VCA Inc.
VCA ANTECH INC (Form: 10-K, Received: 02/28/2014 14:35:04)


 
 
 
 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549  
FORM 10-K
 
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2013
or
 
[ ]
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
incorporation or organization)
 
12401 West Olympic Boulevard,
Los Angeles, California
(Address of principal executive offices)
 
(I.R.S. employer
identification no.)
 
90064-1022
(Zip code)
 
Registrant’s telephone number, including area code: (310) 571-6500
 
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of Each Exchange on Which Registered
Common Stock, par value $0.001 per share
 
Nasdaq Global Select Market
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  [X]        No  [ ]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    
Yes  [ ]        No  [X]
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    [X]
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]
The aggregate market value of the voting common equity held by non-affiliates as of June 30, 2013 , was approximately $ 2.2 billion , computed by reference to the price of $26.09 per share, the price at which the common equity was last sold on such date as reported on the NASDAQ Global Select Market. For purposes of this computation, it is assumed that the shares beneficially held by directors and officers of the registrant would be deemed to be stock held by affiliates. Non-affiliated common stock outstanding at June 30, 2013 was 84,962,481 shares.
Total common stock outstanding at February 24, 2014 was 88,248,976  shares.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the definitive Proxy Statement to be delivered to stockholders in connection with the 2014 Annual Meeting of Stockholders are incorporated by reference into Items 10, 11, 12, 13 and 14 hereof.

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VCA Antech, Inc. and Subsidiaries
Table of Contents
 
 
 
 
 
Page
 
PART I
 
 
 
 
 
PART II
 
 
 
 
 
PART III
 
 
 
 
 
PART IV
 
 


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PART I

ITEM 1.
BUSINESS

Company Overview

We are a leading national animal healthcare company operating in the United States and Canada. We provide veterinary services and diagnostic testing to support veterinary care, we sell diagnostic imaging equipment and other medical technology products and related services to the veterinary market and we provide various communication, marketing solutions and other services to the veterinary community.

Our animal hospitals offer a full range of general medical and surgical services for companion animals, as well as specialized treatments including advanced diagnostic services, internal medicine, oncology, ophthalmology, dermatology and cardiology. In addition, we provide pharmaceutical products and perform a variety of pet wellness programs including health examinations, diagnostic testing, routine vaccinations, spaying, neutering and dental care. Our network of animal hospitals is supported by more than 3,000 veterinarians and had approximately 8.3 million patient visits in 2013 . Our network of veterinary diagnostic laboratories 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. Our network of veterinary diagnostic laboratories provides diagnostic testing for over 16,000 clients, which includes standard animal hospitals, large animal practices, universities and other government organizations. Our medical technology business sells digital radiography and ultrasound imaging equipment, provides education and training on the use of that equipment, and provides consulting and mobile imaging services. Our communication and marketing solutions business provides services to veterinary practices, pharmaceutical manufacturers, and the pet owning community. Our services to veterinary practices include subscriptions to our Pro Pet Portals. The Pro Pet Portal provides an online platform for the veterinarian to offer secure individualized portals for pet owners as well as practice websites that are branded to the individual veterinary clinic. We also sell appointment reminder notices that are sent to pet owners on behalf of their clinics. Our services to manufacturers predominately involve targeted marketing programs to animal hospitals whom are subscribers to our Pro Pet Portal.

Our principal executive offices are located at 12401 West Olympic Boulevard, Los Angeles, California. We can be contacted at (310) 571-6500.

Company History

Our company was formed in 1986 as a Delaware corporation and has since established a position in the animal healthcare industry through both internal growth and by acquisitions. By our twentieth anniversary in 2006, we operated a total of 379 animal hospitals, 33 laboratories, and a supplier of digital radiography and ultrasound imaging equipment. Subsequent to 2006, our company continued to grow by adding, additional laboratories, independent animal hospitals, animal hospital chains and other ancillary businesses, the following of which were noteworthy:

On June 1, 2007, we acquired Healthy Pet Corp. (“Healthy Pet”), which operated 44 animal hospitals and a small laboratory, which primarily serviced its own animal hospitals, as of the acquisition date. This acquisition allowed us to expand our animal hospital operations, particularly in Massachusetts, Connecticut, Virginia and Georgia.

On July 1, 2009, we acquired Eklin Medical Systems, Inc. (“Eklin”), a leading seller of digital radiography, ultrasound and practice management software systems in the veterinary market. We combined the operations of Eklin with our Sound Technologies, Inc (“STI”) business unit and the resulting combined company is the largest supplier of diagnostic imaging equipment and other medical technology products tailored specifically for the veterinary market.

On July 1 2010, we acquired Pet DRx Corporation (“Pet DRx”), which operated 23 animal hospitals as of the acquisition date. This acquisition allowed us to expand our animal hospital operations in California.

On July 11, 2011, we acquired BrightHeart Veterinary Centers (“BrightHeart”) which operated nine animal hospitals, eight of which focus on the delivery of specialty and emergency medicine. The acquisition increased our level of market recognition in areas where we had an existing market presence.


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On August 9, 2011, we acquired Vetstreet, Inc., formerly known as MediMedia Animal Health, LLC (“Vetstreet”), the nation’s largest provider of online communications, professional education and marketing solutions to the veterinary community. The acquisition of Vetstreet expanded the breadth of our product offerings to the veterinary community.

On January 31, 2012 we expanded our operations into Canada with an increased investment in Associate Veterinary Clinics (1984) Limited ("AVC"), which operated 44 hospitals in three Canadian provinces as of the acquisition date.

Industry Overview

According to American Pet Products Association, Inc’s. (“APPA”) 2013-2014 APPA National Pet Owners Survey , the United States population of companion animals is approximately 208 million, including about 179 million dogs and cats. APPA estimates that approximately $32 billion was spent in the United States on pets in 2013 for veterinary care, supplies, medicine and boarding and grooming. The survey indicated that the ownership of pets is widespread with approximately 83 million, or 68%, of U.S. households owning at least one pet, including companion and other animals. Specifically, 57 million households owned at least one dog and 45 million households owned at least one cat.

We believe that among pet owners there is a growing awareness of pet health and wellness, including the benefits of preventive care and specialized services. As technology continues to migrate from the human healthcare sector into the practice of veterinary medicine, more sophisticated treatments, diagnostic tests and equipment are becoming available to treat companion animals. These new and increasingly complex procedures, diagnostic tests, including laboratory testing and advanced imaging, and pharmaceuticals are gaining wider acceptance as pet owners are exposed to these previously unconsidered treatment programs through their exposure with this technology in human healthcare, and through literature and marketing programs sponsored by large pharmaceutical and pet nutrition companies.

Even as treatments available in veterinary medicine become more complex, prices for veterinary services typically remain a low percentage of a pet owner’s income, facilitating payment at the time of service. Unlike the human healthcare industry, providers of veterinary services are not dependent on third-party payers in order to collect fees. As such, providers of veterinary services typically do not have the problems of extended payment collection cycles or pricing pressures from third-party payers faced by human healthcare providers. Outsourced laboratory testing and diagnostic equipment sales are wholesale businesses that collect payments directly from animal hospitals under standard industry payment terms. Fees for services provided in our animal hospitals are due at the time of service. In 2013 , over 99% of our animal hospital services were paid at the time of service. In addition, over the past three fiscal years our bad debt expense has averaged less than 1% of total revenue.

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 infestation of fleas, heartworms and ticks, and the number of daylight hours.

Animal Hospital Industry

Animal healthcare is provided predominately by the veterinarian practicing as a sole practitioner, or as part of a larger group practice or hospital. Veterinarians diagnose and treat animal illnesses and injuries, perform surgeries, provide routine medical exams and prescribe medication. Some veterinarians specialize by type of medicine, such as orthopedics, dentistry, ophthalmology or dermatology. Others focus on a particular type of animal. The principal factors in a pet owner’s decision as to which veterinarian to use include convenient location and hours, personal recommendations, reasonable fees and quality of care.

According to the American Veterinary Medical Association, the U.S. market for veterinary services is highly fragmented with more than 53,000 veterinarians practicing at the end of 2013 . We have estimated that there are over 26,000 companion animal hospitals operating at the end of 2013 . Although most animal hospitals are single-site, sole-practitioner facilities, we believe veterinarians are gravitating toward larger, multi-doctor animal hospitals that provide state-of-the-art facilities, treatments, methods and pharmaceuticals to enhance the services they can provide their clients.

Well-capitalized animal hospital operators have the opportunity to supplement their internal growth with selective acquisitions. We believe the extremely fragmented animal hospital industry is consolidating due to:

the choice of some owners of animal hospitals to diversify their investment portfolio by selling all or a portion of their investment in the animal hospital;


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the purchasing, marketing and administrative cost advantages that can be realized by a large, multiple location, multi-doctor veterinary provider;

the cost of financing equipment purchases and upgrading technology necessary for a successful practice;

the desire of veterinarians to focus on practicing veterinary medicine, rather than spending large portions of their time performing the administrative tasks necessary to operate an animal hospital; and

the appeal to many veterinarians of the benefits and flexible work schedule that is not typically available to a sole practitioner or single-site provider.

Diagnostic Laboratory Industry

Veterinarians use laboratory tests to diagnose and monitor illnesses and conditions through the detection of substances in urine, tissue, fecal and blood samples, and other specimens. As is the case with the physician treating a human patient, laboratory diagnostic testing is becoming a routine diagnostic tool used by the veterinarian.

Veterinary laboratory tests are performed primarily at veterinary diagnostic laboratories, universities or at animal hospitals using on-site diagnostic equipment. For certain tests, on-site diagnostic equipment can provide more timely results than outside laboratories, but this in-house testing requires the animal hospital or veterinarian to purchase or lease the equipment, maintain and calibrate the equipment periodically to avoid testing errors, employ trained personnel to operate it and purchase testing supplies. Conversely, veterinary diagnostic laboratories can provide a wider range of tests than generally are available on-site at most animal hospitals and do not require any up-front investment on the part of the animal hospital or veterinarian. Leading veterinary diagnostic laboratories also employ highly trained individuals who specialize in the detection and diagnosis of diseases and thus are a valuable resource for the veterinarian.

Our laboratories offer a broad spectrum of standard and customized tests to the veterinary market, convenient sample pick-up times, rapid test reporting and access to professional consulting services provided by trained specialists. Providing the customer with this level of service at competitive prices requires high throughput volumes due to the operating leverage associated with the laboratory business. As a result, larger laboratories are likely to have a competitive advantage relative to smaller laboratories.

We believe that the outsourced laboratory testing market is an integral segment of the animal healthcare industry as a result of:

the emphasis in veterinary education on diagnostic tests and the trend toward specialization in veterinary medicine, which are causing veterinarians to increasingly rely on tests for more accurate diagnoses;

the continued technological developments in veterinary medicine, which are increasing the breadth of tests offered; and

the continued focus on wellness, early detection and monitoring programs in veterinary medicine.

Business Strategy

Our business strategy is to continue expanding our market leadership in animal healthcare through our Animal Hospital, Laboratory, Medical Technology and Vetstreet operating segments. Key elements to our strategy include:

Capitalizing on our Leading Market Position to Generate Revenue Growth.     Our leading market position in the animal hospital, veterinary laboratory and the online communications markets positions us to capitalize on favorable growth trends in the animal healthcare industry. In our animal hospitals, we seek to generate revenue growth by capitalizing on the growing emphasis on pet health and wellness. In our laboratories, we seek to generate revenue growth by taking advantage of the growing number of outsourced diagnostic tests, the opportunities to expand the testing that we provide and by increasing our market share. We continually educate veterinarians on new and existing technologies and tests available to diagnose medical conditions. Further, we leverage the knowledge of our specialists by providing veterinarians with extensive client support in utilizing and understanding these diagnostic tests. Our Medical Technology business seeks to leverage our strengths in the broader veterinary markets by introducing technologies, products and services to the veterinary market. We seek to generate revenue growth by increasing our market share and educating veterinarians on new and existing technologies. In our Vetstreet business, we seek to generate revenue growth by providing integrated animal healthcare online and offline educational products,

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communication products and customized solutions for pharmaceutical manufacturers and veterinary professionals seeking to influence pet owner behavior in a medically appropriate way. By providing pet owners the basic knowledge they need to get more attuned to their pets' health, providing them authoritative pet health information and encouraging them to create and maintain a close relationship with the veterinarian of their choice, veterinary practice revenues should benefit.

Leveraging Established Infrastructure to Improve Margins.     We intend to leverage our established Animal Hospital and Laboratory infrastructure to increase our operating margins. Due to our established networks and the fixed cost nature of our business model, we are able to realize high margins on incremental revenue from Animal Hospital and Laboratory customers. For example, given that our nationwide transportation network servicing our Laboratory customers is a relatively fixed cost, we are able to achieve significantly higher margins on most incremental tests ordered by the same customer when picked up by our couriers at the same time.

Utilizing Enterprise-Wide Information Systems to Improve Operating Efficiencies.     Our Laboratory and the majority of our Animal Hospital operations utilize enterprise-wide management information systems. We believe that these common systems enable us to more effectively manage the key operating metrics that drive our business. With the aid of these systems, we seek to standardize pricing, expand the services we provide and increase volume through targeted marketing programs.

Pursuing Selected Acquisitions.     The fragmentation of the animal hospital industry provides us with significant expansion opportunities in our Animal Hospital segment. Depending upon the attractiveness of the candidates and the strategic fit with our existing operations, we intend to acquire independent animal hospitals each year with aggregate annual revenue of approximately $50 million to $85 million. Our overall acquisition strategy involves the identification of high-quality practices where we can create additional value through the services and scale we can provide. Our typical candidate mirrors the profile of our existing animal hospital base. These acquisitions will be used to both expand existing markets and to enter into new geographic areas. In addition, we also evaluate the acquisition of animal hospital chains, laboratories or related businesses if favorable opportunities are presented. We intend primarily to use cash in our acquisitions but, depending on the timing and amount of our acquisitions, we may use stock or debt.

Business Segments

We report our results of operations through two reportable segments: Animal Hospital and Laboratory. Our Vetstreet and Medical Technology operating segments do not meet the materiality requirements to be presented as separate reportable segments. Accordingly, they are grouped into an “All Other” category.

Information regarding revenue and operating income, attributable to each of our reportable segments, is included in the Segment Result s section within Management’s Discussion and Analysis of Financial Condition and Results of Operations, and within Note 15, Lines of Business, of our Notes to Consolidated Financial Statements , which are incorporated herein by reference.

Animal Hospital

At December 31, 2013 , we operated or managed 609 animal hospitals serving 41 states and four Canadian provinces. Our Animal Hospital revenue accounted for 79% , 78% and 77% of total consolidated revenue in 2013 , 2012 and 2011 , respectively.

Services

In addition to general medical and surgical services, we offer specialized treatments for companion animals, including advanced diagnostic services, internal medicine, oncology, neurology, endocrinology, ophthalmology, dermatology and cardiology. We also provide pharmaceutical products for use in the delivery of treatments by our veterinarians and pet owners. Many of our animal hospitals offer additional services, including grooming, bathing and boarding. We also sell specialty pet products at our animal hospitals, including pet food, vitamins, therapeutic shampoos and conditioners, flea collars and sprays, and other accessory products.

Animal Hospital Network

We seek to provide quality care in clean, attractive facilities that are generally open between 10 to 15 hours per day, six to seven days per week. Our typical animal hospital:


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is located in a 4,000 to 6,000 square-foot, freestanding facility in an attractive location;

has annual revenue between $1 million and $3 million;

is supported by three to five veterinarians; and

has an operating history of over 10 years.

As of December 31, 2013 , our network of freestanding, full-service animal hospitals had facilities located in the following states and four Canadian provinces:

California
 
108

 
Nevada
 
7

Texas *
 
48

 
Hawaii
 
6

Washington *
 
33

 
Minnesota *
 
6

New York *
 
30

 
Alaska
 
5

Florida
 
29

 
New Mexico
 
5

Massachusetts
 
27

 
Delaware
 
4

Pennsylvania
 
26

 
New Hampshire *
 
4

Illinois
 
19

 
South Carolina
 
4

Virginia
 
18

 
Wisconsin
 
4

Georgia
 
18

 
Missouri
 
3

Colorado
 
18

 
Rhode Island *
 
3

Connecticut
 
15

 
Tennessee
 
3

Arizona
 
14

 
Kansas *
 
2

New Jersey *
 
13

 
Kentucky
 
2

Indiana
 
12

 
Louisiana *
 
2

Ohio
 
12

 
Nebraska *
 
2

Oregon*
 
12

 
Vermont
 
2

Maryland
 
12

 
Alabama *
 
1

Michigan *
 
11

 
Utah
 
1

North Carolina *
 
8

 
West Virginia *
 
1

Oklahoma
 
7

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Alberta, Canada *
 
22

 
 
 
 
British Columbia, Canada*
 
8

 
 
 
 
Ontario, Canada*
 
18

 
 
 
 
Quebec, Canada*
 
4

 
 
 
 
 
*
States and Canadian provinces with laws, rules and regulations which require that veterinary medical practices be owned by licensed veterinarians and that corporations which are not owned by licensed veterinarians refrain from providing, or holding themselves out as providers of, veterinary medical care. In these states/provinces we do not own the veterinary practices or provide veterinary care but provide management and other administrative services to the independently owned veterinary practices.

Marketing

We direct our marketing efforts toward increasing the number of annual visits from existing clients through customer education efforts and toward attracting new clients to our network of hospitals through online and offline initiatives. We inform and educate our clients about pet wellness and quality care through mailings of HealthyPet Magazine , which focuses on pet care and wellness. We also market through targeted demographic mailings regarding specific pet health issues and collateral health material made available at each animal hospital. With these internal marketing programs, we seek to leverage our existing customer base by increasing the number and intensity of the services received during each visit. We send reminder

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notices to increase awareness of the advantages of regular, comprehensive veterinary medical care, including preventive care such as early disease detection exams, vaccinations, dental screening and geriatric care. We also have expanded our online capabilities both internally and through Vetstreet. Our internal efforts involve offering increased convenience for our clients to book appointments or find detailed health related materials on our hospital websites. We also enter into referral arrangements with local pet shops, humane societies and veterinarians to increase our client base. We seek to obtain referrals from veterinarians by promoting our specialized diagnostic and treatment capabilities to veterinarians and veterinary practices that cannot offer their clients these services. Through Vetstreet, we provide robust health and wellness information to the pet owning community in order to attract additional clients to both VCA and non-VCA hospitals.

Personnel

Our animal hospitals generally employ a staff of between 20 and 30 full-time-equivalent employees, depending upon the facility’s size and customer base. The staff includes administrative and technical support personnel, three to five veterinarians, and a hospital manager who supervises the day-to-day activities of the facility.

We actively recruit qualified veterinarians and technicians and are committed to supporting continuing education for our professional staff. We operate post-graduate teaching programs for veterinarians at 28 of our facilities, which train over 150 veterinarians each year. We believe that these programs enhance our reputation in the veterinary profession and further our ability to continue to recruit the most talented veterinarians.

We seek to establish an environment that supports the veterinarian in the delivery of quality medicine and fosters professional growth through increased patient flow and a diverse case mix, continuing education, state-of-the-art equipment and access to specialists. We believe our animal hospitals offer attractive employment opportunities to veterinarians because of our professional environment, competitive compensation, management opportunities, employee benefits not generally available to a sole practitioner, flexible work schedules that accommodate personal lifestyles and the ability to relocate to different regions of the country.

We have established a medical advisory board to support our operations. Our advisory board, under the direction of our Chief Medical Officer, recommends medical standards for our network of animal hospitals and is comprised of veterinarians recognized for their outstanding knowledge and reputations in the veterinary field. Our advisory board members represent both the different geographic regions in which we operate and the medical specialties practiced by our veterinarians; and three members are faculty members at highly-ranked veterinary colleges. Additionally, our regional medical directors, a group of highly experienced veterinarians, are also closely involved in the development and implementation of our medical programs.

Laboratory

We operate a full-service, veterinary diagnostic laboratory network serving all 50 states and certain areas in Canada. Our Laboratory revenue accounted for 16% of total consolidated revenue in both 2013 and 2012 and 18% in 2011 . We service a diverse customer base of over 16,000 clients including animal hospitals we operate, which accounted for 16% of total Laboratory revenue in both 2013 and 2012 and 14% in 2011 .

Services

Our diagnostic spectrum includes over 300 different tests in the area of chemistry, pathology, endocrinology, serology, hematology and microbiology, as well as tests specific to particular diseases.

Although modified to address the particular requirements of the species tested, the tests performed in our veterinary laboratories are similar to those performed in human clinical laboratories and utilize similar laboratory equipment and technologies. We believe that the growing concern for animal health, combined with the movement of veterinary medicine toward increasing specialization, may result in the migration of additional areas of human testing into the veterinary field.

Given the recent advancements in veterinary medical technology and the increased breadth and depth of knowledge required for the practice of veterinary medicine, many veterinarians solicit the knowledge and experience of our specialists to interpret test results to aid in the diagnosis of illnesses and to suggest possible treatment alternatives. Our diagnostic experts include veterinarians, chemists and other scientists with expertise in pathology, internal medicine, oncology, cardiology, dermatology, neurology and endocrinology. Because of our specialists involvement, we believe the quality of our service further distinguishes our laboratory services as a premiere service provider.


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Laboratory Network

At December 31, 2013 , we operated 56 veterinary diagnostic laboratories. Our laboratory network includes:

primary hubs that are open 24 hours per day and offer a full-testing menu;

secondary laboratories that are open 24 hours per day and offer a wide-testing menu servicing large metropolitan areas; and

short-term assessment and treatment (“STAT”) laboratories that service other locations with demand sufficient to warrant nearby laboratory facilities and are open primarily during daytime hours.

We connect our laboratories to our customers with what we believe is the industry’s largest transportation network, picking up requisitions daily through an extensive network of independent drivers and couriers. Customers outside our transportation network use FedEx to send specimens to our laboratory just outside of Memphis, Tennessee, which permits rapid and cost-efficient testing because of the proximity to the primary sorting facility of FedEx.

In 2013 , we derived approximately 86% of our Laboratory revenue from major metropolitan areas, where we offer twice-a-day pick-up service and same-day results. In addition, in these areas we generally offer to report results within three hours of pick-up. Outside of these areas, we typically provide test results to veterinarians before 8:00 a.m. the day following pick-up.

Sales, Marketing and Client Service

Our full-time sales and field-service representatives market laboratory services and maintain relationships with existing customers. Our sales force is compensated via salary plus commission and organized along geographic regions. We support our sales efforts by strengthening our industry-leading team of specialists, developing marketing literature, attending trade shows, participating in trade associations and providing educational services to veterinarians. Our client-service representatives respond to customer inquiries, provide test results and, when appropriate, introduce the customer to other services offered by the laboratory.

Personnel

Each of our primary and secondary laboratory locations includes a manager, supervisors for each department and personnel for laboratory testing. In addition, we employ or contract with specialists to interpret test results to assist veterinarians in the diagnosis of illnesses and to suggest possible treatment alternatives.

We actively recruit qualified personnel and are committed to supporting continuing education for our professional staff. We have internal training programs for routine testing procedures to improve the skill level of our technicians and to improve the overall capacity of our existing staff. We sponsor various residents and certain other educational programs. These programs serve to build awareness of our company with students, who may seek employment with our company following graduation.

Systems

We use an enterprise-wide management information system to support our Animal Hospital operations. We decide whether or not to place newly acquired animal hospitals on this network based on a cost-benefit analysis. In addition, a majority of our animal hospitals utilize consistent patient accounting/point-of-sale software and we are able to track performance of hospitals on a per-service, per-veterinarian and per-client basis.

We use an enterprise-wide management information system to support our veterinary laboratories. All of our financial data, customer records and laboratory results are stored in computer databases. Laboratory technicians and specialists are able to electronically access test results from remote testing sites. Our software gathers data in a data warehouse enabling us to provide expedient results via fax or through our Internet online resulting system.

Competition

The companion animal healthcare industry is highly competitive and subject to continual change in the manner in which services are delivered and providers are selected. We believe that the primary factors influencing a customer’s selection of an animal hospital are convenient location and hours, personal recommendations, reasonable fees and quality of care. Our primary competitors for our animal hospitals in most markets are individual practitioners or small, regional multi-clinic practices. In

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addition, some national companies in the pet care industry, including the operators of super-stores, are developing networks of animal hospitals in markets that include our animal hospitals. We also compete with sellers of pet-related products and diagnostic services delivered via the Internet.

Among veterinary diagnostic laboratories, we believe that quality, price, specialist support and the time required to deliver results are the major competitive factors. There are many clinical laboratories that provide a broad range of diagnostic testing services in the same markets serviced by us, and we also face competition from several providers of on-site diagnostic equipment that allows veterinarians to perform various testing. Our principal competitor in most geographic locations in the United States is IDEXX Laboratories.

Our Vetstreet business operates in the online communication, professional education and marketing business within the animal healthcare industry. We believe that the primary factors influencing a customer's selection of a company which provides services such as Vetstreet to be price, breadth of product offerings and ease of integration with existing systems. The competitive landscape in this business changed during 2012. Five competitors have launched pet portal product offerings similar to Vetstreet's. We consider three of the five to be direct competitors. Vetstreet’s main competition in this space is IDEXX, Demand Force, and ePet Health.

Government Regulation

Certain states and provinces have laws, rules and regulations which require that veterinary medical practices be either wholly-owned or majority-owned by licensed veterinarians and that corporations which are not wholly-owned or majority-owned by licensed veterinarians refrain from providing, or holding themselves out as providers of, veterinary medical care. In these states and provinces, we provide management and other administrative services to veterinary practices rather than owning such practices or providing such care. We provide management and other administrative services to veterinary practices located in these states and provinces.

At December 31, 2013 , we provided management and administrative services to 176 animal hospitals in 15 states, and 52 animal hospitals in four Canadian provinces. In some cases, in addition to providing management and administrative services we may lease the veterinary facility and equipment to the veterinary practice. We consolidate these veterinary practices for financial reporting purposes. Although we have structured our operations to comply with our understanding of the veterinary medicine laws of each state and province in which we operate, interpretive legal precedent and regulatory guidance varies by jurisdiction and is often sparse and not fully developed. A determination that we are in violation of applicable restrictions on the practice of veterinary medicine in any jurisdiction in which we operate could have a material adverse effect on our operations, particularly if we were unable to restructure our operations to comply with the requirements of that jurisdiction.

In addition, all of the states in which we operate impose various registration requirements. To fulfill these requirements, we have registered each of our facilities with appropriate governmental agencies and, where required, have appointed a licensed veterinarian to act on behalf of each facility. All veterinarians practicing in our animal hospitals are required to maintain valid state licenses to practice.

Our acquisitions may be subject to pre-merger or post-merger review by governmental authorities for anti-trust and other legal compliance. Adverse regulatory action could negatively affect our operations through the assessment of fines or penalties against us or the possible requirement of divestiture of one or more of our operations.

Employees

At December 31, 2013 we employed or managed on behalf of the professional corporations to which we provide services approximately 11,100 full-time-equivalent employees. At that date, none of these employees were a party to a collective bargaining agreement.

Availability of Our Reports Filed with the Securities and Exchange Commission (“SEC”)

We maintain a website with the address http://investor.vcaantech.com . We are not including the information contained on our website as a part of, or incorporating it by reference into, this annual report on Form 10-K. We make available free of charge through our website our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after we electronically file that material with, or furnish that material to, the SEC.


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The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. Copies of our reports filed electronically with the SEC may be accessed on the SEC’s website www.sec.gov . The public may also read and copy any materials filed with the SEC at the SEC’s Public Reference Room at 100 F Street NE, Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at (800) SEC-0330.  

ITEM 1A.
RISK FACTORS

Various sections of this annual report contain forward-looking statements, all of which are based on current expectations and could be affected by the uncertainties and risk factors described below and throughout this annual report. Our actual results may differ materially from these forward-looking statements.

Changes in the demand for our products and services could negatively affect our operating results.

The frequency of visits to our animal hospitals has declined and may continue to decline. We believe that the frequency of visits is impacted by consumer spending habits, which are affected by a number of factors, including among other things, prevailing economic conditions, levels of employment, salaries and wage rates, consumer confidence and consumer perception of economic conditions. The United States and Canadian economies have undergone and may continue to experience significant volatility and disruption. The timing and sustainability of an economic recovery is uncertain and additional macroeconomic, business and financial disruptions could have a material adverse effect on the demand for our services. In addition, economic concerns may cause some pet owners to elect to skip or defer visits to veterinary hospitals, affect their willingness to approve certain diagnostic tests, comply with a treatment plan, forgo expensive treatment options, defer treatment for their pets altogether or even own a pet. Additionally, the frequency of visits to our animal hospitals and the number of diagnostic tests performed by our laboratories may be negatively impacted as a result of preventative care and better pet nutrition. Demand for vaccinations will be impacted in the future as protocols for vaccinations change. Our veterinarians establish their own vaccine protocols. Some of our veterinarians have changed their protocols and others may change their protocols in light of recent and/or future literature. The demand for our products and services may also decline as a result of the eradication or substantial declines in the prevalence of certain diseases. Also, many pet-related products traditionally sold at animal hospitals have become more widely available in retail stores and other channels of distribution, including the Internet, resulting in a decline in demand for these products at our animal hospitals. All of the foregoing may result in a decrease in sales of our products and services, which could have a material adverse effect on our business, financial position, results of operations, and cash flows.

The significant competition in the companion animal healthcare industry could result in a decrease in our prices, an increase in our acquisition costs, a loss of market share and could materially affect our revenue and profitability.

The companion animal healthcare industry is highly competitive with few barriers to entry. To compete successfully, we may be required to reduce prices, increase our acquisition and operating costs or take other measures that could have a material adverse effect on our financial condition, results of operations, margins and cash flow. In addition, if we are unable to compete successfully, we may lose market share.

A significant component of our annual growth strategy includes the acquisition of independent animal hospitals. The competition for animal hospital acquisitions from small national and regional multi-clinic companies may cause us to increase the amount we pay to acquire additional animal hospitals and may result in fewer acquisitions than anticipated by our growth strategy. If we are unable to acquire a requisite number of animal hospitals annually or if our acquisition costs increase, we may be unable to effectively implement our growth strategy and realize anticipated economies of scale.

Some national companies in the pet care industry, including the operators of super-stores, are developing networks of animal hospitals in markets that include our animal hospitals; this may cause us to reduce prices to remain competitive. Reducing prices may have a material adverse effect on our Animal Hospital revenue, alternatively not reducing prices may cause us to lose market share.

We compete with clinical laboratory companies in the same markets we service. These companies have acquired additional laboratories in the markets in which we operate and may continue their expansion, and aggressively “bundle” their products and services to compete with us. Increased competition may materially adversely affect our Laboratory revenue and margins. Several other national companies develop and sell on-site diagnostic equipment that allows veterinarians to perform their own laboratory tests. Growth of the on-site diagnostic testing market may have a material adverse effect on our Laboratory revenue.

11




Our medical technology business is a leader in the market for medical imaging equipment in the animal healthcare industry. Our primary competitors are companies that are much larger than us and have substantially greater capital, manufacturing, marketing and research and development resources than we do, including companies such as Siemens, Philips and Canon. The success of our medical technology business, in part, is due to its focus on the veterinary market, which allows it to differentiate its products and services to meet the unique needs of this market. If this market receives more focused attention from these larger competitors, we may find it difficult to compete and as a result our revenues and operating margins from this business could decline.

If we are unable to effectively execute our growth strategy, we may not achieve our desired economies of scale and our profitability may decline.

Our success depends in part on our ability to increase our revenue and operating income through a balanced program of organic growth initiatives and selective acquisitions of established animal hospitals, laboratories and related businesses. If we cannot implement or effectively execute on this strategy, our results of operations will be materially adversely affected. Even if we effectively implement our growth strategy, we may not achieve the economies of scale that we have experienced in the past or that we anticipate occurring in the future. We experienced a decline in same-store revenue growth in our animal hospitals for ten consecutive quarters, which ended in the second quarter of 2011. Our Laboratory growth had also been affected and became negative during certain quarters of the three year period ending December 31, 2010. Our Animal Hospital same-store revenue, adjusted for differences in business days, has fluctuated between a decline of 3.2% and growth of 1.2% for 2009 through 2013. Our Laboratory internal revenue growth, adjusted for differences in billing days, has fluctuated between 0% and 5.3% over the same years. Our internal growth may continue to fluctuate and may be below our historical rates. Any reduction in the rate of our internal growth may cause our revenue and operating income to decrease. Investors should not assume that our historical growth rates are reliable indicators of results in future periods.

Due to the fixed cost nature of our business, fluctuations in our revenue could adversely affect our gross profit, operating income and margins.

A substantial portion of our expense, particularly rent and personnel costs, are fixed and are based in part on expectations of revenue. We may be unable to reduce spending in a timely manner to compensate for any significant fluctuations in our revenue. Accordingly, shortfalls in revenue may materially adversely affect our gross profit, operating income and margins.

We may experience difficulties hiring skilled veterinarians due to shortages that could disrupt our business.

From time to time we experience shortages of skilled veterinarians in some regional markets in which we operate animal hospitals which may require us to enhance wages and benefits to recruit and retain enough qualified veterinarians to adequately staff our animal hospitals. If our labor costs increase, we may not be able to raise our rates for our products and services to offset these increased costs. Our failure to recruit and retain qualified veterinarians, or to control our labor costs, could have a material adverse effect on our business, financial position, results of operations, and cash flows.

Any failure in our information technology systems, disruption in our transportation network or failure to receive supplies could significantly increase testing turn-around time, reduce our production capacity and otherwise disrupt our operations.

Our Laboratory operations depend on the continued and uninterrupted performance of our information technology systems and transportation network, including overnight delivery services provided by FedEx. Sustained system failures or interruption in our transportation network could disrupt our ability to process laboratory requisitions, perform testing, provide test results in a timely manner and/or bill the appropriate party. We could lose customers and revenue as a result of a system or transportation network failure. In addition, any change in government regulation related to transportation samples or specimens could also have an impact on our business.

Our computer systems are vulnerable to damage or interruption from a variety of sources, including telecommunications failures, electricity brownouts or blackouts, malicious human acts and natural disasters. Moreover, despite network security measures, some of our servers are potentially vulnerable to digital break-ins, computer viruses and similar disruptive problems. Despite the precautions we have taken, unanticipated problems affecting our systems could cause interruptions in our information technology systems. Our insurance policies may not adequately compensate us for any losses that may occur due to any failures in our systems.


12



Our Laboratory operations depend on a limited number of employees to upgrade and maintain its customized computer systems. If we were to lose the services of some or all of these employees, it may be time-consuming for new employees to become familiar with our systems, and we may experience disruptions in service during these periods.

Our operations depend, in some cases, on the ability of single source suppliers or a limited number of suppliers, to deliver products and supplies on a timely basis. Some of these suppliers are smaller companies with limited capital resources and some of the products that we purchase from these suppliers are proprietary, and, therefore, cannot be readily or easily replaced by alternative suppliers. We have in the past experienced, and may in the future experience, shortages of or difficulties in acquiring products and/or supplies in the quantities and of the quality needed. Shortages in the availability of products and/or supplies for an extended period of time will disrupt our ability to deliver products and provide services in a timely manner, could result in the loss of customers, and could have a material adverse impact on our results of operations.

Difficulties integrating new acquisitions may impose increased costs, loss of customers and a decline in operating margins and profitability and other risks that we may not anticipate.

Our success depends in part on our ability to timely and cost-effectively acquire, and integrate into our business, additional animal hospitals, laboratories and related businesses. In 2013, we acquired 20 animal hospitals and one laboratory. In 2012, we acquired 79 animal hospitals, including 44 with the acquisition of AVC, one laboratory and ThinkPets. In 2011, we acquired 27 animal hospitals, including nine with the acquisition of BrightHeart, one laboratory and Vetstreet. We expect to continue our animal hospital acquisition program and, if presented with favorable opportunities, we may acquire animal hospital chains, laboratories or related businesses. Our expansion into new territories and new business segments creates the risk that we will be unsuccessful in the integration of the acquired businesses that are new to our operations. Any difficulties in the integration process could result in increased expense, loss of customers and a decline in operating margins and profitability. In some cases, we have experienced delays and increased costs in integrating acquired businesses, particularly where we acquire a large number of animal hospitals in a single region at or about the same time. We also could experience delays in converting the systems of acquired businesses into our systems, which could result in increased staff and payroll expense to collect our results as well as delays in reporting our results, both for a particular region and on a consolidated basis. Further, the legal and business environment prevalent in new territories and with respect to new businesses may pose risks that we do not anticipate and materially adversely impact our ability to integrate newly acquired operations. In addition, our field management may spend a greater amount of time integrating these new businesses and less time managing our existing businesses. During these periods, there may be less attention directed to marketing efforts or staffing issues, which could affect our revenue and expense. For all of these reasons, our historical success in integrating acquired businesses is not a reliable indicator of our ability to do so in the future.

We may be unable to adequately protect our customers’ privacy or we may fail to comply with privacy laws.

The protection of customer, employee and company data is critical and the regulatory environment surrounding information security, storage, use, processing, disclosure and privacy is demanding, with the frequent imposition of new and changing requirements. In addition, our customers expect that we will adequately protect their personal information. Any actual or perceived significant breakdown, intrusion, interruption, cyber-attack or corruption of customer, employee or company data or our failure to comply with federal, state, local and foreign privacy laws could damage our reputation and result in lost sales, fines and lawsuits. Despite our efforts and technology to secure our computer network, security could be compromised, confidential information could be misappropriated or system disruptions could occur. Our failure to comply with security requirements imposed by applicable law or the payment card industry or rectify a security issue may result in fines and the imposition of restrictions on our ability to accept payment by credit or debit cards. Vetstreet offers e-commerce services to third party veterinary practices and engages in e-commerce. Federal, state and international laws and regulations may govern the collection, use, retention, sharing and security of data that we receive from customers, visitors to the websites of our customers, and others. In addition, we have and post on our website our own privacy policy concerning the collection, use and disclosure of user data. Any failure, or perceived failure, by us to comply with our posted privacy policies or with any privacy-related laws, government regulations or directives, or industry self-regulatory principles could result in damage to our reputation, or proceedings or actions against us by governmental entities or otherwise, which could potentially have a material adverse effect on our business.

The carrying value of our goodwill and other intangible assets could be subject to an impairment write-down.

At December 31, 2013, our consolidated balance sheet reflected $1.3 billion of goodwill and $86.7 million of other intangible assets, constituting a substantial portion of our total assets of $2.2 billion at that date. We expect that the aggregate amount of goodwill and other intangible assets on our consolidated balance sheet will increase as a result of future acquisitions. We continually evaluate whether events or circumstances have occurred that suggest that the fair value of our other intangible

13



assets or each of our reporting units are below their respective carrying values. The determination that the fair value of our intangible assets or one of our reporting units is less than its carrying value would result in an impairment write-down. The impairment write-down would be reflected as an operating expense and could have a material adverse effect on our results of operations during the period in which we recognize the expense.

Our estimated fair values are calculated in accordance with generally accepted accounting principles related to fair value and utilize valuation methods 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. We provide no assurance that forecasted growth rates, valuation multiples, and discount rates will not deteriorate or that we will not incur additional impairment charges. We will continue to analyze changes to these assumptions in future periods.

The fair value of our Vetstreet reporting unit, exceeded its carrying value by 10%. The carrying amount of goodwill in the Vetstreet reporting unit was $9.2 million. As mentioned in previous filings, Vetstreet had experienced operational delays with the execution of their business strategy, in part due to complexities involved in the migration of their information systems from their former parent to our corporate data center. In early 2013, the migration was completed and the company began the full implementation of their new business strategy. The fair value of the reporting unit for purposes of impairment testing was determined utilizing a revised estimate of future cash flows that reflected a recovery of certain aspects of the Vetstreet business in 2014 and beyond. In the event that we are not able to timely deliver product enhancements necessary to reestablish our competitive advantage, our forecasted growth rates may not be attainable and therefore we could incur an impairment charge in the future with respect to this business.
We require a significant amount of cash to service our debt and expand our business as planned.

We have, and will continue to have, a substantial amount of debt. Our substantial amount of debt requires us to dedicate a significant portion of our cash flow from operations to service interest and principal payments on our debt, thereby reducing the funds available for use for working capital, capital expenditures, acquisitions and general corporate purposes.

Our failure to satisfy covenants in our debt instruments will cause a default under those instruments.

In addition to imposing restrictions on our business and operations, our debt instruments include a number of covenants relating to financial ratios and tests. Our ability to comply with these covenants may be affected by events beyond our control, including prevailing economic, financial and industry conditions. The breach of any of these covenants would result in a default under these instruments. An event of default would permit our lenders and other debtholders to declare all amounts borrowed from them to be due and payable, together with accrued and unpaid interest. If we are unable to repay debt to our senior lenders, these lenders and other debtholders could proceed against our assets.

Our debt instruments may adversely affect our ability to run our business.

Our substantial amount of debt, as well as the guarantees of our subsidiaries and the security interests in our assets and those of our subsidiaries, could impair our ability to operate our business effectively and may limit our ability to take advantage of business opportunities. For example, our senior credit facility may:

limit our ability to borrow additional funds or to obtain other financing in the future for working capital, capital expenditures, acquisitions, investments and general corporate purposes;

limit our ability to dispose of our assets, create liens on our assets or to extend credit;

make us more vulnerable to economic downturns and reduce our flexibility in responding to changing business and economic conditions;

limit our flexibility in planning for, or reacting to, changes in our business or industry;

place us at a competitive disadvantage to our competitors with less debt; and

restrict our ability to pay dividends, repurchase or redeem our capital stock or debt, or merge or consolidate with another entity.


14



The terms of our senior credit facility allow us, under specified conditions, to incur further indebtedness, which would heighten the foregoing risks. If compliance with our debt obligations materially hinders our ability to operate our business and adapt to changing industry conditions, we may lose market share, our revenue may decline and our operating results may suffer.

It is our intent to refinance our senior credit facility prior to its expiration in 2016. Although in the past we have been able to obtain financing on terms we believe to be reasonable, there is a possibility that we may not be able to obtain financing on favorable terms in the future.

Any failure by the manufacturers of our medical imaging equipment, failure in our ability to develop functional and cost-effective software for our products, or any product malfunctions could result in a decline in customer purchases and a reduction in our revenue and profitability.

We do not develop or manufacture the medical imaging equipment that we distribute, except for the software component of our digital radiography machines. Our business in large part is dependent upon distribution agreements with the manufacturers of the equipment, the ability of those manufacturers to produce desirable equipment and to keep pace with advances in technology, our ability to develop cost-effective, functional, and user-friendly software for the digital radiography machines, and the overall rate of new development within the industry. If the distribution agreements terminate or are not renewed, if the manufacturers breach their covenants under these agreements, if the equipment manufactured by these manufacturers or our software becomes less competitive or if there is a general decrease in the rate of new development within the industry, demand for our products and services would decrease.

Manufacturing flaws, component failures, design defects, or inadequate disclosure of product-related information could result in an unsafe condition or injury. These problems could result in product liability claims and lawsuits alleging that our products have resulted or could result in an unsafe condition or injury. In addition, a material adverse event involving one of our products could result in reduced market acceptance and demand for all of our products, and could harm our reputation and our ability to market our products in the future. Any of the foregoing problems could disrupt our business and have a material adverse effect on our business, results of operations, financial condition and cash flows.

Our use of self-insurance, self-insured retention and high-deductible insurance programs to cover certain claims for losses suffered and costs or expenses incurred could negatively impact our business upon the occurrence of an uninsured and/or significant event.

We self-insure and use high-retention or high-deductible insurance programs with regard to property risks, general, professional and employment practice liabilities, health benefits, and workers’ compensation. In the event that the frequency of losses we experience increases unexpectedly, the aggregate of those losses could materially increase our liability and adversely affect our cash flows and results of operations. In addition, we have made certain judgments as to the limits on our existing insurance coverage that we believe are in line with industry standards, as well as in light of economic and availability considerations. If we experience losses above these limits it could materially adversely affect our financial and business condition.

If we fail to comply with governmental regulations applicable to our business, various governmental agencies may impose fines, institute litigation or preclude us from operating in certain states.

Certain states and provinces have laws, rules and regulations which require that veterinary medical practices be owned by licensed veterinarians and that corporations which are not owned by licensed veterinarians refrain from providing, or holding themselves out as providers of, veterinary medical care. At December 31, 2013, we provided management and administrative services to 176 animal hospitals in 15 states and 52 animal hospital in four Canadian provinces, under management agreements with these veterinary practices, including 48 practices in Texas, 33 in Washington, and 30 in New York. We may experience difficulty in expanding our operations into other states or provinces with similar laws, rules and regulations. Although we have structured our operations to comply with our understanding of the veterinary medicine laws of each state and province in which we operate, interpretive legal precedent and regulatory guidance varies by jurisdiction and is often sparse and not fully developed. A determination that we are in violation of applicable restrictions on the practice of veterinary medicine in any jurisdiction in which we operate, could have a material adverse effect on us, particularly if we are unable to restructure our operations to comply with the requirements of that jurisdiction.

All of the states in which we operate impose various registration requirements. To fulfill these requirements, we have registered each of our facilities with appropriate governmental agencies and, where required, have appointed a licensed veterinarian to act on behalf of each facility. All veterinarians practicing in our animal hospitals are required to maintain valid state licenses to practice.

15



Fluctuations in foreign currency exchange rates could adversely affect our operating results.

We are exposed to foreign currency fluctuation risk in Canada as we recently expanded our animal hospital operations and now operate 52 animal hospitals in four provinces and operate four laboratories that create market risk associated with changes in the value of the Canadian dollar. In addition, in the future we may expand into other international markets. Currency exchange rates fluctuate on a daily basis as a result of a number of factors and cannot easily be predicted. To date, we have not hedged against foreign currency fluctuations; however, we may pursue hedging alternatives in the future. Our business, financial condition, operating results and cash flows therefore could be materially adversely affected by fluctuations in the exchange rate between international currencies and the U.S. dollar.

Our international operations may result in additional market risks, which may harm our business.

We operate over 50 animal hospitals and four laboratories in Canada as of December 31, 2013. In the future we may expand into other international markets. As our international operations grow, they may require greater management and financial resources. Internal operations require the integration of personnel with varying cultural and business backgrounds and an understanding of the relevant differences in the cultural, legal and regulatory environments. Our results may be increasingly affected by the risks of our international operations, including:

changes in internal staffing and employment issues,

failure to understand the local culture and market, and

the burden of complying with foreign laws, including tax and labor laws and foreign financial accounting standards.

Changes in regulations or user concerns regarding privacy and protection of user data could adversely affect our business.

Federal, state and international laws and regulations may govern the collection, use, retention, sharing and security of data that we receive from customers, visitors to the websites of our customers, and others. In addition, we have and post on our website our own privacy policy concerning the collection, use and disclosure of user data. Any failure, or perceived failure, by us to comply with our posted privacy policies or with any privacy-related laws, government regulations or directives, or industry self-regulatory principles could result in damage to our reputation, or proceedings or actions against us by governmental entities or otherwise, which could potentially have an adverse effect on our business.
 
ITEM 1B.
UNRESOLVED STAFF COMMENTS

None.
 
ITEM 2.
PROPERTIES

Our corporate headquarters and principal executive offices are located in Los Angeles, California, in approximately 60,000 square feet of leased space. At February 19, 2014, we leased or owned facilities at 724 other locations that house our animal hospitals, laboratories, our medical technology business, and our Vetstreet business. We own 152 facilities and the remainder are leased. We believe that our real property facilities are adequate for our current needs.
 


16



ITEM 3.
LEGAL PROCEEDINGS

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, titled 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, titled Carlos Lopez vs. Logistics Delivery Solutions, LLC, Antech Diagnostics, Inc., et. al. Logistics Delivery Solutions, LLC, a co-defendant in the lawsuit, is a company with which Antech has contracted to provide courier services in California. The lawsuit seeks to assert claims on behalf of individuals who were engaged by Logistics Delivery Solutions, LLC to perform such courier services and alleges, among other allegations, that Logistics Delivery Solutions, and Antech Diagnostics improperly classified the plaintiffs as independent contractors, improperly failed to pay overtime wages, and improperly failed to provide proper meal and rest periods. The lawsuit seeks damages, statutory penalties, and other relief, including attorneys' fees and costs.

We are vigorously defending these lawsuits. Because these lawsuits are in the initial stages, the financial impact to us, if any, cannot be predicted.

In addition to the lawsuits described above, we are party to various legal proceedings arising in the ordinary course of business, but we are not currently a party to any legal proceeding that we believe would have a material adverse effect on our financial position or results of operations.

ITEM 4.
MINE SAFETY DISCLOSURES

Not applicable.
PART II  

ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock trades on the NASDAQ Global Select Market under the symbol “WOOF.” The following table sets forth the range of high and low sales prices per share for our common stock as quoted on the NASDAQ Global Select Market for the periods indicated.

 
 
High
 
Low
Fiscal 2013 by Quarter
 
 
 
 
Fourth
 
$
31.67

 
$
26.84

Third
 
$
29.58

 
$
25.55

Second
 
$
27.18

 
$
20.89

First
 
$
23.81

 
$
20.32

Fiscal 2012 by Quarter
 
 
 
 
Fourth
 
$
21.44

 
$
18.42

Third
 
$
23.21

 
$
17.56

Second
 
$
26.00

 
$
20.04

First
 
$
23.41

 
$
19.22


A t February 24, 2014 , there were 293  holders of record of our common stock.


17



The following graph sets forth the percentage change in cumulative total stockholder return on our common stock from December 31, 2008 to December 31, 2013. These periods are compared with the cumulative returns of the NASDAQ Stock Market (U.S. Companies) Index and the Russell 2000 Index. The comparison assumes $100 was invested on December 31, 2008 in our common stock and in each of the foregoing indices. The stock price performance on the following graph is not necessarily indicative of future stock price performance.


*$100 invested on 12/31/08 in stock or index, including reinvestment of dividends. Fiscal year ending December 31.

 
 
12/08
 
12/09
 
12/10
 
12/11
 
12/12
 
12/13
VCA Antech, Inc.
 
100.00

 
125.35

 
117.15

 
99.35

 
105.89

 
157.75

NASDAQ Composite
 
100.00

 
144.88

 
170.58

 
171.30

 
199.99

 
283.39

Russell 2000
 
100.00

 
127.17

 
161.32

 
154.59

 
179.86

 
249.69


Dividends

We have not paid cash dividends on our common stock, and we do not anticipate paying cash dividends in the foreseeable future. In addition, our senior credit facility places limitations on our ability to pay cash dividends in respect of our common stock. Specifically, our senior credit facility dated August 16, 2011 prohibits us from declaring, ordering, paying, or setting apart any sum for any dividends or other distributions on account of any shares of any class of stock, other than dividends payable solely in shares of stock to holders of such class of stock. Any future determination as to the payment of dividends on our common stock will be restricted by these limitations, will be at the discretion of our Board of Directors and will depend on our results of operations, financial condition, capital requirements and other factors deemed relevant by the Board of Directors, including the General Corporation Law of the State of Delaware, which provides that dividends are only payable out of surplus or current net profits.


18



Transactions in Our Equity Securities

For the period covered by this report, we have not engaged in any transactions involving the sale of our unregistered equity securities that were not disclosed in a quarterly report on Form 10-Q or a current report on Form 8-K. We have not engaged in any sales of registered securities for which the use of proceeds is required to be disclosed.
  
The following table provides information on shares of our common stock we repurchased during the fourth quarter of 2013 (in thousands except average price paid per share data):
 
 
 
 
 
 
 
Total Number of
 
Approximate Dollar
 
 
 
 
 
 
Shares Purchased as
 
Value of Shares That
 
 
Total Number
 
Average
 
Part of Publicly
 
May Yet Be Purchased
 
 
of Shares
 
Price Paid
 
Announced Plan
 
Under the Plan
Period
 
Purchased
 
Per Share
 
or Program
 
or Program
(1)
 
(2)
 
(3)
 
(4)
 
(4)
 
 
 
 
 
 
 
 
 
October 1, 2013 to October 31, 2013
 
258,344

 
$
27.68

 
258,344

 
$
102,976,305

November 1, 2013 to November 30, 2013
 
127,301

 
$
29.42

 
100,000

 
$
100,007,725

December 1, 2013 to December 31, 2013
 
288,000

 
$
30.29

 
288,000

 
$
91,284,521

 
 
673,645

 
$
29.12

 
646,344

 
$
91,284,521


(1) Information is based on settlement dates of repurchase transactions.

(2) Consists of shares of our common stock, par value $0.001 per share. Of these shares, 646,344 shares were repurchased in the open market pursuant to a previously-announced share repurchase program (see (4) below). The balance of the repurchases were related to 27,301 shares of common stock surrendered to us by employees to satisfy minimum statutory tax withholding obligations in connection with the vesting of restricted stock. In the table above, these shares were excluded from column (4) as they do not affect the number of shares that may be repurchased under the Share Repurchase Program.

(3) The average price paid for shares repurchased under the Share Repurchase Program excludes commissions paid.

(4) We have an ongoing authorization, since April 2013 from our Board of Directors to repurchase up to $125 million in shares of our common stock in open market purchases or negotiated transactions.

 

19



ITEM 6.
SELECTED FINANCIAL DATA

The following table provides our selected consolidated financial data as of and for each of the years in the five-year period ended December 31, 2013 . The income statement and cash flow data and the other financial data for each of the three years ended December 31, 2013 , and the balance sheet data as of December 31, 2013 and 2012 has been derived from our financial statements included elsewhere in this Form 10-K. The other periods presented were derived from our financial statements that are not included in this Form 10-K.

The selected financial data presented below is not necessarily indicative of results of future operations and should be read in conjunction with the Management’s Discussion and Analysis of Financial Condition and Results of Operations section and our consolidated financial statements and related notes included elsewhere in this 10-K.
 
December 31,
 
2013
 
2012
 
2011
 
2010
 
2009
 
(in thousands, except per share amounts)
Income Statement Data:
 
 
 
 
 
 
 
 
 
Animal Hospital revenue (1)
$
1,417,908

 
$
1,331,314

 
$
1,150,120

 
$
1,052,462

 
$
994,215

Laboratory revenue
344,831

 
327,801

 
316,797

 
310,654

 
310,057

All Other revenue (2)
112,740

 
112,960

 
80,430

 
64,013

 
48,557

Intercompany revenue
(72,110
)
 
(72,433
)
 
(61,986
)
 
(45,661
)
 
(38,322
)
Total revenue
1,803,369

 
1,699,642

 
1,485,361

 
1,381,468

 
1,314,507

Direct costs
1,393,989

 
1,324,668

 
1,146,904

 
1,050,304

 
973,275

Gross profit
409,380

 
374,974

 
338,457

 
331,164

 
341,232

Selling, general and administrative expense (3)
157,911

 
157,155

 
121,112

 
123,541

 
95,669

Impairment of goodwill and other long-lived assets (4)

 
123,573

 
21,310

 

 

Net loss on sale of assets
2,455

 
1,310

 
382

 
374

 
4,035

Operating income (4)
249,014

 
92,936

 
195,653

 
207,249

 
241,528

Interest expense, net
18,549

 
16,552

 
16,884

 
13,630

 
21,466

Debt retirement costs

 

 
2,764

 
2,131

 

Business combination adjustment gain

 
(5,719
)
 

 

 

Other expense (income)
90

 
(488
)
 
118

 
(772
)
 
(104
)
Income before provision for income taxes
230,375

 
82,591

 
175,887

 
192,260

 
220,166

Provision for income taxes (4)(5)
87,453

 
31,875

 
76,027

 
78,102

 
84,580

Net income
142,922

 
50,716

 
99,860

 
114,158

 
135,586

Net income attributable to noncontrolling interests
5,411

 
5,165

 
4,455

 
3,915

 
4,158

Net income attributable to VCA Antech, Inc.
$
137,511

 
$
45,551

 
$
95,405

 
$
110,243

 
$
131,428

Basic earnings per share
$
1.55

 
$
0.52

 
$
1.10

 
$
1.28

 
$
1.54

Diluted earnings per share
$
1.53

 
$
0.51

 
$
1.09

 
$
1.27

 
$
1.53

Weighted-average shares outstanding for basic earnings per share
88,621

 
87,681

 
86,606

 
86,049

 
85,077

Weighted-average shares outstanding for diluted earnings per share
89,663

 
88,671

 
87,394

 
87,051

 
86,097



20



 
 
December 31,
 
 
2013
 
2012
 
2011
 
2010
 
2009
 
 
(in thousands, except percentages)
Other Financial Data:
 
 
 
 
 
 
 
 
 
 
Consolidated gross margin
 
22.7
%
 
22.1
 %
 
22.8
 %
 
24.0
%
 
26.0
%
Animal Hospital gross margin
 
14.7
%
 
14.2
 %
 
15.6
 %
 
16.4
%
 
18.5
%
Laboratory gross margin
 
47.5
%
 
46.3
 %
 
45.4
 %
 
45.8
%
 
46.3
%
All Other gross margin
 
34.2
%
 
34.3
 %
 
26.1
 %
 
30.1
%
 
32.6
%
Consolidated operating margin (1)(4)
 
13.8
%
 
5.5
 %
 
13.2
 %
 
15.1
%
 
18.4
%
Animal Hospital operating margin
 
12.1
%
 
11.7
 %
 
13.5
 %
 
14.1
%
 
16.3
%
Laboratory operating margin
 
38.3
%
 
37.3
 %
 
36.6
 %
 
37.3
%
 
38.9
%
All Other operating margin (2)(4)
 
5.0
%
 
(108.2
)%
 
(24.2
)%
 
7.3
%
 
6.1
%
Cash Flow Data:
 
 
 
 
 
 
 
 
 
 
Net cash provided by operating activities
 
$
256,372

 
$
237,253

 
$
191,051

 
$
168,073

 
$
183,471

Net cash used in investing activities
 
$
(126,731
)
 
$
(219,258
)
 
$
(271,310
)
 
$
(150,174
)
 
$
(130,760
)
Net cash (used in) provided by financing activities
 
$
(72,013
)
 
$
(13,514
)
 
$
47,004

 
$
(66,142
)
 
$
3,467

Capital expenditures
 
$
(73,270
)
 
$
(76,807
)
 
$
(63,485
)
 
$
(61,951
)
 
$
(50,801
)
Balance Sheet Data (at period end):
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
125,029

 
$
68,435

 
$
63,651

 
$
97,126

 
$
145,181

Goodwill
 
$
1,330,917

 
$
1,291,231

 
$
1,237,607

 
$
1,092,480

 
$
985,674

Total assets
 
$
2,237,781

 
$
2,091,580

 
$
1,995,368

 
$
1,766,422

 
$
1,627,404

Long-term debt
 
$
619,645

 
$
630,643

 
$
618,853

 
$
527,036

 
$
545,055

Total VCA Antech, Inc. stockholders’ equity
 
$
1,307,340

 
$
1,183,503

 
$
1,107,878

 
$
998,924

 
$
875,047

 
(1)  
On January 31, 2012, we increased our investment in Associate Veterinary Clinics (1981) LTD ("AVC"), becoming the sole non-veterinary shareholder. Accordingly, we now consolidate their results into our own. At the time of the additional investment, AVC operated 44 animal hospitals.

On July 11, 2011, we acquired BrightHeart Veterinary Centers (“BrightHeart”), which operated nine animal hospitals as of the acquisition date.

On July 1, 2010, we acquired Pet DRx Corporation, which operated 23 animal hospitals as of the acquisition date.

On July 1, 2009, we acquired Eklin Medical Systems, Inc. ("Eklin"), a supplier of digital radiography equipment to the veterinary industry.

(2)  
On February 1, 2012, we acquired ThinkPets, Inc. ("ThinkPets"), which was merged into our existing Vetstreet business. ThinkPets was previously a competitor of Vetstreet.

On August 9, 2011, we acquired Vetstreet, a provider of online communications, professional education and marketing solutions to the veterinary community.

On July 1, 2009, we acquired Eklin, a supplier of digital radiography equipment to the veterinary industry.

(3)  
In 2010, our SG&A, operating income and operating margin were unfavorably impacted by a $14.5 million accrual related to consulting and Supplemental Executive Retirement Program ("SERP") amounts to be paid in accordance with consulting and SERP agreements entered into on June 30, 2010.

(4)  
In 2012, our operating income and operating margin were unfavorably impacted by a $123.6 million non-cash impairment charge. The charge was primarily attributable to impairment of our goodwill and intangible assets, related to our Vetstreet business, included in our All Other segments category. Our operating income was also impacted by a $3.1 million out-of-period adjustment to depreciation expense related to our acquired capital leases. These charges impacted our 2012 consolidated operating margin by 7.5%.

21



In 2011, our operating income and operating margin was unfavorably impacted by a $21.3 million non-cash goodwill impairment charge, related to our medical technology business. The charge impacted our 2011 operating margin by 1.4%.    

(5)  
The 2012 provision for income taxes was impacted by the tax effect of the impairment charge, mentioned above.

The 2010 provision for income taxes includes the recognition of $5.4 million, or $3.5 million net of tax, related to additional state tax payments required as a result of a tax settlement reached.

ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our consolidated financial statements provided under Part II, Item 8 of this annual report on Form 10-K. 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,” “seek,” “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 result in these forward-looking statements in being different than reflected in this report are described throughout this annual report and particularly in “Risk Factors” Part I, Item 1A of this annual report on Form 10-K.

The forward-looking information set forth in this annual report on Form 10-K is as of February 28, 2014 , and we undertake no duty to update this information. Shareholders and prospective investors can find information filed with the SEC after February 28, 2014 , at our website at http://investor.vcaantech.com or at the SEC’s website at www.sec.gov .

Overview

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 December 31, 2013 , our animal hospital network consisted of 609 animal hospitals in 41 states and in four Canadian provinces.

Our Laboratory segment operates the largest network of veterinary diagnostic laboratories in the nation. Our laboratories provide sophisticated testing and consulting services used by veterinarians in the detection, diagnosis, evaluation, monitoring, treatment and prevention of diseases and other conditions affecting animals. At December 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.


22



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, Non-GAAP gross margin, Non-GAAP gross profit, excluding acquisition related amortization and Non-GAAP gross margin, excluding acquisition related amortization 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, Non-GAAP operating margin, Non-GAAP operating income, excluding acquisition related amortization and Non-GAAP operating margin, excluding acquisition related amortization on a consolidated basis and lastly our Non-GAAP net income, Non-GAAP diluted earnings per share, Non-GAAP net income, excluding acquisition related amortization and Non-GAAP diluted earnings per share, excluding acquisition related amortization. See “Consolidated Results of Operations  Non-GAAP Financial Measures” below for information about our use of these Non-GAAP financial measures, including our reasons for including the measures, material limitations with respect to the usefulness of the measures, and a reconciliation of each Non-GAAP financial measure to the most directly comparable GAAP financial measure. All references to Non-GAAP figures in the discussion that follows refer to Non-GAAP results excluding acquisition related amortization.

Executive Overview

In 2013, we experienced increases in both consolidated revenue and gross profit. The increases were primarily driven by revenue from our acquisitions, as well as organic growth in our Animal Hospital, Laboratory and Medical Technology business segments. Our Animal Hospital same-store revenue growth, adjusted for differences in business days, was 1.1% and 1.2% in 2013 and 2012, respectively. Our Laboratory revenue growth, adjusted for differences in billing days, was 5.3% and 3.6% in 2013 and 2012, respectively. In 2013, our consolidated operating income increased 167.9% primarily due to an impairment charge recorded in 2012. Our Non-GAAP consolidated operating income, excluding acquisition related amortization, increased 11.3%, on a 60 basis point increase in consolidated operating margin primarily due to improved results from our Animal Hospital, Laboratory and Medical Technology businesses and from cost management at our Vetstreet business.

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.

We believe that our ability to maintain or increase margins in 2014 will be dependent on organic revenue growth rates. We plan to continue our growth strategy of acquiring individual animal hospitals and maintain our strong emphasis on expense management. However, our ability to return to our historical margins will be dependent on increases in same-store revenue growth in our animal hospitals and successful integration of our acquired businesses.

Share Repurchase Program

In April 2013, our Board of Directors authorized a 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 have been and will continue to be 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. Refer to Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities in Part II of this report.

Financing Transaction

On January 25, 2012, we amended our Amended and Restated Credit and Guaranty Agreement, dated as of August 16, 2011. The amendment replenished the aggregate amount of uncommitted incremental facilities available under our senior credit facility to a maximum of $100 million, after giving effect to the funding of $50 million of new term loan commitments on January 24, 2012, which were drawn in connection with the additional investment made in AVC, detailed below.


23



Acquisitions

Our annual growth strategy includes the acquisition of independent animal hospitals. We also evaluate the acquisition of animal hospital chains, laboratories or related businesses if favorable opportunities are presented. In 2013, we acquired 20 independent animal hospitals with annualized revenue of $60.4 million. The following table summarizes the changes in the number of facilities operated by our Animal Hospital and Laboratory segments:
 
 
For the Years Ended
December 31,
 
 
2013
 
2012
 
2011
Animal hospitals:
 
 
 
 
 
 
Beginning of period
 
609

 
541

 
528

Acquisitions, excluding AVC in 2012 and BrightHeart in 2011
 
20

 
35

 
18

AVC
 

 
44

 

BrightHeart
 

 

 
9

New facilities
 

 
1

 

Acquisitions relocated into our existing animal hospitals
 
(2
)
 
(6
)
 
(3
)
Sold, closed or merged
 
(18
)
 
(6
)
 
(11
)
End of period
 
609

 
609

 
541

Laboratories:
 
 
 
 
 
 
Beginning of period
 
55

 
53

 
50

Acquisitions
 
1

 
1

 
1

New facilities
 

 
2

 
2

Closed or merged
 

 
(1
)
 

End of period
 
56

 
55

 
53

 
2011 BrightHeart Acquisition

On July 11, 2011, we acquired 100% of the membership interests of BrightHeart for approximately $50 million in cash. BrightHeart operated nine animal hospitals, eight of which focused on the delivery of specialty and emergency medicine. The acquisition increased our level of market recognition in areas where we had an existing market presence. At the time of the acquisition, BrightHeart had annualized revenue of approximately $53.4 million. Our consolidated financial statements reflect the operating results of BrightHeart since July 11, 2011.

2011 Vetstreet Acquisition

On August 9, 2011, we acquired Vetstreet, a provider of online communications, professional education and marketing solutions to the veterinary community. The acquisition of Vetstreet expanded the breadth of our product offerings to the veterinary community. We acquired Vetstreet for $146.4 million, net of cash acquired. At the time of the acquisition, Vetstreet had annualized revenue of approximately $23.0 million. Our consolidated financial statements reflect the operating results of Vetstreet since August 9, 2011 reported within our "All Other" category in our segment disclosures.

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 consolidated financial statements reflect the operating results of AVC since January 31, 2012.
 

24



2012 ThinkPets Acquisition

On February 1, 2012, we acquired 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 consolidated financial statements reflect the operating results of ThinkPets since February 1, 2012 reported within our "All Other" category in our segment disclosures.

Critical Accounting Policies and Estimates

We believe that the application of the following accounting policies, which are important to our financial position and results of operations, require significant judgments and estimates on the part of management. For a summary of all of our accounting policies, including the accounting policies discussed below, see Note 2 , Summary of Significant Accounting Policies, in our consolidated financial statements of this annual report on Form 10-K.

Revenue

Generally, we recognize revenue when persuasive evidence of a sales arrangement exists, delivery of goods has occurred or services have been rendered, the sales price or fee is fixed or determinable and collectability is reasonably assured. For the Animal Hospital segment, revenue is recognized when services are performed or products are sold. For the Laboratory segment, revenue is recognized when services are performed. For the other segments, revenue is recognized when services are provided or delivery of goods has occurred.

Multiple Element Arrangements

We sell our digital radiography imaging equipment bundled with other services in certain instances. These items are accounted for under the FASB’s Revenue Recognition - Multiple-Element Arrangements guidance.

Under the guidance, sales arrangement consideration is allocated at the inception of the arrangement to all deliverables using the relative selling price method, whereby any discount in the arrangement is allocated proportionally to each deliverable on the basis of each deliverable’s selling price. The selling price for each deliverable is based on vendor-specific objective evidence (“VSOE”) if available, third-party evidence (“TPE”) if VSOE is not available, or estimated selling price (“ESP”) if neither VSOE nor TPE is available. For elements where VSOE is available, VSOE of fair value is based on the price for those products and services when sold separately by us or the price established by management with the relevant authority. TPE of selling price is the price of our, or any of our competitor’s, largely interchangeable products or services in stand-alone sales to similarly situated customers. ESP is generally calculated based upon multiple factors that vary depending upon the unique facts and circumstances related to each deliverable. Key external and internal factors considered in developing the ESPs include prices charged by us for similar arrangements, historical pricing practices and the nature of the product. In addition, when developing ESPs, we may consider other factors as appropriate, including the pricing of competitive alternatives if they exist, and product-specific business objectives. We exercise significant judgment to evaluate the relevant facts and circumstances in calculating the ESP of the deliverables in our arrangements.

We recognize revenue when the services are provided or at the time of delivery or installation and customer acceptance. Generally, at the time of delivery and installation of equipment the only undelivered item is the post-contract customer support ("PCS"). This obligation is contractually defined in both terms of scope and period. For the PCS, we recognize the revenue for these services on a straight-line basis over the period of support and we expense the costs of these services as they are incurred.

Valuation of Goodwill and Other Intangible Assets

Goodwill

We allocate a significant portion of the purchase price for our acquired businesses to goodwill. Our goodwill represents the excess of the cost of an acquired entity over the net of the amounts assigned to identifiable assets acquired and liabilities assumed. The total amount of our goodwill at December 31, 2013 was $1.3 billion, consisting of $1.2 billion for our Animal Hospital reporting unit, $96.9 million for our Laboratory reporting unit, $9.2 million for our Vetstreet reporting unit and $8.2 million for our Medical Technology reporting unit.

We test our goodwill for impairment annually, or sooner if circumstances indicate impairment may exist, in accordance with goodwill guidance. Our annual impairment testing date is October 31, which allows us time to accurately complete our

25



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”).

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 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.

Negative changes in our projected 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. 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.

2013 Impairment Test
After completing our October 31, 2013 impairment test for each of our reporting units, we concluded that goodwill was not impaired for any of our reporting units. In addition, our Animal Hospital, Laboratory and Medical Technology reporting units were not at risk of failing step one of the goodwill impairment test. Our Laboratory reporting unit exceeded its carrying value by a substantial margin. We applied a hypothetical ten percent decrease to the fair values of all of our reporting units which would not have triggered additional impairment testing and analysis.
The fair value of our Vetstreet reporting unit, exceeded its carrying value by 10%. The carrying amount of goodwill in the Vetstreet reporting unit was $9.2 million. As mentioned in previous filings, Vetstreet had experienced operational delays with the execution of their business strategy, in part due to complexities involved in the migration of their information systems from their former parent to our corporate data center. In early 2013, the migration was completed and the company began the full implementation of their new business strategy. The fair value of the reporting unit for purposes of impairment testing was determined utilizing a revised estimate of future cash flows that reflected a recovery of certain aspects of the Vetstreet business in 2014 and beyond. In the event that we are not able to timely deliver product enhancements necessary to reestablish our competitive advantage, our forecasted growth rates may not be attainable and therefore we could incur an impairment charge in the future with respect to this business.
2012 Impairment Test
After completing our October 31, 2012 impairment test for each of our reporting units, we concluded that goodwill was not impaired in our Animal Hospital, Laboratory or Medical Technology reporting units. In addition, each of these reporting units were not at risk of failing step one of the goodwill impairment test. Our Laboratory reporting unit exceeded its carrying value by a substantial margin. We applied a hypothetical ten percent decrease to the fair values of these reporting units which would not have triggered additional impairment testing and analysis. We also concluded, however, that an impairment charge would be necessary with respect to our Vetstreet reporting unit.

26



In 2012, we recorded an impairment charge in our Vetstreet reporting unit reflecting changes in our estimate of forecasted cash flows related to continued operational delays in part due to our upgrading and migration of Vetstreet's information technology systems from their former parent to our corporate data center; less than anticipated financial results for the 2012 fiscal year; the negative impact of increasing competition and a related overall change in business strategy to better compete in the marketplace. The Vetstreet reporting unit's remaining goodwill was $8.8 million.
2011 Impairment Test
After completing our October 31, 2011 impairment test for each of our reporting units, we concluded that goodwill was not impaired in our Animal Hospital, Laboratory or our newly acquired Vetstreet reporting units. Our Animal Hospital reporting unit, which had $1.0 billion of goodwill, marginally exceeded its carrying value and our Laboratory reporting unit exceeded its carrying value by a substantial margin. The acquisition of Vetstreet resulted in reporting unit goodwill of $97.2 million.
In 2011, we recorded an impairment charge in our Medical Technology reporting unit reflecting changes in our estimate of forecasted cash flows. This reporting unit’s remaining goodwill was $8.2 million.

Other Intangible Assets

In addition to goodwill, we acquire other identifiable intangible assets in our acquisitions, including but not limited to covenants-not-to-compete, client lists, lease related assets and customer relationships. We value these identifiable intangible assets at estimated fair value. Our estimated fair values are based on generally accepted valuation techniques such as market comparables, discounted cash flow techniques or costs to replace. These valuation methods involve the use of significant assumptions such as the timing and amount of future cash flows, risks, appropriate discount rates, and the useful lives of intangible assets.

Subsequent to acquisition, we test our identifiable intangible assets for impairment as part of a broader test for impairment of long-lived assets under the FASB’s accounting guidance whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The recognition and measurement of an impairment loss under the FASB’s accounting guidance also involves a two-step process:

First we identify potential impairment by estimating the aggregate projected undiscounted future cash flows associated with an asset or asset group and compare that amount with the carrying value of those assets. If the aggregate projected cash flow is greater than our carrying amount, there is no impairment and the second step is not needed.

If the estimated aggregate projected undiscounted future cash flows associated with an asset or asset group is less than the carrying value, we then write the assets or asset group down to the estimated fair value with a corresponding charge to earnings. If the estimated fair value is greater than carrying value, there is no adjustment. We may be required to make significant estimates in determining the fair value of some of our assets or asset groups.

There was no impairment charge recorded on our long-lived intangible assets in 2013 and 2011. In conjunction with our 2012 year-end review, we recorded long-lived intangible asset impairment of $22.9 million related to the aforementioned Vetstreet business. The intangibles consisted of technology, customer relationships, trademarks and certain other contracts.

Income Taxes

We account for income taxes under the FASB’s accounting guidance for income taxes. We record deferred tax liabilities and deferred tax assets, which represent taxes to be settled or recovered in the future. We adjust our deferred tax assets and deferred tax liabilities to reflect changes in tax rates or other statutory tax provisions. Changes in tax rates or other statutory provisions are recognized in the period the enactment occurs.

We make judgments in assessing our ability to realize future benefits from our deferred tax assets, which includes operating loss carryforwards. We believe that our earnings during the periods when the temporary differences become deductible will be sufficient to realize the related future tax benefits. Should we determine that we would not be able to realize all or a portion of our deferred tax assets, an adjustment would be made to the carrying amount through a valuation allowance.

Also, our net deductible temporary differences and tax carryforwards are recorded using the enacted tax rates expected to apply to taxable income in the periods in which the deferred tax liability or asset is expected to be settled or realized. At December 31, 2013, we have a net deferred tax liability of $71.2 million. Should the expected applicable tax rates change in the

27



future, an adjustment to the net deferred tax liability would be credited or charged, as appropriate, to income in the period such determination was made. For example, an increase of 1.0% in our income tax rate would cause us to increase our net deferred tax liability balance by $1.7 million with a corresponding charge to earnings.

We also assess differences between our tax bases, which are more likely than not to be realized, and the as-filed tax bases of certain assets and liabilities. We account for unrecognized tax benefits in accordance with the FASB’s accounting guidance on income taxes, which prescribe a minimum probability threshold that a tax position must meet before a financial statement benefit is recognized. The minimum threshold is defined as a tax position that is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation, based solely on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. We did not have any unrecognized tax benefits on December 31, 2013.



28



Consolidated Results of Operations

The following table sets forth components of our income statements expressed as a percentage of revenue:

 
 
For the Years Ended December 31,
 
 
2013
 
2012
 
2011
Revenue:
 
 
 
 
 
 
Animal Hospital
 
78.6
 %
 
78.4
 %
 
77.4
 %
Laboratory
 
19.1

 
19.3

 
21.3

All Other
 
6.3

 
6.6

 
5.5

Intercompany
 
(4.0
)
 
(4.3
)
 
(4.2
)
Total revenue
 
100.0

 
100.0

 
100.0

Direct costs
 
77.3

 
77.9

 
77.2

Gross profit
 
22.7

 
22.1

 
22.8

Selling, general and administrative expense
 
8.8

 
9.2

 
8.2

Impairment of goodwill and other long-lived assets
 

 
7.3

 
1.4

Net loss on sale of assets
 
0.1

 
0.1

 

Operating income
 
13.8

 
5.5

 
13.2

Interest expense, net
 
1.0

 
1.0

 
1.2

Debt retirement costs
 

 

 
0.2

Business combination adjustment gain
 

 
(0.4
)
 

Income before provision for income taxes
 
12.8

 
4.9

 
11.8

Provision for income taxes
 
4.9

 
1.9

 
5.1

Net income
 
7.9

 
3.0

 
6.7

Net income attributable to noncontrolling interests
 
0.3

 
0.3

 
0.3

Net income attributable to VCA Antech, Inc.
 
7.6
 %
 
2.7
 %
 
6.4
 %

Revenue

The following table summarizes our revenue (in thousands, except percentages):

 
 
For the Years Ended December 31,
 
 
 
 
 
 
2013
 
2012
 
2011
 
% Change
 
 
$
 
% of
Total
 
$
 
% of
Total
 
$
 
% of
Total
 
2013
 
2012
Animal Hospital
 
$
1,417,908

 
78.6
 %
 
$
1,331,314

 
78.4
 %
 
$
1,150,120

 
77.4
 %
 
6.5
 %
 
15.8
 %
Laboratory
 
344,831

 
19.1
 %
 
327,801

 
19.3
 %
 
316,797

 
21.3
 %
 
5.2
 %
 
3.5
 %
All Other
 
112,740

 
6.3
 %
 
112,960

 
6.6
 %
 
80,430

 
5.5
 %
 
(0.2
)%
 
40.4
 %
Intercompany
 
(72,110
)
 
(4.0
)%
 
(72,433
)
 
(4.3
)%
 
(61,986
)
 
(4.2
)%
 
0.4
 %
 
(16.9
)%
Total revenue
 
$
1,803,369

 
100.0
 %
 
$
1,699,642

 
100.0
 %
 
$
1,485,361

 
100.0
 %
 
6.1
 %
 
14.4
 %

Consolidated revenue increased $103.7 million in 2013 , as compared to 2012 . The increase in revenue was primarily attributable to acquisitions, primarily in the animal hospitals segment. Excluding acquisitions, revenue increased $21.7 million. This remaining increase was primarily due to organic revenue from both our Animal Hospital and Laboratory segments. Our Animal Hospital same-store revenue increased 1.1% in 2013 . Our Laboratory internal revenue growth was 5.3% in 2013 .

Consolidated revenue increased $214.3 million in 2012 , as compared to 2011 . The increase in revenue was primarily attributable to acquisitions including animal hospitals in the United States and Canada, Vetstreet and ThinkPets. Excluding acquisitions, revenue increased $15.1 million due to organic revenue increases from both our Animal Hospital and Laboratory segments. Our Animal Hospital same-store revenue increased 1.2% in 2012 . Our Laboratory internal revenue growth was 3.6% in 2012 .


29



Gross Profit

The following table summarizes our consolidated gross profit, Non-GAAP consolidated gross profit and Non-GAAP consolidated gross profit, excluding acquisition related amortization in dollars and as a percentage of applicable revenue (in thousands, except percentages):
 
 
For the Years Ended December 31,
 
 
 
 
 
 
2013
 
2012
 
2011
 
% Change
 
 
$
 
Gross
Margin
 
$
 
Gross
Margin
 
$
 
Gross
Margin
 
2013
 
2012
Animal Hospital
 
$
209,127

 
14.7
%
 
$
189,111

 
14.2
%
 
$
179,810

 
15.6
%
 
10.6
 %
 
5.2
%
Laboratory
 
163,879

 
47.5
%
 
151,761

 
46.3
%
 
143,790

 
45.4
%
 
8.0
 %
 
5.5
%
All Other
 
38,601

 
34.2
%
 
38,707

 
34.3
%
 
20,971

 
26.1
%
 
(0.3
)%
 
84.6
%
Intercompany
 
(2,227
)
 


 
(4,605
)
 


 
(6,114
)
 


 


 


Consolidated gross profit
 
$
409,380

 
22.7
%
 
$
374,974

 
22.1
%
 
$
338,457

 
22.8
%
 
9.2
 %
 
10.8
%
Impact of inventory adjustment
 
(2,808
)
 
 
 

 
 
 

 
 
 
 
 
 
Impact of rent expense adjustment
 
(1,396
)
 
 
 

 
 
 

 
 
 
 
 
 
Impact of vacant property adjustment
 
2,046

 
 
 

 
 
 

 
 
 
 
 
 
Impact of depreciation expense adjustment
 

 
 
 
3,051

 
 
 

 
 
 
 
 
 
Non-GAAP consolidated gross profit and Non-GAAP gross margin (1)
 
$
407,222

 
22.6
%
 
$
378,025

 
22.2
%
 
$
338,457

 
22.8
%
 
 
 
 
Intangible asset amortization associated with acquisitions
 
20,753

 
 
 
21,858

 
 
 
11,955

 
 
 
 
 
 
Non-GAAP consolidated gross profit, excluding acquisition related amortization and Non-GAAP gross margin, excluding acquisition related amortization (1)
 
$
427,975

 
23.7
%
 
$
399,883

 
23.5
%
 
$
350,412

 
23.6
%
 
 
 
 
____________________________
(1)  
Non-GAAP consolidated gross profit, Non-GAAP gross margin, Non-GAAP consolidated gross profit, excluding acquisition related amortization and Non-GAAP gross margin, excluding acquisition related amortization are not measurements 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 $34.4 million in 2013 , as compared to 2012 . Non-GAAP consolidated gross profit, excluding acquisition related amortization, increased $28.1 million in 2013, as compared to 2012. The increase in consolidated gross profit included $8.8 million of gross profit related to the acquisitions consummated since the beginning of 2012. Excluding the impact of acquisitions, the remainder of the increase was attributable to organic revenue growth and increased gross margins at our Animal Hospital, Laboratory, and Medical Technology business segments.

Consolidated gross profit increased $36.5 million in 2012 , as compared to 2011 . Non-GAAP consolidated gross profit, excluding acquisition related amortization, increased $49.5 million in 2012, as compared to 2011. The increase consolidated gross profit included $31.5 million of gross profit primarily from the acquisition of AVC, Vetstreet and ThinkPets. Excluding the impact of acquisitions, the remaining increase in gross profit is attributable to organic revenue growth at our Laboratory and Vetstreet segments, partially offset by a decrease in gross profit from our same-store animal hospitals.



30



Segment Results

Animal Hospital Segment
    
Revenue

Animal Hospital revenue increased $86.6 million in 2013 , as compared to 2012 and $181.2 million in 2012 , as
compared to 2011 . The components of the increases are summarized in the following table (in thousands, except percentages and average price per order):    
 
 
2013 Comparative Analysis
 
2012 Comparative Analysis
 
 
For the Years Ended December 31,
 
 
2013
 
2012
 
%
Change
 
2012
 
2011
 
%
Change
Animal Hospital Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
Same-store facility:
 
 
 
 
 
 
 
 
 
 
 
 
Orders (1)
 
6,912

 
7,078

 
(2.3
)%
 
6,747

 
6,867

 
(1.7
)%
Average revenue per order (2)
 
$
174.83

 
$
168.81

 
3.6
 %
 
$
165.43

 
$
160.56

 
3.0
 %
Same-store revenue (1)
 
$
1,208,416

 
$
1,194,824

 
1.1
 %
 
$
1,116,153

 
$
1,102,535

 
1.2
 %
Business day adjustment (3)
 

 
3,774

 
 
 

 

 
 
Foreign currency impact
 
(4,028
)
 

 
 
 

 

 
 
Net acquired revenue (4)
 
213,520

 
132,716

 
 
 
215,161

 
47,585

 
 
Total
 
$
1,417,908

 
$
1,331,314

 
6.5
 %
 
$
1,331,314

 
$
1,150,120

 
15.8
 %
 
(1)  
Same-store revenue and orders were calculated using Animal Hospital operating results, adjusted to exclude the operating results for newly acquired animal hospitals that we did not own as of the beginning of the comparable period in the prior year. Same-store revenue also includes revenue generated by customers referred from our relocated or combined animal hospitals, including those merged upon acquisition.

(2)  
Computed by dividing same-store revenue by same-store orders.

(3)  
The business day adjustment reflects the impact of one less business day for the year ended December 31, 2013 , as compared to the year ended December 31, 2012 .

(4)  
Net acquired revenue represents the revenue from those animal hospitals acquired, net of revenue from those animal hospitals sold or closed on or after the beginning of the comparable period, which was January 1, 2012 for the 2013 Comparative Analysis and January 1, 2011 for the 2012 Comparative Analysis. Fluctuations in net acquired revenue occur based on the volume, size and timing of acquisitions and dispositions during the periods from this date through the end of the applicable period.

Our business strategy is to place a greater emphasis on comprehensive wellness visits and advanced medical procedures, which typically generate higher priced orders. The migration of lower priced orders from our animal hospitals to other distribution channels mentioned above and our emphasis on comprehensive wellness visits has, over the past several years, resulted in a decrease in lower priced orders and an increase in higher priced orders.

For the year ended December 31, 2013 , we experienced a decrease in the number of lower priced orders while higher priced orders remained relatively flat. We believe these results are a consequence of the competitive environment and the impact of changes in our overall business environment on the mix of the procedures performed. For the year ended December 31, 2012 , contrary to historical trends, we experienced a decrease in the number of both lower and higher priced orders, which we believe was primarily a consequence of the economic conditions in the United States at that time.

Price increases as well as the aforementioned mix in year over year growth rates of low to high-priced orders contributed to the overall increase in the average revenue per order. Prices at each of our hospitals are reviewed regularly and adjustments are made based on market considerations, demographics and our costs. These adjustments historically approximated 3% to 6% on most services at the majority of our animal hospitals and are typically implemented in November of each year; however, price increases in 2013 generally ranged between 3% and 4%.

   

31



Gross Profit

Animal Hospital gross profit is calculated as Animal Hospital revenue less Animal Hospital direct costs. Animal Hospital direct costs comprise all costs of services and products at the animal hospitals including, but not limited to, salaries of veterinarians, technicians and all other animal hospital-based personnel, facilities rent, occupancy costs, supply costs, depreciation and amortization, certain marketing and promotional expenses and costs of goods sold associated with the retail sales of pet food and pet supplies.

The following table summarizes gross profit, gross margin, Non-GAAP gross profit, Non-GAAP gross margin, Non-GAAP gross profit, excluding acquisition related amortization and Non-GAAP gross margin, excluding acquisition related amortization for our Animal Hospital segment (in thousands, except percentages) and the same measures on a same-store basis:

 
For the Years Ended December 31,
 
2013
 
2012
 
% Change
 
2012
 
2011
 
% Change
Gross profit
$
209,127

 
$
189,111

 
10.6
%
 
$
189,111

 
$
179,810

 
5.2
 %
Impact of inventory adjustment
(2,808
)
 

 
 
 

 

 
 
Impact of rent expense adjustment
(1,396
)
 

 
 
 

 

 
 
Impact of vacant property adjustment
2,046

 

 
 
 

 

 
 
Impact of depreciation expense adjustment

 
3,051

 
 
 
3,051

 

 
 
Non-GAAP gross profit (1)
$
206,969

 
$
192,162

 
7.7
%
 
$
192,162

 
$
179,810

 
6.9
 %
Intangible asset amortization associated with acquisitions
16,088

 
15,118

 
 
 
15,118

 
9,235

 
 
Non-GAAP gross profit, excluding acquisition related amortization (1)
$
223,057

 
$
207,280

 
7.6
%
 
$
207,280

 
$
189,045

 
9.6
 %
Gross margin
14.7
%
 
14.2
%
 
 
 
14.2
%
 
15.6
%
 
 
Non-GAAP gross margin (1)
14.6
%
 
14.4
%
 
 
 
14.4
%
 
15.6
%
 
 
Non-GAAP gross margin, excluding amortization (1)
15.7
%
 
15.6
%
 
 
 
15.6
%
 
16.4
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Same-store gross profit (2)
187,763

 
175,125

 
7.2
%
 
164,975

 
174,446

 
(5.4
)%
Impact of inventory adjustment
(2,615
)
 

 
 
 

 

 
 
Impact of rent expense adjustment
(1,396
)
 

 
 
 

 

 
 
Impact of vacant property adjustment
1,662

 

 
 
 

 

 
 
Impact of depreciation expense adjustment

 
3,051

 
 
 
3,051

 

 
 
Non-GAAP same-store gross profit (1)
$
185,414

 
$
178,176

 
4.1
%
 
$
168,026

 
$
174,446

 
(3.7
)%
Intangible asset amortization associated with acquisitions
7,861

 
9,866

 
 
 
7,284

 
8,074

 
 
Non-GAAP same-store gross profit, excluding acquisition related amortization (1)
$
193,275

 
$
188,042

 
2.8
%
 
$
175,310

 
$
182,520

 
(4.0
)%
Same-store gross margin
15.5
%
 
14.7
%
 
 
 
14.8
%
 
15.8
%
 
 
Non-GAAP same-store gross margin (1)
15.3
%
 
14.9
%
 
 
 
15.1
%
 
15.8
%
 
 
Non-GAAP same-store gross margin, excluding acquisition related amortization (1)
16.0
%
 
15.7
%
 
 
 
15.7
%
 
16.6
%
 
 
__________________________
(1)
Non-GAAP gross profit, Non-GAAP gross margin, Non-GAAP gross profit, excluding acquisition related amortization and Non-GAAP gross margin, excluding acquisition related amortization and the same measures expressed on a same store basis, are not measurements of financial performance prepared in accordance with GAAP. See “Non-GAAP Financial Measures.”

(2)
Same-store gross profit for the year ended December 31, 2012 was adjusted to reflect one additional business day in 2012 as compared to 2013.

32



In 2013 , our Animal Hospital gross margin was essentially flat, as compared to 2012. In 2012 , our Animal Hospital gross margin declined as a result of lower same-store margins as a result of increased labor costs and to a lesser extent lower gross margins from our acquired hospitals, as compared to 2011.

In 2013 , our Animal Hospital same-store gross margin increased, as compared to 2012, primarily due to improved leverage from heartworm medication and retail supplies. In 2012 , our Animal Hospital same-store gross margin decreased as compared to 2011, primarily due to deleveraging as a result of increased labor costs.

Over the last several years, we have acquired a significant number of animal hospitals. Many of these newly acquired animal hospitals had lower gross margins at the time of acquisition than those previously operated by us. We have improved these lower gross margins, in the aggregate, subsequent to the acquisition primarily through cost efficiencies.

Laboratory Segment

The following table summarizes revenue and gross profit for our Laboratory segment (in thousands, except percentages):

 
 
For the Years Ended December 31,
 
% Change
 
 
2013
 
2012
 
2011
 
2013
 
2012
Revenue
 
$
344,831

 
$
327,801

 
$
316,797

 
5.2
%
 
3.5
%
Gross profit
 
$
163,879

 
$
151,761

 
$
143,790

 
8.0
%
 
5.5
%
Gross margin
 
47.5
%
 
46.3
%
 
45.4
%
 
 
 
 

Laboratory revenue increased $17.0 million in 2013 , as compared to 2012 and $11.0 million in 2012 , as compared to 2011 . The components of the increase in Laboratory revenue are detailed below (in thousands, except percentages and average price per requisition):

 
 
2013 Comparative Analysis
 
2012 Comparative Analysis
 
 
For the Years Ended December 31,
 
 
2013
 
2012
 
%
Change
 
2012 (5)
 
2011 (5)
 
%
Change
Laboratory Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
Internal growth:
 
 
 
 
 
 
 
 
 
 
 
 
Number of requisitions (1)
 
12,868

 
12,584

 
2.3
%
 
12,605

 
12,378

 
1.8
%
Average revenue per requisition (2)
 
$
26.77

 
$
26.00

 
3.0
%
 
$
25.99

 
$
25.55

 
1.7
%
Total internal revenue (1)
 
$
344,488

 
$
327,243

 
5.3
%
 
$
327,609