recordkeeping
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 Any 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 When we discover situations of non compliance we seek to remedy them and bring the affected area back into compliance 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 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
In the course of our business we also may be subject to fines or penalties equitable remedies including but not limited to the suspension revocation or non renewal of licenses and litigation For example in February 2020 Animal Health International pleaded 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 was subject to a total criminal fine and forfeiture of 52 8 million The reoccurrence of any such event 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 evolving laws and regulations relating to confidentiality of sensitive personal information or standards in electronic health records or transmissions we could be required to make significant product changes or incur substantial 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 The legal environment surrounding data privacy is demanding with the frequent imposition of new and changing regulatory requirements 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 California Privacy Rights Act or CPRA that became effective on January 1 2023 and the pan European General Data Protection Regulation or GDPR Additionally nearly all other states have passed proposed or are considering comprehensive privacy legislation and privacy bills have been proposed at the federal level that may result in additional legal requirements that impact our business
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 or use patient information or could require us to incur significant additional costs to conform to these legal requirements
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
adversely affect our tax positions Effective for tax years beginning after December 31 2022 the Inflation Reduction Act of 2022 established a new 15 corporate alternative minimum tax for corporations whose average adjusted net income for any consecutive three year period beginning after December 31 2022 exceeds 1 0 billion and a new a 1 excise tax on net repurchases of corporate stock In addition the Organization for Economic Cooperation and Development OECD has published a framework to implement a global minimum income tax rate of 15 through its base erosion and profit shifting pillar two project BEPS Pillar Two Countries around the world are in various stages of adopting these rules some having enacted or substantively enacted legislation while others are drafting formal legislative proposals The OECD guidance offers transition and safe harbor rules around the implementation of the BEPS Pillar Two global minimum tax We continue to evaluate the impact of this new legislation At this time we do not expect the impact of this legislation to be material to our effective tax rate However there can be no assurance that our future effective tax rate will not
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
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
We are subject to 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 In particular recessionary or inflationary conditions
and depressed levels of consumer and commercial spending may cause dental and animal health customers to reduce modify delay or cancel plans to purchase the products we distribute and services we provide may cause dental and animal health professionals to decrease or stop investing in their practices 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 and recent and prospective banking failures may adversely affect consumer confidence and thereby reduce dental and veterinary office visits The impacts of efforts by federal state and local governments to combat inflation are unpredictable and could have an adverse impact on consumer spending Current interest rates have also created some tightening in the credit markets Continued tight credit markets or credit market volatility may cause financing difficulties which in turn may cause dental and animal health customers to reduce modify delay or cancel plans to purchase the products we distribute and services we provide 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 contract sales as compared to the gain that would be realized if the average interest rate in our portfolio were to increase at a rate more similar to the interest rate markets Tension between the U S and China as well as conflicts involving Russia Ukraine Israel and Gaza and other unrest also are creating increased global and economic uncertainty which could adversely affect spending on the dental and animal health products and services we distribute Global political and or trade issues also could adversely impact the ability of U S producers to export finished protein products to other countries in the world Furthermore although inflation did not materially impact our results of operations in fiscal 2024 cost inflation during fiscal 2024 including wage inflation generally increased our operating costs including our cost of goods transportation costs labor costs and other administrative costs We may face higher and sustained rates of inflation with subsequent increases in operational costs that we may be unable to pass through to our dental and animal health customers
Our processes for assessing identifying and managing material risks from cybersecurity threats are incorporated into our overall enterprise risk management framework We take a cross functional approach to cybersecurity risk which includes input from information security information technology legal compliance internal audit finance and operations as appropriate Under the oversight of our Board including its Audit and Finance Committee our senior management information security team and our Cybersecurity Risk Committee comprised of key executive and senior leaders from primary corporate functions devote resources to cybersecurity and implement risk management processes designed to adapt to the changing cybersecurity landscape respond to emerging threats and proactively coordinate our people processes and procedures to respond to cybersecurity incidents We regularly assess the threat landscape and cybersecurity risks Our internal audit team reviews enterprise risk management level cybersecurity risks as part of our overall enterprise risk management framework In addition our information security team oversees regular monitoring of our information technology and other operating systems that are designed to detect potential security incidents We have operationalized a written incident response plan designed to assess identify and coordinate among various functions the response activities to cyber incidents and determine the impact of any such cybersecurity incidents that may jeopardize the confidentiality integrity or availability of our information systems or adversely affect our business and information systems In the event of a significant cybersecurity incident the incident response plan provides guidance on roles responsibilities procedures and reporting processes
Depending on the environment and system we have implemented a number of measures and policies designed to enhance the security and resiliency of our network information and data systems including but not limited to encryption standards antivirus protection remote access multifactor authentication treatment of confidential information and the use of the internet artificial intelligence social media email and wireless devices user access control management intrusion monitoring systems information security continuity measures including redundant systems and information backups network segmentation encryption of certain data event logging and implementation of an application patching and update cadence These measures and policies go through an internal review process and are approved by appropriate members of management
We have performed simulations and tabletop exercises at a management level Our employees are required to complete cybersecurity training at least once every year and have access to more frequent cybersecurity trainings online We also require certain employees to complete additional role based cybersecurity trainings Our information
We use consultants and other third parties to assist us from time to time to identify assess and manage material risks from cybersecurity threats including for example cybersecurity software providers managed cybersecurity service providers professional cybersecurity advisors and penetration testing firms
Depending on the nature of the services provided the sensitivity of the systems and data at issue and the identity of the service provider we take various measures designed to help manage cybersecurity risk associated with our use of third party service providers which may include due diligence monitoring of cybersecurity threat risks identified through such diligence in connection with our use of third party service providers and imposing certain contractual obligations
While we face a number of cybersecurity risks in connection with our business and from time to time we have had to address non material security incidents and expect to experience security incidents in the future we are not aware of any risks from cybersecurity threats that have materially affected or are reasonably likely to materially affect our business strategy results of operations or financial condition For more information about the cybersecurity risks we face that may materially affect the Company see the risk factor entitled Risks generally associated with information systems software products and cybersecurity attacks could adversely affect our results of operations in Item 1A Risk Factors
Our Chief Information Security Officer CISO is responsible for developing and implementing our cybersecurity risk management and information security program including regularly reporting on cybersecurity matters to management and the Audit and Finance Committee He has a Bachelor of Science degree in Information Technology from Saint Mary s University of Minnesota and over 25 years of experience covering a wide range of enterprise IT and Information Security programs for large global corporations He also has multiple industry certifications including as a Certified Information Systems Security Professional CISSP and participates in various security leadership forums and committees Our CISO has led our cybersecurity program since joining our company in 2018 and was recently promoted to CISO from Senior Director Information Security
Our CISO reports to our Chief Information Officer CIO who has held that role for 7 years and oversees our broader information technology program He has over 30 years of information technology experience including over 20 years in leadership roles
Among other matters our Board delegates to our Audit and Finance Committee the oversight of our programs policies and procedures related to cybersecurity information asset security and network security Broad oversight is maintained by our full Board which receives regular reports from the Audit and Finance Committee as well as management as appropriate The Audit and Finance Committee and the full Board actively participate in discussions with management and among themselves regarding cybersecurity risk Our CIO and CISO present to the Audit and Finance Committee at least a bi annual review of our strategies policies and internal controls relating to information technology and cybersecurity including network security cloud security and physical security with respect to corporate goals industry trends and competitive advantages To aid the Board with its cybersecurity oversight responsibilities the Board also receives regular presentations on these topics Our incident response plan is designed to escalate certain cybersecurity incidents from our information security team and CISO through our Chief Legal Officer and CIO to our Audit and Finance Committee depending on the impact of the incident
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
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
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 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
On June 10 2024 the number of holders on record of common stock was 1 570 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
In fiscal 2024 a quarterly cash dividend of 0 26 per share was declared throughout the year In fiscal 2024 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
On March 11 2024 the Board of Directors authorized a 500 million share repurchase program through March 16 2027 replacing a prior authorization which was expiring and under which there was 180 0 million remaining As of April 27 2024 there was 500 0 million remaining under the current stock repurchase program
The graph below compares the cumulative total shareholder return on 100 invested at the market close on April 26 2019 through April 27 2024 with the cumulative return over the same time period on the same amount invested in the S P Mid Cap 400 and the Dow Jones U S Health Care Index
Our financial information for fiscal 2024 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 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 2024 ended on April 27 2024 and consisted of 52 weeks Fiscal 2023 ended on April 29 2023 and consisted of 52 weeks Fiscal 2022 ended on April 30 2022 and consisted of 53 weeks Fiscal 2025 will end on April 26 2025 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
We are impacted by various conditions that create uncertainty in our macro economic environment Cost inflation and higher interest rates may affect our customer s willingness to invest in capital equipment and could impact our customers volume of purchases Interest expense on variable rate indebtedness increased due to higher interest rates Cost inflation increased certain operating costs and Patterson has implemented price increases in response however cost inflation did not materially impact our net results of operations in fiscal 2024
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
On August 27 2021 we signed a memorandum of understanding to settle the federal securities class action complaint against Patterson Companies Inc and its former CEO and former CFO filed by Plymouth County Retirement System on March 28 2018 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 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 On June 10 2022 the U S District Court for the District of Minnesota entered an order granting final approval to the settlement
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 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 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 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 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
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 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
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 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
Consolidated net sales in fiscal 2024 were 6 568 3 million an increase of 1 5 from 6 471 5 million in fiscal 2023 Foreign exchange rate changes had a favorable impact of 0 4 on fiscal 2024 sales The impact of acquisitions for fiscal 2024 contributed a net increase in sales of approximately 0 3
Dental segment net sales decreased 0 1 to 2 488 6 million in fiscal 2024 from 2 492 1 million in fiscal 2023 Foreign exchange rate changes had an unfavorable impact of 0 1 on fiscal 2024 net sales Net sales of consumables increased 4 2 net sales of equipment decreased 7 0 and net sales of value added services and other decreased 0 9 in fiscal 2024 The decrease in equipment net sales was experienced across imaging and digital categories
Animal Health segment net sales increased 2 6 to 4 067 1 million in fiscal 2024 from 3 964 9 million in fiscal 2023 Foreign exchange rate changes had a favorable impact of 0 8 on fiscal 2024 net sales Acquisitions contributed 0 5 to Animal Health net sales in fiscal 2024 The net sales growth in fiscal 2024 was primarily due to market share gains within Production Animal categories led by beef dairy and swine
Consolidated gross profit margin decreased 20 basis points from the prior year to 21 0 Approximately 10 basis points of gross margin decline was due to the widely reported cybersecurity attack on our vendor partner Change Healthcare in fiscal 2024 which
esulted in many dental practices being unable to process insurance claims Many of our practice management software solutions incorporated fee based integration with Change Healthcare for claims management for our customers During the outage Patterson suspended charging for that service which impacted the net sales and gross profit of our Dental segment The Corporate segment net sales and gross profit included unfavorable impacts of interest rate changes on our customer financing portfolio in both fiscal 2024 and 2023 This interest rate impact was partially offset by a gain on associated interest rate swap agreements which is reflected in other income net in our Consolidated Statements of Operations and Other Comprehensive Income
Consolidated operating expenses for fiscal 2024 were 1 127 3 million a 2 8 increase from the prior year of 1 097 0 million The consolidated operating expense ratio of 17 1 in fiscal 2024 increased 20 basis points from the prior fiscal year The increase in operating expenses included investment in margin accretive initiatives technology and facility enhancements in fiscal 2024 and was impacted by a 3 6 million gain on sale of an office building in fiscal 2023
Fiscal 2024 operating income was 252 9 million or 3 9 of net sales as compared to 276 0 million or 4 3 of net sales in fiscal 2023 The change in operating income was primarily driven by an increase in operating expenses partially offset by the increase in net sales and gross profit in fiscal 2024 as compared to fiscal 2023
Dental segment operating income was 209 8 million for fiscal 2024 a decrease of 27 5 million from fiscal 2023 The decrease was primarily driven by investments in our commercial software business a decrease in equipment net sales and the impact of the Change Healthcare cybersecurity attack in fiscal 2024 The change was also impacted by a 3 6 million gain on sale of an office building in fiscal 2023
Animal Health segment operating income was 139 1 million for fiscal 2024 an increase of 12 1 million from fiscal 2023 The increase was primarily driven by a growth in net sales and gross profit partially offset by higher operating expenses in fiscal 2024
Corporate segment operating loss was 96 0 million for fiscal 2024 as compared to a loss of 88 3 million for fiscal 2023 The change was primarily attributable to an increase in operating expenses and unfavorable impacts of interest rate changes on our customer financing portfolio in fiscal 2024
Net other expense was 9 9 million in fiscal 2024 compared to net other expense of 5 8 million in fiscal 2023 The increase was primarily due to higher interest expense partially offset by a higher gain on interest rate swaps
Net income attributable to Patterson Companies Inc was 185 9 million in fiscal 2024 compared to 207 6 million in fiscal 2023 Earnings per diluted share were 1 98 in fiscal 2024 compared to 2 12 in fiscal 2023 Weighted average diluted shares in fiscal
Net cash used in operating activities was 789 4 million in fiscal 2024 compared to 754 9 million in fiscal 2023 and 981 0 million in fiscal 2022 Net cash used in operating activities in fiscal 2024 and fiscal 2023 was primarily due to the impact of our Receivables Securitization Program 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 provided by investing activities was 959 5 million in fiscal 2024 compared to 901 6 million in fiscal 2023 and 1 239 0 million in fiscal 2022 Collections of deferred purchase price receivables were 1 028 3 million 998 9 million and 1 213 5 million in fiscal 2024 2023 and 2022 respectively
In fiscal 2023 we recorded cash receipts of 15 2 million from a sale of an office building and used cash of 33 3 million for acquisitions and 15 0 million to purchase a Dental investment 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 67 6 million 64 2 million and 38 3 million in fiscal 2024 2023 and 2022 respectively We expect to use a total of approximately 75 million for capital expenditures in fiscal 2025
Net cash used in financing activities in fiscal 2024 was 215 9 million driven by 229 5 million in share repurchases 98 3 million for dividend payments and 36 0 million for payments on long term debt partially offset by 141 0 million draw on our revolving line of credit Net cash used in financing activities in fiscal 2023 was 126 5 million driven by 101 3 million for dividend payments 55 5 million in share repurchases and 1 5 million for payments on long term debt partially offset by 16 0 million draw on our revolving line of credit 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
In fiscal 2024 2023 and 2022 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 consisted of a 700 0 million revolving credit facility and a 300 0 million term loan facility and was set to mature no later than February 2024
In fiscal 2023 we amended and restated the Credit Agreement the Amended Credit Agreement The Amended Credit Agreement consists of a 700 0 million revolving credit facility and a 300 0 million term loan facility and will mature no later than October 2027 We used the Amended Credit Agreement facilities to refinance and consolidate the Credit Agreement and pay the fees and expenses incurred therewith We expect to use the Amended Credit Agreement to finance our ongoing working capital needs and for other general corporate purposes
As of April 27 2024 295 5 million was outstanding under the Amended Credit Agreement term loan at an interest rate of 6 54 and 186 0 million was outstanding under the Amended Credit Agreement revolving credit facility at an interest rate of 6 53 As of April 29 2023 298 5 million was outstanding under the Credit Agreement term loan at an interest rate of 6 08 and 45 0 million was outstanding under the Credit Agreement revolving credit facility at an interest rate of 5 93
On March 11 2024 the Board of Directors authorized a 500 million share repurchase program through March 16 2027 replacing a prior authorization which was expiring and under which there was 180 0 million remaining As of April 27 2024 500 0 million remains available under the current repurchase authorization
We have 114 5 million in cash and cash equivalents as of April 27 2024 of which 59 3 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 27 2024 is 33 8 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
As a convenience to our customers we offer several different financing alternatives including a third party program and a Patterson sponsored program For the third party program we act as a facilitator between the customer and the third party financing entity with no on going involvement in the financing transaction Under the Patterson sponsored program equipment purchased by creditworthy customers may be financed up to a maximum of 2 million We generally sell our customers financing contracts to outside financial institutions in the normal course of our business
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 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 27 2024 was 575 000
As of April 27 2024 our gross liability for uncertain tax positions including interest and penalties was 9 8 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
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 27 8 million in fiscal 2024 and adversely affected net sales by 108 5 million in fiscal 2023 while they positively impacted net sales by 41 0 million in fiscal 2022 Changes in currency exchange rates are a risk accompanying foreign operations but this risk is not considered material with respect to our consolidated operations
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
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
Estimates for returns damaged goods rebates loyalty programs and other revenue allowances are made at the time the revenue is recognized based on the historical experience for such items The receivables that result from the recognition of revenue are reported net of related allowances We maintain a valuation allowance based upon the expected collectability of receivables held Estimates are used to determine the valuation allowance and are based on several factors including historical collection data economic trends and credit worthiness of customers
Receivables from vendors earned as a result of volume rebates and reimbursements for customer pricing contracts and promotions are recorded as a reduction of cost of sales in the period in which the related revenue is recognized We estimate the vendor receivables earned but not received based on sales forecasts transactional data and historical vendor collection trends
We offer customer financing contracts on equipment purchases by creditworthy customers For financing contracts at a below market interest rate we record a subsidy as a reduction to net sales in the period the contract is originated The subsidy on below market rate contracts is estimated based on analyses of current publicly available interest rate trends We do not consider contracts with a term of one year or less to have a significant financing component and do not record a subsidy for these contracts
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 receive the proceeds of the contracts upon sale to financial institutions with a portion of the proceeds held by the financial institutions as a deferred purchase price DPP as security against eventual
performance of the portfolio Customer financing net sales include the impact of changes in interest rates on DPP receivables as the average interest rate in our contract portfolio may not fluctuate at the same rate as interest rate markets resulting in an increase or reduction of gain on contract sales We enter into an interest rate swap to hedge a portion of the related interest rate risk These agreements do not qualify for hedge accounting and the gains or losses on an interest rate swap are reported in other income and expense in our consolidated statements of operation and other comprehensive income
Inventory primarily consists 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 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 The net realizable value of such inventories is estimated based on analyses and assumptions including but not limited to historical usage future demand and market requirements
We capitalize certain costs incurred for software to be sold leased or otherwise marketed to our customers The costs are treated as capital or expense based on the nature of the costs and the project stage in which the costs were incurred At the end of each fiscal quarter we compare the unamortized capitalized costs of software to be sold to its net realizable value The net realizable value of capitalized software assets is the estimated future gross revenues from that product reduced by the estimated future costs of completing and disposing of that product including the costs of performing maintenance and customer support required to satisfy the entity s responsibility set forth at the time of sale If the unamortized amount exceeds the net realizable value an impairment is recorded If the unamortized capitalized costs are less than the net realizable value of that asset then there is no impairment The net realizable value of capitalized software assets is estimated based on analyses and assumptions including but not limited to capitalizable costs labor expenses revenue growth projections and weighted average cost of capital
Goodwill is not amortized but rather is tested at least annually at the beginning of the fourth quarter for impairment or more often if events or circumstances indicate the carrying value of the asset may not be recoverable
We assess the recoverability of goodwill using a qualitative evaluation or a quantitative test to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount including goodwill The determination of fair value 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
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 or asset groups 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 or asset groups are written down to fair value using financial projections and discount rates based on analyses and assumptions including but not limited to financial projections royalty rates and weighted average cost of capital
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
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
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 102 7 million for the fiscal year ended April 27 2024
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 2 8 million to income before taxes for the fiscal year ended April 27 2024
The Amended 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 October 2027 Interest on borrowings is variable and is determined as a base rate plus a spread This spread as well as a commitment fee on the unused portion of the facility is based on our leverage ratio as defined in the Amended Credit Agreement 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 4 8 million annual impact on our income 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 the interest rates in our facilities are priced based on SOFR or commercial paper rates plus a defined spread 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 We have 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 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 before taxes
We have audited Patterson Companies Inc s internal control over financial reporting as of April 27 2024 based on criteria established in Internal Control Integrated Framework issued by 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 27 2024 based on the COSO criteria
We also have audited in accordance with the standards of the Public Company Accounting Oversight Board United States PCAOB the consolidated balance sheets of the Company as of April 27 2024 and April 29 2023 the related consolidated statements of operations and other comprehensive income changes in stockholders equity and cash flows for each of the three years in the period ended April 27 2024 and the related notes and the financial statement schedule listed in the Index at Item 15 a 2 and our report dated June 18 2024 expressed an unqualified opinion thereon
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
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
We have audited the accompanying consolidated balance sheets of Patterson Companies Inc the Company as of April 27 2024 and April 29 2023 the related consolidated statements of operations and other comprehensive income changes in stockholders equity and cash flows for each of the three years in the period ended April 27 2024 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 27 2024 and April 29 2023 and the results of its operations and its cash flows for each of the three years in the period ended April 27 2024 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 27 2024 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 18 2024 expressed an unqualified opinion thereon
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
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
At April 27 2024 the Company s capitalized development costs of software to be sold were 73 3 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 the net realizable value If the unamortized capitalized costs of an asset 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 the 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 labor and contractor costs which are affected by expected future market or economic conditions
We obtained an understanding evaluated the design and tested the operating effectiveness of controls over the Company s process to compare unamortized capitalized costs of software to be sold to the net realizable value including controls over management s forecasting processes used to develop the projected future revenue and labor and contractor costs used in the fair value estimates as well as controls over management s review of the significant data and assumptions described above
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 historical actuals as well as other relevant factors We assessed the reasonableness of forecasted future revenue by comparing the forecasts to historical software sales results and relevant software market industry data We assessed the reasonableness of future labor and contractor costs by comparing the estimates to historical actuals and presentations of planned enhancements We also performed sensitivity analyses of significant assumptions to evaluate the significance of changes in the recoverability that would result from changes in assumptions
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
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
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
are fully consolidated special purpose entities established to sell certain receivables to unaffiliated financial institutions The assets of PDC Funding PDC Funding II PDC Funding III and PDC Funding IV would be available first and foremost to satisfy the claims of its creditors There are no known creditors of PDC Funding PDC Funding II PDC Funding III or PDC Funding IV The Consolidated Financial Statements also include the assets and liabilities of Technology Partner Innovations LLC which is further described in Note 13
We operate with a 52 53 week accounting convention with our fiscal year ending on the last Saturday in April Fiscal 2024 ended on April 27 2024 and consisted of 52 weeks Fiscal 2023 ended on April 29 2023 and consisted of 52 weeks Fiscal 2022 ended on April 30 2022 and consisted of 53 weeks Fiscal 2025 will end on April 26 2025 and will consist of 52 weeks
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 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 cost which approximates fair value
Inventory net 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 81 and 81 of total inventories at April 27 2024 and April 29 2023 respectively
The accumulated LIFO reserve was 154 055 and 146 915 at April 27 2024 and April 29 2023 respectively We believe that inventory replacement cost exceeds the inventory balance by an amount approximating the LIFO reserve
Property and equipment net 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 are not amortized but rather are tested at least annually at the beginning of the fourth quarter for impairment or more often if events or circumstances indicate the carrying value of the asset may not be recoverable
Goodwill impairment testing is done at the reporting unit level which represents an operating segment or a component of an operating segment We have two reporting units 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 perform a qualitative evaluation or a quantitative test to assess goodwill for impairment The qualitative evaluation is an assessment of factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount including goodwill We may elect not to perform the qualitative assessment for one or both reporting units and perform a quantitative impairment test
If performed the quantitative goodwill impairment test compares the fair value of each reporting unit to the reporting unit s carrying value including goodwill If the reporting unit s carrying value exceeds its fair value an impairment loss will be recognized 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 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
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
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
During fiscal 2024 2023 and 2022 we recorded 11 651 9 068 and 7 267 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
We capitalize certain costs incurred for software to be sold leased or otherwise marketed to our customers The costs are treated as capital or expense based on the nature of the costs and the project stage in which the costs were incurred At the end of each fiscal quarter we compare the unamortized capitalized costs of software to be sold to its net realizable value The net realizable value of capitalized software assets is the estimated future gross revenues from that product reduced by the estimated future costs of completing and disposing of that product including the costs of performing maintenance and customer support required to satisfy the entity s responsibility set forth at the time of sale If the unamortized amount exceeds the net realizable value an impairment is recorded If the unamortized capitalized costs are less than the net realizable value of that asset then there is no impairment
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
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 product 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 support and software services is recognized ratably over the period in which the support and services are provided
In addition to revenues generated from the distribution of consumable products under arrangements buy sell agreements where the full market value of the product is recorded as revenue we earn commissions for services provided under agency agreements The agency agreement contrasts to a buy sell agreement in that we do not have control over the transaction as we do not have the primary responsibility of fulfilling the promise of the good or service and we do not bill or collect from the customer in an agency relationship Commissions under agency agreements are recorded when the services are provided
Estimates for returns damaged goods rebates loyalty programs and other revenue allowances are made at the time the revenue is recognized based on the historical experience for such items The receivables that result from the recognition of revenue are reported net of related allowances We maintain a valuation allowance based upon the expected collectability of receivables held Estimates are used to determine the valuation allowance and are based on several factors including historical collection data economic trends and credit worthiness of customers Receivables are written off when we determine the amounts to be uncollectible typically upon customer bankruptcy or non response to continuous collection efforts The portions of receivable amounts that are not expected to be collected during the next twelve months are classified as long term
Receivables from vendors earned as a result of volume rebates and reimbursements for customer pricing contracts and promotions are recorded as a reduction of cost of sales in the period in which the related revenue is recognized We estimate the vendor receivables earned but not received based on sales forecasts transactional data and historical vendor collection trends
We offer customer financing contracts on equipment purchases by creditworthy customers For financing contracts at a below market interest rate we record a subsidy as a reduction to net sales in the period the contract is originated The subsidy on below market rate contracts is estimated based on analyses of current publicly available interest rate trends We do not consider contracts with a term of one year or less to have a significant financing component and do not record a subsidy for these contracts
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 receive the proceeds of the contracts upon sale to financial institutions with a portion of the proceeds held by the financial institutions as a deferred purchase price DPP as security against eventual
performance of the portfolio Customer financing net sales include the impact of changes in interest rates on DPP receivables as the average interest rate in our contract portfolio may not fluctuate at the same rate as interest rate markets resulting in an increase or reduction of gain on contract sales We enter into an interest rate swap to hedge a portion of the related interest rate risk These agreements do not qualify for hedge accounting and the gains or losses on an interest rate swap are reported in other income and expense in our Consolidated Statements of Operation and Other Comprehensive Income
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
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 27 2024 and April 29 2023 were 1 373 and 1 338 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 27 2024 and April 29 2023 contract liabilities of 37 399 and 36 850 were reported in other accrued liabilities respectively During the fiscal year ended April 27 2024 we recognized 33 454 of the amount previously deferred at April 29 2023
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 Costs of the program and changes in the corresponding liability are recognized as reductions to net sales As of April 27 2024 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 87 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
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 3 124 6 888 and 1 532 for fiscal 2024 2023 and 2022 respectively There were no deferred direct marketing expenses included in the Consolidated Balance Sheets as of April 27 2024 and April 29 2023
We have interests in a number of entities that are accounted for using the equity method During fiscal 2024 2023 and 2022 we made purchases of 195 048 198 712 and 193 625 from these entities respectively During fiscal 2024 2023 and 2022 we recorded net sales of 150 892 123 271 and 117 347 to these entities respectively
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
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
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
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
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
In fiscal 2024 we merged the stand alone Patterson Companies Inc Employee Stock Ownership Plan the ESOP into the Patterson Companies Inc 401 k Plan the 401 k Plan The ESOP remains a component of the 401 k Plan with many of the relevant provisions for the ESOP in effect The ESOP was previously frozen to new participants in fiscal 2021 and the last employer contribution was made to eligible participants effective for the plan year ended December 31 2020
The general purpose of the 401 k plan is to provide additional financial security during retirement by providing employees with an incentive to make regular savings contributions In addition to the participation of our employees we make annual matching contributions using an established formula Employer contribution expense was 20 003 19 649 and 21 013 for fiscal 2024 2023 and 2022 respectively which is included in operating expenses within the Consolidated Statements of Operations and Other Comprehensive Income
Comprehensive income is computed as net income plus certain other items that are recorded directly to stockholders equity Significant items included in comprehensive income are foreign currency translation adjustments and the effective portion of cash flow hedges net of tax Foreign currency translation adjustments do not include a provision for income tax because earnings from foreign operations are considered to be indefinitely
The amount of basic EPS is computed by dividing net income 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 by the weighted average number of outstanding common shares and common share equivalents when dilutive during the period
Potentially dilutive securities representing 1 022 932 and 772 shares for fiscal 2024 2023 and 2022 respectively were excluded from the calculation of diluted EPS because their effects were anti dilutive using the treasury stock method
In December 2023 the Financial Accounting Standards Board FASB issued Accounting Standards Update ASU No 2023 09 Income Taxes Topic 740 Improvements to Income Tax Disclosures This ASU requires additional disclosures related to rate reconciliation and income taxes paid The new standard is effective for annual disclosures in fiscal year 2026 and interim disclosures in fiscal year 2027 with early adoption permitted We currently are evaluating the impact of adopting this pronouncement
In November 2023 the FASB issued ASU No 2023 07 Segment Reporting Topic 280 Improvements to Reportable Segment Disclosures This ASU requires disclosures of significant segment expenses and other segment items Disclosures about a reportable segment s profit or loss and assets will be required for both annual and interim periods This ASU also requires disclosure of the title and position of Chief Operating Decision Maker CODM and an explanation of how the CODM uses the reported measures of profit or loss in assessing performance and allocating resources The new standard is effective for annual disclosures in fiscal year 2025 and interim disclosures in fiscal year 2026 with early adoption permitted We currently are evaluating the impact of adopting this pronouncement
During the first quarter of fiscal 2024 we used 1 108 to pay a holdback following our acquisition of substantially all of the assets of Miller Vet Holdings LLC The payment was due on the 24 month anniversary of the closing date
During the third quarter of fiscal 2023 we acquired substantially all of the assets of Relief Services for Veterinary Practitioners and Animal Care Technologies RSVP and ACT Texas based companies that provide innovative solutions to veterinary practices through data extraction and conversion staffing and video based training services Also during the third quarter of fiscal 2023 we acquired substantially all of the assets of Dairy Tech Inc a Colorado based company that provides pasteurizing equipment and single use bags that allow dairy producers to produce store and feed colostrum for newborn calves as well as product offerings for beef cattle producers These acquisitions expand our Companion Animal and Production Animal value added platforms and add solutions to their suite of offerings
The total purchase price for these acquisitions is 37 535 which includes holdbacks of 4 255 that will be paid on the 24 month anniversary of the closing dates and working capital adjustments of 23 which were paid in the fourth quarter of fiscal 2023 As of the acquisition date we have recorded 17 300 of identifiable intangibles 16 040 of goodwill and net tangible assets of 4 233 in our Consolidated Balance Sheets related to these acquisitions Goodwill which is deductible for income tax purposes was increased by 272 subsequent to acquisition date as a result of working capital adjustments Goodwill was recorded within the Animal Health segment and represents the
expected benefit of integrating these value added platforms with our existing operations We have included their results of operations in our financial statements since the date of acquisition within the Animal Health segment The accounting for the acquisitions was complete as of October 28 2023 The acquisitions were not deemed significant and did not materially impact our financial statements and therefore pro forma results are not provided
Cash on hand is generally in interest earning accounts Included in cash and cash equivalents in the Consolidated Balance Sheets are 33 813 and 33 072 as of April 27 2024 and April 29 2023 respectively which represent cash collected from previously sold customer financing contracts that have not yet been settled See Note 5 for additional information
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 27 2024 of which 200 000 was utilized
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 27 2024 and April 29 2023 the fair value of outstanding trade receivables transferred to the Purchasers under the facility and derecognized from the Consolidated Balance Sheets were 400 626 and 429 853 respectively Sales of trade receivables under this facility were 3 585 194 3 718 167 and 3 643 700 and cash collections from customers on receivables sold were 3 614 901 3 684 412 and 3 632 145 during the fiscal years ended 2024 2023 and 2022 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 we recorded losses of 13 850 11 403 and 3 247 during fiscal 2024 2023 and 2022 respectively related to the Receivables
As a convenience to our customers we offer several different financing alternatives including a third party program and a Patterson sponsored program For the third party program we act as a facilitator between the customer and the third party financing entity with no on going involvement in the financing transaction Under the Patterson sponsored program equipment purchased by creditworthy customers may be financed up to a maximum of 2 000 We generally sell our customers financing contracts to 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
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 27 2024 was 575 000
Historically we maintained two arrangements under which we sell these contracts We formerly also maintained an agreement with Fifth Third Bank Fifth Third whereby Fifth Third purchased customers financing contracts PDC Funding II sold its financing contracts to Fifth Third We received the proceeds of the contracts upon sale to Fifth Third At least 15 0 were held by the conduit as security against eventual performance of the portfolio
During fiscal 2024 Fifth Third sold and assigned the remaining purchased customer financing contracts to the facility in which MUFG is the agent We transferred and assigned the related DPP receivable of 15 400 from PDC Funding II to PDC Funding and the DPP counterparty changed from Fifth Third to MUFG We amended our agreement with MUFG as agent and expanded capacity under that agreement from 525 000 to 575 000 We thereby ended our agreement with Fifth Third
We service the financing contracts for which we are paid a servicing fee The servicing fees we receive are considered adequate compensation for services rendered Accordingly no servicing asset or liability has been recorded
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 or loss on sale of the related receivables and recorded in net sales in the Consolidated Statements of Operations and Other Comprehensive Income Expenses incurred related to customer financing activities are recorded in operating expenses in our Consolidated Statements of Operations and Other Comprehensive Income
During fiscal 2024 2023 and 2022 we sold 281 076 261 853 and 314 732 of contracts under these arrangements respectively In net sales in the Consolidated Statements of Operations and Other Comprehensive Income we recorded losses of 11 010 4 082 and 18 379 during fiscal 2024 2023 and 2022 respectively related to these contracts sold Cash collections on financed receivables sold were 291 621 302 851 and 426 188 during the fiscal years ended 2024 2023 and 2022 respectively Unamortized discounts of 3 097 and 0 were recorded as of April 27 2024 and April 29 2023 respectively which represent subsidies on contracts with below market interest rates
Included in cash and cash equivalents in the Consolidated Balance Sheets are 33 813 and 33 072 as of April 27 2024 and April 29 2023 respectively which represent cash collected from previously sold customer financing contracts that have not yet been settled Included in current receivables in the Consolidated Balance Sheets are 74 430 and 77 646 as of April 27 2024 and April 29 2023 respectively of finance contracts we have not yet sold A total of 581 729 of finance contracts receivable sold under the arrangements was outstanding at April 27 2024 Since the internal financing program began in 1994 bad debt write offs have amounted to less than 1 of the loans originated
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 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 27 2024 PDC Funding had purchased an interest rate cap from a bank with a notional amount of 575 000 and a maturity date of July 2031 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
We utilize forward interest rate swap agreements to hedge against interest rate fluctuations that impact the amount of net sales we record related to our customer financing contracts These interest rate swap agreements do not qualify for hedge accounting treatment and accordingly we record the fair value of the agreements as an asset or liability and the change in fair value as income or expense during the period in which the change occurs
As of April 29 2023 the remaining notional amount for interest rate swap agreements was 551 504 with the latest maturity date in fiscal 2030 During fiscal 2024 we entered into forward interest rate swap agreements with a notional amount of 247 734 As of April 27 2024 the remaining notional amount for interest rate swap agreements was 565 420 with the latest maturity date in fiscal 2031
Net cash receipts of 14 413 and 7 626 were received in fiscal 2024 and 2023 respectively to settle a portion of our assets and liabilities related to interest rate swap agreements These receipts are reflected as cash flows in the Consolidated Statements of Cash Flows within net cash used in operating activities
We recorded no ineffectiveness during fiscal 2024 2023 or 2022 As of April 27 2024 the estimated pre tax portion of accumulated other comprehensive loss that is expected to be reclassified into earnings over the next twelve months is 1 250 which will be recorded as an increase to interest expense
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
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
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
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
Certain assets are measured at fair value on a non recurring basis These assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments under certain circumstances We adjust the carrying value of our non marketable equity securities to fair value when observable transactions of identical or similar securities occur or due to an impairment
We have an investment in Vetsource a commercial partner and leading home delivery provider for veterinarians 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 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 The carrying value of the investment we owned following this sale was 56 849 and 56 849 as of April 27 2024 and April 29 2023
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 as a result of this transaction The carrying value of this put option as of April 27 2024 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 There were no fair value adjustments to such assets during the fiscal year ended April 27 2024
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 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 2 299 and 2 299 as of April 27 2024 and April 29 2023 respectively
Our debt is not measured at fair value in the Consolidated Balance Sheets The estimated fair value of our debt as of April 27 2024 and April 29 2023 was 448 287 and 483 139 respectively as compared to a carrying value of 451 661 and 487 231 at April 27 2024 and April 29 2023 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
With respect to the amortized intangible assets future amortization expense is expected to approximate 38 525 28 716 27 324 26 761 and 23 739 for fiscal 2025 2026 2027 2028 and 2029 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
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
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 consisted of a 700 000 revolving credit facility and a 300 000 term loan facility and was set to mature no later than February 2024
In fiscal 2023 we amended and restated the Credit Agreement the Amended Credit Agreement The Amended Credit Agreement consists of a 700 000 revolving credit facility and a 300 000 term loan facility and will mature no later than October 2027 We used the Amended Credit Agreement facilities to refinance and consolidate the Credit Agreement and pay the fees and expenses incurred therewith We expect to use the Amended Credit Agreement to finance our ongoing working capital needs and for other general corporate purposes
As of April 27 2024 295 500 was outstanding under the Amended Credit Agreement term loan at an interest rate of 6 54 and 186 000 was outstanding under the Amended Credit Agreement revolving credit facility at an interest rate of 6 53 As of April 29 2023 298 500 was outstanding under the Credit Agreement term loan at an interest rate of 6 08 and 45 000 was outstanding under the Credit Agreement revolving credit facility at an interest rate of 5 93
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 27 2024
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
At April 27 2024 we had a U S foreign tax credit asset that will expire in two 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 18 620 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
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 27 2024 and April 29 2023 Patterson s gross unrecognized tax benefits were 8 049 and 8 291 respectively If determined to be unnecessary these amounts net of deferred tax assets of 1 690 and 1 741 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
We also recognize both interest and penalties with respect to unrecognized tax benefits as a component of income tax expense As of April 27 2024 and April 29 2023 we had recorded 1 756 and 1 617 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 27 2024 we recorded as part of tax expense 365 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 The IRS has either examined or waived examination for all periods up to and including our fiscal year ended April 25 2020 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
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 Patterson and Cure Partners each contributed additional net assets of 1 000 and 1 000 during fiscal 2023 and 2022 respectively and no additional net assets were contributed during fiscal 2024 We have determined that TPI is a variable interest entity and we consolidate the results of operations of TPI as we have concluded that we are the primary beneficiary of TPI Since TPI was formed there have been no changes in ownership interests As of April 27 2024 we had noncontrolling interests of 588 on our Consolidated Balance Sheets
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 turnkey digital solutions and value added services to dentists dental laboratories institutions and other healthcare professionals throughout North America Animal Health is a leading full line distributor in North America and the U K of animal health products services and technologies to both the production animal and companion pet markets Our Corporate segment is comprised of general and administrative expenses including home office support costs in areas such as information technology finance legal human resources and facilities In addition customer financing and other miscellaneous sales are
reported within Corporate results Corporate assets consist primarily of cash and cash equivalents accounts receivable property and equipment and long term receivables We evaluate segment performance based on operating income The costs to operate the fulfillment centers are allocated to the business units based on the through put of the unit
The following table presents our declared cash dividends per share on our common stock for the past three years In fiscal 2024 2023 and 2022 dividends were declared in the period presented and paid in the following quarter
During fiscal 2024 we repurchased 7 604 shares of our common stock for 229 508 or an average of 30 18 per share During fiscal 2023 we repurchased 2 020 shares of our common stock for 55 492 or an average of 27 47 per share During fiscal 2022 we repurchased 1 032 shares of our common stock for 35 000 or an average of 33 90 per share
On March 11 2024 the Board of Directors authorized a 500 000 share repurchase program through March 16 2027 replacing a prior authorization which was expiring As of April 27 2024 500 000 remains available under the current stock repurchase program
The Consolidated Statements of Operations and Other Comprehensive Income for fiscal 2024 2023 and 2022 include pre tax after tax stock based compensation expense of 17 871 14 060 15 543 12 353 and 23 805 18 686 respectively Pre tax expense is included in operating expenses within the Consolidated Statements of Operations and Other Comprehensive Income
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
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 27 2024 there were 289 shares outstanding under prior plans
Related to stock options exercised the intrinsic value cash received and tax benefits realized were 1 906 5 365 and 332 respectively in fiscal 2024 4 289 15 555 and 948 respectively in fiscal 2023 and 1 552 3 975 and 238 respectively in fiscal 2022
Restricted stock awards and restricted stock units granted to employees generally vest over a three 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 2024 2023 and 2022 was 13 773 16 123 and 19 970 respectively
In fiscal 2024 2023 and 2022 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 2024 2023 and 2022 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 2024 and 2023 was 2 438 and 6 220 respectively No performance unit awards vested in fiscal 2022
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 27 2024 there were 658 shares available for purchase under the ESPP
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 putative class actions under the California Labor Code Private Attorneys General Act and other matters including matters arising out of the ordinary course of business including securities litigation 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 Adverse outcomes 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 May 23 2024 Plaintiff Monica Mehring and Mehring Family Dentistry together Plaintiffs filed a class action complaint against Patterson Companies Inc doing business as Patterson Dental UnitedHealth Group and its subsidiaries Change Healthcare and Optum Inc collectively the Defendants in a case captioned Dr Monica Mehring et al v Patterson Companies Inc et al Case No 4 24 cv 3147 N D Cal May 23 2024 the Class Action Complaint The Class Action Complaint alleges that as a result of Defendants failure to implement robust cybersecurity controls a group of cybercriminals were able to infiltrate Defendants computer networks and steal for ransom confidential health data and source code among other things Data Breach Notwithstanding the Class Action Complaint s generic reference to Defendants Plaintiffs describe the Data Breach as UnitedHealth Group s February 21 2024 discovery that a suspected nation state associated cyber security threat actor had gained access to some of the Change Healthcare information technology systems Plaintiffs allege that as a direct result of the Data Breach they were unable to submit claims through Patterson supplied Eaglesoft software and to date have been unable to receive payments for claims submitted on February 20 2024 While Plaintiffs assert that they use Eaglesoft to access Change Healthcare and Optum software to integrate processing prescriptions billing and insurance the Class Action Complaint does not allege that Eaglesoft or any of Patterson s IT systems or computer networks were accessed by any threat actor or were otherwise the subject of the alleged Data Breach Notwithstanding the foregoing Plaintiffs assert the following causes of action against all Defendants negligence negligent interference with prospective economic advantage negligence per se breach of implied contract breach of covenant of good faith and fair dealing and unjust enrichment Plaintiffs purport to bring each claim on behalf of a nationwide class defined as i a ll healthcare providers in the United States whose use of Change Healthcare s and Optum s services were disrupted by the D ata B reach occurring in February 2024 and ii a ll healthcare providers in the United States whose use of Patterson Dental s Eaglesoft s services were disrupted by the D ata B reach occurring in February 2024 Plaintiffs separately seek to certify a Delaware statewide class defined as i a ll healthcare providers in the state of Delaware whose use of Change Healthcare s and Optum s services were disrupted by the D ata B reach occurring in February 2024 and ii a ll healthcare providers in the state of Delaware whose use of Patterson Dental s Eaglesoft s services were disrupted by the D ata B reach occurring in February 2024 We are vigorously defending ourselves in this litigation We do not anticipate that this matter will have a material adverse effect on our financial statements
The amounts reclassified from AOCL during fiscal 2024 include gains and losses on cash flow hedges net of taxes of 321 The impact to the Consolidated Statements of Operations and Other Comprehensive Income was an increase to interest expense of 1 363 for fiscal 2024
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 27 2024 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
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 27 2024 using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission COSO in
Based on this assessment management has concluded that our internal control over financial reporting was effective as of April 27 2024 Ernst Young LLP the independent registered public accounting firm that audited our Consolidated Financial Statements included in Item 8
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 27 2024 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting
A significant portion of the compensation of our executive officers is delivered in the form of equity awards including restricted stock units performance units and non qualified stock options All these awards contain vesting requirements related to service with performance units also requiring satisfaction of certain performance criteria to obtain a payout This compensation design is intended to align executive compensation with the performance experienced by our shareholders Following delivery of shares of our common stock under such equity awards once any applicable service or performance based vesting standards have been satisfied our executive officers from time to time engage in the open market sale of some of those shares for diversification or other personal reasons Our executive officers may also engage from time to time in other transactions involving our securities
Transactions in our securities by our directors and officers are required to be made in accordance with our Securities Trading and Information Disclosure Policy our Insider Trading Policy which among other things requires that the transactions be in accordance with applicable U S federal securities laws that prohibit trading while in possession of material nonpublic information Rule 10b5 1 under the Exchange Act provides an affirmative defense that enables directors and officers to prearrange transactions in the company s securities in a manner that avoids concerns about initiating transactions while in possession of material nonpublic information Our Insider Trading Policy permits our directors and officers to enter into trading plans designed to comply with Rule 10b5 1
In addition our directors and officers are required to maintain an ownership of the company s common stock with a value equal to at least a multiple of their annual base salary 5x annual salary for our Chief Executive Officer and 3x annual salary for all direct reports to our Chief Executive Officer or their annual cash retainer 5x annual cash retainer for non employee directors
During the three months ended April 27 2024 none of the company s directors or officers as defined in Rule 16a 1 f of the Exchange Act adopted modified or terminated a Rule 10b5 1 trading arrangement except as set forth below and none of the company s directors or officers as defined in Rule 16a 1 f of the Exchange Act adopted modified or terminated a non Rule 10b5 1 trading arrangement as such terms are defined in Item 408 of Regulation S K of the Securities Act of 1933 as amended
On March 12 2024 Donald J Zurbay our President and Chief Executive Officer modified his written trading plan dated September 25 2023 which is intended to satisfy the affirmative defense conditions of Rule 10b5 1 c The plan s maximum duration of the plan is until December 31 2024 or such earlier date upon a the completion of all trades under the plan b the expiration of the orders relating to such trades without execution or c the occurrence of such other termination event as specified in the plan As modified the first trade will not occur until June 11 2024 at the earliest The trading plan is intended to permit Mr Zurbay to sell i 1 327 shares of our common stock pursuant to performance units that vested on April 24 2021 ii 3 897 shares of our common stock pursuant to restricted stock units that vested on June 29 2019 iii 1 016 shares of our common stock pursuant to restricted stock units that vested on June 29 2020 iv 976 shares of our common stock pursuant to restricted stock units that vested on July 1 2019 v 25 of the net vested shares of our common stock pursuant to performance units that
will vest on July 1 2024 vi 25 of the net vested shares of our common stock pursuant to restricted stock units that will vest on July 1 2024 and vii 25 of the net vested shares of our common stock pursuant to restricted stock units that will vest on December 5 2024
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 16 2024 the 2024 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 2024 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 Section 16 a Reports in the 2024 Proxy Statement The information called for by Item 10 as to the Audit and Finance 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 2024 Proxy Statement and such information is incorporated by reference herein Information regarding our insider trading policy is incorporated herein by reference to the information set forth under the caption Executive Compensation Other Executive Compensation Arrangements Policies and Practices in the 2024 Proxy Statement
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
Information regarding executive compensation is incorporated herein by reference to the information set forth under the caption Executive Compensation in the 2024 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 2024 Proxy Statement Information regarding the Compensation and Human Capital 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 2024 Proxy Statement
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 2024 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 2024 Proxy Statement
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 2024 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 2024 Proxy Statement
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 2024 Proxy Statement
Employment Agreement by and between Patterson Companies Inc and Donald J Zurbay dated October 12 2022 incorporated by reference to our Current Report on Form 8 K filed October 13 2022 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
Inducement Severance and Change in Control Agreement by and between Patterson Companies Inc and Kevin M Barry dated December 13 2022 incorporated by reference to our Current Report on Form 8 K filed December 15 2022 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
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
Transition and Separation Agreement by and between Patterson Companies Inc and Tim E Rogan dated May 10 2024 incorporated by reference to our Current Report on Form 8 K filed May 10 2024 File No 000 20572
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 5 dated as of April 3 2024 filed herewith
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
Third Amended and Restated Credit Agreement dated as of October 28 2022 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 October 31 2022 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
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 Amendment 26 dated April 3 2024 filed herewith
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 Second Amendment dated July 18 2022 incorporated by reference to our Quarterly Report on Form 10 Q filed September 1 2022 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
Filed Electronically The following financial information from our Annual Report on Form 10 K for fiscal 2024 formatted in Inline eXtensible Business Reporting Language iXBRL i the Consolidated Balance Sheets ii the Consolidated Statements of Operations and Other Comprehensive Income 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
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
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

Company Name	PATTERSON COMPANIES, INC. Vist SEC web-site
Category	WHOLESALE-MEDICAL, DENTAL & HOSPITAL EQUIPMENT & SUPPLIES
Trading Symbol	PDCO