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YoY shift: Lean +
Year-over-year tone shift - average net-tone change across Risk Factors and MD&A vs the prior 10-K. This filing is 0.15pp more bullish than last year's.
Why YoY instead of absolute: the LM lexicon has ~6.6× more negative words than positive (legal/risk-disclosure language is heavy on hedging), so every 10-K reads bearish on raw tone. Year-over-year change strips that bias and surfaces the actual shift in management's framing.
Tone shift by section
The two components the gauge averages: how Risk Factors and MD&A each shifted in net tone versus last year's 10-K. The headline above is their average, so a green needle over a soft section just means the other section carried it.
Risk Factors
-0.08pp
Flat
Net-tone change vs last year's 10-K.
MD&A
+0.38pp
Lean +
Net-tone change vs last year's 10-K.
Per-snippet highlights
Sentence-level sentiment highlighting with category and subcategory filters is coming once the snippet-scoring pipeline lands. For now, dig into the actual section text on the Sections tab.
Language change vs prior 10-K
Risk Factors (Item 1A) - words with the biggest YoY frequency increase
Negative rising
vulnerabilities+8
claims+4
adverse+3
litigation+3
negatively+3
Positive rising
enhance+3
effective+2
transparency+2
leading+2
able+1
Risk Factors (Item 1A)
10,307 words
Item 1A. RISK FACTORS
We believe that the following risks could have a material adverse impact on our business, reputation, financial results, financial condition and/or the trading price of our common stock. In addition, our business operations could be affected by factors that are not presently known to us or that we currently consider not to be material to our operations, so you should not consider the risks disclosed in this section to necessarily represent a complete statement of all risks and uncertainties. The order in which these factors appear does not necessarily reflect their relative importance or priority.
COMPANY RISKS
We are dependent on our suppliers and exposed to the risks of their businesses, because we generally do not manufacture the products we sell.
We obtain substantially all of the products we distribute from third parties. If a supplier is unable to deliver product in a timely and efficient manner, whether due to financial difficulty, natural disaster, pandemic, the failure to comply with applicable government requirements or other reasons, we could experience sales. We have experienced, and may continue to experience, in the supply chains for third-party manufacturing of certain products we distribute, including in obtaining or to obtain raw materials, inflated price of product inputs, in operations of logistics service providers and resulting in shipments. Customers may be
Language change vs prior 10-K
MD&A (Item 7) - words with the biggest YoY frequency increase
Negative rising
against+2
impairments+2
claims+2
decline+1
unable+1
Positive rising
gains+2
favorable+2
gain+1
positively+1
enhancements+1
MD&A (Item 7)
5,434 words
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
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.
unwillingness to accept such delays. The suppliers on which we rely also may be adversely affected by a seriousbreach 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.
Disruption to our distribution capabilities, including service issues with our third-party shippers, could materially adversely affect our results.
Weather, natural disaster, fire, terrorism, pandemic, strikes, civil unrest, geopolitical events or other reasons could impair our ability to distribute products and conduct our business. If we are unable to manage effectively such events if they occur, there could be 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
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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.
Sales of private label products entail additional risks, including the risk that such sales could adversely affect our relationships with suppliers.
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.
Changes in supplier rebates or other purchasing incentives could negatively affect our business.
The terms on which we purchase or sell products from many suppliers 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 failure to successfullyinnovate and develop new and enhanced software and e-services products could negatively affect our business.
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
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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 successfullyinnovate 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 undetectederrors 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.
Patterson’s continued success depends on positive perceptions of Patterson’s reputation.
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.
Illicit human use of pharmaceutical products we distribute could adversely affect human health and safety, our reputation and our business.
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.
Risks inherent in acquisitions and dispositions could offset the anticipated benefits, and we may face difficulty in efficiently and effectively integrating acquired businesses.
As a part of our business strategy, we acquire and dispose of assets and businesses in the ordinary course. 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
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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 achievedesired synergies as a result of our acquisitions, and they could be viewed negatively by our customers, securities analysts and investors.
Turnover or loss of key personnel or highly skilled employees, including executive officers, could disrupt our operations and any inability to attract and retain personnel could harm our business.
Our future success depends partly on the continued service of our highly qualified and well-trained key personnel, including executive officers. Any unplanned turnover or our failure to develop an adequate succession plan for key positions could reduce our institutional knowledge base and erode our competitive advantage. While our Board of Directors and management actively monitor our succession plans and processes for our executive leadership team, our business could be adversely impacted if we lose key personnel unexpectedly. Competition for senior management is intense and we may not be successful in attracting and retaining key personnel. In addition, 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.
Risks generally associated with information systems, software products and cybersecurity attacks could adversely affect our results of operations.
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 successfullydefendagainst, 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.
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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 outagenegatively 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 gainunauthorized 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 persistentthreats, 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 claimsagainst us by our customers and/or governmental agencies.
Our growing use of AI systems to automate processes and analyze data poses inherent risks.
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.
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Wide-spread public health concerns have, and may in the future, adversely affect our animal health and dental businesses, as we experienced with the COVID-19 pandemic.
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.
Our business and operations are subject to risks related to climate change.
The long-term effects of global climate change present both physical risks (such as extreme weather conditions or rising sea levels) and transition risks (such as regulatory or technology changes), which are expected to be widespread and unpredictable. These changes could over time affect, for example, the availability and cost of products, commodities and energy (including utilities), which in turn may impact our ability to procure goods or services required for the operation of our business at the quantities and levels we require. In addition, certain of our operations and facilities are in locations that may be impacted by the physical risks of climate change, and we face the risk of losses incurred as a result of physical damage to distribution or fulfillment centers of our third-party suppliers, loss or spoilage of inventory and business interruption caused by such events. Insurance may not be available or cost effective for the coverage limits needed. 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.
Our credit agreements contain restrictive covenants and additional limits and our other debt instruments contain cross-default provisions, which limit our business and financing activities.
The covenants under our credit agreements impose restrictions on our business and financing activities, subject to certain exceptions or the consent of our lenders, including, among other things, limits on our ability to incur additional debt, create liens, enter into certain merger, acquisition and divestiture transactions, pay dividends and engage in transactions with affiliates. The credit agreements contain certain customary affirmative covenants, including requirements that we maintain a maximum consolidated leverage ratio and a minimum consolidated interest coverage ratio, pursuant to which we may be affected by changes in interest rates, and customary events of 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
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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.
Our governing documents, other documents to which we are a party, and Minnesota law may discourage takeovers and business combinations that our shareholders might prefer.
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.
INDUSTRY RISKS
The dental and animal health supply markets are highly competitive, and we may not be able to compete successfully.
Our competitors include national, regional and local full-service distributors, mail-order distributors and Internet-based businesses. Some of our competitors have greater resources than we do, or operate through different sales and distribution models that could allow them to compete more successfully. 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.
The dental and animal health supply markets are consolidating, including vertical integration in the production animal market, and we may not be able to compete successfully.
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.
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The formation or expansion of GPOs, provider networks and buying groups may place us at a competitive disadvantage.
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 punitivedamages for pet owners in case of wrongful death or injury.
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Our dental segment is exposed to the risks of the health care industry, including changes in demand due to political, economic and regulatory influences, and other factors outside our control.
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.
Increased OTC and e-commerce sales of products we sell could adversely affect our business.
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.
LITIGATION AND REGULATORY RISKS
We are subject to a variety of litigation and governmental inquiries and investigations.
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. Defendingagainst 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.
If we fail to comply with laws and regulations relating to health care fraud or other laws and regulations, we could sufferpenalties or be required to make significant changes to our operations.
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 “falseclaims laws” and “anti-kickback” laws. Health care fraud
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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 criminalpenalties and costs, including treble damages and substantial civil penalties under the federal FalseClaims Act as well as potential loss of licenses and the ability to participate in federal and state health care programs, criminalpenalties, 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 unsuccessfulchallenges by regulatory authorities or private regulators could result in reputational harm and the incurring of substantial costs. Most states have adopted similar state falseclaims laws, and these state laws have their own penalties which may be in addition to federal FalseClaims 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.
Change and uncertainty in the health care industry could materially adversely affect our business.
Laws and regulations affecting the health care industry in the U.S., including the ACA, have changed and may continue to change the landscape in which our industry operates. Foreign government authorities may also adopt reforms of their health systems. We cannot predict what further reform proposals, if any, will be adopted, when they may be adopted, or what impact they may have on us. 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;
• subject us to inspection by the FDA and the DEA and similar state authorities;
• regulate the sale, transportation, importation, storage, handling and disposal of hazardous or potentially hazardous substances;
• regulate the distribution and storage of pharmaceuticals and controlled substances;
• require us to advertise and promote our drugs and devices in accordance with FDA requirements;
• require registration with the FDA and the DEA and various state agencies;
• require record keeping and documentation of transactions involving drug products;
• require us to design and operate a system to identify and report suspicious orders of controlled substances to the DEA;
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• require us to manage returns of products that have been recalled and subject us to inspection of our recall procedures and activities;
• impose on us reporting requirements if a pharmaceutical, HCT/P product or medical device causes serious illness, injury or death;
• require manufacturers, wholesalers, repackagers and dispensers of prescription drugs to identify and trace certain prescription drugs as they are distributed;
• require the licensing of prescription drug wholesalers and third-party logistics providers; and
• mandate compliance with standards for the recordkeeping, storage and handling of prescription drugs, and associated reporting requirements.
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 criminalfines 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 resolveallegations of non-compliance, we could be required to make settlement payments or be subject to civil and criminalpenalties, 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 pleadedguilty 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.
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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 claimsagainst us by our customers and/or governmental agencies and involve substantial damages, fines, penalties and other liabilities and expenses and costs for remediation.
Tax legislation could materially adversely affect our financial results and tax liabilities.
We are subject to the tax laws and regulations of the United States federal, state and local governments, as well as foreign jurisdictions which are extremely complex and subject to varying interpretations. From time to time, various legislative initiatives may be proposed that could materially adversely affect our tax positions. 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 be adversely affected by this legislation or any other legislative initiatives. Although we believe that our historical tax positions are sound and consistent with applicable laws, regulations and existing precedent, there can be no assurance that our tax positions will not be challenged by relevant tax authorities or that we would be successful in any such challenge.
Our international operations are subject to inherent risks that could adversely affect our business.
There are a number of risks inherent in foreign operations, including the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act, complex regulatory requirements, staffing and management complexities, import and export costs, other economic factors and political considerations, all of which are subject to unanticipated changes. Our foreign operations also expose us to foreign currency fluctuations. Because our financial statements are denominated in U.S. dollars, changes in currency exchange rates between the U.S. dollar and other currencies will have an impact on our income. Currency exchange rate fluctuations may adversely affect our results of operations and financial condition. Furthermore, we generally do not hedge translation exposure with respect to foreign operations.
GENERAL RISKS
Uncertain macro-economic conditions, including inflationary pressure, could materially adversely affect demand for dental and animal health products and services.
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
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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.
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 enhancingefficiency. Management defines internal growth as net sales adjusted to exclude the impact of foreign currency, changes in product selling relationships and contributions from recent acquisitions. Foreign currency impact represents the difference in results that is attributable to fluctuations in currency exchange rates the company uses to convert results for all foreign entities where the functional currency is not the U.S. dollar. The company calculates the impact as the difference between the current period results translated using the current period currency exchange rates and using the comparable prior period’s currency exchange rates. The company believes the disclosure of net sales changes in constant currency provides useful supplementary information to investors in light of significant fluctuations in currency rates.
Factors Affecting Our Results
Macro-economic Conditions. 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.
Receivables Securitization Program. We are a party to certain receivables purchase agreements with MUFG Bank, Ltd. ("MUFG"), under which MUFG acts as an agent to facilitate the sale of certain Patterson receivables (the “Receivables”) to certain unaffiliated financial institutions (the “Purchasers”). The proceeds from the sale of these Receivables comprise a combination of cash and a deferred purchase price (“DPP”) receivable. The DPP receivable is ultimately realized by Patterson following the collection of the underlying Receivables sold to the Purchasers. The collection of the DPP receivable is recognized as an increase to net cash provided by investing activities within the Consolidated Statements of Cash Flows, with a corresponding reduction to net cash used in operating activities within the Consolidated Statements of Cash Flows.
Fiscal 2022 Legal Reserve. On August 27, 2021, we signed a memorandum of understanding to settle the federal securities class action complaintagainst 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
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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.
Gains on Vetsource Investment. In fiscal 2022, we sold a portion of our investment in Vetsource, with a carrying value of $25.8 million, for $56.8 million. We recorded a pre-tax gain of $31.0 million in gains on investments in our Consolidated Statements of Operations and Other Comprehensive Income 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.
Gain on Vets Plus Investment. In fiscal 2022, we sold a portion of our investment in Vets Plus with a carrying value of $4.0 million for $17.1 million. We recorded a pre-tax gain of $13.1 million in gains on investments in our Consolidated Statements of Operations and Other Comprehensive Income 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.
Inventory Donation Charges. In fiscal 2022, we committed to donate certain personal protective equipment to charitable organizations to assist with COVID-19 recovery efforts. We recorded a charge of $49.2 million within cost of sales in our Consolidated Statements of Operations and Other Comprehensive Income 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.
Results of Operations
The following table summarizes our results as a percent of net sales:
Fiscal Year Ended
April 27, 2024
April 29, 2023
April 30, 2022
Net sales
Cost of sales
Gross profit
Operating expenses
Operating income
Other income (expense), net
Income before taxes
Income tax expense
Net income
Net loss attributable to noncontrolling interests
Net income attributable to Patterson Companies, Inc.
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Fiscal 2024 Compared to Fiscal 2023
Net sales . 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.
Gross profit . 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 r 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.
Operating expenses . 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.
Operating income . 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.
Other income (expense). 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.
Income tax expense . The effective income tax rate for fiscal 2024 was 23.7%, compared to 23.5% for fiscal 2023.
Net income attributable to Patterson Companies, Inc. and earnings per share . 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
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2024 were 93.7 million, compared to 97.8 million in fiscal 2023. The fiscal 2024 and fiscal 2023 cash dividend declared was $1.04 per common share.
Fiscal 2023 Compared to Fiscal 2022
See Item 7 in our 2023 Annual Report on Form 10-K filed June 21, 2023.
Liquidity and Capital Resources
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 2024 , we used $1.1 million to pay a holdback following the acquisition of substantially all of the assets of Miller Vet Holdings, LLC, which was due on the 24 month anniversary of the closing date. 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%.
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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 strengthdiminishes to a level that precluded us from taking part in this facility or other similar facilities. Also, market conditions outside of our control could adversely affect the ability for us to sell the contracts.
Customer Financing Arrangements
As a convenience to our customers, we offer several different financing alternatives, including a third party program and a Patterson-sponsored program. For the third party program, we act as a facilitator between the customer and the third party financing entity with no on-going involvement in the financing transaction. Under the Patterson-sponsored program, equipment purchased by creditworthy customers may be financed up to a maximum of $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.
Our financing business is described in further detail in Note 5 to the Consolidated Financial Statements.
Contractual Obligations
A summary of our contractual obligations as of April 27, 2024 was as follows (in thousands):
Payments due by year
Total
Less than
1 year
1-3 years
3-5 years
More than
5 years
Long-term debt principal
Long-term debt interest
Operating leases
Total
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.
For a more complete description of our contractual obligations, see Notes 10 and 11 to the Consolidated Financial Statements.
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Working Capital Management
The following table summarizes our average accounts receivable days sales outstanding and average annual inventory turnover for the past three fiscal years:
Fiscal Year Ended
April 27, 2024
April 29, 2023
April 30, 2022
Days sales outstanding
Inventory turnover
Foreign Operations
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.
Critical Accounting Policies and Estimates
Patterson has adopted various accounting policies to prepare our Consolidated Financial Statements in accordance with accounting principles generally accepted in the U.S. Management believes that our policies are conservative and our philosophy is to adopt accounting policies that minimize the risk of adverse events having a material impact on recorded assets and liabilities. However, the preparation of financial statements requires the use of estimates and judgments regarding the realization of assets and the settlement of liabilities based on the information available to management at the time. Changes subsequent to the preparation of the financial statements in economic, technological and competitive conditions may materially impact the recorded values of Patterson’s assets and liabilities. Therefore, the users of the financial statements should read all the Notes to the Consolidated Financial Statements and be aware that conditions currently unknown to management may develop in the future. This may require a material adjustment to a recorded asset or liability to consistently apply to our significant accounting principles and policies that are discussed in Note 1 to the Consolidated Financial Statements. The financial performance and condition of Patterson may also be materially impacted by transactions and events that we have not previously experienced and for which we have not been required to establish an accounting policy or adopt a generally accepted accounting principle.
Revenue Recognition – Revenues are generated from the sale of consumable products, equipment and support, software and support, technical service parts and labor, and other sources. Revenues are recognized when or as performance obligations are satisfied. Performance obligations are satisfied when the customer obtains control of the goods or services.
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
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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.
Our financing business is described in further detail in Note 5 to the Consolidated Financial Statements.
Inventory and Reserves – 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.
Recoverability of Development Costs of Software to be Sold - 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.
No significant impairments were recorded in fiscal 2024, 2023, or 2022 as a result of the assessments performed of the recoverability of development costs to be sold.
Recoverability of Goodwill – 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.
We performed qualitative assessments for our goodwill impairment tests in fiscal 2024. No impairments were recorded in fiscal 2024, 2023, or 2022 as a result of goodwill tests performed.
Recoverability of Long-Lived Assets – Long-lived assets, including definite-lived intangible assets, are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets (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.
No significant impairments were recorded in fiscal 2024, 2023, or 2022 as a result of the assessments performed of the recoverability of long-lived assets.
Income Taxes – We are subject to income taxes in the U.S. and numerous foreign jurisdictions. Significant judgments are required in determining the consolidated provision for income taxes. Changes in tax policy or interpretation of current tax law create potential added uncertainties.
During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. As a result, we recognize tax liabilities based on estimates of whether additional taxes
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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.
Recent Accounting Pronouncements
For information concerning new accounting standards and the impact of the implementation of these standards on our financial statements, see Note 1 to the Consolidated Financial Statements.
