VCA Inc.
VCA INC (Form: 10-Q, Received: 05/06/2016 14:06:20)
 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________________ 
FORM 10-Q  
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2016
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-16783
___________________________________________________ 
VCA Inc.
(Exact name of registrant as specified in its charter)
 
Delaware
 
95-4097995
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
12401 West Olympic Boulevard
Los Angeles, California 90064-1022
(Address of principal executive offices)
(310) 571-6500
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ].
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [  ].
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.:
Large accelerated filer [X]
  
Accelerated filer [  ]
 
 
 
Non-accelerated filer [  ]
  
Smaller reporting company [  ]
(Do not check if a smaller reporting company)
  
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X].
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: common stock, $0.001 par value, 80,823,218 shares as of May 3, 2016 .
 
 
 
 
 



VCA Inc. and Subsidiaries
Form 10-Q
March 31, 2016
Table of Contents

Page
Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



PART I.
FINANCIAL INFORMATION

ITEM 1.
FINANCIAL STATEMENTS

VCA Inc. and Subsidiaries
Condensed, Consolidated Balance Sheets
(Unaudited)
(In thousands, except par value)
 
March 31, 2016
 
December 31, 2015
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
74,480

 
$
98,888

Trade accounts receivable, less allowance for uncollectible accounts of $21,236 and $21,775 at March 31, 2016 and December 31, 2015, respectively
79,540

 
76,634

Inventory
54,961

 
51,523

Prepaid expenses and other
33,090

 
30,521

Prepaid income taxes
7,798

 
24,598

Total current assets
249,869

 
282,164

Property and equipment, net
540,017

 
507,753

Goodwill
1,656,389

 
1,517,650

Other intangible assets, net
114,469

 
97,377

Notes receivable
5,472

 
2,194

Other
97,459

 
93,994

Total assets
$
2,663,675

 
$
2,501,132

Liabilities and Equity
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
33,947

 
$
33,623

Accounts payable
46,573

 
52,337

Accrued payroll and related liabilities
88,510

 
75,519

Other accrued liabilities
77,418

 
70,828

Total current liabilities
246,448

 
232,307

Long-term debt, net
918,622

 
832,718

Deferred income taxes
131,150

 
131,478

Other liabilities
39,167

 
36,084

Total liabilities
1,335,387

 
1,232,587

Commitments and contingencies

 

Redeemable noncontrolling interests
11,787

 
11,511

Preferred stock, par value $0.001, 11,000 shares authorized, none outstanding

 

VCA Inc. stockholders’ equity:
 
 
 
Common stock, par value $0.001, 175,000 shares authorized, 80,801 and 80,764 shares outstanding as of March 31, 2016 and December 31, 2015, respectively
81

 
81

Additional paid-in capital
22,681

 
19,708

Retained earnings
1,321,434

 
1,275,207

Accumulated other comprehensive loss
(37,789
)
 
(50,034
)
Total VCA Inc. stockholders’ equity
1,306,407

 
1,244,962

Noncontrolling interests
10,094

 
12,072

Total equity
1,316,501

 
1,257,034

Total liabilities and equity
$
2,663,675

 
$
2,501,132



The accompanying notes are an integral part of these condensed, consolidated financial statements.

1


VCA Inc. and Subsidiaries
Condensed, Consolidated Statements of Income
(Unaudited)
(In thousands, except per share amounts)



 
Three Months Ended
March 31,
 
2016
 
2015
Revenue
$
563,439

 
$
499,453

Direct costs
426,659

 
385,591

Gross profit
136,780

 
113,862

Selling, general and administrative expense
50,128

 
44,398

Net loss on sale or disposal of assets
563

 
335

Operating income
86,089

 
69,129

Interest expense, net
7,095

 
4,837

Other (income) expense
(264
)
 
66

Income before provision for income taxes
79,258

 
64,226

Provision for income taxes
31,536

 
24,673

Net income
47,722

 
39,553

Net income attributable to noncontrolling interests
1,495

 
1,252

Net income attributable to VCA Inc.
$
46,227

 
$
38,301

Basic earnings per share
$
0.57

 
$
0.47

Diluted earnings per share
$
0.57

 
$
0.46

Weighted-average shares outstanding for basic earnings per share
80,776

 
82,347

Weighted-average shares outstanding for diluted earnings per share
81,523

 
83,373



The accompanying notes are an integral part of these condensed, consolidated financial statements.

2


VCA Inc. and Subsidiaries
Condensed, Consolidated Statements of Comprehensive Income
(Unaudited)
(In thousands)

 
 
Three Months Ended
March 31,
 
2016
 
2015
Net income (1)  
$
47,722

 
$
39,553

Other comprehensive income:
 
 
 
Foreign currency translation adjustments
12,598

 
(15,680
)
Other comprehensive income (loss)
12,598

 
(15,680
)
Total comprehensive income
60,320

 
23,873

Comprehensive income attributable to noncontrolling interests (1) 
1,848

 
780

Comprehensive income attributable to VCA Inc.
$
58,472

 
$
23,093

____________________________
(1)  
Includes approximately $1.0 million and $0.8 million of net income related to redeemable and mandatorily redeemable noncontrolling interests for the three months ended March 31, 2016 and 2015 , respectively.



































The accompanying notes are an integral part of these condensed, consolidated financial statements.

3


VCA Inc. and Subsidiaries
Condensed, Consolidated Statements of Equity
(Unaudited)
(In thousands)


 
Common Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income
 
Noncontrolling
Interests
 
 Total
 
Shares
 
Amount
 
 
 
 
 
Balances, December 31, 2014
82,937

 
$
83

 
$
155,802

 
$
1,064,158

 
$
(19,397
)
 
$
10,975

 
$
1,211,621

Net income (excludes $417 and $359 related to redeemable and mandatorily redeemable noncontrolling interests, respectively)

 

 

 
38,301

 

 
476

 
38,777

Other comprehensive loss (excludes $195 related to mandatorily redeemable noncontrolling interests)

 

 

 

 
(15,208
)
 
(277
)
 
(15,485
)
Formation of noncontrolling interests

 

 

 

 

 
(14
)
 
(14
)
Distribution to noncontrolling interests

 

 

 

 

 
(598
)
 
(598
)
Purchase of noncontrolling interests

 

 
(217
)
 

 

 
(473
)
 
(690
)
Share-based compensation

 

 
4,132

 

 

 

 
4,132

Issuance of common stock under stock incentive plans
76

 

 
404

 

 

 

 
404

Stock repurchases
(878
)
 
(1
)
 
(44,844
)
 

 

 

 
(44,845
)
Excess tax benefit from stock based compensation

 

 
791

 

 

 

 
791

Balances, March 31, 2015
82,135

 
$
82

 
$
116,068

 
$
1,102,459

 
$
(34,605
)
 
$
10,089

 
$
1,194,093

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances, December 31, 2015
80,764

 
$
81

 
$
19,708

 
$
1,275,207

 
$
(50,034
)
 
$
12,072

 
$
1,257,034

Net income (excludes $641 and $365 related to redeemable and mandatorily redeemable noncontrolling interests, respectively)

 
$

 
$

 
$
46,227

 
$

 
$
489

 
$
46,716

Other comprehensive income (excludes $167 related to mandatorily redeemable noncontrolling interests)

 

 

 

 
12,245

 
186

 
12,431

Distribution to noncontrolling interests

 

 

 

 

 
(637
)
 
(637
)
Purchase of noncontrolling interests

 

 
(1,821
)
 

 

 
(1,909
)
 
(3,730
)
Share-based compensation

 

 
4,906

 

 

 

 
4,906

Issuance of common stock under stock incentive plans
55

 

 
286

 

 

 

 
286

Stock repurchases
(18
)
 

 
(843
)
 

 

 

 
(843
)
Excess tax benefit from stock based compensation

 

 
445

 

 

 

 
445

Other

 

 

 

 

 
(107
)
 
(107
)
Balances, March 31, 2016
80,801

 
$
81

 
$
22,681

 
$
1,321,434

 
$
(37,789
)
 
$
10,094

 
$
1,316,501


The accompanying notes are an integral part of these condensed, consolidated financial statements.

4


VCA Inc. and Subsidiaries
Condensed, Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)

 
Three Months Ended
March 31,
 
2016
 
2015
Cash flows from operating activities:
 
 
 
Net income
$
47,722

 
$
39,553

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
21,289

 
19,797

Amortization of debt issue costs
433

 
434

Provision for uncollectible accounts
851

 
1,183

Net loss on sale or disposal of assets
563

 
335

Share-based compensation
4,906

 
4,132

Excess tax benefits from share-based compensation
(445
)
 
(791
)
Other
4,489

 
(989
)
Changes in operating assets and liabilities:
 
 
 
Trade accounts receivable
(3,339
)
 
(14,570
)
Inventory, prepaid expenses and other assets
(7,569
)
 
2,862

Accounts payable and other accrued liabilities
(4,801
)
 
(6,954
)
Accrued payroll and related liabilities
12,955

 
14,052

Income taxes
16,855

 
21,581

Net cash provided by operating activities
93,909

 
80,625

Cash flows from investing activities:
 
 
 
Business acquisitions, net of cash acquired
(160,385
)
 
(33,652
)
Property and equipment additions
(25,806
)
 
(16,526
)
Proceeds from sale or disposal of assets
12

 
92

Other
(7,346
)
 
(576
)
Net cash used in investing activities
(193,525
)
 
(50,662
)
Cash flows from financing activities:
 
 
 
Repayment of long-term obligations
(9,678
)
 
(5,165
)
Proceeds from revolving credit facility
90,000

 

Distributions to noncontrolling interest partners
(1,238
)
 
(1,325
)
Purchase of noncontrolling interests
(3,730
)
 
(1,483
)
Proceeds from issuance of common stock under stock incentive plans
286

 
404

Excess tax benefits from share-based compensation
445

 
791

Stock repurchases
(843
)
 
(44,845
)
Other
(333
)
 
(80
)
Net cash provided by (used in) financing activities
74,909

 
(51,703
)
Effect of currency exchange rate changes on cash and cash equivalents
299

 
(365
)
Decrease in cash and cash equivalents
(24,408
)
 
(22,105
)
Cash and cash equivalents at beginning of period
98,888

 
81,383

Cash and cash equivalents at end of period
$
74,480

 
$
59,278

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

The accompanying notes are an integral part of these condensed, consolidated financial statements.

5


VCA Inc. and Subsidiaries
Condensed, Consolidated Statements of Cash Flows (Continued)
(Unaudited)
(In thousands)

 
Three Months Ended
March 31,
 
2016
 
2015
Supplemental disclosures of cash flow information:
 
 
 
Interest paid
$
5,173

 
$
4,482

Income taxes paid
$
14,213

 
$
3,077



The accompanying notes are an integral part of these condensed, consolidated financial statements.

6


VCA Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements
March 31, 2016
(Unaudited)

 
1.
Nature of Operations
Our company, VCA Inc. (“VCA”) is a Delaware corporation formed in 1986 and is based in Los Angeles, California. We are an animal healthcare company with the following four operating segments: animal hospitals ("Animal Hospital"), veterinary diagnostic laboratories ("Laboratory"), veterinary medical technology ("Medical Technology"), and Camp Bow Wow Franchising, Inc. (f/k/a D.O.G. Enterprises, LLC ("Camp Bow Wow"). Our operating segments are aggregated into two reportable segments: Animal Hospital and Laboratory. Our Medical Technology and Camp Bow Wow operating segments are combined in our All Other category. See Note 8 , Lines of Business within these notes to unaudited condensed, consolidated financial statements.
Our Animal Hospitals offer a full range of general medical and surgical services for companion animals. Our Animal Hospitals treat diseases and injuries, provide pharmaceutical products and perform a variety of pet-wellness programs, including health examinations, diagnostic testing, vaccinations, spaying, neutering and dental care. At March 31, 2016 , we operated or managed 703 animal hospitals throughout 41 states and four Canadian provinces.
We operate a full-service veterinary diagnostic laboratory network serving all 50 states and certain areas in Canada. Our Laboratory network provides sophisticated testing and consulting services used by veterinarians in the detection, diagnosis, evaluation, monitoring, treatment and prevention of diseases and other conditions affecting animals. At March 31, 2016 , we operated 60 laboratories of various sizes located strategically throughout the United States and Canada.
Our Medical Technology business sells digital radiography and ultrasound imaging equipment, provides education and training on the use of that equipment, provides consulting and mobile imaging services, and sells software and ancillary services to the veterinary market.
Our Camp Bow Wow business franchises a premier provider of pet services including dog day care, overnight boarding, grooming and other ancillary services at specially designed pet care facilities, principally under the trademark Camp Bow Wow ® .  As of March 31, 2016 , there were 126 Camp Bow Wow franchise locations operating in 34 states and one Canadian province. 
On December 31, 2015, our company sold substantially all of the assets of Vetstreet Inc. ("Vetstreet") to a subsidiary of Henry Schein, Inc.. Concurrent with the sale of Vetstreet, we purchased a 19.9% interest in the continuing Vetstreet business. Prior to the sale of Vetstreet, its results of operations were included in our "All Other" category.
The practice of veterinary medicine is subject to seasonal fluctuation. In particular, demand for veterinary services is significantly higher during the warmer months because pets spend a greater amount of time outdoors where they are more likely to be injured and are more susceptible to disease and parasites. In addition, use of veterinary services may be affected by levels of flea infestation, heartworms and ticks, and the number of daylight hours.

2.
Basis of Presentation
Our accompanying unaudited, condensed, consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information and in accordance with the rules and regulations of the United States Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the disclosures required by GAAP for annual financial statements as permitted under applicable rules and regulations. In the opinion of management, all normal recurring adjustments considered necessary for a fair presentation have been included. The results of operations for the three months ended March 31, 2016 are not necessarily indicative of the results to be expected for the full year ending December 31, 2016 . For further information, refer to our audited consolidated financial statements and notes thereto included in our 2015 Annual Report on Form 10-K.

The preparation of our condensed, consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in our condensed, consolidated financial statements and notes thereto. Actual results could differ from those estimates.





7


VCA Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
March 31, 2016
(Unaudited)

3.
Goodwill and Other Long-Lived Assets
Goodwill
The following table presents the changes in the carrying amount of our goodwill for the three months ended March 31, 2016 (in thousands):
 
 
Animal
Hospital
 
Laboratory
 
All Other
 
Total
Balance as of December 31, 2015
 
 
 
 
 
 
 
Goodwill
$
1,402,106

 
$
101,269

 
$
144,332

 
$
1,647,707

Accumulated impairment losses

 

 
(130,057
)
 
(130,057
)
Subtotal
1,402,106

 
101,269

 
14,275

 
1,517,650

Goodwill acquired
129,246

 

 
120

 
129,366

Foreign translation adjustment
9,013

 
31

 

 
9,044

Other (1)
329

 

 

 
329

Balance as of March 31, 2016
 
 
 
 
 
 
 
Goodwill
1,540,694

 
101,300

 
144,452

 
1,786,446

Accumulated impairment losses

 

 
(130,057
)
 
(130,057
)
Subtotal
$
1,540,694

 
$
101,300

 
$
14,395

 
$
1,656,389

 ____________________________

(1)  
"Other" consists primarily of measurement period adjustments.

Other Intangible Assets
Our acquisition related amortizable intangible assets at March 31, 2016 and December 31, 2015 are as follows (in thousands):

 
As of March 31, 2016
 
As of December 31, 2015
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Non-contractual customer relationships
$
132,741

 
$
(54,491
)
 
$
78,250

 
$
116,082

 
$
(48,821
)
 
$
67,261

Covenants not-to-compete
16,311

 
(5,364
)
 
10,947

 
12,435

 
(4,779
)
 
7,656

Favorable lease assets
9,461

 
(5,543
)
 
3,918

 
9,441

 
(5,440
)
 
4,001

Technology
1,377

 
(643
)
 
734

 
1,377

 
(589
)
 
788

Trademarks
11,242

 
(4,535
)
 
6,707

 
10,551

 
(4,086
)
 
6,465

Franchise rights
11,730

 
(1,857
)
 
9,873

 
11,730

 
(1,564
)
 
10,166

Total
$
182,862

 
$
(72,433
)
 
$
110,429

 
$
161,616

 
$
(65,279
)
 
$
96,337











8


VCA Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
March 31, 2016
(Unaudited)

3.
Goodwill and Other Long-Lived Assets, continued

The following table summarizes our aggregate amortization expense related to acquisition related intangible assets (in thousands):
 
 
Three Months Ended
March 31,
 
2016
 
2015
Aggregate amortization expense
$
6,228

 
$
5,526

The estimated amortization expense related to acquisition related intangible assets for the remainder of 2016 and each of the succeeding years thereafter, as of March 31, 2016 , is as follows (in thousands):

Finite-lived intangible assets:
 
Remainder of 2016
$
20,119

2017
21,442

2018
18,033

2019
15,070

2020
10,234

Thereafter
25,531

Total
$
110,429

Indefinite-lived intangible assets:
 
Trademarks
4,040

Total intangible assets
$
114,469

 

4.
Acquisitions

The table below reflects the activity related to the acquisitions and dispositions of our animal hospitals and laboratories during the three months ended March 31, 2016 and 2015 , respectively:

 
Three Months Ended
March 31,
 
2016
 
2015
Animal Hospitals:
 
 
 
Acquisitions
24

 
11

Acquisitions, merged
(1
)
 
(2
)
Sold, closed or merged
(2
)
 
(2
)
Net increase
21

 
7

 
 
 
 
Laboratories:
 
 
 
Acquisitions

 
1

Acquisitions, merged

 
(1
)
Net increase

 








9


VCA Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
March 31, 2016
(Unaudited)

4.
Acquisitions, continued

Animal Hospital and Laboratory Acquisitions
The purchase price allocations for some of the 2016 animal hospital acquisitions included in the table below are preliminary; however, adjustments, if any, are not expected to be material. The measurement periods for purchase price allocations do not exceed 12 months from the acquisition date. The following table summarizes the aggregate consideration for our independent animal hospitals and labs acquired during the three months ended March 31, 2016 and 2015 , respectively, (in thousands):

 
Three Months Ended
March 31,
 
2016
 
2015
Consideration:
 
 
 
  Cash, net of cash acquired
$
157,325

 
$
31,850

  Assumed debt
1,361

 
4,446

  Holdbacks
3,508

 
1,722

  Earn-outs
3,437

 

      Fair value of total consideration transferred
$
165,631

 
$
38,018

 
 
 
 
Allocation of the Purchase Price:
 
 
 
  Tangible assets
$
17,541

 
$
764

  Identifiable intangible assets (1)
18,844

 
2,838

  Goodwill (2)
129,246

 
34,563

  Other liabilities assumed

 
(147
)
      Fair value of assets acquired and liabilities assumed
$
165,631

 
$
38,018

____________________________

(1)  
Identifiable intangible assets include customer relationships, trademarks and covenants-not-to-compete. The weighted-average amortization period for the total identifiable intangible assets is approximately five years. The weighted-average amortization period for customer relationships, trademarks and covenants is approximately five years, two years and five years, respectively.

(2)  
We expect that $129.2 million and $30.4 million of the goodwill recorded for these acquisitions, as of March 31, 2016 and 2015 , respectively, will be fully deductible for income tax purposes.

Included in the table above is Antech Diagnostics, Inc.'s March 31, 2015 acquisition of Abaxis Veterinary Reference Laboratory ("AVRL") for total consideration of $21.0 million . The purchase price allocation had been finalized during the quarter ended December 31, 2015.








10


VCA Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
March 31, 2016
(Unaudited)

5.
Other Accrued Liabilities
Other accrued liabilities consisted of the following at March 31, 2016 and December 31, 2015 (in thousands):

 
March 31, 2016
 
December 31, 2015
Deferred revenue
$
15,853

 
$
14,647

Accrued health insurance
4,996

 
4,952

Deferred rent
4,998

 
4,791

Accrued other insurance
5,691

 
5,013

Miscellaneous accrued taxes (1)
3,972

 
3,317

Accrued accounting and legal fees
3,772

 
2,697

Accrued workers' compensation
3,741

 
3,212

Holdbacks and earn-outs
13,072

 
9,959

Customer deposits
3,088

 
2,971

Accrued lease payments
1,763

 
1,536

Other
16,472

 
17,733

 
$
77,418

 
$
70,828

____________________________
(1)     Includes property, sales and use taxes.


6.
Long-Term Obligations

During the current fiscal year, ASU 2015-03 and ASU 2015-15 were adopted. In accordance with ASU 2015-03, the table below presents debt issuance costs as a direct deduction from the face amount of the corresponding notes in the current period and retrospectively in the prior fiscal year end.




























11


VCA Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
March 31, 2016
(Unaudited)

6.
Long-Term Obligations, continued

Long-term obligations consisted of the following at March 31, 2016 and December 31, 2015 (in thousands):

 
 
 
 
March 31, 2016
 
December 31, 2015
Senior term notes
 
Principal amount
 
$
577,500

 
$
585,000

 
 
Less unamortized debt issuance costs
 
(2,230
)
 
(2,408
)
 
 
Senior term notes less unamortized debt issuance costs, maturing in 2019, secured by assets, variable interest rate (1.94% and 1.92% at March 31, 2016 and December 31, 2015, respectively)
 
$
575,270

 
$
582,592

Revolving credit
 
Principal amount
 
$
322,000

 
$
232,000

 
 
Less unamortized debt issuance costs
 
(3,470
)
 
(3,725
)
 
 
Revolving line of credit less unamortized debt issuance costs, maturing in 2019, secured by assets, variable interest rate (1.96% and 1.92% at March 31, 2016 and December 31, 2015, respectively)
 
$
318,530

 
$
228,275

Secured seller note
 
Notes payable matures in 2016, secured by assets and stock of certain subsidiaries, with interest rate of 10.0%
 
230

 
230

 
 
Total debt obligations
 
894,030

 
811,097

 
 
Capital lease obligations and other debt
 
58,539

 
55,244

 
 
 
 
952,569

 
866,341

 
 
Less — current portion
 
(33,947
)
 
(33,623
)
 
 
 
 
$
918,622

 
$
832,718


As of March 31, 2016, we have borrowed $322.0 million from our revolving credit facility to fund our acquisitions and for repurchases under our existing $400 million share repurchase program.

Maturity and Principal Payments. The senior term notes mature on August 27, 2019 . Principal payments on the senior term notes of $7.5 million are due each calendar quarter from June 30, 2016 to and including June 30, 2017, $11.3 million are due each calendar quarter from September 30, 2017 to and including June 30, 2018 and $15.0 million are due each calendar quarter thereafter with a final payment of the outstanding principal balance due upon maturity.

The revolving credit facility has a per annum commitment fee determined by reference to the Leverage Ratio in effect from time to time and is applied to the unused portion of the commitment. The revolving credit facility matures on August 27, 2019. Principal payments on the revolving credit facility are made at our discretion with the entire unpaid amount due at maturity. At March 31, 2016 , we had borrowings of $322.0 million under our revolving credit facility.

The following table sets forth the scheduled principal payments for our senior credit facility (in thousands):
 
 
2016
 
2017
 
2018
 
2019
 
2020
Senior term notes
 
$
22,500

 
$
37,500

 
$
52,500

 
$
465,000

 
$

Revolving loans
 

 

 

 
322,000

 

 
 
$
22,500

 
$
37,500

 
$
52,500

 
$
787,000

 
$






12


VCA Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
March 31, 2016
(Unaudited)

6.
Long-Term Obligations, continued

Guarantees and Security. We and each of our wholly-owned domestic subsidiaries guarantee the outstanding indebtedness under the senior credit facility. Any borrowings, along with the guarantees of the domestic subsidiaries, are further secured by a pledge of substantially all of our consolidated assets, including 65% of the voting equity and 100% of the non-voting equity interest in each of our foreign subsidiaries.


7.    Calculation of Earnings per Share
Basic earnings per share is calculated by dividing net income by the weighted-average number of shares outstanding during the period. Diluted earnings per share is calculated by dividing net income attributable to VCA Inc. by the weighted-average number of common shares outstanding, after giving effect to all dilutive potential common shares outstanding during the period. Basic and diluted earnings per share were calculated as follows (in thousands, except per share amounts):  

 
Three Months Ended
March 31,
 
2016
 
2015
Net income attributable to VCA Inc.
$
46,227

 
$
38,301

Weighted-average common shares outstanding:
 
 
 
Basic
80,776

 
82,347

Effect of dilutive potential common shares:
 
 
 
Stock options
284

 
340

Non-vested shares and units
463

 
686

Diluted
81,523

 
83,373

Basic earnings per common share
$
0.57

 
$
0.47

Diluted earnings per common share
$
0.57

 
$
0.46

For the three months ended March 31, 2016 and 2015, potential common shares of 40,193 and 77,186 , respectively, were excluded from the computation of diluted earnings per share because their inclusion would have had an antidilutive effect.





13


VCA Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
March 31, 2016
(Unaudited)


8.
Lines of Business

Our Animal Hospital and Laboratory business segments are each considered reportable segments in accordance with the FASB's guidance related to Segment Reporting. Our Animal Hospital segment provides veterinary services for companion animals and sells related retail and pharmaceutical products. Our Laboratory segment provides diagnostic laboratory testing services for veterinarians, both associated with our animal hospitals and those independent of us. Our other operating segments included in the “All Other” category in the following tables are our Medical Technology business, which sells digital radiography and ultrasound imaging equipment, related computer hardware, software and ancillary services to the veterinary market, and our Camp Bow Wow business, which primarily franchises a premier provider of pet services including dog day care, overnight boarding, grooming and other ancillary services at specially designed pet care facilities. These operating segments do not meet the quantitative requirements for reportable segments. Our operating segments are strategic business units that have different services, products and/or functions. The segments are managed separately because each is a distinct and different business venture with unique challenges, risks and rewards. We also operate a corporate office that provides general and administrative support services for our other segments.
The accounting policies of our segments are the same as those described in the summary of significant accounting policies included in our 2015 Annual Report on Form 10-K. We evaluate the performance of our segments based on gross profit and operating income. For purposes of reviewing the operating performance of our segments, all intercompany sales and purchases are generally accounted for as if they were transactions with independent third parties at current market prices.






































14


VCA Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
March 31, 2016
(Unaudited)

8.
Lines of Business, continued

The following is a summary of certain financial data for each of our segments (in thousands):

 
Animal
Hospital
 
Laboratory
 
All Other
 
Corporate
 

Eliminations
 
Total
Three Months Ended
March 31, 2016
 
 
 
 
 
 
 
 
 
 
 
External revenue
$
458,623

 
$
89,240

 
$
14,454

 
$

 
$
1,122

 
$
563,439

Intercompany revenue

 
17,487

 
4,959

 

 
(22,446
)
 

Total revenue
458,623

 
106,727

 
19,413

 

 
(21,324
)
 
563,439

Direct costs
385,206

 
50,011

 
12,503

 

 
(21,061
)
 
426,659

Gross profit
73,417

 
56,716

 
6,910

 

 
(263
)
 
136,780

Selling, general and administrative expense
12,085

 
10,296

 
5,299

 
22,448

 

 
50,128

Operating income (loss) before sale or disposal of assets
61,332

 
46,420

 
1,611

 
(22,448
)
 
(263
)
 
86,652

Net loss (gain) on sale or disposal of assets
575

 

 

 
(12
)
 

 
563

Operating income (loss)
$
60,757

 
$
46,420

 
$
1,611

 
$
(22,436
)
 
$
(263
)
 
$
86,089

Depreciation and amortization
$
17,573

 
$
2,781

 
$
883

 
$
638

 
$
(586
)
 
$
21,289

Property and equipment additions
$
18,544

 
$
4,652

 
$
607

 
$
2,851

 
$
(848
)
 
$
25,806

Three Months Ended
March 31, 2015
 
 
 
 
 
 
 
 
 
 
 
External revenue
$
393,026

 
$
78,809

 
$
26,533

 
$

 
$
1,085

 
$
499,453

Intercompany revenue

 
15,163

 
7,694

 

 
(22,857
)
 

Total revenue
393,026

 
93,972

 
34,227

 

 
(21,772
)
 
499,453

Direct costs
337,542

 
45,990

 
22,803

 

 
(20,744
)
 
385,591

Gross profit
55,484

 
47,982

 
11,424

 

 
(1,028
)
 
113,862

Selling, general and administrative expense
11,221

 
8,865

 
8,687

 
15,625

 

 
44,398

Operating income (loss) before sale or disposal of assets
44,263

 
39,117

 
2,737

 
(15,625
)
 
(1,028
)
 
69,464

Net loss on sale or disposal of assets
294

 
6

 
9

 
26

 

 
335

Operating income (loss)
$
43,969


$
39,111

 
$
2,728

 
$
(15,651
)
 
$
(1,028
)
 
$
69,129

Depreciation and amortization
$
16,072

 
$
2,504

 
$
1,152

 
$
592

 
$
(523
)
 
$
19,797

Property and equipment additions
$
12,082

 
$
3,216

 
$
800

 
$
1,064

 
$
(636
)
 
$
16,526


At March 31,2016
 
 
 
 
 
 
 
 
 
 
 
Total assets
$
2,377,077

 
$
322,776

 
$
69,589

 
$
586,394

 
$
(692,161
)
 
$
2,663,675

At December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
Total assets
$
2,186,959

 
$
306,296

 
$
73,491

 
$
471,112

 
$
(536,726
)
 
$
2,501,132





15


VCA Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
March 31, 2016
(Unaudited)

9.
Commitments and Contingencies

We have certain commitments including operating leases, purchase agreements and acquisition agreements. These items are discussed in detail in our consolidated financial statements and notes thereto included in our 2015 Annual Report on Form 10-K. We also have contingencies as follows:

a.
Earn-Out Payments

We have contractual arrangements in connection with certain acquisitions, whereby additional cash may be paid to former owners of acquired companies upon fulfillment of specified financial criteria as set forth in the respective agreements. The amount to be paid cannot be determined until the earn-out periods have expired. If the specified financial criteria are satisfied, we will be obligated to pay an additional $ 8.8 million .
In accordance with business combination accounting guidance, contingent consideration, such as earn-outs, are recognized as part of the consideration transferred on the acquisition date. A liability is initially recorded based upon its acquisition date fair value. The changes in fair value are recognized in earnings where applicable for each reporting period. The fair value is determined using a contractually stated formula using either a multiple of revenue or Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA"). The formulas used to determine the estimated fair value are Level 3 inputs. The changes in fair value were immaterial to our condensed, consolidated financial statements taken as a whole. We recorded $6.7 million and $ 3.5 million in earn-out liabilities as of March 31, 2016 and December 31, 2015 , respectively, which are included in other accrued liabilities in our condensed, consolidated balance sheets.

b.
Legal Proceedings

On July 16, 2014, two additional former veterinary assistants filed a purported class action lawsuit against us in the Superior Court of the State of California for the County of Los Angeles, titled La Kimba Bradsbery and Cheri Brakensiek vs. Vicar Operating, Inc., et. al. The lawsuit seeks to assert claims on behalf of current and former veterinary assistants, kennel assistants, and client service representatives employed by us in California, and alleges, among other allegations, that we improperly failed to pay regular and overtime wages, improperly failed to provide proper meal and rest periods, improperly failed to pay reporting time pay, improperly failed to reimburse for certain business-related expenses, and engaged in unfair business practices. The lawsuit seeks damages, statutory penalties, and other relief, including attorneys’ fees and costs.

In September 2014, the court issued an order staying the La Kimba Bradsbery lawsuit, which stay remains in place. If the stay is lifted, we intend to vigorously defend against the Bradsbery action. At this time, we are unable to estimate the reasonably possible loss or range of possible loss, but do not believe losses, if any, would have a material effect on our results of operations or financial position taken as a whole.

On July 12, 2013, an individual who provided courier services with respect to our laboratory clients in California filed a purported class action lawsuit against us in the Superior Court of the State of California for the County of Santa Clara - San Jose Branch, titled Carlos Lopez vs. Logistics Delivery Solutions, LLC, Antech Diagnostics, Inc., et. al. Logistics Delivery Solutions, LLC, a co-defendant in the lawsuit, is a company with which Antech has contracted to provide courier services in
California. The lawsuit seeks to assert claims on behalf of individuals who were engaged by Logistics Delivery Solutions, LLC to perform such courier services and alleges, among other allegations, that Logistics Delivery Solutions and Antech Diagnostics improperly classified the plaintiffs as independent contractors, improperly failed to pay overtime wages, and improperly failed to provide proper meal periods. The lawsuit seeks damages, statutory penalties, and other relief, including attorneys' fees and costs. The parties have an agreement in principle to settle the action, on a class-wide basis, for an amount not to exceed $ 1,250,000 . Logistics Delivery Solutions, LLC, has agreed to pay half of the claim. Accordingly, as of March 31, 2016 , we have accrued the remaining fifty percent. The proposed settlement, when and if it becomes effective, would not be an admission of wrongdoing or acceptance of fault by any of the defendants named in the complaint. Antech Diagnostics and Logistics Delivery Solutions have agreed upon the terms of this proposed settlement to eliminate the uncertainties, risk, distraction and expense associated with protracted litigation. The Court granted preliminary approval of the settlement on November 30, 2015, subject to court approval and class notice administration before it will be effective. On March 25, 2016, the Court issued an order granting final approval of the settlement. On April 11, 2016, the Court entered the Judgment approving the settlement. The judgment will go into effect on June 1, 2016. Payments to class members will be disbursed in late June or early July.




16


VCA Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
March 31, 2016
(Unaudited)

9.
Commitments and Contingencies, continued

On May 12, 2014, an individual client who purchased goods and services from one of our animal hospitals filed a purported class action lawsuit against us in the United States District Court for the Northern District of California, titled Tony M. Graham vs. VCA Antech, Inc. and VCA Animal Hospitals, Inc. The lawsuit seeks to assert claims on behalf of the plaintiff and other individuals who purchased similar goods and services from our animal hospitals and alleges, among other allegations, that we improperly charged such individuals for “biohazard waste management” in connection with the services performed. The lawsuit seeks compensatory and punitive damages in unspecified amounts, and other relief, including attorneys' fees and costs. VCA successfully had the venue transferred to the Southern District of California. The parties have engaged in extensive discovery. Plaintiffs filed their motion for class certification on February 12, 2016. The Defendants’ Opposition to the class certification is due in May 2016. We intend to continue to vigorously defend this action. At this time, we are unable to estimate the reasonably possible loss or range of possible loss, but do not believe losses, if any, would have a material effect on our results of operations or financial position taken as a whole.

In addition to the lawsuits described above, we are party to ordinary routine legal proceedings and claims incidental to our business, but we are not currently a party to any legal proceeding that we believe would have a material adverse effect on our financial position, results of operations, or cash flows.





17


VCA Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
March 31, 2016
(Unaudited)

10.
Noncontrolling Interests
We own some of our animal hospitals in partnerships with noncontrolling interest holders. We consolidate our partnerships in our condensed, consolidated financial statements because our ownership interest in these partnerships is equal to or greater than 50.1% and we control these entities. We record noncontrolling interest in income of subsidiaries equal to our partners’ percentage ownership of the partnerships’ income. We also record changes in the redemption value of our redeemable noncontrolling interests in net income attributable to noncontrolling interests in our condensed, consolidated income statements. We reflect our noncontrolling partners’ cumulative share in the equity of the respective partnerships as either noncontrolling interests in equity, mandatorily redeemable noncontrolling interests in other liabilities, or redeemable noncontrolling interests in temporary equity (mezzanine) in our condensed, consolidated balance sheets.

a.
Mandatorily Redeemable Noncontrolling Interests
The terms of some of our partnership agreements require us to purchase the partner’s equity in the partnership in the event of the partner’s death. We report these redeemable noncontrolling interests at their estimated redemption value, which approximates fair value, and classify them as liabilities due to the certainty of the related event. Estimated redemption value is determined using either a contractually stated formula or a discounted cash flow technique, both of which are used as an approximation of fair value. The discounted cash flow inputs used to determine the redemption value are Level 3 and include forecasted growth rates, valuation multiples, and the weighted average cost of capital. We recognize changes in the obligation as interest cost in our condensed, consolidated income statement.

The following table provides a summary of mandatorily redeemable noncontrolling interests included in other liabilities in our condensed, consolidated balance sheets (in thousands):
 
Income
Statement
Impact
 
Mandatorily Redeemable
Noncontrolling
Interests
Balance as of December 31, 2014
 
 
$
9,405

Noncontrolling interest expense
$
359

 
 
Redemption value change
(86
)
 
273

Purchase of noncontrolling interests
 
 
(803
)
Distribution to noncontrolling interests
 
 
(346
)
Currency translation adjustment
 
 
(195
)
Balance as of March 31, 2015
 
 
$
8,334

 
 
 
 
Balance as of December 31, 2015
 
 
$
8,588

Noncontrolling interest expense
$
365

 
 
Redemption value change
(116
)
 
249

Distribution to noncontrolling interests
 
 
(312
)
Currency translation adjustment
 
 
167

Balance as of March 31, 2016
 
 
$
8,692




18


VCA Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
March 31, 2016
(Unaudited)


10.
Noncontrolling Interests, continued

b.
Redeemable Noncontrolling Interests
We also enter into partnership agreements whereby the noncontrolling interest partner is issued certain “put” rights. These rights are normally exercisable at the sole discretion of the noncontrolling interest partner. We report these redeemable noncontrolling interests at their estimated redemption value and classify them in temporary equity (mezzanine). We recognize changes in the obligation in net income attributable to noncontrolling interests in our condensed, consolidated income statement.
The following table provides a summary of redeemable noncontrolling interests (in thousands):

 
Income
Statement
Impact
 
Redeemable
Noncontrolling
Interests
Balance as of December 31, 2014
 
 
$
11,077

Noncontrolling interest expense
$
322

 
 
Redemption value change
95

 
417

Distribution to noncontrolling interests
 
 
(386
)
Balance as of March 31, 2015
 
 
$
11,108

 
 
 
 
Balance as of December 31, 2015
 
 
$
11,511

Noncontrolling interest expense
$
387

 
 
Redemption value change
254

 
641

Distribution to noncontrolling interests
 
 
(365
)
Balance as of March 31, 2016
 
 
$
11,787

 



19


VCA Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
March 31, 2016
(Unaudited)

11.
Recent Accounting Pronouncements

In March 2016, the FASB issued Accounting Standards Update (ASU) 2016-09, “ Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting ”, as part of the Board’s Simplification Initiative. The areas for simplification in this Update involves several aspects of share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This ASU is effective for annual periods beginning after December 15, 2016, including interim periods within those annual periods, with early adoption permitted. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. We are currently evaluating the impact of the adoption of ASU 2016-09 on our consolidated financial statements.
    
In March 2016, the FASB issued Accounting Standards Update (ASU) 2016-08, “ Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) ”. The amendments in this Update affect the guidance in Accounting Standards Update 2014-09 , "Revenue from Contracts with Customers (Topic 606)" , which is not yet effective. The effective date and transition requirements for the amendments in this Update are the same as the effective date and transition requirements of Update 2014-09. Accounting Standards Update No. 2015-14, " Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date" , defers the effective date of Update 2014-09 by one year.

In March 2016, the FASB issued Accounting Standards Update (ASU) 2016-07, “Investments-Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting” . The amendments in this Update eliminate the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required. The amendments in this Update require that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The amendments should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. Earlier adoption is permitted. No additional disclosures are required at transition. We do not expect this adoption to have a significant impact on our consolidated financial statements.

In February 2016, the FASB issued Accounting Standards Update (ASU) 2016-02, “Leases (Topic 842) Section A-Leases: Amendments to the FASB Accounting Standards Codification®; Section B-Conforming Amendments Related to Leases: Amendments to the FASB Accounting Standards Codification®; Section C-Background Information and Basis for Conclusions” . The amendments in this Update affect any entity that enters into a lease with some specified scope exemptions and supersedes Topic 840, Leases. The main difference between previous GAAP and Topic 842 is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP which did not require lease assets and lease liabilities to be recognized for most leases. The lease assets and lease liabilities arising from operating leases should be recognized in the statement of financial position. A lessee should recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. When measuring assets and liabilities arising from a lease, a lessee (and a lessor) should include payments to be made in optional periods only if the lessee is reasonably certain to exercise an option to extend the lease or not to exercise an option to terminate the lease.
The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. We are currently evaluating the impact of the adoption of ASU 2016-02 on our consolidated financial statements.








20


VCA Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
March 31, 2016
(Unaudited)

11.
Recent Accounting Pronouncements, continued

In January 2016, the FASB issued Accounting Standards Update (ASU) 2016-01, “Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” . An entity should present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk if the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. For public business entities, this Update is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. We do not expect this adoption to have a significant impact on our consolidated financial statements.


12.     Subsequent Events

Purchase of Majority Interest in CAPNA

On May 2, 2016, we acquired an 80% ownership interest in Companion Animal Practices, North America (CAPNA) for approximately $344 million. CAPNA, founded in 2010 , is located in Las Vegas, Nevada and operates a network of 56 free standing animal hospitals in 18 states.

During April 2016, we borrowed $345 million from our revolving credit facility to fund the CAPNA acquisition.





21


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

 
Page
 
 
 
 
 
 
 
 
 
 
 
 




22


Introduction
The following discussion should be read in conjunction with our condensed, consolidated financial statements provided under Part I, Item I of this Quarterly Report on Form 10-Q. We have included herein statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We generally identify forward-looking statements in this report using words like “believe,” “intend,” “expect,” “estimate,” “may,” “plan,” “should plan,” “project,” “contemplate,” “anticipate,” “predict,” “potential,” “continue,” or similar expressions. You may find some of these statements below and elsewhere in this report. These forward-looking statements are not historical facts and are inherently uncertain and outside of our control. Any or all of our forward-looking statements in this report may turn out to be incorrect. They can be affected by inaccurate assumptions we might make, or by known or unknown risks and uncertainties. Many factors mentioned in our discussion in this report will be important in determining future results. Consequently, no forward-looking statement can be guaranteed. Actual future results may vary materially. Factors that may cause our plans, expectations, future financial condition and results to change are described throughout this report and in our Annual Report on Form 10-K, particularly in “Risk Factors,” Part I, Item 1A of that report.
The forward-looking information set forth in this Quarterly Report on Form 10-Q is as of May 6, 2016 , and we undertake no duty to update this information unless required by law. Shareholders and prospective investors can find information filed with the SEC after May 6, 2016 at our website at http://investor.vca.com or at the SEC’s website at www.sec.gov .
We are a leading North American animal healthcare company. We provide veterinary services and diagnostic testing services to support veterinary care and we sell diagnostic imaging equipment and other medical technology products and related services to veterinarians. We also franchise a premier provider of pet services including dog day care, overnight boarding, grooming and other ancillary services at specially designed pet care facilities.
Our reportable segments are as follows:  
Our Animal Hospital segment operates the largest network of freestanding, full-service animal hospitals in the nation. Our animal hospitals offer a full range of general medical and surgical services for companion animals. We treat diseases and injuries, offer pharmaceutical and retail products and perform a variety of pet wellness programs, including health examinations, diagnostic testing, routine vaccinations, spaying, neutering and dental care. At March 31, 2016 , our animal hospital network consisted of 703 animal hospitals in 41 states and in four Canadian provinces.
Our Laboratory segment operates the largest network of veterinary diagnostic laboratories in the nation. Our laboratories provide sophisticated testing and consulting services used by veterinarians in the detection, diagnosis, evaluation, monitoring, treatment and prevention of diseases and other conditions affecting animals. At March 31, 2016 , our laboratory network consisted of 60 laboratories serving all 50 states and certain areas in Canada.
For the three months ended March 31, 2016 , our “All Other” category includes the results of our Medical Technology and Camp Bow Wow operating segments. For the comparable prior periods in 2015, our "All Other" category included the results of operations of our Vetstreet operating segment, which we sold in December 2015. Each of these segments did not meet the materiality thresholds to be considered reportable segments.
The practice of veterinary medicine is subject to seasonal fluctuation. In particular, demand for veterinary services is significantly higher during the warmer months because pets spend a greater amount of time outdoors where they are more likely to be injured and are more susceptible to disease and parasites. In addition, use of veterinary services may be affected by levels of flea infestation, heartworms and ticks, and the number of daylight hours.




23


Use of Supplemental Non-GAAP Financial Measures

In this management's discussion and analysis, we use supplemental measures of our performance, which are derived from our consolidated financial information, but which are not presented in our consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). These financial measures, which are considered “Non-GAAP financial measures” under SEC rules, include our Non-GAAP gross profit and our Non-GAAP gross margin on a consolidated basis for our Animal Hospital segment, and the same measures expressed on a same-store basis. Additionally, our Non-GAAP financial measures include our Non-GAAP operating income and Non-GAAP operating margin on a consolidated basis. Lastly, our Non-GAAP financial measures also include our Non-GAAP consolidated net income and Non-GAAP diluted earnings per share. See Consolidated Results of Operations - Non-GAAP Financial Measures below for information about our use of these Non-GAAP financial measures, including our reasons for including the measures, material limitations with respect to the usefulness of the measures, and a reconciliation of each Non-GAAP financial measure to the most directly comparable GAAP financial measure.
Executive Overview
During the three months ended March 31, 2016 , we experienced increases in consolidated revenue, gross profit and operating income. The increases were primarily driven by revenue from our acquisitions and organic growth in our Animal Hospital and Laboratory segments. Our Animal Hospital same-store revenue increased 7.6% for the three months ended March 31, 2016 , as compared to the same period in the prior year. Our Laboratory internal revenue increased 9.1% for the three months ended March 31, 2016 , as compared to the same period in the prior year. Our consolidated operating income increased 24.5% for the three months ended March 31, 2016 , as compared to the same period in the prior year. Our consolidated operating margin increased by 150 basis points for the three months ended March 31, 2016 , as compared to the same period in the prior year. Our Non-GAAP consolidated operating income, which excludes the impact of intangible asset amortization associated with acquisitions, transaction expenses related to the acquisition of Companion Animal Practices, North America (“CAPNA”) and other discrete items, increased 27.6% for the three months ended March 31, 2016 , as compared to the same period in the prior year. Our Non-GAAP consolidated operating margins increased by 200 basis points for the three months ended March 31, 2016 , as compared to the same period in the prior year. The increase in Non-GAAP consolidated operating income was primarily due to improved results from our Animal Hospital and Laboratory business segments.
Share Repurchase Program
In April 2013, our Board of Directors authorized a share repurchase for up to $125 million of our common shares, which was completed in August 2014. In August 2014, our Board of Directors authorized the continuance of that share repurchase program, authorizing us to repurchase up to an additional $400 million of our common shares.  These repurchases may be made from time to time in open market transactions, pursuant to trading plans established in accordance with SEC rules, through privately negotiated transactions, block trades or accelerated share repurchases.  The timing and number of shares repurchased will depend on a variety of factors, including price, capital availability, legal requirements and economic and market conditions. The Company is not obligated to purchase any shares under the repurchase program, and repurchases may be suspended or discontinued at any time without prior notice.  During the quarter ended March 31, 2016, we elected to deploy our capital on acquisitions and accordingly, no share repurchases were made. Our share repurchase program has no expiration date. The repurchases have been and will continue to be funded by existing cash balances and by our revolving credit facility. Refer to Item 2. Unregistered Sales of Equity Securities and the Use of Proceeds in Part II of this report.
Recent Developments
On May 2, 2016, we acquired an 80% ownership interest in CAPNA for approximately $344 million. CAPNA, founded in 2010, is located in Las Vegas, Nevada and operates a network of 56 free standing animal hospitals in 18 states.

Refer to Note 12, Subsequent Events to the Unaudited Condensed, Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
Acquisitions
Our annual growth strategy includes the acquisition of independent animal hospitals. We also evaluate the acquisition of animal hospital chains, laboratories and related businesses if favorable opportunities are presented. For the three months ended March 31, 2016 , we acquired $84.0 million of annualized Animal Hospital revenue.
The following table summarizes the changes in the number of facilities operated by our Animal Hospital and Laboratory segments during the three months ended March 31, 2016 and 2015 , respectively:



24



 
Three Months Ended
March 31,
 
2016
 
2015
Animal Hospitals:
 
 
 
Beginning of period
682

 
643

Acquisitions
24

 
11

Acquisitions, merged
(1
)
 
(2
)
Sold, closed or merged
(2
)
 
(2
)
End of period
703

 
650

 
 
 
 
Laboratories:
 
 
 
Beginning of period
60

 
59

Acquisitions

 
1

Acquisitions, merged

 
(1
)
End of period
60

 
59


Critical Accounting Policies
Our condensed, consolidated financial statements have been prepared in accordance with GAAP, which require management to make estimates and assumptions that affect reported amounts. The estimates and assumptions are based on historical experience and on other factors that management believes to be reasonable. Actual results may differ from those estimates. Critical accounting policies represent the areas where more significant judgments and estimates are used in the preparation of our condensed, consolidated financial statements. A discussion of such critical accounting policies, which include revenue recognition, goodwill, other intangible assets, and income taxes, can be found in our 2015 Annual Report on Form 10-K. There have been no material changes to the policies noted above as of this Quarterly Report on Form 10-Q for the period ended March 31, 2016 .

Recent Accounting Pronouncements

A discussion of recent accounting pronouncements is included in Note 11 , Recent Accounting Pronouncements to the Unaudited Condensed, Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.




25


Consolidated Results of Operations
The following table sets forth components of our condensed, consolidated income statements expressed as a percentage of revenue:
 
 
Three Months Ended
March 31,
 
2016
 
2015
Revenue:
 
 
 
Animal Hospital
81.4
 %
 
78.7
 %
Laboratory
18.9

 
18.8

All Other
3.5

 
6.9

Intercompany
(3.8
)
 
(4.4
)
Total revenue
100.0

 
100.0

Direct costs
75.7

 
77.2

Gross profit
24.3

 
22.8

Selling, general and administrative expense
8.9

 
8.9

Net loss on sale or disposal of assets
0.1

 
0.1

Operating income
15.3

 
13.8

Interest expense, net
1.2

 
0.9

Income before provision for income taxes
14.1

 
12.9

Provision for income taxes
5.6

 
5.0

Net income
8.5

 
7.9

Net income attributable to noncontrolling interests
0.3

 
0.2

Net income attributable to VCA Inc.
8.2
 %
 
7.7
 %
Revenue
The following table summarizes our revenue (in thousands, except percentages):
 
 
Three Months Ended
March 31,
 
2016
 
2015
 
 
 
$
 
% of
Total
 
$
 
% of
Total
 
%
Change
Animal Hospital
$
458,623

 
81.4
 %
 
$
393,026

 
78.7
 %
 
16.7
 %
Laboratory
106,727

 
18.9
 %
 
93,972

 
18.8
 %
 
13.6
 %
All Other
19,413

 
3.5
 %
 
34,227

 
6.9
 %
 
(43.3
)%
Intercompany
(21,324
)
 
(3.8
)%
 
(21,772
)
 
(4.4
)%
 
2.1
 %
Total revenue
$
563,439

 
100.0
 %
 
$
499,453

 
100.0
 %
 
12.8
 %

Consolidated revenue increased $ 64.0 million for the three months ended March 31, 2016 , as compared to the same period in the prior year. The increase was primarily attributable to revenue from animal hospitals acquired since the beginning of the comparable period. Excluding the impact of acquisitions, revenue increased $25.3 million for the three months ended March 31, 2016 , primarily due to organic growth in our Animal Hospital and Laboratory segments. The increase was partially offset by the impact of foreign currency translation. Our Animal Hospital same-store revenue increased 7.6% for the three months ended March 31, 2016 , as compared to the same period in the prior year. Our Laboratory internal revenue growth was 9.1% for the three months ended March 31, 2016 , as compared to the same period in the prior year.






26


Direct Costs
The following table summarizes our direct costs (in thousands, except percentages):
 
Three Months Ended
March 31,
 
2016
 
2015
 
 
 
$
 
% of
Revenue
 
$
 
% of
Revenue
 
%
Change
Animal Hospital
$
385,206

 
84.0
 %
 
$
337,542

 
85.9
 %
 
14.1
 %
Laboratory
50,011

 
46.9
 %
 
45,990

 
48.9
 %
 
8.7
 %
All Other
12,503

 
64.4
 %
 
22,803

 
66.6
 %
 
(45.2
)%
Intercompany
(21,061
)
 
(3.7
)%
 
(20,744
)
 
(4.2
)%
 
(1.5
)%
Total direct costs
$
426,659

 
75.7
 %
 
$
385,591

 
77.2
 %
 
10.7
 %

Consolidated direct costs increased $41.1 million for the three months ended March 31, 2016 , as compared to the same period in the prior year. The increase was primarily attributable to animal hospitals acquired since the beginning of the comparable period in the prior year. Excluding the impact of animal hospital acquisitions, the increase in direct costs was primarily due to compensation related costs, supplies, and rent, predominately in the animal hospital segment and discussed further under Segment Results .

Gross Profit
The following table summarizes our consolidated gross profit and consolidated Non-GAAP gross profit in dollars and as a percentage of applicable revenue (in thousands, except percentages):
 
 
Three Months Ended
March 31,
 
2016
 
2015
 
 
 
$
 
Gross
Margin
 
$
 
Gross
Margin
 
%
Change
Animal Hospital
$
73,417

 
16.0
%
 
$
55,484

 
14.1
%
 
32.3
 %
Laboratory
56,716

 
53.1
%
 
47,982

 
51.1
%
 
18.2
 %
All Other
6,910

 
35.6
%
 
11,424

 
33.4
%
 
(39.5
)%
Intercompany
(263
)
 
 
 
(1,028
)
 
 
 
 
Consolidated gross profit
$
136,780

 
24.3
%
 
$
113,862

 
22.8
%
 
20.1
 %
Intangible asset amortization associated with acquisitions
6,228

 
 
 
5,465

 
 
 
 
Non-GAAP consolidated gross profit and Non-GAAP gross margin (1)
$
143,008

 
25.4
%
 
$
119,327

 
23.9
%
 
19.8
 %
 ____________________________
(1)  
Non-GAAP consolidated gross profit and Non-GAAP gross margin are not measurements of financial performance prepared in accordance with GAAP. See Non-GAAP Financial Measures