VCA Inc.
VCA ANTECH INC (Form: 10-Q, Received: 05/10/2013 06:02:08)

 
 
 
 
 
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, 2013
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-16783
___________________________________________________ 
VCA Antech, 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, 88,534,818 shares as of Ma y 6, 2013.
 
 
 
 
 



VCA Antech, Inc. and Subsidiaries
Form 10-Q
March 31, 2013
Table of Contents
 
Page
Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



PART I.
FINANCIAL INFORMATION

ITEM 1.
FINANCIAL STATEMENTS

VCA Antech, Inc. and Subsidiaries
Condensed, Consolidated Balance Sheets
(Unaudited)
(In thousands, except par value)
 
March 31, 2013
 
December 31, 2012
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
105,286

 
$
68,435

Trade accounts receivable, less allowance for uncollectible accounts of $15,982 and $16,546 at March 31, 2013 and December 31, 2012, respectively
71,096

 
55,912

Inventory
54,072

 
51,456

Prepaid expenses and other
24,918

 
25,086

Deferred income taxes
26,131

 
22,579

Prepaid income taxes
6,904

 
20,061

Total current assets
288,407

 
243,529

Property and equipment, net
406,849

 
403,444

Goodwill
1,294,189

 
1,291,231

Other intangible assets, net
90,395

 
94,823

Notes receivable, net
3,139

 
6,080

Deferred financing costs, net
3,918

 
4,232

Other
50,805

 
48,241

Total assets
$
2,137,702

 
$
2,091,580

Liabilities and Equity
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
42,939

 
$
39,002

Accounts payable
45,594

 
39,416

Accrued payroll and related liabilities
59,023

 
49,893

Other accrued liabilities
63,291

 
57,131

Total current liabilities
210,847

 
185,442

Long-term debt, less current portion
578,967

 
591,641

Deferred income taxes
82,606

 
75,846

Other liabilities
34,807

 
37,267

Total liabilities
907,227

 
890,196

Commitments and contingencies

 

Redeemable noncontrolling interests
7,043

 
6,991

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

 

VCA Antech, Inc. stockholders’ equity:
 
 
 
Common stock, par value $0.001, 175,000 shares authorized, 88,494 and 88,372 shares outstanding as of March 31, 2013 and December 31, 2012, respectively
88

 
88

Additional paid-in capital
395,564

 
390,359

Retained earnings
821,694

 
791,209

Accumulated other comprehensive (loss) income
(897
)
 
1,847

Total VCA Antech, Inc. stockholders’ equity
1,216,449

 
1,183,503

Noncontrolling interests
6,983

 
10,890

Total equity
1,223,432

 
1,194,393

Total liabilities and equity
$
2,137,702

 
$
2,091,580



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

1

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



 
 
Three Months Ended
March 31,
 
2013
 
2012
Revenue
$
438,606

 
$
409,465

Direct costs
341,683

 
316,086

Gross profit
96,923

 
93,379

Selling, general and administrative expense
39,846

 
39,051

Net loss on sale or disposal of assets
1,726

 
523

Operating income
55,351

 
53,805

Interest expense, net
4,307

 
4,087

Business combination adjustment gain

 
(5,719
)
Other income
(9
)
 
(207
)
Income before provision for income taxes
51,053

 
55,644

Provision for income taxes
19,230

 
19,323

Net income
31,823

 
36,321

Net income attributable to noncontrolling interests
1,338

 
1,076

Net income attributable to VCA Antech, Inc
$
30,485

 
$
35,245

Basic earnings per share
$
0.34

 
$
0.41

Diluted earnings per share
$
0.34

 
$
0.40

Weighted-average shares outstanding for basic earnings per share
88,400

 
86,984

Weighted-average shares outstanding for diluted earnings per share
89,379

 
88,055



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

2


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

 
 
Three Months Ended
March 31,
 
2013
 
2012
Net income (1)  
$
31,823

 
$
36,321

Other comprehensive income:
 
 
 
Foreign currency translation adjustments
(2,744
)
 
1,064

Other comprehensive (loss) income
(2,744
)
 
1,064

Total comprehensive income
29,079

 
37,385

Comprehensive income attributable to noncontrolling interests (1) 
1,338

 
1,076

Comprehensive income attributable to VCA Antech, Inc
$
27,741

 
$
36,309

 ____________________________
(1)  
Includes approximately $711,000 and $510,000 of net income related to redeemable and mandatorily redeemable noncontrolling interests for the three months ended March 31, 2013 and 2012, respectively.



































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

3


VCA Antech, 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, 2011
86,796

 
$
87

 
$
361,715

 
$
745,658

 
$
418

 
$
10,074

 
$
1,117,952

Net income (excludes $176 and $334 related to redeemable and mandatorily redeemable noncontrolling interests, respectively).

 

 

 
35,245

 

 
566

 
35,811

Other comprehensive income

 

 

 

 
1,064

 

 
1,064

Distribution to noncontrolling interests

 

 

 

 

 
(426
)
 
(426
)
Share-based compensation

 

 
4,183

 

 

 

 
4,183

Issuance of common stock under stock incentive plans
256

 

 
2,621

 

 

 

 
2,621

Issuance of common stock for acquisitions
473

 

 
10,500

 

 

 

 
10,500

Stock repurchases
(27
)
 

 
(614
)
 

 

 

 
(614
)
Excess tax benefit from stock options

 

 
187

 

 

 

 
187

Tax shortfall and other from stock options and awards

 

 
17

 

 

 

 
17

Balances, March 31, 2012
87,498

 
$
87

 
$
378,609

 
$
780,903

 
$
1,482

 
$
10,214

 
$
1,171,295

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances, December 31, 2012
88,372

 
$
88

 
$
390,359

 
$
791,209

 
$
1,847

 
$
10,890

 
$
1,194,393

Net income (excludes $238 and $473 related to redeemable and mandatorily redeemable noncontrolling interests, respectively).

 

 

 
30,485

 

 
627

 
31,112

Other comprehensive loss

 

 

 

 
(2,744
)
 

 
(2,744
)
Distribution to noncontrolling interests

 

 

 

 

 
(452
)
 
(452
)
Purchase of noncontrolling interests

 

 
(470
)
 

 

 
(4,082
)
 
(4,552
)
Share-based compensation

 

 
3,770

 

 

 

 
3,770

Issuance of common stock under stock incentive plans
128

 

 
1,876

 

 

 

 
1,876

Stock repurchases
(6
)
 

 
(59
)
 

 

 

 
(59
)
Excess tax benefit from stock options

 

 
62

 

 

 

 
62

Tax benefit and other from stock options and awards

 

 
26

 

 

 

 
26

Balances, March 31, 2013
88,494

 
$
88

 
$
395,564

 
$
821,694

 
$
(897
)
 
$
6,983

 
$
1,223,432



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

4


VCA Antech, Inc. and Subsidiaries
Condensed, Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
 
Three Months Ended
March 31,
 
2013
 
2012
Cash flows from operating activities:
 
 
 
Net income
$
31,823

 
$
36,321

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
18,239

 
16,562

Amortization of debt issue costs
314

 
322

Provision for uncollectible accounts
1,093

 
1,146

Business combination adjustment gain

 
(5,719
)
Net loss on sale or disposal of assets
1,726

 
523

Share-based compensation
3,770

 
4,183

Deferred income taxes
2,868

 
4,212

Excess tax benefit from exercise of stock options
(62
)
 
(187
)
Other
(414
)
 
(391
)
Changes in operating assets and liabilities:
 
 
 
Trade accounts receivable
(16,126
)
 
(4,606
)
Inventory, prepaid expense and other assets
(2,491
)
 
(2,939
)
Accounts payable and other accrued liabilities
12,127

 
814

Accrued payroll and related liabilities
9,149

 
10,725

Income taxes
13,235

 
12,698

Net cash provided by operating activities
75,251

 
73,664

Cash flows from investing activities:
 
 
 
Business acquisitions, net of cash acquired
(6,756
)
 
(65,472
)
Real estate acquired in connection with business acquisitions
(510
)
 

Property and equipment additions
(17,969
)
 
(16,072
)
Proceeds from sale of assets
177

 
36

Other
(115
)
 
193

Net cash used in investing activities
(25,173
)
 
(81,315
)
Cash flows from financing activities:
 
 
 
Repayment of debt
(8,733
)
 
(34,626
)
Proceeds from issuance of long-term debt

 
50,000

Proceeds from revolving credit facility

 
50,000

Repayment of revolving credit facility

 
(50,000
)
Payment of financing costs

 
(101
)
Distributions to noncontrolling interest partners
(1,197
)
 
(719
)
Purchase of noncontrolling interests
(5,032
)
 

Proceeds from issuance of common stock under stock option plans
1,876

 
2,621

Excess tax benefit from exercise of stock options
62

 
187

Stock repurchases
(59
)
 
(579
)
Other

 
(151
)
Net cash (used in) provided by financing activities
(13,083
)
 
16,632

Effect of currency exchange rate changes on cash and cash equivalents
(144
)
 
84

Increase in cash and cash equivalents
36,851

 
9,065

Cash and cash equivalents at beginning of period
68,435

 
63,651

Cash and cash equivalents at end of period
$
105,286

 
$
72,716

 
 
 
 
 
 
 
 

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

5


VCA Antech, Inc. and Subsidiaries
Condensed, Consolidated Statements of Cash Flows - Continued
(Unaudited)
(In thousands)
 
Three Months Ended
March 31,
 
2013
 
2012
Supplemental disclosures of cash flow information:
 
 
 
Interest paid
$
3,999

 
$
3,854

Income taxes paid
$
3,808

 
$
1,877

Supplemental schedule of noncash investing and financing activities:
 
 
 
Detail of acquisitions:
 
 
 
Fair value of assets acquired
$
6,969

 
$
136,579

Fair value of pre-existing investment in AVC

 
(11,850
)
Noncontrolling interest

 
(6,071
)
Cash paid for acquisitions
(6,756
)
 
(65,273
)
Cash paid to debt holders

 
(25,915
)
Issuance of common stock for acquisitions

 
(10,500
)
Contingent consideration
(53
)
 

Holdbacks
(160
)
 
(1,275
)
Liabilities assumed
$

 
$
15,695



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

6


VCA Antech, Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements
March 31, 2013
(Unaudited)

 
1.
Nature of Operations
Our company, VCA Antech, 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 Vetstreet.
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, 2013 , we operated 604 animal hospitals throughout 41 states and three 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, 2013 , we operated 56 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 Vetstreet business provides online communications, professional education, marketing solutions to the veterinary community and an ecommerce platform for independent animal hospitals.
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, 2013 are not necessarily indicative of the results to be expected for the full year ending December 31, 2013 . For further information, refer to our consolidated financial statements and notes thereto included in our 2012 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 Antech, Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
March 31, 2013
(Unaudited)


3.
Goodwill and Other Intangible Assets
Goodwill
The following table presents the changes in the carrying amount of our goodwill for the three months ended March 31, 2013 (in thousands):
 
 
Animal
Hospital
 
Laboratory
 
All Other
 
Total
Balance as of December 31, 2012
 
 
 
 
 
 
 
Goodwill
$
1,177,348

 
$
96,861

 
$
137,833

 
$
1,412,042

Accumulated impairment losses

 

 
(120,811
)
 
(120,811
)
Balance as of December 31, 2012, net
1,177,348

 
96,861

 
17,022

 
1,291,231

Goodwill acquired
4,957

 
15

 

 
4,972

Foreign translation adjustment
(2,034
)
 
(15
)
 

 
(2,049
)
Other (1)
(389
)
 

 
424

 
35

Balance as of March 31, 2013
 
 
 
 
 
 
 
Goodwill
1,179,882

 
96,861

 
138,257

 
1,415,000

Accumulated impairment losses

 

 
(120,811
)
 
(120,811
)
Balance as of March 31, 2013, net
$
1,179,882

 
$
96,861

 
$
17,446

 
$
1,294,189

 ____________________________

(1)  
Other includes acquisition-price adjustments, and adjustments related to the sale of animal hospitals.
Other Intangible Assets
Our acquisition related amortizable intangible assets at March 31, 2013 and December 31, 2012 are as follows (in thousands):
 
 
As of March 31, 2013
 
As of December 31, 2012
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Non-contractual customer relationships
$
107,045

 
$
(36,467
)
 
$
70,578

 
$
110,404

 
$
(36,605
)
 
$
73,799

Covenants not-to-compete
11,703

 
(6,782
)
 
4,921

 
12,707

 
(7,357
)
 
5,350

Favorable lease assets
7,228

 
(3,999
)
 
3,229

 
7,228

 
(3,866
)
 
3,362

Trademarks
12,296

 
(3,290
)
 
9,006

 
12,494

 
(3,001
)
 
9,493

Contracts
956

 
(591
)
 
365

 
956

 
(570
)
 
386

Technology
6,588

 
(4,312
)
 
2,276

 
6,588

 
(4,179
)
 
2,409

Client lists
50

 
(30
)
 
20

 
50

 
(26
)
 
24

Total
$
145,866

 
$
(55,471
)
 
$
90,395

 
$
150,427

 
$
(55,604
)
 
$
94,823


 



8


VCA Antech, Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
March 31, 2013
(Unaudited)


3.
Goodwill and Other Intangible Assets, continued

The following table summarizes our aggregate amortization expense related to acquisition related intangible assets (in thousands):
 
 
Three Months Ended
March 31,
 
2013
 
2012
Aggregate amortization expense
$
5,044

 
$
4,876

The estimated amortization expense related to intangible assets for the remainder of 2013 and each of the succeeding years thereafter, as of March 31, 2013 , is as follows (in thousands):

Remainder of 2013
$
15,367

2014
18,500

2015
16,462

2016
13,416

2017
6,867

Thereafter
19,783

Total
$
90,395

 

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, 2013 and 2012, respectively:

 
Three Months Ended
March 31,
Animal Hospitals:
2013
 
2012
Animal Hospital acquisitions, excluding Associate Veterinary Clinics (1981) LTD ("AVC")
3

 
9

Acquisitions, merged

 
(2
)
AVC acquisition

 
44

Sold, closed or merged
(8
)
 
(3
)
Total
(5
)
 
48

 
 
 
 
Laboratories:
 
 
 
Acquisition
1

 





9


VCA Antech, Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
March 31, 2013
(Unaudited)


4.
Acquisitions, continued
Animal Hospital and Laboratory Acquisitions, excluding AVC
The following table summarizes the aggregate consideration for our independent animal hospitals acquired during the three months ended March 31, 2013 and 2012, respectively and the allocation of the acquisition price (in thousands):

 
Three Months Ended
March 31,
 
2013
 
2012
Consideration:
 
 
 
  Cash
$
6,756

 
$
8,988

  Holdbacks
160

 
225

  Earnout contingent consideration
53

 

      Fair value of total consideration transferred
$
6,969

 
$
9,213

 
 
 
 
Allocation of the Purchase Price:
 
 
 
  Tangible assets
$
491

 
$
308

  Identifiable intangible assets
1,506

 
1,616

  Goodwill (1)
4,972

 
7,289

      Total
$
6,969

 
$
9,213

____________________________

(1)      We expect that $ 4.1 million and $3.4 million of the goodwill recorded for these acquisitions, as of March 31, 2013 and March 31, 2012 , respectively will be deductible for income tax purposes.
In addition to the purchase price listed above, we made cash payments for real estate acquired in connection with our purchase of animal hospitals totaling $510,000 for the three months ended March 31, 2013 . There were no cash payments made for real estate for the three months ended March 31, 2012 .
AVC Investment
On January 31, 2012, we increased our investment in AVC by approximately CDN $81 million (approximately US $81 million ) becoming the sole non-veterinarian shareholder of AVC. At the time of the additional investment, AVC operated 44 animal hospitals in three Canadian provinces, offering services ranging from primary care, to specialty referral services and 24-hour emergency care. This investment and planned additional investments in AVC will facilitate our continued expansion in the Canadian market. At the time of the investment, AVC had annualized revenue of approximately CDN $95 million (approximately US $95 million ). Our condensed, consolidated financial statements reflect the operating results of AVC since January 31, 2012.




10


VCA Antech, Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
March 31, 2013
(Unaudited)


4.
Acquisitions, continued

The following table summarizes the total investment and the final allocation of the investment in AVC (in thousands):
Consideration:
 
  Cash
$
48,819

  Cash paid to debt holders
25,915

      Fair value of total consideration transferred
$
74,734

 
 
Allocation of the Purchase Price:
 
  Tangible assets
$
11,694

  Identifiable intangible assets (1)
25,170

  Goodwill (2)
79,707

  Other liabilities assumed
(21,826
)
 
94,745

  Noncontrolling interest
(8,161
)
  Fair value of pre-existing investment in AVC
(11,850
)
      Total
$
74,734

____________________________

(1)     Identifiable intangible assets include customer relationships, trademark and covenants-not-to-compete. The weighted-average amortization period for the total identifiable intangible assets is approximately six years . The customer-related intangible assets weighted-average amortization period is approximately five years . The trademark weighted-average amortization period is approximately ten years . The covenants-not-to-compete weighted-average amortization period is approximately three years .

(2)      As of March 31, 2013 , we expect that approximately $ 362,000 of the goodwill recorded for this acquisition will be deductible for income tax purposes.
AVC is reported within our Animal Hospital reportable segment.
ThinkPets, Inc ("ThinkPets")
On February 1, 2012, we acquired a 100% interest in ThinkPets for $21 million , payable by delivery of 473,389 shares of VCA common stock and $10.5 million in cash. We merged the operations of ThinkPets with Vetstreet, which we expect will improve the products and services it offers to clients of both companies. Our condensed, consolidated financial statements reflect the operating results of ThinkPets since February 1, 2012.



11


VCA Antech, Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
March 31, 2013
(Unaudited)


4.
Acquisitions, continued
The following table summarizes the total purchase price and the final allocation of the investment in ThinkPets (in thousands):
Consideration:
 
  Cash
$
7,468

  Issuance of common stock for acquisitions
10,500

  Holdback
1,050

      Fair value of total consideration transferred
$
19,018

 
 
Allocation of the Purchase Price:
 
  Tangible assets
$
2,093

  Identifiable intangible assets (1)
7,221

  Goodwill (2)
12,155

  Other liabilities assumed
(2,451
)
      Total
$
19,018

____________________________

(1)      Identifiable intangible assets include customer relationships, contracts and trademarks. The weighted average
amortization period for the total identifiable intangible assets is approximately eight years , for the customer-related
intangible assets approximately nine years , for the technology approximately four years , and for the trademarks
approximately two years .

(2)      As of March 31, 2013 , we expect that approximately $ 821,000 of the goodwill recorded for this acquisition will be deductible for income tax purposes.
ThinkPets is reported within our "All Other" category in our segment disclosures combined with our Medical Technology and Vetstreet operating segments.





12


VCA Antech, Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
March 31, 2013
(Unaudited)


5.
Other Accrued Liabilities
Other accrued liabilities consisted of the following (in thousands):
 
 
March 31,
2013
 
December 31,
2012
Deferred revenue
$
10,670

 
$
10,811

Accrued health insurance
6,514

 
6,409

Accrued other insurance
3,875

 
3,799

Deferred rent
3,770

 
3,604

Accrued consulting fees
2,943

 
3,114

Accrued workers' compensation
3,086

 
3,570

Holdbacks and earnouts
3,552

 
3,599

Miscellaneous accrued taxes (1)
3,546

 
3,485

Customer deposits
2,693

 
3,140

Other
22,642

 
15,600

 
$
63,291

 
$
57,131

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

 
6.
Fair Value Measurements
Fair Value of Financial Instruments
The FASB accounting guidance requires disclosure of fair value information about financial instruments, whether or not they are recognized in the accompanying condensed, consolidated balance sheets. Fair value as defined by the guidance is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value estimates of financial instruments are not necessarily indicative of the amounts we might pay or receive in actual market transactions. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
Cash and Cash Equivalents. These balances include cash and cash equivalents with maturities of less than three months. The carrying amount approximates fair value due to the short-term maturities of these instruments.
Receivables, Less Allowance for Doubtful Accounts, Accounts Payable and Certain Other Accrued Liabilities. Due to their short-term nature, fair value approximates carrying value.
Long-Term Debt. The fair value of debt at March 31, 2013 and December 31, 2012 is based upon the ask price quoted from an external source, which is considered a Level 2 input.



13


VCA Antech, Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
March 31, 2013
(Unaudited)


 
6.
Fair Value Measurements, continued

The following table reflects the carrying value and fair value of our variable-rate long-term debt (in thousands):
 
 
As of March 31, 2013
 
As of December 31, 2012
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
Variable-rate long-term debt
$
584,531

 
$
584,531

 
$
592,422

 
$
592,422

At March 31, 2013 , we did not have any material applicable nonrecurring measurements of nonfinancial assets and nonfinancial liabilities.
During the quarter ended December 31, 2012 , our Vetstreet goodwill was written down to its implied fair value. Our Vetstreet goodwill balance as of December 31, 2012 was $ 8.8 million . Additionally, during the quarter ended December 31, 2012 , our Vetstreet long-lived assets were written down to their estimated fair value. Our Vetstreet long-lived assets balance as of December 31, 2012 was $ 28.7 million .

7.
Share-Based Compensation
Stock Option Activity
A summary of our stock option activity for the three months ended March 31, 2013 is as follows (in thousands):
 
 
Stock
Options
 
Weighted-
Average
Exercise
Price
Outstanding at December 31, 2012
2,181

 
$
17.20

Granted

 
$

Exercised
(121
)
 
$
16.08

Canceled

 
$

Outstanding at March 31, 2013
2,060

 
$
17.27

Exercisable at March 31, 2013
984

 
$
17.28

Vested and expected to vest at March 31, 2013
2,032

 
$
17.28

There were no stock options granted during the three months ended March 31, 2013 . The aggregate intrinsic value of our stock options exercised during the three months ended March 31, 2013 was $817,000 and the actual tax benefit realized on options exercised during this period was $320,000 .
At March 31, 2013 there was $4.9 million of total unrecognized compensation cost related to our stock options. This cost is expected to be recognized over a weighted-average period of 2.9 years .
The compensation cost charged against income, for stock options for the three months ended March 31, 2013 and 2012 , was $604,000 and $474,000 , respectively. The corresponding income tax benefit recognized was $236,000 and $186,000 , for the three months ended March 31, 2013 and 2012 , respectively.
Nonvested Stock Activity
During the three months ended March 31, 2013 , no shares of nonvested common stock were granted.



14


VCA Antech, Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
March 31, 2013
(Unaudited)



7.    Share-Based Compensation, continued
Total compensation cost charged against income related to nonvested stock awards was $ 2.6 million and $ 3.7 million , for the three months ended March 31, 2013 and 2012 , respectively. The corresponding income tax benefit recognized in the income statement was $1.0 million and $1.5 million , for the three months ended March 31, 2013 and 2012 , respectively.
At March 31, 2013 , there was $16.0 million of unrecognized compensation cost related to these nonvested shares, which will be recognized over a weighted-average period of 2.7 years . A summary of our nonvested stock activity for the three months ended March 31, 2013 is as follows (in thousands, except per share amounts):  

 
Shares    
 
Grant Date
Weighted-
Average Fair
Value
Per Share
Outstanding at December 31, 2012
1,451

 
$
19.90

Granted

 
$

Vested
(7
)
 
$
22.98

Forfeited/Canceled

 
$

Outstanding at March 31, 2013
1,444

 
$
19.89

 
Restricted Stock Unit Activity
During the three months ended March 31, 2013 , no restricted stock units ("RSUs") were granted.
Total compensation cost charged against income related to RSU awards was $603,000 for the three months ended March 31, 2013 . The corresponding income tax benefit recognized in the income statement for the same period was $236,000 . There was no compensation cost charged against income and related income tax benefit for the three months ended March 31, 2012 .
At March 31, 2013 , there was $4.0 million of unrecognized compensation cost related to these RSUs, which will be recognized over a weighted-average period of 3.4 years .


8.
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 Antech, 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):  



15


VCA Antech, Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
March 31, 2013
(Unaudited)



8.    Calculation of Earnings per Share, continued

 
Three Months Ended
March 31,
 
2013
 
2012
Net income attributable to VCA Antech, Inc
$
30,485

 
$
35,245

Weighted-average common shares outstanding:
 
 
 
Basic
88,400

 
86,984

Effect of dilutive potential common shares:
 
 
 
Stock options
284

 
560

Nonvested shares and units
695

 
511

Diluted
89,379

 
88,055

Basic earnings per share
$
0.34

 
$
0.41

Diluted earnings per share
$
0.34

 
$
0.40


For the three months ended March 31, 2013 and 2012 , potential common shares of 497,826 and 1,067,063 , respectively, were excluded from the computation of diluted earnings per share because their inclusion would have had an antidilutive effect.

9.
Lines of Business
Our reportable segments are Animal Hospital and Laboratory. 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 “All Other” 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 Vetstreet business. Vetstreet provides online communications, professional education, marketing solutions to the veterinary community and an ecommerce platform for independent animal hospitals. 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 segments.
The accounting policies of our segments are essentially the same as those described in the summary of significant accounting policies included in our 2012 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.
 
The following is a summary of certain financial data for each of our segments (in thousands):



16


VCA Antech, Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
March 31, 2013
(Unaudited)



9.    Lines of Business, continued

 
Animal
Hospital
 
Laboratory
 
All Other
 
Corporate
 
Intercompany
Eliminations
 
Total
Three Months Ended
March 31, 2013
 
 
 
 
 
 
 
 
 
 
 
External revenue
$
340,615

 
$
73,638

 
$
24,353

 
$

 
$

 
$
438,606

Intercompany revenue

 
13,697

 
4,170

 

 
(17,867
)
 

Total revenue
340,615

 
87,335

 
28,523

 

 
(17,867
)
 
438,606

Direct costs
295,416

 
44,870

 
18,889

 

 
(17,492
)
 
341,683

Gross profit
45,199

 
42,465

 
9,634

 

 
(375
)
 
96,923

Selling, general and administrative expense
8,325

 
8,005

 
8,914

 
14,602

 

 
39,846

Operating income (loss) before charges
36,874

 
34,460

 
720

 
(14,602
)
 
(375
)
 
57,077

Net loss (gain) on sale or disposal of assets
1,729

 
(5
)
 
2

 

 

 
1,726

Operating income (loss)
$
35,145

 
$
34,465

 
$
718

 
$
(14,602
)
 
$
(375
)
 
$
55,351

Depreciation and amortization
$
13,387

 
$
2,507

 
$
1,965

 
$
819

 
$
(439
)
 
$
18,239

Property and equipment additions
$
14,441

 
$
1,918

 
$
1,333

 
$
640

 
$
(363
)
 
$
17,969

Three Months Ended
March 31, 2012
 
 
 
 
 
 
 
 
 
 
 
External revenue
$
316,125

 
$
71,971

 
$
21,369

 
$

 
$

 
$
409,465

Intercompany revenue

 
12,759

 
4,956

 

 
(17,715
)
 

Total revenue
316,125

 
84,730

 
26,325

 

 
(17,715
)
 
409,465

Direct costs
270,569

 
44,179

 
17,658

 

 
(16,320
)
 
316,086

Gross profit
45,556

 
40,551

 
8,667

 

 
(1,395
)
 
93,379

Selling, general and administrative expense
7,057

 
7,598

 
9,283

 
15,113

 

 
39,051

Operating income (loss) before charges
38,499

 
32,953

 
(616
)
 
(15,113
)
 
(1,395
)
 
54,328

Net loss (gain) on sale or disposal of assets
505

 
(7
)
 
8

 
17

 

 
523

Operating income (loss)
$
37,994

 
$
32,960

 
$
(624
)
 
$
(15,130
)
 
$
(1,395
)
 
$
53,805

Depreciation and amortization
$
11,344

 
$
2,553

 
$
2,263

 
$
764

 
$
(362
)
 
$
16,562

Property and equipment additions
$
10,766

 
$
1,067

 
$
1,722

 
$
2,983

 
$
(466
)
 
$
16,072

At March 31, 2013
 
 
 
 
 
 
 
 
 
 
 
Total assets
$
1,762,143

 
$
255,689

 
$
97,095

 
$
55,959

 
$
(33,184
)
 
$
2,137,702

At December 31, 2012
 
 
 
 
 
 
 
 
 
 
 
Total assets
$
1,648,578

 
$
244,551

 
$
98,159

 
$
127,963

 
$
(27,671
)
 
$
2,091,580








17


VCA Antech, Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
March 31, 2013
(Unaudited)



10.
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 2012 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 that were accounted for under previous business combinations accounting guidance, whereby additional cash may be paid to former owners of acquired companies upon attainment of specified financial criteria, as set forth in the respective agreements. The amount to be paid cannot be determined until the earn-out periods expire and the attainment of criteria is established. If the specified financial criteria are attained, we will be obligated to pay approximately $1.5 million . Under the current business combination accounting guidance, contingent consideration, such as earn-out liabilities, is recognized as part of the consideration transferred on the acquisition date. A corresponding liability is recorded based on the fair value of the liability, if the fair value is known or determinable. The changes in fair value are recognized in earnings where applicable for each reporting period.
 
b.
Other Contingencies
We have certain contingent liabilities resulting from litigation and claims incident to the ordinary course of our business. We believe that the probable resolution of such contingencies will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.

11.
Income Taxes

The effective tax rate for the three months ended March 31, 2013 was 38.7% , as compared to 41.2% for the year ended December 31, 2012 . The decrease in the effective tax rate was primarily due to a nondeductible charge related to goodwill impairment and a non-taxable gain of $ 5.7 million which was related to an increase in our historic noncontrolling interest in AVC, both of which were taken in 2012 .


12.
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).
 
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 inputs and include forecasted growth rates, valuation multiples, and the weighted-average cost of capital. We recognize changes in the obligation as interest cost in the condensed, consolidated statements of income.
 




18


VCA Antech, Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
March 31, 2013
(Unaudited)


12.    Noncontrolling Interests, continued

The following table provides a summary of mandatorily redeemable noncontrolling interests (in thousands):

 
Income
Statement
Impact
 
Mandatorily Redeemable
Noncontrolling
Interests
Balance as of December 31, 2011
 
 
$
3,111

Noncontrolling interest
$
334

 
 
Redemption value change
(55
)
 
279

Formation of noncontrolling interests
 
 
6,071

Distribution to noncontrolling interests
 
 
(103
)
Currency translation adjustment
 
 
68

Balance as of March 31, 2012
 
 
$
9,426

 
 
 
 
Balance as of December 31, 2012
 
 
$
11,047

Noncontrolling interest
$
473

 
 
Redemption value change
39

 
512

Purchase of noncontrolling interests
 
 
(658
)
Dissolution of noncontrolling interests
 
 
(358
)
Distribution to noncontrolling interests
 
 
(559
)
Currency translation adjustment
 
 
(219
)
Balance as of March 31, 2013
 
 
$
9,765



b.
Redeemable Noncontrolling Interests
We also enter into partnership agreements whereby the minority partner is issued certain “put” rights. These rights are normally exercisable at the sole discretion of the minority 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.
The following table provides a summary of redeemable noncontrolling interests (in thousands):
 
 
Income
Statement
Impact
 
Redeemable
Noncontrolling
Interests
Balance as of December 31, 2011
 
 
$
6,964

Noncontrolling interest
$
210

 
 
Redemption value change
(34
)
 
176

Distribution to noncontrolling interests
 
 
(190
)
Balance as of March 31, 2012
 
 
$
6,950

 
 
 
 
Balance as of December 31, 2012
 
 
$
6,991

Noncontrolling interest
$
212

 
 
Redemption value change
26

 
238

Distribution to noncontrolling interests
 
 
(186
)
Balance as of March 31, 2013
 
 
$
7,043

 



19


VCA Antech, Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
March 31, 2013
(Unaudited)


13.
Recent Accounting Pronouncements

In March 2013, the FASB issued new accounting guidance to resolve diversity in practice about which accounting guidance to use when releasing the cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary. This amendment also resolves the diversity in practice related to the treatment of business combinations achieved in stages involving a foreign entity. In practice, some entities view step acquisitions as being composed of two events, the disposition of the equity method investment and simultaneous acquisition of the controlling financial interest, whereby the cumulative translation adjustment related to the equity method investment is released to net income. Entities that view those transactions as a single event do not release any cumulative translation adjustment. These amendments affect entities that cease to hold a controlling financial interest within a foreign entity and there is a cumulative translation adjustment balance associated with the foreign entity. These amendments also affect entities that lose a controlling financial interest in an investment in a foreign entity and those that acquire a business in stages by increasing an investment in a foreign entity from one accounted for as an equity method investment to one accounted for as a consolidated investment.

When a parent ceases to have a controlling financial interest in a subsidiary or group of assets within a foreign entity the parent is required to release any cumulative translation adjustment to net income. The cumulative translation adjustment should be released to net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets resided.

For an equity method investment that is a foreign entity a pro rata portion of the cumulative translation adjustment should be released into net income upon a partial sale of the equity method investment. This treatment does not apply to an equity method investment that is not a foreign entity, in those instances a cumulative translation adjustment would be released into net income only if the partial sale represented a complete or substantially complete liquidation of the foreign entity that contains the equity method investment.

These amendments clarify that the sale of an investment in a foreign entity includes events that result in the loss of a controlling financial interest in a foreign entity and events that result in an acquirer obtaining control of an acquiree in which it held an equity interest immediately before the acquisition date. Upon the occurrence of those two situations the cumulative translation adjustment should be released to net income.

The guidance is effective prospectively for fiscal years and interim periods beginning after December 25, 2013. Early adoption is permitted. This guidance is not expected to significantly impact our consolidated financial statements.


14.    Subsequent Events

Second Amendment to Amended and Restated Credit and Guaranty Agreement

On April 19, 2013, we executed a second amendment to our Amended and Restated Credit and Guaranty Agreement entered into as of August 16, 2011. The second amendment (i) removes limits on our ability to conduct a share repurchase program so long as we remain in compliance with certain existing financial covenants; (ii) increases the income we may receive from leases and subleases; (iii) increases the amount of debt we may assume in connection with acquisitions; and (iv) increases our ability to invest in Canada and the United Kingdom. This amendment in and of itself does not have a material financial effect.

Share Repurchase Program

In April, our Board of Directors authorized a new share repurchase program, authorizing us to repurchase up to $125.0 million of our common shares from time to time in open market purchases, pursuant to trading plans established in accordance with SEC rules or through privately negotiated transactions. The extent and timing of our repurchases will depend upon market conditions, our cash requirements to fund the long-term growth investments in our business and other corporate considerations. The repurchases will be funded by existing cash balances and by our revolving credit facility. The share repurchase program has no expiration date. The repurchase program may be suspended or discontinued at any time.




20


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




21


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 wrong. 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 10, 2013 , 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 10, 2013 at our website at http://investor.vcaantech.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 provide both online and printed communications, education and information, and analytical-based marketing solutions to the veterinary community.
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, 2013 , our animal hospital network consisted of 604 animal hospitals in 41 states and in three 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, 2013 , our laboratory network consisted of 56 laboratories serving all 50 states and certain areas in Canada.
Our "All Other" category includes the results of our Medical Technology and Vetstreet operating segments. Each of these segments did not meet the materiality thresholds to be reported individually.
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.
The slow economic recovery continues to have an adverse impact on our organic revenue growth and our profitability. Consumer spending habits, including spending for pet healthcare, are affected by, among other things, prevailing economic conditions, levels of employment, salaries and wage rates, consumer confidence and consumer perception of economic conditions. These factors continue to impact consumer spending and may continue to cause levels of spending to remain depressed for the foreseeable future. Additionally, these factors may cause pet owners to elect to defer expensive treatment options or to forgo treatment for their pets altogether.




22


Executive Overview
During the three months ended March 31, 2013, we achieved an increase in both consolidated revenue and gross profit. The increases were primarily due to revenue from our acquisitions, as well as organic growth in our Animal Hospital and Laboratory businesses. Our Animal Hospital same-store revenue increased 1.8%, adjusted for two less business days in 2013, as compared to the same period in 2012. Our Laboratory internal revenue, adjusted for differences in billing days, increased 4.3%. Our Non-GAAP consolidated gross profit margin declined only 20 basis points primarily due to deleveraging in our Animal Hospital segment. Our Non-GAAP operating income increased 9.9% on a 40 basis point increase in Non-GAAP operating margins for the three months ended March 31, 2013, as compared to the same period in 2012. The increase was primarily due to the acquisition of Associate Veterinary Clinics (1981) LTD ("AVC") and ThinkPets as well as improved results from our laboratory business segment.
Share Repurchase Program
In April, our Board of Directors authorized a new share repurchase program, authorizing us to repurchase up to $125.0 million of our common shares from time to time in open market purchases, pursuant to trading plans established in accordance with SEC rules or through privately negotiated transactions. The extent and timing of our repurchases will depend upon market conditions, our cash requirements to fund the long-term growth investments in our business and other corporate considerations. The repurchases will be funded by existing cash balances and by our revolving credit facility. The share repurchase program has no expiration date. The repurchase program may be suspended or discontinued at any time.
Acquisitions
Our annual growth strategy includes the acquisition of independent animal hospitals. In addition, we also evaluate the acquisition of animal hospital chains, laboratories or related businesses if favorable opportunities are presented. We currently anticipate that during the current year, we will acquire $ 50 million to $ 85 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, 2013 and 2012, respectively:
 
 
Three Months Ended March 31,
 
2013
2012
Animal Hospitals:
 
 
Beginning of period
609

541

Acquisitions, excluding AVC
3

9

Acquisitions, merged

(2
)
AVC acquisition

44

Sold, closed or merged
(8
)
(3
)
End of period
604

589

 
 
 
Laboratories:
 
 
Beginning of period
55

53

Acquired
1


End of period
56

53

AVC
On January 31, 2012, we increased our investment in AVC by approximately CDN $81 million (approximately US $81 million) becoming the sole non-veterinarian shareholder of AVC. At the time of the additional investment, AVC operated 44 animal hospitals in three Canadian provinces, offering services ranging from primary care, to specialty referral services and 24-hour emergency care. This investment and planned additional investments in AVC will facilitate our continued expansion in the Canadian market. At the time of the investment, AVC had annualized revenue of approximately CDN $95 million (approximately US $95 million). Our condensed, consolidated financial statements reflect the operating results of AVC since January 31, 2012.



23


ThinkPets, Inc. ("ThinkPets")
On February 1, 2012, we acquired a 100% interest in ThinkPets for $21 million, payable by delivery of 473,389 shares of VCA common stock and $10.5 million in cash. We merged the operations of ThinkPets with Vetstreet, which we expect will improve the products and services it offers to clients of both companies. Our condensed, consolidated financial statements reflect the operating results of ThinkPets since February 1, 2012.

Critical Accounting Policies
Our condensed, consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“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, capitalized software costs, income taxes, and self-insured liabilities can be found in our 2012 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, 2013 . A summary of our valuation of goodwill accounting policy is discussed below.

Valuation of Goodwill

At March 31, 2013 , we had $ 1.3 billion of goodwill, accounting for 61% of our total assets. Our goodwill represents the excess of the cost of our acquired entities over the net of the amounts assigned to identifiable assets acquired and liabilities assumed.

We test our goodwill for impairment annually, or sooner if circumstances indicate impairment may exist, in accordance with goodwill guidance. We adopted the end of October as our annual impairment testing date, which allows us time to accurately complete our impairment testing process in order to incorporate the results in our annual financial statements and timely file those statements with the Securities and Exchange Commission (“SEC”) in accordance with our accelerated filing requirements.

The recognition and measurement of a goodwill impairment loss involves either a qualitative assessment of the fair value of each reporting unit or a more detailed two-step process. We have not presently elected to rely on a qualitative assessment, accordingly we measure our goodwill for impairment based upon the following two-step process:

First we identify potential impairment by comparing the estimated fair value of our reporting units with the carrying
value of our reporting units, with carrying value defined as the reporting unit’s net assets, including goodwill. If the estimated
fair value of our reporting units is greater than our carrying value, there is no impairment and the second step is not needed.
  
If we identify a potential impairment in the first step, we then measure the amount of impairment. The amount of the impairment is determined by allocating the estimated fair value of the reporting unit, as determined in step one, to the reporting unit's net assets based on fair value as would be done in an acquisition. In this hypothetical purchase price allocation, the residual estimated fair value, after allocation to the reporting units' identifiable net assets, is the implied current fair value of goodwill. If the implied current fair value of goodwill is less than the carrying amount of goodwill, goodwill is considered impaired and written down to the implied current fair value with a corresponding charge to earnings. However, if the implied current fair value of goodwill is greater than the carrying amount of goodwill, goodwill is not considered impaired and is not adjusted to the implied current fair value. Determining the fair value of the net assets of our reporting units under this step requires significant estimates.
Our estimated fair values are calculated in accordance with generally accepted accounting principles related to fair value and utilize generally accepted valuation techniques, consisting primarily of discounted cash flow techniques and market comparables, where applicable. These valuation methods involve the use of significant assumptions and estimates such as forecasted growth rates, valuation multiples, the weighted-average cost of capital, and risk premiums, which are based upon the best available market information and are consistent with our long-term strategic plans. The performance of our reporting units, and in turn the risk of goodwill impairment, is subject to a number of risks and uncertainties, some of which are outside of our control.



24


Negative changes in the undiscounted cash flows related to variables such as revenue growth rates, margins, or the discount rate could result in a decrease in the estimated fair value of our reporting units and could ultimately result in a substantial goodwill impairment charge. We monitor our reporting units on a quarterly basis and have not identified any events subsequent to December 31, 2012, which would indicate any impairment may have occurred in any of our reporting units.

Our Animal Hospital reporting unit, which has approximately $1.2 billion of goodwill as of March 31, 2013 , exceeded its carrying value by 13% during the 2012 testing. Negative changes in the undiscounted cash flows related to variables, such as revenue growth rates, margins, or the discount rate, could result in a decrease in the estimated fair value of our Animal Hospital reporting unit and could ultimately result in a substantial goodwill impairment charge. The performance of our Animal Hospital reporting unit, and in turn, the risk of goodwill impairment, is subject to a number of risks and uncertainties, some of which are outside of our control.

Recent Accounting Pronouncements
 
A discussion of recent accounting pronouncements is included in Note 13, " Recent Accounting Pronouncements " to the Unaudited Condensed, Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

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 both a consolidated basis and with respect to our Animal Hospital segment. Additionally, our Non-GAAP financial measures include our Non-GAAP operating income and Non-GAAP operating margin on a consolidated basis. See “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.




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,
 
2013
 
2012
Revenue:
 
 
 
Animal Hospital
77.7
 %
 
77.2
 %
Laboratory
19.9

 
20.7

All Other
6.5

 
6.4

Intercompany
(4.1
)
 
(4.3
)
Total revenue
100.0

 
100.0

Direct costs
77.9

 
77.2

Gross profit
22.1

 
22.8

Selling, general and administrative expense
9.1

 
9.6

Net loss on sale of assets
0.4

 

Operating income
12.6

 
13.2

Interest expense, net
1.0

 
1.0

Business combination adjustment gain

 
(1.4
)
Income before provision for income taxes
11.6

 
13.6

Provision for income taxes
4.4

 
4.7

Net income
7.2

 
8.9

Net income attributable to noncontrolling interests
0.3

 
0.3

Net income attributable to VCA Antech, Inc
6.9
 %
 
8.6
 %
Revenue
The following table summarizes our revenue (in thousands, except percentages):
 
 
Three Months Ended
March 31,
 
2013
 
2012
 
 
 
$
 
% of
Total
 
$
 
% of
Total
 
%
Change
Animal Hospital
$
340,615

 
77.7
 %
 
$
316,125

 
77.2
 %
 
7.7
 %
Laboratory
87,335

 
19.9
 %
 
84,730

 
20.7
 %
 
3.1
 %
All Other
28,523

 
6.5
 %
 
26,325

 
6.4
 %
 
8.3
 %
Intercompany
(17,867
)
 
(4.1
)%
 
(17,715
)
 
(4.3
)%
 
(0.9
)%
Total revenue
$
438,606

 
100.0
 %
 
$
409,465

 
100.0
 %
 
7.1
 %

Consolidated revenue increased $ 29.1 million for the three months ended March 31, 2013 , as compared to the same period in the prior year. The increase was primarily attributable to revenue from acquisitions from January 1, 2012, including animal hospitals and ThinkPets. Excluding the impact of acquisitions, revenue increased $2.6 million due to organic growth in both our Laboratory and Animal Hospital segments.




26


Gross Profit
The following table summarizes our gross profit and Non-GAAP consolidated gross profit in both dollars and as a percentage of applicable revenue, or gross margin and Non-GAAP gross margin (in thousands, except percentages):
 
 
Three Months Ended
March 31,
 
2013
 
2012
 
 
 
$
 
Gross
Margin
 
$
 
Gross
Margin
 
%
Change
Animal Hospital
$
45,199

 
13.3
%
 
$
45,556

 
14.4
%
 
(0.8
)%
Laboratory
42,465

 
48.6
%
 
40,551

 
47.9
%
 
4.7
 %
All Other
9,634

 
33.8
%
 
8,667

 
32.9
%
 
11.2
 %
Intercompany
(375
)
 
 
 
(1,395
)
 
 
 
 
Total gross profit
$
96,923

 
22.1
%
 
$
93,379

 
22.8
%
 
3.8
 %
Impact of vacant property adjustment
2,046

 
 
 

 
 
 
 
Non-GAAP consolidated gross profit and Non-GAAP gross margin (1)
$
98,969

 
22.6
%
 
$
93,379

 
22.8
%
 
6.0
 %
 ____________________________
(1)  
Non-GAAP consolidated gross profit and Non-GAAP gross margin is not a measurement of financial performance prepared in accordance with GAAP. See “Non-GAAP Financial Measures” below for information about 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.
Consolidated gross profit increased $ 3.5 million for the three months ended March 31, 2013 , as compared to the same period in the prior year. Animal Hospital gross profit includes a $2.0 million charge to accrue