VCA Inc.
VCA ANTECH INC (Form: 10-Q, Received: 11/08/2013 14:21:44)

 
 
 
 
 
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 September 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, 88,749,756 shares as of November 4, 2013.
 
 
 
 
 



VCA Antech, Inc. and Subsidiaries
Form 10-Q
September 30, 2013
Table of Contents
 
Page
Number
 
 
 
 
 
 
 
 
 
 
 
 
Condensed, Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2013 and 2012
 
 
 
 
Condensed, Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2013 and 2012
 
 
 
 
Condensed, Consolidated Statements of Equity for the Nine Months Ended September 30, 2013 and 2012
 
 
 
 
Condensed, Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2013 and 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



PART I.
FINANCIAL INFORMATION

ITEM 1.
FINANCIAL STATEMENTS

VCA Antech, Inc. and Subsidiaries
Condensed, Consolidated Balance Sheets
(Unaudited)
(In thousands, except par value)
 
September 30, 2013
 
December 31, 2012
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
153,174

 
$
68,435

Trade accounts receivable, less allowance for uncollectible accounts of $17,420 and $16,546 at September 30, 2013 and December 31, 2012, respectively
60,770

 
55,912

Inventory
51,929

 
51,456

Prepaid expenses and other
25,115

 
25,086

Deferred income taxes
26,130

 
22,579

Prepaid income taxes
1,512

 
20,061

Total current assets
318,630

 
243,529

Property and equipment, net
445,392

 
403,444

Goodwill
1,320,952

 
1,291,231

Other intangible assets, net
90,139

 
94,823

Notes receivable, net
3,474

 
6,080

Deferred financing costs, net
3,295

 
4,232

Other
53,453

 
48,241

Total assets
$
2,235,335

 
$
2,091,580

Liabilities and Equity
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
51,232

 
$
39,002

Accounts payable
37,797

 
39,416

Accrued payroll and related liabilities
62,323

 
49,893

Other accrued liabilities
63,814

 
57,131

Total current liabilities
215,166

 
185,442

Long-term debt, less current portion
581,145

 
591,641

Deferred income taxes
82,568

 
75,846

Other liabilities
35,947

 
37,267

Total liabilities
914,826

 
890,196

Commitments and contingencies

 

Redeemable noncontrolling interests
11,031

 
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, 88,948 and 88,372 shares outstanding as of September 30, 2013 and December 31, 2012, respectively
89

 
88

Additional paid-in capital
398,099

 
390,359

Retained earnings
904,003

 
791,209

Accumulated other comprehensive (loss) income
(1,861
)
 
1,847

Total VCA Antech, Inc. stockholders’ equity
1,300,330

 
1,183,503

Noncontrolling interests
9,148

 
10,890

Total equity
1,309,478

 
1,194,393

Total liabilities and equity
$
2,235,335

 
$
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
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
Revenue
$
464,055

 
$
433,613

 
$
1,367,916

 
$
1,281,450

Direct costs
353,378

 
334,432

 
1,046,022

 
988,283

Gross profit
110,677

 
99,181

 
321,894

 
293,167

Selling, general and administrative expense
38,747

 
37,608

 
117,616

 
115,656

Net (gain) loss on sale or disposal of assets
(109
)
 
387

 
1,187

 
1,022

Operating income
72,039

 
61,186

 
203,091

 
176,489

Interest expense, net
4,474

 
4,295

 
14,439

 
12,746

Business combination adjustment gain

 

 

 
(5,719
)
Other income
(86
)
 
(284
)
 
(113
)
 
(639
)
Income before provision for income taxes
67,651

 
57,175

 
188,765

 
170,101

Provision for income taxes
25,740

 
21,533

 
71,571

 
62,360

Net income
41,911

 
35,642

 
117,194

 
107,741

Net income attributable to noncontrolling interests
1,264

 
1,605

 
4,400

 
4,139

Net income attributable to VCA Antech, Inc
$
40,647

 
$
34,037

 
$
112,794

 
$
103,602

Basic earnings per share
$
0.46

 
$
0.39

 
$
1.27

 
$
1.18

Diluted earnings per share
$
0.45

 
$
0.38

 
$
1.26

 
$
1.17

Weighted-average shares outstanding for basic earnings per share
88,834

 
87,773

 
88,583

 
87,554

Weighted-average shares outstanding for diluted earnings per share
89,845

 
88,654

 
89,659

 
88,589



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
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
Net income (1)  
$
41,911

 
$
35,642

 
$
117,194

 
$
107,741

Other comprehensive income:
 
 
 
 
 
 
 
Foreign currency translation adjustments
2,633

 
2,878

 
(3,708
)
 
2,465

Other comprehensive loss
2,633

 
2,878

 
(3,708
)
 
2,465

Total comprehensive income
44,544

 
38,520

 
113,486

 
110,206

Comprehensive income attributable to noncontrolling interests (1) 
1,264

 
1,605

 
4,400

 
4,139

Comprehensive income attributable to VCA Antech, Inc.
$
43,280

 
$
36,915

 
$
109,086

 
$
106,067

 ____________________________
(1)  
Includes approximately $2.6 million and $2.1 million of net income related to redeemable and mandatorily redeemable noncontrolling interests for the nine months ended September 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 $702 and $1,359 related to redeemable and mandatorily redeemable noncontrolling interests, respectively).

 

 

 
103,602

 

 
2,078

 
105,680

Other comprehensive income

 

 

 

 
2,465

 

 
2,465

Distribution to noncontrolling interests

 

 

 

 

 
(1,102
)
 
(1,102
)
Share-based compensation

 

 
10,466

 

 

 

 
10,466

Issuance of common stock under stock incentive plans
745

 
1

 
3,321

 

 

 

 
3,322

Issuance of common stock for acquisitions
473

 

 
10,500

 

 

 

 
10,500

Stock repurchases
(185
)
 

 
(3,933
)
 

 

 

 
(3,933
)
Excess tax benefit from stock options

 

 
358

 

 

 

 
358

Tax shortfall and other from stock options and awards

 

 
52

 

 

 

 
52

Balances, September 30, 2012
87,829

 
$
88

 
$
382,479

 
$
849,260

 
$
2,883

 
$
11,050

 
$
1,245,760

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances, December 31, 2012
88,372

 
$
88

 
$
390,359

 
$
791,209

 
$
1,847

 
$
10,890

 
$
1,194,393

Net income (excludes $1,152 and $1,475 related to redeemable and mandatorily redeemable noncontrolling interests, respectively).

 

 

 
112,794

 

 
1,773

 
114,567

Other comprehensive loss

 

 

 

 
(3,708
)
 

 
(3,708
)
Formation of noncontrolling interests

 

 

 

 

 
1,806

 
1,806

Distribution to noncontrolling interests

 

 

 

 

 
(1,175
)
 
(1,175
)
Purchase of noncontrolling interests

 

 
(976
)
 

 

 
(4,309
)
 
(5,285
)
Share-based compensation

 

 
10,340

 

 

 

 
10,340

Issuance of common stock under stock incentive plans
1,313

 
1

 
15,110

 

 

 

 
15,111

Stock repurchases
(737
)
 

 
(19,384
)
 

 

 

 
(19,384
)
Excess tax benefit from stock options

 

 
2,654

 

 

 

 
2,654

Tax benefit and other from stock options and awards

 

 
(4
)
 

 

 

 
(4
)
Other

 

 

 

 

 
163

 
163

Balances, September 30, 2013
88,948

 
$
89

 
$
398,099

 
$
904,003

 
$
(1,861
)
 
$
9,148

 
$
1,309,478



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)

 
Nine Months Ended
September 30,
 
2013
 
2012
Cash flows from operating activities:
 
 
 
Net income
$
117,194

 
$
107,741

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
57,783

 
56,882

Amortization of debt issue costs
937

 
961

Provision for uncollectible accounts
5,380

 
4,437

Business combination adjustment gain

 
(5,719
)
Net loss on disposal of assets
1,187

 
1,022

Share-based compensation
10,340

 
10,466

Deferred income taxes
2,868

 
14,119

Excess tax benefit from exercise of stock options
(2,654
)
 
(358
)
Other
(251
)
 
(838
)
Changes in operating assets and liabilities:
 
 
 
Trade accounts receivable
(9,986
)
 
(5,079
)
Inventory, prepaid expense and other assets
(1,634
)
 
(6,727
)
Accounts payable and other accrued liabilities
4,941

 
3,161

Accrued payroll and related liabilities
11,408

 
10,007

Income taxes
21,492

 
(1,636
)
Net cash provided by operating activities
219,005

 
188,439

Cash flows from investing activities:
 
 
 
Business acquisitions, net of cash acquired
(39,640
)
 
(108,031
)
Real estate acquired in connection with business acquisitions
(1,208
)
 
(1,602
)
Property and equipment additions
(52,682
)
 
(55,257
)
Proceeds from sale of assets
905

 
112

Other
(1,738
)
 
(1,583
)
Net cash used in investing activities
(94,363
)
 
(166,361
)
Cash flows from financing activities:
 
 
 
Repayment of debt
(28,507
)
 
(52,040
)
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
(3,324
)
 
(2,802
)
Purchase of noncontrolling interests
(5,727
)
 

Proceeds from issuance of common stock under stock option plans
15,111

 
3,322

Excess tax benefit from exercise of stock options
2,654

 
358

Repurchase of common stock
(19,384
)
 
(3,897
)
Other
(160
)
 
(1,273
)
Net cash used in financing activities
(39,337
)
 
(6,454
)
Effect of currency exchange rate changes on cash and cash equivalents
(566
)
 
386

Increase in cash and cash equivalents
84,739

 
16,010

Cash and cash equivalents at beginning of period
68,435

 
63,651

Cash and cash equivalents at end of period
$
153,174

 
$
79,661

 
 
 
 
 
 
 
 

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)

 
Nine Months Ended
September 30,
 
2013
 
2012
Supplemental disclosures of cash flow information:
 
 
 
Interest paid
$
9,487

 
$
11,614

Income taxes paid
$
47,305

 
$
48,671

 
 
 
 
Supplemental schedule of noncash investing and financing activities:
 
 
 
Detail of acquisitions:
 
 
 
Fair value of assets acquired
$
58,825

 
$
187,515

Fair value of pre-existing investment in AVC

 
(11,850
)
Noncontrolling interest
(5,406
)
 
(8,161
)
Cash paid for acquisitions
(39,640
)
 
(108,031
)
Cash paid to debt holders
(2,360
)
 
(25,915
)
Issuance of common stock for acquisitions

 
(10,500
)
Contingent consideration
(1,120
)
 
(934
)
Holdbacks
(892
)
 
(2,525
)
Liabilities assumed
$
9,407

 
$
19,599

 
 
 
 
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
September 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 September 30, 2013 , we operated 606 animal hospitals throughout 41 states and four Canadian provinces.
We operate a full-service veterinary diagnostic laboratory network serving all 50 states and certain areas in Canada. Our laboratory network provides sophisticated testing and consulting services used by veterinarians in the detection, diagnosis, evaluation, monitoring, treatment and prevention of diseases and other conditions affecting animals. At September 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 a home delivery 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 nine months ended September 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.

During the quarter ended September 30, 2013, we recorded a non-cash physical inventory adjustment in our Animal Hospital business segment, which resulted in a $2.8 million credit adjustment to direct costs.



7


VCA Antech, Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
September 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 nine months ended September 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
32,549

 
8

 

 
32,557

Foreign translation adjustment
(2,836
)
 
(22
)
 

 
(2,858
)
Other (1)
(421
)
 

 
443

 
22

Balance as of September 30, 2013
 
 
 
 
 
 
 
Goodwill
1,206,640

 
96,847

 
138,276

 
1,441,763

Accumulated impairment losses

 

 
(120,811
)
 
(120,811
)
Balance as of September 30, 2013, net
$
1,206,640

 
$
96,847

 
$
17,465

 
$
1,320,952

 ____________________________

(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 September 30, 2013 and December 31, 2012 are as follows (in thousands):
 
 
As of September 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
$
113,573

 
$
(41,637
)
 
$
71,936

 
$
110,404

 
$
(36,605
)
 
$
73,799

Covenants not-to-compete
9,873

 
(5,458
)
 
4,415

 
12,707

 
(7,357
)
 
5,350

Favorable lease assets
7,465

 
(4,252
)
 
3,213

 
7,228

 
(3,866
)
 
3,362

Trademarks
12,096

 
(3,865
)
 
8,231

 
12,494

 
(3,001
)
 
9,493

Contracts
956

 
(633
)
 
323

 
956

 
(570
)
 
386

Technology
4,901

 
(2,891
)
 
2,010

 
6,588

 
(4,179
)
 
2,409

Client lists
50

 
(39
)
 
11

 
50

 
(26
)
 
24

Total
$
148,914

 
$
(58,775
)
 
$
90,139

 
$
150,427

 
$
(55,604
)
 
$
94,823


 



8


VCA Antech, Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
September 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
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
Aggregate amortization expense
$
5,588

 
$
6,612

 
$
16,153

 
$
16,830

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

Remainder of 2013
$
5,471

2014
20,613

2015
18,557

2016
15,520

2017
9,096

Thereafter
20,882

Total
$
90,139

 

4.
Acquisitions

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

 
Nine Months Ended
September 30,
Animal Hospitals:
2013
 
2012
Animal Hospital acquisitions, excluding Associate Veterinary Clinics (1981) LTD ("AVC")
14

 
24

Acquisitions, merged
(2
)
 
(4
)
AVC acquisition

 
44

Sold, closed or merged
(15
)
 
(4
)
Net (decrease) increase
(3
)
 
60

 
 
 
 
Laboratories:
 
 
 
Acquisitions
1

 

Created

 
2

Net increase
1

 
2





9


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


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

 
Nine Months Ended
September 30,
 
2013
 
2012
Consideration:
 
 
 
  Cash
$
39,640

 
$
51,744

  Cash paid to debt holders
2,360

 

  Holdbacks
892

 
1,475

  Earnout contingent consideration
1,120

 
934

      Fair value of total consideration transferred
$
44,012

 
$
54,153

 
 
 
 
Allocation of the Purchase Price:
 
 
 
  Tangible assets
$
13,494

 
$
1,995

  Identifiable intangible assets
12,774

 
9,184

  Goodwill (1)
32,557

 
42,974

  Other liabilities assumed
(9,407
)
 

 
$
49,418

 
$
54,153

Noncontrolling interest
(5,406
)
 

Total
$
44,012

 
$
54,153

____________________________

(1)      We expect that $12.9 million and $40.0 million of the goodwill recorded for these acquisitions, as of September 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 $1.2 million for the nine months ended September 30, 2013 . There were $1.6 million in cash payments made for real estate for the nine months ended September 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 additional investments in AVC facilitates 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)
September 30, 2013
(Unaudited)


4.
Acquisitions, continued

The AVC investment accounting was finalized during the first quarter of 2013. 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 September 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)
September 30, 2013
(Unaudited)


4.
Acquisitions, continued
The ThinkPets acquisition accounting was finalized during the first quarter of 2013. 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 consists of amortization periods of nine years for customer-related intangible assets, four years for technology contracts and two years for trademarks.

(2)      As of September 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)
September 30, 2013
(Unaudited)


5.
Other Accrued Liabilities
Other accrued liabilities consisted of the following (in thousands):
 
 
As of September 30, 2013
 
As of December 31, 2012
Deferred revenue
$
10,340

 
$
10,811

Accrued health insurance
5,897

 
6,409

Deferred rent
4,294

 
3,604

Accrued other insurance
4,236

 
3,799

Miscellaneous accrued taxes (1)
4,090

 
3,485

Accrued workers' compensation
5,980

 
3,570

Holdbacks and earnouts
4,042

 
3,599

Customer deposits
2,872

 
3,140

Accrued consulting fees
2,943

 
3,114

Accrued lease payments
2,992

 
888

Other
16,128

 
14,712

 
$
63,814

 
$
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 September 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)
September 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 September 30, 2013
 
As of December 31, 2012
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
Variable-rate long-term debt
$
568,750

 
$
568,750

 
$
592,422

 
$
592,422

At September 30, 2013 , we did not have any material applicable nonrecurring measurements of nonfinancial assets and nonfinancial liabilities.
During the quarter ended December 31, 2012 , Vetstreet's goodwill was written down to its implied fair value. Vetstreet's goodwill balance as of December 31, 2012 was $ 8.8 million . Additionally, during the quarter ended December 31, 2012 , Vetstreet's long-lived assets were written down to their estimated fair value. Vetstreet's 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 nine months ended September 30, 2013 is as follows (in thousands):
 
 
Stock
Options
 
Weighted-
Average
Exercise
Price
Outstanding at December 31, 2012
2,181

 
$
17.20

Exercised
(912
)
 
$
16.82

Expired
(36
)
 
$
30.70

Canceled
(24
)
 
$
16.21

Outstanding at September 30, 2013
1,209

 
$
17.11

Exercisable at September 30, 2013
472

 
$
16.69

Vested and expected to vest at September 30, 2013
1,191

 
$
17.12

There were no stock options granted during the nine months ended September 30, 2013 . The aggregate intrinsic value of our stock options exercised during the three and nine months ended September 30, 2013 was $7.5 million and $9.7 million , respectively and the actual tax benefit realized on options exercised during these periods was $3.0 million and $3.8 million , respectively.
At September 30, 2013 there was $4.1 million of total unrecognized compensation cost related to our stock options. This cost is expected to be recognized over a weighted-average period of 2.4 years .
The compensation cost charged against income, for stock options for the three months ended September 30, 2013 and 2012 , was $436,000 and $362,000 , respectively. The corresponding income tax benefit recognized was $171,000 and $142,000 , for the three months ended September 30, 2013 and 2012 , respectively.
The compensation cost charged against income, for stock options for the nine months ended September 30, 2013 and 2012 , was $1.5 million and $1.1 million , respectively. The corresponding income tax benefit recognized was $599,000 and $433,000 , for the nine months ended September 30, 2013 and 2012 , respectively.





14


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


7.    Share-Based Compensation, continued
Nonvested Stock Activity
During the nine months ended September 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 $ 1.8 million and $ 2.1 million , for the three months ended September 30, 2013 and 2012 , respectively. The corresponding income tax benefit recognized in the income statement was $700,000 and $805,000 , for the three months ended September 30, 2013 and 2012 , respectively.
Total compensation cost charged against income related to nonvested stock awards was $6.7 million and $9.1 million , for the nine months ended September 30, 2013 and 2012 , respectively. The corresponding income tax benefit recognized in the income statement was $2.6 million and $3.6 million , for the nine months ended September 30, 2013 and 2012 , respectively.
At September 30, 2013 , there was $12.1 million of unrecognized compensation cost related to these nonvested shares, which will be recognized over a weighted-average period of 2.3 years . A summary of our nonvested stock activity for the nine months ended September 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
(362
)
 
$
20.25

Outstanding at September 30, 2013
1,101

 
$
19.84

 
Restricted Stock Unit Activity
During the nine months ended September 30, 2013 , we granted 292,478 performance based restricted stock units ("RSUs") to our executive officers representing the right to receive one share of common stock. These RSUs will be earned upon achievement of the applicable performance criteria during the performance periods, from October 1, 2013 through December 31, 2015, as set forth in the 2013 equity performance award agreements. Assuming achievement of the required performance conditions and continued service through each vesting date, these awards will vest in four equal annual installments beginning September 2014 through September 2017.
Total compensation cost charged against income related to RSU awards was $696,000 and $279,000 for the three months ended September 30, 2013 and 2012 , respectively. The corresponding income tax benefit recognized in the income statement was $273,000 and $109,000 , for the three months ended September 30, 2013 and 2012 , respectively.
Total compensation cost charged against income related to RSU awards was $2.1 million and $279,000 for the nine months ended September 30, 2013 and 2012 , respectively. The corresponding income tax benefit recognized in the income statement was $806,000 and $109,000 , for the nine months ended September 30, 2013 and 2012 , respectively.
At September 30, 2013 , there was $10.7 million of unrecognized compensation cost related to these RSUs, which will be recognized over a weighted-average period of 3.7 years .






15


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


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):  
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
Net income attributable to VCA Antech, Inc
$
40,647

 
$
34,037

 
$
112,794

 
$
103,602

Weighted-average common shares outstanding:
 
 
 
 
 
 
 
Basic
88,834

 
87,773

 
88,583

 
87,554

Effect of dilutive potential common shares:
 
 
 
 
 
 
 
Stock options
310

 
461

 
318

 
523

Nonvested shares and units
701

 
420

 
758

 
512

Diluted
89,845

 
88,654

 
89,659

 
88,589

Basic earnings per share
$
0.46

 
$
0.39

 
$
1.27

 
$
1.18

Diluted earnings per share
$
0.45

 
$
0.38

 
$
1.26

 
$
1.17


There were no potential common shares that were excluded from the computation of diluted earnings per share for the three months ended September 30, 2013 . For the three months ended September 30, 2012 , potential common shares of 1,220,547 were excluded from the computation of diluted earnings per share because their inclusion would have had an antidilutive effect.
For the nine months ended September 30, 2013 and 2012 , potential common shares of 23,538 and 1,100,645 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.





16


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


9.
Lines of Business, continued
The segment information presented below includes a reclassification to eliminate discounts on certain Laboratory contracts that were previously allocated to the All Other operating segment from Eliminations in the prior year financial data. These reclasses better represent the corresponding discounts and thus the operating results of our standalone entities. These changes in segment reporting only revised the presentation within the table below and did not impact our condensed consolidated financial statements for any period presented. The segment information for the three and nine months ended September 30, 2012 has been adjusted retrospectively to conform to the current period presentation.
 
The following is a summary of certain financial data for each of our segments (in thousands):

 
Animal
Hospital
 
Laboratory
 
All Other
 
Corporate
 

Eliminations
 
Total
Three Months Ended
September 30, 2013
 
 
 
 
 
 
 
 
 
 
 
External revenue
$
368,868

 
$
72,877

 
$
21,482

 
$

 
$
828

 
$
464,055

Intercompany revenue

 
13,583

 
5,980

 

 
(19,563
)
 

Total revenue
368,868

 
86,460

 
27,462

 

 
(18,735
)
 
464,055

Direct costs
308,029

 
45,650

 
17,456

 

 
(17,757
)
 
353,378

Gross profit
60,839

 
40,810

 
10,006

 

 
(978
)
 
110,677

Selling, general and administrative expense
8,678

 
7,921

 
7,618

 
14,530

 

 
38,747

Operating income (loss) before charges
52,161

 
32,889

 
2,388

 
(14,530
)
 
(978
)
 
71,930

Net (gain) loss on sale or disposal of assets
(110
)
 
11

 

 
(10
)
 

 
(109
)
Operating income (loss)
$
52,271

 
$
32,878

 
$
2,388

 
$
(14,520
)
 
$
(978
)
 
$
72,039

Depreciation and amortization
$
15,037

 
$
2,554

 
$
2,087

 
$
816

 
$
(450
)
 
$
20,044

Property and equipment additions
$
15,915

 
$
1,905

 
$
872

 
$
1,795

 
$
(900
)
 
$
19,587

Three Months Ended
September 30, 2012
 
 
 
 
 
 
 
 
 
 
 
External revenue
$
342,840

 
$
68,139

 
$
21,970

 
$

 
$
664

 
$
433,613

Intercompany revenue

 
13,147

 
6,130

 

 
(19,277
)
 

Total revenue
342,840

 
81,286

 
28,100

 

 
(18,613
)
 
433,613

Direct costs
288,588

 
44,109

 
19,217

 

 
(17,482
)
 
334,432

Gross profit
54,252

 
37,177

 
8,883

 

 
(1,131
)
 
99,181

Selling, general and administrative expense
7,745

 
7,285

 
8,764

 
13,814

 

 
37,608

Operating income (loss) before charges
46,507

 
29,892

 
119

 
(13,814
)
 
(1,131
)
 
61,573

Net (gain) loss on sale or disposal of assets
(77
)
 

 
464

 

 

 
387

Operating income (loss)
$
46,584

 
$
29,892

 
$
(345
)
 
$
(13,814
)
 
$
(1,131
)
 
$
61,186

Depreciation and amortization
$
13,953

 
$
2,544

 
$
2,611

 
$
806

 
$
(395
)
 
$
19,519

Property and equipment additions
$
14,069

 
$
1,342

 
$
1,660

 
$
2,120

 
$
(1,099
)
 
$
18,092









17


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


9.    Lines of Business, continued

 
Animal
Hospital
 
Laboratory
 
All Other
 
Corporate
 

Eliminations
 
Total
Nine Months Ended
September 30, 2013
 
 
 
 
 
 
 
 
 
 
 
External revenue
$
1,074,688

 
$
223,466

 
$
67,339

 
$

 
$
2,423

 
$
1,367,916

Intercompany revenue

 
41,559

 
16,118

 

 
(57,677
)
 

Total revenue
1,074,688

 
265,025

 
83,457

 

 
(55,254
)
 
1,367,916

Direct costs
908,537

 
136,524

 
54,394

 

 
(53,433
)
 
1,046,022

Gross profit
166,151

 
128,501

 
29,063

 

 
(1,821
)
 
321,894

Selling, general and administrative expense
25,723

 
23,891

 
24,573

 
43,429

 

 
117,616

Operating income (loss) before charges
140,428

 
104,610

 
4,490

 
(43,429
)
 
(1,821
)
 
204,278

Net loss (gain) on sale or disposal of assets
1,459

 
5

 
3

 
(280
)
 

 
1,187

Operating income (loss)
$
138,969

 
$
104,605

 
$
4,487

 
$
(43,149
)
 
$
(1,821
)
 
$
203,091

Depreciation and amortization
$
43,108

 
$
7,651

 
$
5,989

 
$
2,370

 
$
(1,335
)
 
$
57,783

Property and equipment additions
$
41,682

 
$
5,641

 
$
3,244

 
$
3,741

 
$
(1,626
)
 
$
52,682

Nine Months Ended
September 30, 2012
 
 
 
 
 
 
 
 
 
 
 
External revenue
$
1,001,247

 
$
212,562

 
$
65,926

 
$

 
$
1,715

 
$
1,281,450

Intercompany revenue

 
40,074

 
15,917

 

 
(55,991
)
 

Total revenue
1,001,247

 
252,636

 
81,843

 

 
(54,276
)
 
1,281,450

Direct costs
852,059

 
132,612

 
54,499

 

 
(50,887
)
 
988,283

Gross profit
149,188

 
120,024

 
27,344

 

 
(3,389
)
 
293,167

Selling, general and administrative expense
22,797

 
22,393

 
27,076

 
43,390

 

 
115,656

Operating income (loss) before charges
126,391

 
97,631

 
268

 
(43,390
)
 
(3,389
)
 
177,511

Net loss (gain) on sale or disposal of assets
316

 
(14
)
 
704

 
16

 

 
1,022

Operating income (loss)
$
126,075

 
$
97,645

 
$
(436
)
 
$
(43,406
)
 
$
(3,389
)
 
$
176,489

Depreciation and amortization
$
40,536

 
$
7,618

 
$
7,456

 
$
2,374

 
$
(1,102
)
 
$
56,882

Property and equipment additions
$
40,132

 
$
4,691

 
$
4,430

 
$
8,111

 
$
(2,107
)
 
$
55,257


At September 30, 2013
 
 
 
 
 
 
 
 
 
 
 
Total assets
$
1,849,587

 
$
252,179

 
$
99,435

 
$
63,803

 
$
(29,669
)
 
$
2,235,335

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

 
$
244,551