NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

Note 1. General

Basis of Presentation

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly the financial position of Patterson Companies, Inc. (referred to herein as "Patterson" or in the first person notations "we," "our," and "us") as of January 26, 2019 , and our results of operations and cash flows for the periods ended January 26, 2019 and January 27, 2018 . Such adjustments are of a normal recurring nature. The results of operations for the three and nine months ended January 26, 2019 are not necessarily indicative of the results to be expected for any other interim period or for the year ending April 27, 2019. These financial statements should be read in conjunction with the financial statements included in our 2018 Annual Report on Form 10-K filed on June 27, 2018.

The unaudited condensed consolidated financial statements include the assets and liabilities of PDC Funding Company, LLC ("PDC Funding"), PDC Funding Company II, LLC ("PDC Funding II") and PDC Funding Company III, LLC ("PDC Funding III"), which are our wholly owned subsidiaries and separate legal entities formed under Minnesota law. PDC Funding and PDC Funding II are fully consolidated special purpose entities established to sell customer installment sale contracts to outside financial institutions in the normal course of their business. PDC Funding III is a fully consolidated special purpose entity established to sell certain receivables to unaffiliated financial institutions. The assets of PDC Funding, PDC Funding II and PDC Funding III would be available first and foremost to satisfy the claims of its creditors. There are no known creditors of PDC Funding, PDC Funding II or PDC Funding III. The unaudited condensed consolidated financial statements also include the assets and liabilities of Technology Partner Innovations, LLC, which is further described in Note 7.

Fiscal Year End

We operate with a 52-53 week accounting convention with our fiscal year ending on the last Saturday in April. The third quarter of fiscal 2019 and 2018 represents the 13 weeks ended January 26, 2019 and the 13 weeks ended January 27, 2018 , respectively. The nine months ended January 26, 2019 and January 27, 2018 each included 39 weeks. Fiscal 2019 will include 52 weeks and fiscal 2018 included 52 weeks.

Comprehensive Income

Comprehensive income is computed as net income including certain other items that are recorded directly to stockholders’ equity. Significant items included in comprehensive income are foreign currency translation adjustments and the effective portion of cash flow hedges, net of tax. Foreign currency translation adjustments do not include a provision for income tax because earnings from foreign operations are considered to be indefinitely reinvested outside the U.S. The income tax expense related to cash flow hedges was $177 and $265 for the three months ended January 26, 2019 and January 27, 2018 , respectively. The income tax expense related to cash flow hedges was $534 and $795 for the nine months ended January 26, 2019 and January 27, 2018 , respectively.

Earnings Per Share

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

Potentially dilutive securities representing 1,853 and 1,764 shares for the three and nine months ended January 26, 2019 , respectively, and 1,568 and 1,354 shares for the three and nine months ended January 27, 2018 , respectively, were excluded from the calculation of diluted EPS because their effects were anti-dilutive using the treasury stock method.

Revenue Recognition

Revenues are generated from the sale of consumable products, equipment and support, software and support, technical service parts and labor, and other sources. Revenues are recognized when or as performance obligations are satisfied. Performance obligations are satisfied when the customer obtains control of the goods or services.

Consumable, equipment, software and parts sales are recorded upon delivery, except in those circumstances where terms of the sale are FOB shipping point, in which case sales are recorded upon shipment. Technical service labor is recognized as it is provided. Revenue derived from equipment and software support is recognized ratably over the period in which the support is provided.

In addition to revenues generated from the distribution of consumable products under arrangements (buy/sell agreements) where the full market value of the product is recorded as revenue, we earn commissions for services provided under agency agreements. The agency agreement contrasts to a buy/sell agreement in that we do not have control over the transaction, as we do not have the primary responsibility of fulfilling the promise of the good or service and we do not bill or collect from the customer in an agency relationship. Commissions under agency agreements are recorded when the services are provided.

Estimates for returns, damaged goods, rebates, loyalty programs and other revenue allowances are made at the time the revenue is recognized based on the historical experience for such items. The receivables that result from the recognition of revenue are reported net of related allowances. We maintain a valuation allowance based upon the expected collectability of receivables held. Estimates are used to determine the valuation allowance and are based on several factors, including historical collection data, economic trends and credit worthiness of customers. Receivables are written off when we determine the amounts to be uncollectible, typically upon customer bankruptcy or non-response to continuous collection efforts. The portions of receivable amounts that are not expected to be collected during the next twelve months are classified as long-term.

Net sales do not include sales tax as we are considered a pass-through conduit for collecting and remitting sales tax.

Contract Balances

Contract balances represent amounts presented in our condensed consolidated balance sheets when either we have transferred goods or services to the customer or the customer has paid consideration to us under the contract. These contract balances include accounts receivable, contract assets and contract liabilities.

Contract asset balances as of January 26, 2019 and April 28, 2018 were not material. Our contract liabilities primarily relate to advance payments from customers, upfront payments for software and support provided over time, and options that provide a material right to customers, such as our customer loyalty programs. At January 26, 2019 and April 28, 2018 , contract liabilities of $26,416 and $26,166 were reported in other accrued liabilities, respectively. During the nine months ended January 26, 2019 , we recognized $24,819 of the amount previously deferred at April 28, 2018 .

Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, "Revenue from Contracts with Customers (Topic 606)". ASU No. 2014-09 supersedes the revenue recognition requirements in "Revenue Recognition (Topic 605)," and requires entities to recognize revenue in a way

that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. We adopted the new guidance as of April 29, 2018 using the modified retrospective method, and the adoption had no impact on our consolidated net earnings, financial position, or cash flows.

In January 2016, the FASB issued ASU No. 2016-01 "Financial Instruments- Recognition and Measurement of Financial Assets and Financial Liabilities (Subtopic 825-10)", which amends certain aspects of recognition, measurement, presentation and disclosure of financial instruments, including the requirement to measure certain equity investments at fair value with changes in fair value recognized in net income. We adopted ASU No. 2016-01 in the first quarter of fiscal 2019, and the adoption had no impact on our consolidated net earnings, financial position, or cash flows.

In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)," which requires lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by most leases, as well as requires additional qualitative and quantitative disclosures. We are required to adopt ASU 2016-02 in the first quarter of fiscal 2020, with early adoption permitted. We will adopt the new guidance in the first quarter of fiscal 2020 and are currently evaluating the impact of adopting this pronouncement, and anticipate that the new guidance will impact our condensed consolidated balance sheets.

In February 2018, the FASB issued ASU No. 2018-02, "Income Statement-Reporting Comprehensive Income (Topic 220) Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income," which will allow a reclassification from accumulated other comprehensive income to retained earnings for the tax effects that are stranded in accumulated other comprehensive income as a result of tax reform. This standard also requires certain disclosures about stranded tax effects. We will adopt ASU No. 2018-02 in the first quarter of fiscal 2020, and apply it either in the period of adoption or retrospectively to each period in which the income tax effects of the tax reform related to items in accumulated other comprehensive income are recognized. We are currently evaluating the impact of adopting this pronouncement.

Note 2. Receivables Securitization Program

On July 24, 2018, we entered into a Receivables Purchase Agreement (the “Receivables Purchase Agreement”) with MUFG Bank, Ltd. ("MUFG") (f.k.a. The Bank of Tokyo-Mitsubishi UFJ, Ltd.) . Under this agreement, MUFG acts as an agent to facilitate the sale of certain Patterson receivables (the “Receivables”) to certain unaffiliated financial institutions (the “Purchasers”). The sale of these receivables is accounted for as a sale of assets under the provisions of ASC 860, Transfers and Servicing. We utilize PDC Funding III to facilitate the sale to fulfill requirements within the agreement.

Sales of Receivables occur daily and are settled with the Purchasers on a monthly basis. The proceeds from the sale of these Receivables comprise a combination of cash and a deferred purchase price (“DPP”) receivable. The DPP receivable is ultimately realized by Patterson following the collection of the underlying Receivables sold to the Purchasers. The amount available under the Receivables Purchase Agreement fluctuates over time based on the total amount of eligible Receivables generated during the normal course of business, with maximum availability of  $200,000 . As of  January 26, 2019 , $167,000 of the amount available under the Receivables Purchase Agreement was utilized.

We have no retained interests in the transferred Receivables, other than our right to the DPP receivable and collection and administrative service fees. We consider the fees received adequate compensation for services rendered, and accordingly have recorded no servicing asset or liability. The DPP receivable is recorded at fair value within the condensed consolidated balance sheets within prepaid expenses and other current assets. The DPP receivable was $58,322 as of January 26, 2019 . The difference between the carrying amount of the Receivables and the sum of the cash and fair value of the DPP receivable received at time of transfer is recognized as a gain or loss on sale of the related Receivables. We recorded a loss on sale of Receivables within operating expenses in the condensed consolidated statements of income and other comprehensive income during the three and nine months ended January 26, 2019 of $2,719 and $5,590 , respectively.

Note 3. Customer Financing

As a convenience to our customers, we offer several different financing alternatives, including a third party program and a Patterson-sponsored program. For the third party program, we act as a facilitator between the customer and the third party financing entity with no on-going involvement in the financing transaction. Under the Patterson-sponsored program, equipment purchased by creditworthy customers may be financed up to a maximum of $1,000 . We generally

sell our customers’ financing contracts to outside financial institutions in the normal course of our business. These financing arrangements are accounted for as a sale of assets under the provisions of ASC 860, Transfers and Servicing . We currently have two arrangements under which we sell these contracts.

First, we operate under an agreement to sell a portion of our equipment finance contracts to commercial paper conduits with MUFG serving as the agent. We utilize PDC Funding to fulfill a requirement of participating in the commercial paper conduit. We receive the proceeds of the contracts upon sale to MUFG. At least 9.5% of the proceeds are held by the conduit as security against eventual performance of the portfolio. This percentage can be greater and is based upon certain ratios defined in the agreement with MUFG. The capacity under the agreement with MUFG at January 26, 2019 was $525,000 .

Second, we maintain an agreement with Fifth Third Bank ("Fifth Third") whereby Fifth Third purchases customers’ financing contracts. PDC Funding II sells its financing contracts to Fifth Third. We receive the proceeds of the contracts upon sale to Fifth Third. At least 11.0% of the proceeds are held by the conduit as security against eventual performance of the portfolio. This percentage can be greater and is based upon certain ratios defined in the agreement with Fifth Third. The capacity under the agreement with Fifth Third at January 26, 2019 was $100,000 .

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

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

During the three months ended January 26, 2019 and January 27, 2018 , we sold $107,715 and $45,361 of contracts under these arrangements, respectively. During the nine months ended January 26, 2019 and January 27, 2018 , we sold $195,738 and $197,072 of contracts under these arrangements, respectively. In net sales in the condensed consolidated statements of income and other comprehensive income, we recorded a gain of $6,641 during the three months ended January 26, 2019 and a loss of $1,688 during the three months ended January 27, 2018 related to these contracts sold. In net sales in the condensed consolidated statements of income and other comprehensive income, we recorded a gain of $11,866 and $8,539 during the nine months ended January 26, 2019 and January 27, 2018 , respectively, related to these contracts sold.

Included in cash and cash equivalents in the condensed consolidated balance sheets are $33,850 and $35,741 as of January 26, 2019 and April 28, 2018 , respectively, which represent cash collected from previously sold customer financing contracts that have not yet been settled. Included in current receivables in the condensed consolidated balance sheets are $69,772 , net of unearned income of $41 , and $46,232 , net of unearned income of $8 , as of January 26, 2019 and April 28, 2018 , respectively, of finance contracts we have not yet sold. A total of $571,664 of finance contracts receivable sold under the arrangements was outstanding at January 26, 2019 . The DPP receivable under the arrangements was $111,461 and $150,404 as of January 26, 2019 and April 28, 2018 , respectively. Since the internal financing program began in 1994, bad debt write-offs have amounted to less than 1% of the loans originated.

The arrangements require us to maintain a minimum current ratio and maximum leverage ratio. We were in compliance with those covenants at January 26, 2019 .

Note 4. Derivative Financial Instruments

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

The interest rate cap agreements are canceled and new agreements are entered into periodically to maintain consistency with the dollar maximum of the sale agreements and the maturity of the underlying financing contracts.

As of January 26, 2019 , PDC Funding had purchased an interest rate cap from a bank with a notional amount of $525,000 and a maturity date of July 2026. We sold an identical interest rate cap to the same bank. As of January 26, 2019 , PDC Funding II had purchased an interest rate cap from a bank with a notional amount of $100,000 and a maturity date of December 2025. We sold an identical interest rate cap to the same bank.

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

In March 2008, we entered into two forward starting interest rate swap agreements, each with notional amounts of $100,000 and accounted for as cash flow hedges, to hedge interest rate fluctuations in anticipation of the issuance of the senior notes due fiscal 2015 and fiscal 2018 . Upon issuance of the hedged debt, we settled the forward starting interest rate swap agreements and recorded a $1,000 increase, net of income taxes, to other comprehensive income (loss), which was amortized as a reduction to interest expense over the life of the related debt.

In January 2014, we entered into a forward interest rate swap agreement with a notional amount of $250,000 and accounted for it as a cash flow hedge, in order to hedge interest rate fluctuations in anticipation of refinancing the 5.17% senior notes due March 25, 2015 . These notes were repaid on March 25, 2015 and replaced with new $250,000 3.48% senior notes due March 24, 2025 . A cash payment of $29,003 was made in March 2015 to settle the interest rate swap. This amount is recorded in other comprehensive income (loss), net of tax, and is recognized as interest expense over the life of the related debt.

In January 2019, we entered into a forward interest rate swap agreement with a notional amount of $539,400 in order to hedge against interest rate fluctuations that impact the amount of net sales we record related to our customer financing contracts. This interest rate swap does not qualify for hedge accounting treatment and, accordingly, we will record the fair value of the agreements as an asset or liability and the change as income or expense during the period in which the change occurs.

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

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

There were no gains or losses recognized in OCI on cash flow hedging derivatives during the three and nine months ended January 26, 2019 or January 27, 2018 .

We recorded no ineffectiveness during the three and nine month periods ended January 26, 2019 and January 27, 2018 . As of January 26, 2019 , the estimated pre-tax portion of accumulated other comprehensive loss that is expected to be reclassified into earnings over the next twelve months is $2,900 , which will be recorded as an increase to interest expense.

Note 5. Fair Value Measurements

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

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

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

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

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

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

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

Certain assets are measured at fair value on a non-recurring basis. These assets are not measured at fair value on an ongoing basis, but are subject to fair value adjustments under certain circumstances, such as when there is evidence of impairment. There were no fair value adjustments to such assets during the nine month periods ended January 26, 2019 or January 27, 2018 .

Our debt is not measured at fair value in the condensed consolidated balance sheets. The estimated fair value of our debt as of January 26, 2019 and April 28, 2018 was $745,533 and $989,124 , respectively, as compared to a carrying value of $754,771 and $998,628 at January 26, 2019 and April 28, 2018 , respectively. The fair value of debt was measured using a discounted cash flow analysis based on expected market based yields (i.e., Level 2 inputs).

The carrying amounts of receivables, net of allowances, accounts payable, and certain accrued and other current liabilities approximated fair value at January 26, 2019 and April 28, 2018 .

Note 6. Income Taxes

The effective income tax rate for the three months ended January 26, 2019 was 17.4% compared to (170.0)% for the three months ended January 27, 2018 , and for the nine months ended January 26, 2019 was 21.0% compared to (20.9)% for the nine months ended January 27, 2018 .

The change in tax rate for the three and nine months ended January 26, 2019 compared to the three and nine months ended January 27, 2018 was primarily due to the impact of the Tax Cuts and Jobs Act ("Tax Act"), enacted on December 22, 2017 by the U.S. government. The Tax Act significantly revises the future ongoing U.S. federal corporate income tax by, among other things, lowering U.S. federal corporate tax rates and implementing a territorial tax system. Effective January 1, 2018, the Tax Act reduced the U.S. federal corporate tax rate from 35.0% to 21.0% . For the fiscal year ended April 28, 2018, we utilized a blended rate of approximately 30.5% . For the three and nine months ended January 26, 2019 , we utilized a 21.0% U.S. federal statutory rate.

The legislative changes included in the Tax Act are broad and complex. For the fiscal year ended April 28, 2018, we recognized provisional net tax benefit of $76,648 , which included provisional amounts of $81,871 of tax benefit on

U.S. deferred tax assets and liabilities, $4,006 of tax expense for a one-time transition tax on unremitted foreign earnings and $1,217 in withholding taxes paid on current year distributions. During the nine months ended January 26, 2019 , we completed our accounting for the previously recorded provisional impacts of the Tax Act and recorded additional remeasurement benefit of $2,355 on U.S. deferred tax assets and liabilities and a reduction to the transition tax cost of $331 .

For the fiscal year ended April 28, 2018, and directly connected to the transition tax legislation, Patterson approved a one-time repatriation of cash included in the transition tax computation. There was an approximate $1,217 one-time cost recorded during fiscal 2018 to reflect the added withholding tax cost associated with this repatriation. With the exception of this one-time repatriation, Patterson continues to apply ASC 740 based on the provisions of the tax law that were in effect immediately prior to the enactment of the new law. With regard to unremitted earnings of foreign subsidiaries generated after December 31, 2017, we do not currently provide for U.S. taxes since we intend to invest such undistributed earnings indefinitely outside of the U.S.

We have made an accounting policy election to treat the impacts of the global intangible low taxed income (“GILTI”) tax as a period cost in the period incurred. An estimate of GILTI has been included in the effective tax rate for the three and nine months ended January 26, 2019 . We continue to monitor this estimate as the GILTI provisions under the Tax Act are complex and subject to continued regulatory interpretation by the IRS.

While we have completed our accounting for the previously recorded provisional impacts of the Tax Act, pursuant to the Securities and Exchange Commission rules, under SAB 118, changes in interpretations of the Tax Act, analysis of proposed and final regulations as they are issued, current and additional guidance from the Internal Revenue Service and/or state legislative actions as well as potential changes in accounting standards surrounding income taxes and the Tax Act may result in further, potentially material, changes to these completed computations.

Note 7. Technology Partner Innovations, LLC

In the first quarter of fiscal 2019, we entered into an agreement with Cure Partners to form Technology Partner Innovations, LLC (TPI), which is launching a new cloud-based practice management software, NaVetor. Patterson and Cure Partners each contributed net assets of $4,000 to form TPI. We have determined that TPI is a variable interest entity, and we consolidate the results of operations of TPI as we have concluded that we are the primary beneficiary of TPI. During the three and nine ended January 26, 2019 , net loss attributable to the noncontrolling interest was $171 and $447 , respectively, resulting in noncontrolling interests of $3,553 on the condensed consolidated balance sheet at January 26, 2019 .

Note 8. Segment and Geographic Data

We present three reportable segments: Dental, Animal Health and Corporate. Dental and Animal Health are strategic business units that offer similar products and services to different customer bases. Dental provides a virtually complete range of consumable dental products, equipment and software, turnkey digital solutions and value-added services to dentists, dental laboratories, institutions, and other healthcare professionals throughout North America. Animal Health is a leading, full-line distributor in North America and the U.K. of animal health products, services and technologies to both the production-animal and companion-pet markets. Our Corporate segment is comprised of general and administrative expenses, including home office support costs in areas such as information technology, finance, legal, human resources and facilities. In addition, customer financing and other miscellaneous sales are reported within Corporate results. Corporate assets consist primarily of cash and cash equivalents, accounts receivable, property and equipment and long-term receivables. We evaluate segment performance based on operating income. The costs to operate the fulfillment centers are allocated to the operating units based on the through-put of the unit.

The following tables present information about our reportable segments: