VCA Inc.
VCA ANTECH INC (Form: 10-Q, Received: 08/09/2013 14:13:42)

 
 
 
 
 
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 June 30, 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, 88,618,415 shares as of August 6, 2013.
 
 
 
 
 



VCA Antech, Inc. and Subsidiaries
Form 10-Q
June 30, 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)

 
June 30, 2013
 
December 31, 2012
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
112,270

 
$
68,435

Trade accounts receivable, less allowance for uncollectible accounts of $16,759 and $16,546 at June 30, 2013 and December 31, 2012, respectively
70,252

 
55,912

Inventory
51,374

 
51,456

Prepaid expenses and other
24,660

 
25,086

Deferred income taxes
26,130

 
22,579

Prepaid income taxes
8,185

 
20,061

Total current assets
292,871

 
243,529

Property and equipment, net
429,745

 
403,444

Goodwill
1,307,487

 
1,291,231

Other intangible assets, net
86,731

 
94,823

Notes receivable, net
3,625

 
6,080

Deferred financing costs, net
3,606

 
4,232

Other
51,434

 
48,241

Total assets
$
2,175,499

 
$
2,091,580

Liabilities and Equity
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
46,892

 
$
39,002

Accounts payable
37,841

 
39,416

Accrued payroll and related liabilities
51,568

 
49,893

Other accrued liabilities
62,745

 
57,131

Total current liabilities
199,046

 
185,442

Long-term debt, less current portion
587,968

 
591,641

Deferred income taxes
82,508

 
75,846

Other liabilities
34,437

 
37,267

Total liabilities
903,959

 
890,196

Commitments and contingencies

 

Redeemable noncontrolling interests
11,111

 
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, 88,605 and 88,372 shares outstanding as of June 30, 2013 and December 31, 2012, respectively
89

 
88

Additional paid-in capital
394,304

 
390,359

Retained earnings
863,356

 
791,209

Accumulated other comprehensive (loss) income
(4,494
)
 
1,847

Total VCA Antech, Inc. stockholders’ equity
1,253,255

 
1,183,503

Noncontrolling interests
7,174

 
10,890

Total equity
1,260,429

 
1,194,393

Total liabilities and equity
$
2,175,499

 
$
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
June 30,
 
Six Months Ended
June 30,
 
2013
 
2012
 
2013
 
2012
Revenue
$
465,255

 
$
438,372

 
$
903,861

 
$
847,837

Direct costs
350,961

 
337,765

 
692,644

 
653,851

Gross profit
114,294

 
100,607

 
211,217

 
193,986

Selling, general and administrative expense
39,023

 
38,997

 
78,869

 
78,048

Net (gain) loss on sale or disposal of assets
(430
)
 
112

 
1,296

 
635

Operating income
75,701

 
61,498

 
131,052

 
115,303

Interest expense, net
5,658

 
4,364

 
9,965

 
8,451

Business combination adjustment gain

 

 

 
(5,719
)
Other income
(18
)
 
(148
)
 
(27
)
 
(355
)
Income before provision for income taxes
70,061

 
57,282

 
121,114

 
112,926

Provision for income taxes
26,601

 
21,504

 
45,831

 
40,827

Net income
43,460

 
35,778

 
75,283

 
72,099

Net income attributable to noncontrolling interests
1,798

 
1,458

 
3,136

 
2,534

Net income attributable to VCA Antech, Inc
$
41,662

 
$
34,320

 
$
72,147

 
$
69,565

Basic earnings per share
$
0.47

 
$
0.39

 
$
0.82

 
$
0.80

Diluted earnings per share
$
0.46

 
$
0.39

 
$
0.81

 
$
0.79

Weighted-average shares outstanding for basic earnings per share
88,509

 
87,589

 
88,455

 
87,443

Weighted-average shares outstanding for diluted earnings per share
89,653

 
88,723

 
89,531

 
88,555



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
June 30,
 
Six Months Ended
June 30,
 
2013
 
2012
 
2013
 
2012
Net income (1)  
$
43,460

 
$
35,778

 
$
75,283

 
$
72,099

Other comprehensive income:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(3,597
)
 
(1,477
)
 
(6,341
)
 
(413
)
Other comprehensive loss
(3,597
)
 
(1,477
)
 
(6,341
)
 
(413
)
Total comprehensive income
39,863

 
34,301

 
68,942

 
71,686

Comprehensive income attributable to noncontrolling interests (1) 
1,798

 
1,458

 
3,136

 
2,534

Comprehensive income attributable to VCA Antech, Inc.
$
38,065

 
$
32,843

 
$
65,806

 
$
69,152

 ____________________________
(1)  
Includes approximately $1.9 million and $1.3 million of net income related to redeemable and mandatorily redeemable noncontrolling interests for the six months ended June 30, 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 $463 and $839 related to redeemable and mandatorily redeemable noncontrolling interests, respectively).

 

 

 
69,565

 

 
1,232

 
70,797

Other comprehensive loss

 

 

 

 
(413
)
 

 
(413
)
Distribution to noncontrolling interests

 

 

 

 

 
(635
)
 
(635
)
Share-based compensation

 

 
7,767

 

 

 

 
7,767

Issuance of common stock under stock incentive plans
635

 
1

 
2,190

 

 

 

 
2,191

Issuance of common stock for acquisitions
473

 

 
10,500

 

 

 

 
10,500

Stock repurchases
(163
)
 

 
(2,805
)
 

 

 

 
(2,805
)
Excess tax benefit from stock options

 

 
248

 

 

 

 
248

Tax shortfall and other from stock options and awards

 

 
9

 

 

 

 
9

Balances, June 30, 2012
87,741

 
$
88

 
$
379,624

 
$
815,223

 
$
5

 
$
10,671

 
$
1,205,611

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances, December 31, 2012
88,372

 
$
88

 
$
390,359

 
$
791,209

 
$
1,847

 
$
10,890

 
$
1,194,393

Net income (excludes $928 and $992 related to redeemable and mandatorily redeemable noncontrolling interests, respectively).

 

 

 
72,147

 

 
1,216

 
73,363

Other comprehensive loss

 

 

 

 
(6,341
)
 

 
(6,341
)
Distribution to noncontrolling interests

 

 

 

 

 
(850
)
 
(850
)
Purchase of noncontrolling interests

 

 
(469
)
 

 

 
(4,082
)
 
(4,551
)
Share-based compensation

 

 
7,419

 

 

 

 
7,419

Issuance of common stock under stock incentive plans
560

 
1

 
4,180

 

 

 

 
4,181

Stock repurchases
(327
)
 

 
(7,956
)
 

 

 

 
(7,956
)
Excess tax benefit from stock options

 

 
771

 

 

 

 
771

Balances, June 30, 2013
88,605

 
$
89

 
$
394,304

 
$
863,356

 
$
(4,494
)
 
$
7,174

 
$
1,260,429



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)

 
Six Months Ended
June 30,
 
2013
 
2012
Cash flows from operating activities:
 
 
 
Net income
$
75,283

 
$
72,099

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
37,739

 
37,363

Amortization of debt issue costs
626

 
642

Provision for uncollectible accounts
3,364

 
2,551

Business combination adjustment gain

 
(5,719
)
Net loss on sale or disposal of assets
1,296

 
635

Share-based compensation
7,419

 
7,767

Deferred income taxes
2,868

 
10,020

Excess tax benefit from exercise of stock options
(771
)
 
(248
)
Other
(384
)
 
(528
)
Changes in operating assets and liabilities:
 
 
 
Trade accounts receivable
(17,709
)
 
(6,900
)
Inventory, prepaid expense and other assets
(470
)
 
(5,795
)
Accounts payable and other accrued liabilities
4,329

 
(1,805
)
Accrued payroll and related liabilities
1,886

 
1,102

Income taxes
12,595

 
(2,516
)
Net cash provided by operating activities
128,071

 
108,668

Cash flows from investing activities:
 
 
 
Business acquisitions, net of cash acquired
(21,835
)
 
(75,828
)
Real estate acquired in connection with business acquisitions
(510
)
 

Property and equipment additions
(33,095
)
 
(37,165
)
Proceeds from sale of assets
595

 
78

Other
(1,042
)
 
55

Net cash used in investing activities
(55,887
)
 
(112,860
)
Cash flows from financing activities:
 
 
 
Repayment of debt
(17,442
)
 
(43,318
)
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

 
(122
)
Distributions to noncontrolling interest partners
(2,234
)
 
(1,631
)
Purchase of noncontrolling interests
(5,030
)
 

Proceeds from issuance of common stock under stock option plans
4,181

 
2,885

Excess tax benefit from exercise of stock options
771

 
248

Repurchase of common stock
(7,956
)
 
(2,770
)
Other
(99
)
 
(656
)
Net cash (used in) provided by financing activities
(27,809
)
 
4,636

Effect of currency exchange rate changes on cash and cash equivalents
(540
)
 
(28
)
Increase in cash and cash equivalents
43,835

 
416

Cash and cash equivalents at beginning of period
68,435

 
63,651

Cash and cash equivalents at end of period
$
112,270

 
$
64,067

 
 
 
 
 
 
 
 

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)

 
Six Months Ended
June 30,
 
2013
 
2012
Supplemental disclosures of cash flow information:
 
 
 
Interest paid
$
8,145

 
$
7,788

Income taxes paid
$
30,082

 
$
32,685

 
 
 
 
Supplemental schedule of noncash investing and financing activities:
 
 
 
Detail of acquisitions:
 
 
 
Fair value of assets acquired
$
26,473

 
$
147,527

Fair value of pre-existing investment in AVC

 
(11,850
)
Noncontrolling interest
(3,600
)
 
(8,161
)
Cash paid for acquisitions
(21,835
)
 
(75,328
)
Cash paid to debt holders

 
(25,915
)
Issuance of common stock for acquisitions

 
(10,500
)
Contingent consideration
(46
)
 

Holdbacks
(460
)
 
(1,525
)
Liabilities assumed
$
532

 
$
14,248

 
 
 
 
Other noncash items:
 
 
 
Capital lease additions
$
21,668

 
$



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
June 30, 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 operating segments are aggregated into two reportable segments "Animal Hospital" and "Laboratory". Our Medical Technology and Vetstreet operating segments are combined in our "All Other" category. See Footnote 9, "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 June 30, 2013 , we operated 605 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 June 30, 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 several different services to the veterinary community including, online communications, professional education, marketing solutions 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 and six months ended June 30, 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)
June 30, 2013
(Unaudited)


3.
Goodwill and Other Intangible Assets
Goodwill
The following table presents the changes in the carrying amount of our goodwill for the six months ended June 30, 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
20,971

 
8

 

 
20,979

Foreign translation adjustment
(4,778
)
 
(34
)
 

 
(4,812
)
Other (1)
(335
)
 

 
424

 
89

Balance as of June 30, 2013
 
 
 
 
 
 
 
Goodwill
1,193,206

 
96,835

 
138,257

 
1,428,298

Accumulated impairment losses

 

 
(120,811
)
 
(120,811
)
Balance as of June 30, 2013, net
$
1,193,206

 
$
96,835

 
$
17,446

 
$
1,307,487

 ____________________________

(1)  
Other primarily includes measurement period adjustments and a write-off related to a sale of an animal hospital.
Other Intangible Assets
Our acquisition related amortizable intangible assets at June 30, 2013 and December 31, 2012 are as follows (in thousands):
 
 
As of June 30, 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
$
104,775

 
$
(37,830
)
 
$
66,945

 
$
110,404

 
$
(36,605
)
 
$
73,799

Covenants not-to-compete
10,502

 
(6,036
)
 
4,466

 
12,707

 
(7,357
)
 
5,350

Favorable lease assets
8,559

 
(4,157
)
 
4,402

 
7,228

 
(3,866
)
 
3,362

Trademarks
11,973

 
(3,557
)
 
8,416

 
12,494

 
(3,001
)
 
9,493

Contracts
956

 
(612
)
 
344

 
956

 
(570
)
 
386

Technology
6,588

 
(4,445
)
 
2,143

 
6,588

 
(4,179
)
 
2,409

Client lists
50

 
(35
)
 
15

 
50

 
(26
)
 
24

Total
$
143,403

 
$
(56,672
)
 
$
86,731

 
$
150,427

 
$
(55,604
)
 
$
94,823


 



8


VCA Antech, Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
June 30, 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
June 30,
 
Six Months Ended
June 30,
 
2013
 
2012
 
2013
 
2012
Aggregate amortization expense
$
5,521

 
$
5,342

 
$
10,565

 
$
10,218

The estimated amortization expense related to intangible assets for the remainder of 2013 and each of the succeeding years thereafter, as of June 30, 2013 , is as follows (in thousands):

Remainder of 2013
$
10,051

2014
18,537

2015
16,499

2016
13,474

2017
7,118

Thereafter
21,052

Total
$
86,731

 

4.
Acquisitions

The table below reflects the activity related to the acquisitions and dispositions of our animal hospitals and laboratories during the six months ended June 30, 2013 and 2012, respectively:

 
Six Months Ended
June 30,
Animal Hospitals:
2013
 
2012
Animal Hospital acquisitions, excluding Associate Veterinary Clinics (1981) LTD ("AVC")
6

 
14

Acquisitions, merged
(1
)
 
(3
)
AVC acquisition

 
44

Sold, closed or merged
(9
)
 
(4
)
Total
(4
)
 
51

 
 
 
 
Laboratories:
 
 
 
Acquisitions
1

 

Created

 
1

 
1

 
1





9


VCA Antech, Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
June 30, 2013
(Unaudited)


4.
Acquisitions, continued
Animal Hospital and Laboratory Acquisitions, excluding AVC
The following table summarizes the aggregate consideration for our independent animal hospitals, excluding AVC, and one laboratory acquired during the six months ended June 30, 2013 and 2012, respectively, and the preliminary allocation of the acquisition price (in thousands):

 
Six Months Ended
June 30,
 
2013
 
2012
Consideration:
 
 
 
  Cash
$
21,835

 
$
19,193

  Holdbacks
460

 
475

  Earnout contingent consideration
46

 

      Fair value of total consideration transferred
$
22,341

 
$
19,668

 
 
 
 
Allocation of the Purchase Price:
 
 
 
  Tangible assets
$
2,548

 
$
780

  Identifiable intangible assets
2,946

 
3,134

  Goodwill (1)
20,979

 
15,754

  Other liabilities assumed
(532
)
 

 
$
25,941

 
$
19,668

Noncontrolling interest
(3,600
)
 

Total
$
22,341

 
$
19,668

____________________________

(1)      We expect that $ 20.2 million and $11.8 million of the goodwill recorded for these acquisitions, as of June 30, 2013 and 2012 , respectively, will be deductible for income tax purposes.

The allocation of the purchase price is preliminary, because certain items have not been completed or finalized, including but not limited to, the valuation of tangible and intangible assets.

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 six months ended June 30, 2013 . There were no cash payments made for real estate for the six months ended June 30, 2012 .
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)
June 30, 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, net of cash acquired
$
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, trademarks and covenants-not-to-compete. The weighted-average amortization period for total identifiable intangible assets is approximately six years . This consists of amortization periods of five years for customer-related intangible assets, ten years for trademarks and three years for covenants-not-to-compete.

(2)      As of June 30, 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.
2012 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. Subsequent to the acquisition, we merged the operations of ThinkPets with Vetstreet. Our condensed, consolidated financial statements reflect the operating results of ThinkPets since February 1, 2012 reported within our "All Other" category in our segment disclosures.



11


VCA Antech, Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
June 30, 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, net of cash acquired
$
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 total identifiable intangible assets is approximately eight years . This consist of amortization periods of nine years for customer-related intangible assets, four years for technology contracts and two years for trademarks.

(2)      As of June 30, 2013 , we expect that approximately $ 821,000 of the goodwill recorded for this acquisition will be deductible for income tax purposes.





12


VCA Antech, Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
June 30, 2013
(Unaudited)


5.
Other Accrued Liabilities
Other accrued liabilities consisted of the following (in thousands):
 
 
June 30,
2013
 
December 31,
2012
Deferred revenue
$
10,951

 
$
10,811

Accrued health insurance
6,178

 
6,409

Deferred rent
4,349

 
3,604

Accrued other insurance
4,317

 
3,799

Miscellaneous accrued taxes (1)
4,162

 
3,485

Accrued workers' compensation
3,555

 
3,570

Holdbacks and earnouts
3,447

 
3,599

Customer deposits
3,170

 
3,140

Accrued consulting fees
2,943

 
3,114

Accrued lease payments
2,923

 
888

Other
16,750

 
14,712

 
$
62,745

 
$
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 June 30, 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)
June 30, 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 June 30, 2013
 
As of December 31, 2012
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
Variable-rate long-term debt
$
576,641

 
$
576,641

 
$
592,422

 
$
592,422

At June 30, 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 six months ended June 30, 2013 is as follows (in thousands):
 
 
Stock
Options
 
Weighted-
Average
Exercise
Price
Outstanding at December 31, 2012
2,181

 
$
17.20

Exercised
(270
)
 
$
16.34

Expired
(36
)
 
$
30.70

Canceled
(23
)
 
$
16.16

Outstanding at June 30, 2013
1,852

 
$
17.08

Exercisable at June 30, 2013
777

 
$
16.84

Vested and expected to vest at June 30, 2013
1,825

 
$
17.10

There were no stock options granted during the six months ended June 30, 2013 . The aggregate intrinsic value of our stock options exercised during the three and six months ended June 30, 2013 was $1.3 million and $2.1 million , respectively and the actual tax benefit realized on options exercised during these periods was $513,000 and $833,000 , respectively.
At June 30, 2013 there was $4.5 million of total unrecognized compensation cost related to our stock options. This cost is expected to be recognized over a weighted-average period of 2.7 years .
The compensation cost charged against income, for stock options for the three months ended June 30, 2013 and 2012 , was $490,000 and $269,000 , respectively. The corresponding income tax benefit recognized was $192,000 and $105,000 , for the three months ended June 30, 2013 and 2012 , respectively.
The compensation cost charged against income, for stock options for the six months ended June 30, 2013 and 2012 , was $1.1 million and $744,000 , respectively. The corresponding income tax benefit recognized was $428,000 and $291,000 , for the six months ended June 30, 2013 and 2012 , respectively.





14


VCA Antech, Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
June 30, 2013
(Unaudited)



7.    Share-Based Compensation, continued
Nonvested Stock Activity
During the three and six months ended June 30, 2013 , 12,052 shares of nonvested common stock were granted to our directors representing their annual grant. Assuming continued service through each vesting date, these awards will vest in three equal annual installments beginning May 2014 to May 2016.
Total compensation cost charged against income related to nonvested stock awards was $ 2.4 million and $ 3.3 million , for the three months ended June 30, 2013 and 2012 , respectively. The corresponding income tax benefit recognized in the income statement was $940,000 and $1.3 million , for the three months ended June 30, 2013 and 2012 , respectively.
Total compensation cost charged against income related to nonvested stock awards was $5.0 million and $7.0 million , for the six months ended June 30, 2013 and 2012 , respectively. The corresponding income tax benefit recognized in the income statement was $1.9 million and $2.7 million , for the six months ended June 30, 2013 and 2012 , respectively.
At June 30, 2013 , there was $13.9 million of unrecognized compensation cost related to these nonvested shares, which will be recognized over a weighted-average period of 2.5 years. A summary of our nonvested stock activity for the six months ended June 30, 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
12

 
$
24.89

Vested
(290
)
 
$
20.45

Forfeited/Canceled

 
$

Outstanding at June 30, 2013
1,173

 
$
19.82

 
Restricted Stock Unit Activity
During the six months ended June 30, 2013 , no restricted stock units ("RSUs") were granted.
Total compensation cost charged against income related to RSU awards was $760,000 and $1.4 million for the three and six months ended June 30, 2013 , respectively. The corresponding income tax benefit recognized in the income statement for the same periods were $297,000 and $533,000 . There was no compensation cost charged against income and related income tax benefit for the three and six months ended June 30, 2012 .
At June 30, 2013 , there was $3.3 million of unrecognized compensation cost related to these RSUs, which will be recognized over a weighted-average period of 3.2 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)
June 30, 2013
(Unaudited)



8.    Calculation of Earnings per Share, continued

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2013
 
2012
 
2013
 
2012
Net income attributable to VCA Antech, Inc
$
41,662

 
$
34,320

 
$
72,147

 
$
69,565

Weighted-average common shares outstanding:
 
 
 
 
 
 
 
Basic
88,509

 
87,589

 
88,455

 
87,443

Effect of dilutive potential common shares:
 
 
 
 
 
 
 
Stock options
321

 
550

 
298

 
555

Nonvested shares and units
823

 
584

 
778

 
557

Diluted
89,653

 
88,723

 
89,531

 
88,555

Basic earnings per share
$
0.47

 
$
0.39

 
$
0.82

 
$
0.80

Diluted earnings per share
$
0.46

 
$
0.39

 
$
0.81

 
$
0.79


For the three months ended June 30, 2013 and 2012 , potential common shares of 12,909 and 1,047,701 , respectively, were excluded from the computation of diluted earnings per share because their inclusion would have had an antidilutive effect.
For the six months ended June 30, 2013 and 2012 , potential common shares of 26,987 and 1,050,520 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 business is divided into four operating segments: Animal Hospital, Laboratory, Medical Technology and Vetstreet. Our operating segments are managed separately because each is a distinct and different business venture with unique challenges, risks and rewards.
Our reportable segments are aggregated into two reportable segments, "Animal Hospital" and "Laboratory". Our Animal Hospital reportable segment provides veterinary services for companion animals and sells related retail and pharmaceutical products. Our Laboratory reportable segment provides diagnostic laboratory testing services for veterinarians, both associated with our animal hospitals and those independent of us. Our Medical Technology and Vetstreet operating segments do not meet the quantitative requirements for separate reportable segments and are included in our "All Other" category. Our Medical Technology segment sells digital radiography and ultrasound imaging equipment, related computer hardware, software and ancillary services to the veterinary market and our Vetstreet segment provides online communications, professional education, marketing solutions to the veterinary community and an ecommerce platform for independent animal hospitals. 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)
June 30, 2013
(Unaudited)



9.    Lines of Business, continued

 
Animal
Hospital
 
Laboratory
 
All Other
 
Corporate
 
Intercompany
Eliminations
 
Total
Three Months Ended
June 30, 2013
 
 
 
 
 
 
 
 
 
 
 
External revenue
$
365,205

 
$
77,937

 
$
22,113

 
$

 
$

 
$
465,255

Intercompany revenue

 
13,293

 
5,359

 

 
(18,652
)
 

Total revenue
365,205

 
91,230

 
27,472

 

 
(18,652
)
 
465,255

Direct costs
305,092

 
46,004

 
18,049

 

 
(18,184
)
 
350,961

Gross profit
60,113

 
45,226

 
9,423

 

 
(468
)
 
114,294

Selling, general and administrative expense
8,720

 
7,965

 
8,041

 
14,297

 

 
39,023

Operating income (loss) before charges
51,393

 
37,261

 
1,382

 
(14,297
)
 
(468
)
 
75,271

Net (gain) loss on sale or disposal of assets
(160
)
 
(1
)
 
1

 
(270
)
 

 
(430
)
Operating income (loss)
$
51,553

 
$
37,262

 
$
1,381

 
$
(14,027
)
 
$
(468
)
 
$
75,701

Depreciation and amortization
$
14,684

 
$
2,590

 
$
1,937

 
$
735

 
$
(446
)
 
$
19,500

Property and equipment additions
$
11,326

 
$
1,818

 
$
1,039

 
$
1,306

 
$
(363
)
 
$
15,126

Three Months Ended
June 30, 2012
 
 
 
 
 
 
 
 
 
 
 
External revenue
$
342,282

 
$
72,452

 
$
23,638

 
$

 
$

 
$
438,372

Intercompany revenue

 
14,168

 
3,780

 

 
(17,948
)
 

Total revenue
342,282

 
86,620

 
27,418

 

 
(17,948
)
 
438,372

Direct costs
292,902

 
44,324

 
17,624

 

 
(17,085
)
 
337,765

Gross profit
49,380

 
42,296

 
9,794

 

 
(863
)
 
100,607

Selling, general and administrative expense
7,995

 
7,510

 
9,029

 
14,463

 

 
38,997

Operating income (loss) before charges
41,385

 
34,786

 
765

 
(14,463
)
 
(863
)
 
61,610

Net (gain) loss on sale or disposal of assets
(112
)
 
(7
)
 
232

 
(1
)
 

 
112

Operating income (loss)
$
41,497

 
$
34,793

 
$
533

 
$
(14,462
)
 
$
(863
)
 
$
61,498

Depreciation and amortization
$
15,239

 
$
2,521

 
$
2,582

 
$
804

 
$
(345
)
 
$
20,801

Property and equipment additions
$
15,297

 
$
2,282

 
$
1,048

 
$
3,008

 
$
(542
)
 
$
21,093






17


VCA Antech, Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
June 30, 2013
(Unaudited)



9.    Lines of Business, continued

 
Animal
Hospital
 
Laboratory
 
All Other
 
Corporate
 
Intercompany
Eliminations
 
Total
Six Months Ended
June 30, 2013
 
 
 
 
 
 
 
 
 
 
 
External revenue
$
705,820

 
$
151,576

 
$
46,465

 
$

 
$

 
$
903,861

Intercompany revenue

 
26,989

 
9,530

 

 
(36,519
)
 

Total revenue
705,820

 
178,565

 
55,995

 

 
(36,519
)
 
903,861

Direct costs
600,508

 
90,874

 
36,938

 

 
(35,676
)
 
692,644

Gross profit
105,312

 
87,691

 
19,057

 

 
(843
)
 
211,217

Selling, general and administrative expense
17,045

 
15,970

 
16,955

 
28,899

 

 
78,869

Operating income (loss) before charges
88,267

 
71,721

 
2,102

 
(28,899
)
 
(843
)
 
132,348

Net loss (gain) on sale or disposal of assets
1,569

 
(6
)
 
3

 
(270
)
 

 
1,296

Operating income (loss)
$
86,698

 
$
71,727

 
$
2,099

 
$
(28,629
)
 
$
(843
)
 
$
131,052

Depreciation and amortization
$
28,071

 
$
5,097

 
$
3,902

 
$
1,554

 
$
(885
)
 
$
37,739

Property and equipment additions
$
25,767

 
$
3,736

 
$
2,372

 
$
1,946

 
$
(726
)
 
$
33,095

Six Months Ended
June 30, 2012
 
 
 
 
 
 
 
 
 
 
 
External revenue
$
658,407

 
$
144,423

 
$
45,007

 
$

 
$

 
$
847,837

Intercompany revenue

 
26,927

 
8,736

 

 
(35,663
)
 

Total revenue
658,407

 
171,350

 
53,743

 

 
(35,663
)
 
847,837

Direct costs
563,471

 
88,503

 
35,282

 

 
(33,405
)
 
653,851

Gross profit
94,936

 
82,847

 
18,461

 

 
(2,258
)
 
193,986

Selling, general and administrative expense
15,052

 
15,108

 
18,312

 
29,576

 

 
78,048

Operating income (loss) before charges
79,884

 
67,739

 
149

 
(29,576
)
 
(2,258
)
 
115,938

Net loss (gain) on sale or disposal of assets
393

 
(14
)
 
240

 
16

 

 
635

Operating income (loss)
$
79,491

 
$
67,753

 
$
(91
)
 
$
(29,592
)
 
$
(2,258
)
 
$
115,303

Depreciation and amortization
$
26,583

 
$
5,074

 
$
4,845

 
$
1,568

 
$
(707
)
 
$
37,363

Property and equipment additions
$
26,063

 
$
3,349

 
$
2,770

 
$
5,991

 
$
(1,008
)
 
$
37,165


At June 30, 2013
 
 
 
 
 
 
 
 
 
 
 
Total assets
$
1,802,057

 
$
252,070

 
$
96,938

 
$
54,368

 
$
(29,934
)
 
$
2,175,499

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

 
$
244,551

 
$
98,159

 
$
127,963

 
$
(27,671
)
 
$
2,091,580





18


VCA Antech, Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
June 30, 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
In accordance with business combination accounting guidance, contingent consideration, such as earn-out agreements, are recognized as part of the consideration transferred on the acquisition date. A liability is recorded based on fair value. The changes in fair value are recognized in earnings where applicable for each reporting period. We recorded $1.5 million in earnout liabilities as of June 30, 2013 and December 31, 2012, which are included in other accrued liabilities in our consolidated balance sheets.
 
b.
Other Contingencies
On May 29, 2013, a former veterinary assistant at one of our animal hospitals filed a purported class action lawsuit against us in the Superior Court of the State of California for the County of Los Angeles, entitled Jorge Duran vs. VCA Animal Hospitals, Inc., et. al. The lawsuit seeks to assert claims on behalf of current and former veterinary assistants employed by us in California, and alleges, among other allegations, that we improperly failed to pay overtime wages, improperly failed to provide proper meal and rest periods, and engaged in unfair business practices. The lawsuit seeks damages, statutory penalties, and other relief, including attorneys' fees and costs.
Additionally, 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 against Antech Diagnostics, Inc., an indirect wholly-owned subsidiary of VCA, entitled 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 hired by us 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 and rest periods. The lawsuit seeks damages, statutory penalties, and other relief, including attorneys' fees and costs.
We are vigorously investigating and defending these lawsuits. Because these lawsuits are in the initial stages, the financial impact to us, if any, cannot be estimated.
We have certain contingent liabilities resulting from other 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 rates of income attributable to VCA for the three and six months ended June 30, 2013 were 39.0% and 38.8% , respectively, as compared to the three and six months ended June 30, 2012 , of 38.5% and 37.0% , respectively. The increase in the effective rate for the six months ended June 30, 2013 was in part, due to a non-taxable gain of $ 5.7 million in the prior year related to the increase in value of our historic noncontrolling interest in AVC, realized upon the acquisition of the remaining equity interest.