VCA Inc.
VCA INC (Form: 10-Q, Received: 08/08/2017 12:03:03)
 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________________ 
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2017
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-16783
___________________________________________________ 
VCA Inc.
(Exact name of registrant as specified in its charter)
 
Delaware
 
95-4097995
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
12401 West Olympic Boulevard
Los Angeles, California 90064-1022
(Address of principal executive offices)
(310) 571-6500
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ].
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [  ].
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth 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)
  
Emerging growth company [ ]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X].
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: common stock, $0.001 par value, 81,269,757 shares as of August 2, 2017 .
 
 
 
 
 



VCA Inc. and Subsidiaries
Form 10-Q
June 30, 2017
Table of Contents

Page
Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



PART I.
FINANCIAL INFORMATION

ITEM 1.
FINANCIAL STATEMENTS

VCA Inc. and Subsidiaries
Condensed, Consolidated Balance Sheets
(Unaudited)
(In thousands, except par value)
 
June 30, 2017
 
December 31, 2016
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
119,052

 
$
81,409

Trade accounts receivable, less allowance for uncollectible accounts of $22,781 and $23,440 at June 30, 2017 and December 31, 2016, respectively
86,323

 
85,593

Inventory
56,541

 
57,590

Prepaid expenses and other
42,721

 
44,752

Prepaid income taxes

 
11,705

Total current assets
304,637

 
281,049

Property and equipment, net
656,362

 
613,224

Goodwill
2,264,265

 
2,164,422

Other intangible assets, net
207,158

 
212,577

Notes receivable
2,196

 
2,147

Other
103,107

 
99,909

Total assets
$
3,537,725

 
$
3,373,328

Liabilities and Equity
 
 
 
Current liabilities:
 
 
 
Current portion of long-term obligations
$
49,347

 
$
38,320

Accounts payable
57,231

 
68,587

Accrued payroll and related liabilities
96,072

 
97,806

Income tax payable
4,732

 

Other accrued liabilities
93,053

 
91,783

Total current liabilities
300,435

 
296,496

Long-term obligations, net
1,325,411

 
1,309,397

Deferred income taxes, net
148,368

 
142,535

Other liabilities
47,472

 
44,560

Total liabilities
1,821,686

 
1,792,988

Commitments and contingencies

 

Redeemable noncontrolling interests
10,558

 
11,615

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

 

VCA Inc. stockholders’ equity:
 
 
 
Common stock, par value $0.001, 175,000 shares authorized, 81,270 and 81,231 shares outstanding as of June 30, 2017 and December 31, 2016, respectively
81

 
81

Additional paid-in capital
40,985

 
32,157

Retained earnings
1,603,196

 
1,484,391

Accumulated other comprehensive loss
(37,075
)
 
(45,406
)
Total VCA Inc. stockholders’ equity
1,607,187

 
1,471,223

Noncontrolling interests
98,294

 
97,502

Total equity
1,705,481

 
1,568,725

Total liabilities and equity
$
3,537,725

 
$
3,373,328



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

1



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



 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
Revenue
$
743,132

 
$
653,489

 
$
1,421,383

 
$
1,216,928

Direct costs
558,039

 
489,541

 
1,081,822

 
916,200

Gross profit
185,093

 
163,948

 
339,561

 
300,728

Selling, general and administrative expense
59,776

 
48,190

 
118,177

 
98,318

Net loss (gain) on sale or disposal of assets
230

 
(271
)
 
480

 
292

Operating income
125,087

 
116,029

 
220,904

 
202,118

Interest expense, net
10,169

 
7,867

 
19,196

 
14,962

Debt retirement costs

 
1,600

 

 
1,600

Other income
(280
)
 
(600
)
 
(582
)
 
(864
)
Income before provision for income taxes
115,198

 
107,162

 
202,290

 
186,420

Provision for income taxes
44,774

 
40,736

 
79,413

 
72,272

Net income
70,424

 
66,426

 
122,877

 
114,148

Net income attributable to noncontrolling interests
2,712

 
2,376

 
4,072

 
3,871

Net income attributable to VCA Inc.
$
67,712

 
$
64,050

 
$
118,805

 
$
110,277

Basic earnings per share
$
0.83

 
$
0.79

 
$
1.46

 
$
1.36

Diluted earnings per share
$
0.82

 
$
0.78

 
$
1.45

 
$
1.35

Weighted-average shares outstanding for basic earnings per share
81,267

 
80,835

 
81,256

 
80,806

Weighted-average shares outstanding for diluted earnings per share
82,228

 
81,729

 
82,204

 
81,630



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

2



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

 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
Net income (1)  
$
70,424

 
$
66,426

 
$
122,877

 
$
114,148

Other comprehensive income:
 
 
 
 
 
 
 
Foreign currency translation adjustments
6,175

 
32

 
8,556

 
12,630

Other comprehensive income
6,175

 
32

 
8,556

 
12,630

Total comprehensive income
76,599

 
66,458

 
131,433

 
126,778

Comprehensive income attributable to noncontrolling interests (1) 
2,878

 
2,446

 
4,297

 
4,294

Comprehensive income attributable to VCA Inc.
$
73,721

 
$
64,012

 
$
127,136

 
$
122,484

____________________________
(1)  
Includes approximately $1.8 million and $2.1 million of net income related to redeemable and mandatorily redeemable noncontrolling interests for the six months ended June 30, 2017 and 2016 , respectively.



































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

3



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


 
Common Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income
 
Noncontrolling
Interests
 
 Total
 
Shares
 
Amount
 
 
 
 
 
Balances, December 31, 2015
80,764

 
$
81

 
$
19,708

 
$
1,275,207

 
$
(50,034
)
 
$
12,072

 
$
1,257,034

Net income (excludes $1,300 and $827 related to redeemable and mandatorily redeemable noncontrolling interests, respectively)

 

 

 
110,277

 

 
1,744

 
112,021

Other comprehensive income (excludes $168 related to mandatorily redeemable noncontrolling interests)

 

 

 

 
12,207

 
255

 
12,462

Formation of noncontrolling interests

 

 

 

 

 
88,949

 
88,949

Distributions to noncontrolling interests

 

 

 

 

 
(1,166
)
 
(1,166
)
Purchase of noncontrolling interests

 

 
(1,822
)
 

 

 
(1,908
)
 
(3,730
)
Share-based compensation

 

 
9,104

 

 

 

 
9,104

Issuance of common stock under stock incentive plans
117

 

 
1,122

 

 

 

 
1,122

Stock repurchases
(18
)
 

 
(843
)
 

 

 

 
(843
)
Excess tax benefit from share-based compensation

 

 
1,421

 

 

 

 
1,421

Other

 

 
6

 

 

 
(85
)
 
(79
)
Balances, June 30, 2016
80,863

 
$
81

 
$
28,696

 
$
1,385,484

 
$
(37,827
)
 
$
99,861

 
$
1,476,295

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances, December 31, 2016
81,231

 
$
81

 
$
32,157

 
$
1,484,391

 
$
(45,406
)
 
$
97,502

 
$
1,568,725

Net income (excludes $969 and $810 related to redeemable and mandatorily redeemable noncontrolling interests, respectively)

 

 

 
118,805

 

 
2,293

 
121,098

Other comprehensive income (excludes $87 related to mandatorily redeemable noncontrolling interests)

 

 

 

 
8,331

 
138

 
8,469

Formation of noncontrolling interests

 

 

 

 

 
335

 
335

Distributions to noncontrolling interests

 

 

 

 

 
(983
)
 
(983
)
Purchase of noncontrolling interests (excludes $1,185 related to redeemable noncontrolling interests)

 

 
(216
)
 

 

 

 
(216
)
Share-based compensation

 

 
7,993

 

 

 

 
7,993

Issuance of common stock under stock incentive plans
42

 

 
90

 

 

 

 
90

Stock repurchases
(3
)
 

 
(129
)
 

 

 

 
(129
)
Other

 

 
1,090

 

 

 
(991
)
 
99

Balances, June 30, 2017
81,270

 
$
81

 
$
40,985

 
$
1,603,196

 
$
(37,075
)
 
$
98,294

 
$
1,705,481


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

4



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

 
Six Months Ended
June 30,
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net income
$
122,877

 
$
114,148

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
60,920

 
46,978

Amortization of debt issue costs
767

 
865

Provision for uncollectible accounts
4,319

 
2,891

Debt retirement costs

 
1,600

Net loss on sale or disposal of assets
480

 
292

Share-based compensation
7,993

 
9,104

Excess tax benefits from share-based compensation

 
(1,421
)
Other
(1,332
)
 
6,665

Changes in operating assets and liabilities:
 
 
 
Trade accounts receivable
(5,318
)
 
(7,065
)
Inventory, prepaid expenses and other assets
1,287

 
(15,607
)
Accounts payable and other accrued liabilities
8,777

 
5,889

Accrued payroll and related liabilities
(1,936
)
 
2,817

Income taxes
16,449

 
23,557

Net cash provided by operating activities
215,283

 
190,713

Cash flows from investing activities:
 
 
 
Business acquisitions, net of cash acquired
(123,852
)
 
(540,878
)
Property and equipment additions
(54,638
)
 
(58,814
)
Proceeds from sale of assets
1,747

 
282

Other
(7,900
)
 
(4,924
)
Net cash used in investing activities
(184,643
)
 
(604,334
)
Cash flows from financing activities:
 
 
 
Repayment of long-term obligations
(28,259
)
 
(1,256,250
)
Proceeds from issuance of long-term obligations

 
1,255,000

Repayment of revolving credit facility
(30,000
)
 

Proceeds from revolving credit facility
70,000

 
435,000

Payment of financing costs

 
(3,829
)
Distributions to noncontrolling interest partners
(2,333
)
 
(2,554
)
Purchase of noncontrolling interests
(1,401
)
 
(3,730
)
Proceeds from formation of noncontrolling interests
335

 

Proceeds from issuance of common stock under stock incentive plans
90

 
1,122

Excess tax benefits from share-based compensation

 
1,421

Stock repurchases
(129
)
 
(843
)
Other
(1,479
)
 
(1,233
)
Net cash provided by financing activities
6,824

 
424,104

Effect of currency exchange rate changes on cash and cash equivalents
179

 
313

Increase in cash and cash equivalents
37,643

 
10,796

Cash and cash equivalents at beginning of period
81,409

 
98,888

Cash and cash equivalents at end of period
$
119,052

 
$
109,684


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

5



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

 
Six Months Ended
June 30,
 
2017
 
2016
Supplemental disclosures of cash flow information:
 
 
 
Interest paid
$
15,990

 
$
12,272

Income taxes paid
$
62,727

 
$
47,326



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

6



VCA Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements
June 30, 2017
(Unaudited)


1.
Nature of Operations
Our company, VCA Inc. (“VCA”) is a Delaware corporation formed in 1986 and is based in Los Angeles, California. We are an animal healthcare company with the following four operating segments: animal hospitals ("Animal Hospital"), veterinary diagnostic laboratories ("Laboratory"), veterinary medical technology ("Medical Technology"), and Camp Bow Wow Franchising, Inc. (f/k/a D.O.G. Enterprises, LLC ("Camp Bow Wow"). Our operating segments are aggregated into two reportable segments: Animal Hospital and Laboratory. Our Medical Technology and Camp Bow Wow operating segments are combined in our All Other category. See Note 9 , Lines of Business within these notes to unaudited condensed, consolidated financial statements.
Our Animal Hospitals offer a full range of general medical and surgical services for companion animals. Our Animal Hospitals treat diseases and injuries, provide pharmaceutical products and perform a variety of pet-wellness programs, including health examinations, diagnostic testing, vaccinations, spaying, neutering and dental care. At June 30, 2017 , we operated or managed 812 animal hospitals throughout 43 states and five Canadian provinces.
We operate a full-service veterinary diagnostic laboratory network serving all 50 states and certain areas in Canada. Our Laboratory network provides sophisticated testing and consulting services used by veterinarians in the detection, diagnosis, evaluation, monitoring, treatment and prevention of diseases and other conditions affecting animals. At June 30, 2017 , we operated 62 laboratories of various sizes located strategically throughout the United States and Canada.
Our Medical Technology business sells digital radiography and ultrasound imaging equipment, provides education and training on the use of that equipment, provides consulting and mobile imaging services, and sells software and ancillary services to the veterinary market.
Our Camp Bow Wow business franchises a premier provider of pet services including dog day care, overnight boarding, grooming and other ancillary services at specially designed pet care facilities, principally under the trademark Camp Bow Wow ® .  As of June 30, 2017 , there were 132 Camp Bow Wow franchise locations operating in 33 states and one Canadian province. 
On May 1, 2016 , we acquired an 80% ownership interest in Companion Animal Practices, North America ("CAPNA"). CAPNA, founded in 2010 , and at the time of acquisition, operated a network of 56 free standing animal hospitals in 18 states. Accordingly, CAPNA's results of operations are included in our Animal Hospital segment.
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.

Merger Agreement
On January 7, 2017 , we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with MMI Holdings, Inc. (“Acquiror”), Venice Merger Sub Inc., a wholly owned subsidiary of Acquiror (“Merger Sub”), and, solely for purposes of Section 9.15 of the Merger Agreement, Mars, Incorporated (“Mars”), pursuant to which, among other things, at the closing of the merger, we will become a wholly-owned subsidiary of Acquiror (the “Merger”). The Merger is subject to satisfaction of a number of customary closing conditions contained in the Merger Agreement, including the receipt of the outstanding required regulatory approvals and discussed in detail in the definitive proxy statement filed with the U.S. Securities and Exchange Commission by VCA on February 15, 2017 (the “Definitive Proxy Statement”). The Merger Agreement and the Merger are described in greater detail in the Definitive Proxy Statement and other materials and documents filed with the SEC, all of which are available on the SEC’s website at www.sec.gov . The foregoing description of the Merger Agreement is qualified in its entirety by reference to the full text of the Merger Agreement attached as Exhibit 2.1 to our Current Report on Form 8-K filed with the SEC on January 9, 2017 .




7


VCA Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
June 30, 2017
(Unaudited)

2.
Basis of Presentation
Our accompanying unaudited, condensed, consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information and in accordance with the rules and regulations of the United States Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the disclosures required by GAAP for annual financial statements as permitted under applicable rules and regulations. In the opinion of management, all normal recurring adjustments considered necessary for a fair presentation have been included. The results of operations for the six months ended June 30, 2017 are not necessarily indicative of the results to be expected for the full year ending December 31, 2017 . The year end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. For further information, refer to our audited consolidated financial statements and notes thereto included in our 2016 Annual Report on Form 10-K.

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

3.
Goodwill and Other Long-Lived Assets
Goodwill
The following table presents the changes in the carrying amount of our goodwill for the six months ended June 30, 2017 (in thousands):
 
 
Animal
Hospital
 
Laboratory
 
All Other
 
Total
Balance as of December 31, 2016
 
 
 
 
 
 
 
Goodwill
$
2,047,894

 
$
101,283

 
$
145,302

 
$
2,294,479

Accumulated impairment losses

 

 
(130,057
)
 
(130,057
)
Subtotal
2,047,894

 
101,283

 
15,245

 
2,164,422

Goodwill acquired
109,090

 

 

 
109,090

Foreign translation adjustment
6,301

 
16

 

 
6,317

Other (1)
(15,564
)
 

 

 
(15,564
)
Balance as of June 30, 2017
 
 
 
 
 
 
 
Goodwill
2,147,721

 
101,299

 
145,302

 
2,394,322

Accumulated impairment losses

 

 
(130,057
)
 
(130,057
)
Subtotal
$
2,147,721

 
$
101,299

 
$
15,245

 
$
2,264,265

 ____________________________

(1)  
"Other" consists primarily of measurement period adjustments and the sale of an animal hospital.















8


VCA Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
June 30, 2017
(Unaudited)

3.
Goodwill and Other Long-Lived Assets, continued
Other Intangible Assets
Our acquisition related amortizable intangible assets as of June 30, 2017 and December 31, 2016 are as follows (in thousands):
 
As of June 30, 2017
 
As of December 31, 2016
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Non-contractual customer relationships
$
232,789

 
$
(78,875
)
 
$
153,914

 
$
218,847

 
$
(62,331
)
 
$
156,516

Covenants not-to-compete
26,276

 
(9,847
)
 
16,429

 
23,990

 
(7,580
)
 
16,410

Favorable lease assets
6,509

 
(3,112
)
 
3,397

 
9,451

 
(5,855
)
 
3,596

Technology
1,377

 
(893
)
 
484

 
1,377

 
(795
)
 
582

Trademarks
30,752

 
(10,291
)
 
20,461

 
30,144

 
(7,713
)
 
22,431

Client lists
10

 
(2
)
 
8

 
10

 
(1
)
 
9

Franchise rights
11,730

 
(3,324
)
 
8,406

 
11,730

 
(2,737
)
 
8,993

Total
$
309,443

 
$
(106,344
)
 
$
203,099

 
$
295,549

 
$
(87,012
)
 
$
208,537


The following table summarizes our aggregate amortization expense related to other intangible assets (in thousands):
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
Aggregate amortization expense
$
11,338

 
$
9,798

 
$
22,763

 
$
16,026

The estimated amortization expense related to other intangible assets for the remainder of 2017 and each of the succeeding years thereafter, as of June 30, 2017 , is as follows (in thousands):

Definite-lived intangible assets:
 
Remainder of 2017
$
22,782

2018
43,018

2019
39,864

2020
34,819

2021
24,485

Thereafter
38,131

Total
$
203,099

Indefinite-lived intangible assets:
 
Trademarks
4,059

Total intangible assets
$
207,158

 











9


VCA Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
June 30, 2017
(Unaudited)

4.
Acquisitions

The table below reflects the activity related to the acquisitions and dispositions of our animal hospitals and laboratories during the six months ended June 30, 2017 and 2016 , respectively.

 
Six Months Ended
June 30,
 
2017
 
2016
Animal Hospitals:
 
 
 
  Acquisitions, excluding CAPNA in 2016 (1)
24

 
37

  CAPNA (2)

 
56

Acquisitions, merged
(2
)
 
(3
)
Sold, closed or merged
(5
)
 
(5
)
Net increase
17

 
85

 
 
 
 
Laboratories:
 
 
 
New facilities
1

 

Net increase
1

 

____________________________
(1)  
Includes additional independent animal hospitals that were acquired by CAPNA subsequent to its May 2016 acquisition.

(2)  
On May 1, 2016, we acquired an 80% ownership interest in CAPNA.































10


VCA Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
June 30, 2017
(Unaudited)

4.
Acquisitions, continued

Animal Hospital Acquisitions, excluding CAPNA
The purchase price allocations for some of the 2017 animal hospital acquisitions included in the table below are preliminary; however, adjustments, if any, are not expected to be material. The measurement periods for purchase price allocations do not exceed 12 months from the acquisition date. The following table summarizes the aggregate consideration and the allocation of the purchase price for our independent animal hospitals acquired during the six months ended June 30, 2017 and 2016 , respectively (in thousands):
 
Six Months Ended
June 30,
 
2017
 
2016
Consideration:
 
 
 
  Cash
$
123,889

 
$
188,329

  Cash acquired
(37
)
 
(970
)
  Cash, net of cash acquired
$
123,852

 
$
187,359

  Assumed debt
9,697

 
2,601

  Holdbacks
2,255

 
4,148

  Earn-outs
596

 
4,002

      Fair value of total consideration transferred
$
136,400

 
$
198,110

 
 
 
 
Allocation of the Purchase Price:
 
 
 
  Tangible assets
$
11,086

 
$
21,521

  Identifiable intangible assets (1)
16,560

 
24,325

  Goodwill (2)
109,090

 
153,012

  Other liabilities assumed
(336
)
 
(437
)
      Fair value of assets acquired and liabilities assumed
$
136,400

 
$
198,421

Noncontrolling interest

 
(311
)
Total
$
136,400

 
$
198,110

____________________________

(1)  
Identifiable intangible assets include customer relationships, trademarks and covenants-not-to-compete. The weighted-average amortization period for the total identifiable intangible assets is approximately five years. The weighted-average amortization period for customer relationships, trademarks and covenants-not-to-compete is approximately five , seven and five years, respectively.
(2)  
We expect that $99.8 million and $146.9 million of the goodwill recorded for these acquisitions, as of June 30, 2017 and 2016 , respectively, will be fully deductible for income tax purposes.















11


VCA Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
June 30, 2017
(Unaudited)

4.
Acquisitions, continued

2016 CAPNA Acquisition
On May 1, 2016 , we acquired an 80% ownership interest in CAPNA for a purchase price of $350.4 million . CAPNA, founded in 2010 , is located in Las Vegas, Nevada, and at the time of its acquisition, operated a network of 56 free standing animal hospitals in 18 states.

The following table summarizes the purchase price and the final allocation of the purchase price (in thousands):

Consideration:
 
  Cash
$
352,829

  Cash acquired
(3,405
)
  Cash, net of cash acquired
$
349,424

  Holdbacks
1,000

      Fair value of total consideration transferred
$
350,424

 
 
Allocation of the Purchase Price:
 
  Tangible assets
$
36,381

  Identifiable intangible assets (1)
102,300

  Goodwill (2)
325,517

  Other liabilities assumed
(27,774
)
 Fair value of assets acquired and liabilities assumed
$
436,424

  Noncontrolling interest
(86,000
)
Total
$
350,424

____________________________

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

(2)  
As of June 30, 2017, we expect that $262.2 million of goodwill recorded for this acquisition will be deductible for income tax purposes.



















12


VCA Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
June 30, 2017
(Unaudited)

5.
Other Accrued Liabilities
Other accrued liabilities consisted of the following at June 30, 2017 and December 31, 2016 (in thousands):

 
June 30, 2017
 
December 31, 2016
Deferred revenue
$
23,702

 
$
21,400

Holdbacks and earn-outs
14,225

 
20,823

Deferred rent
5,690

 
5,347

Accrued health insurance
5,548

 
4,818

Accrued worker's compensation
5,530

 
3,733

Miscellaneous accrued taxes (1)
4,855

 
2,966

Accrued accounting and legal fees
3,992

 
2,508

Accrued other insurance
2,744

 
6,169

Customer deposits
1,663

 
3,168

Accrued lease payments
1,571

 
1,409

Other
23,533

 
19,442

 
$
93,053

 
$
91,783

____________________________
(1)     Includes property, sales and use taxes.
6.
Long-Term Obligations
Senior Credit Facility

On June 29, 2016 , we entered into a New Senior Credit Facility with various lenders for approximately $1.7 billion of senior secured credit facilities with Bank of America, N.A., as the administrative agent, swingline lender and Letter of Credit issuer, and JPMorgan Chase Bank, N.A., Barclays Bank PLC, Suntrust Bank, and Wells Fargo Bank, N.A. as co-syndication agents (the "New Senior Credit Facility"). The New Senior Credit Facility replaced our previous senior credit facility which provided for $600 million of term notes and an $800 million revolving credit facility. The New Senior Credit Facility provides for $880 million of senior secured term notes and an $800 million senior secured revolving facility, which may be used to borrow, on a same-day notice under a swing line, the lesser of $25 million and the aggregate unused amount of the revolving credit facility then in effect. In addition to refinancing all outstanding amounts under our previous senior credit facility, borrowings under our New Senior Credit Facility may be used for general corporate purchases, including permitted share repurchases. At June 30, 2016 , we had $375 million in outstanding borrowings under the new senior secured revolving facility, which funds were used together with the proceeds from the $880 million of new senior secured term notes to refinance amounts outstanding under our previous senior credit facility.

In connection with the New Senior Credit Facility, we incurred $3.8 million in financing costs, of which approximately $3.2 million were capitalized as deferred financing costs. The remaining $0.6 million of financing costs were expensed as debt retirement costs, along with an additional $1.0 million of previously capitalized deferred financing costs associated with lenders under our previous senior credit facility who are not lenders under our New Senior Credit Facility.

In 2016, ASU 2015-03 and ASU 2015-15 were adopted. In accordance with ASU 2015-03, the table below presents debt issuance costs as a direct deduction from the face amount of the corresponding notes in the current period and retrospectively in the prior fiscal year end.









13


VCA Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
June 30, 2017
(Unaudited)

6.
Long-Term Obligations, continued

Long-term obligations consisted of the following at June 30, 2017 and December 31, 2016 (in thousands):
 
 
 
 
June 30, 2017
 
December 31, 2016
Senior term notes
 
Principal amount
 
$
858,000

 
$
869,000

 
 
Less unamortized debt issuance costs
 
(2,293
)
 
(2,605
)
 
 
Senior term notes less unamortized debt issuance costs, secured by assets, variable interest rate (2.73% and 2.28% at June 30, 2017 and December 31, 2016, respectively) (1)
 
$
855,707

 
$
866,395

Revolving credit
 
Principal amount
 
$
440,000

 
$
400,000

 
 
Less unamortized debt issuance costs
 
(3,638
)
 
(4,093
)
 
 
Revolving line of credit less unamortized debt issuance costs, secured by assets, variable interest rate (2.73% and 2.28% at June 30, 2017 and December 31, 2016, respectively) (1)
 
$
436,362

 
$
395,907

Secured seller note
 
Notes payable matures in 2017, secured by assets and stock of certain subsidiaries, with interest rate of 10.0%
 
230

 
230

 
 
Other Debt
 
1,418

 
1,801

 
 
Total debt obligations
 
1,293,717

 
1,264,333

 
 
Capital lease obligations
 
81,041

 
83,384

 
 
 
 
1,374,758

 
1,347,717

 
 
Less — current portion
 
(49,347
)
 
(38,320
)
 
 
 
 
$
1,325,411

 
$
1,309,397

____________________________
(1)  
Notes payable and the revolving line of credit at June 30, 2017 will mature in 2021 under the New Senior Credit Facility.

Interest Rate. In general, borrowings under the New Senior Credit Facility (including swing line borrowings) bear interest, at our option, on either:

the base rate (as defined below) plus the applicable margin of 0.50% (Pricing Tier 3, see table below) per annum; or

the Eurodollar rate (as defined below), plus a margin of 1.50% (Pricing Tier 3, see table below) per annum

Each of the aforementioned margins remain applicable until the date of delivery of the compliance certificate and the financial statements, for the period ended June 30, 2017 , at which time the applicable margin will be determined by reference to the leverage ratio in effect from time to time as set forth in the following table:












14


VCA Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
June 30, 2017
(Unaudited)

6.
Long-Term Obligations, continued
Pricing Tier
 
Consolidated Leverage Ratio
 
Applicable Margin for Eurodollar Loans/Letter of Credit Fees
 
Applicable Margin for Base Rate Loans
 
Commitment Fee
1
 
≥ 3.50:1.00
 
2.00
%
 
1.00
%
 
0.40
%
2
 
< 3.50:1.00 and ≥ 2.75:1.00
 
1.75
%
 
0.75
%
 
0.35
%
3
 
< 2.75:1.00 and ≥ 1.75:1.00
 
1.50
%
 
0.50
%
 
0.30
%
4
 
< 1.75:1.00 and ≥ 1.00:1.00
 
1.25
%
 
0.25
%
 
0.25
%
5
 
< 1.00:1.00
 
1.00
%
 
%
 
0.25
%

The base rate for the senior term notes is a rate per annum equal to the highest of the (a) Federal Funds Rate plus 0.5%, (b) Bank of America, N.A.'s ("Bank of America") prime rate in effect on such day, and (c) the Eurodollar rate plus 1.0%. The Eurodollar rate is defined as the rate per annum equal to the London Interbank Offered Rate ("LIBOR"), or a comparable or successor rate which is approved by Bank of America.

Maturity and Principal Payments. The senior term notes mature on June 29, 2021 . Principal payments on the senior term notes are due in the amount of $11.0 million each calendar quarter from September 30, 2017 to and including June 30, 2019 , $16.5 million due each calendar quarter from September 30, 2019 to and including June 30, 2020 and $22.0 million due each calendar quarter thereafter with a final payment of the outstanding principal balance due upon maturity.
 
The revolving credit facility has a per annum commitment fee determined by reference to the Leverage Ratio in effect from time to time and is applied to the unused portion of the commitment. The revolving credit facility matures on June 29, 2021 . Principal payments on the revolving credit facility are made at our discretion with the entire unpaid amount due at maturity. At June 30, 2017 , we had borrowings of $440.0 million under our revolving credit facility.

The following table sets forth the scheduled principal payments for our senior credit facility (in thousands):
 
 
2017
 
2018
 
2019
 
2020
 
2021
 
Thereafter
Senior term notes
 
$
22,000

 
$
44,000

 
$
55,000

 
$
77,000

 
$
660,000

 
$

Revolving loans
 

 

 

 

 
440,000

 

 
 
$
22,000

 
$
44,000

 
$
55,000

 
$
77,000

 
$
1,100,000

 
$


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

Debt Covenants. The New Senior Credit Facility contains certain financial covenants pertaining to interest coverage and leverage ratios. In addition, the New Senior Credit Facility has restrictions pertaining to the payment of cash dividends on all classes of stock. At June 30, 2017 , we had a interest coverage ratio of 14.75 to 1.00, which was in compliance with the required ratio of no less than 3.00 to 1.00, and a leverage ratio of 2.59 to 1.00, which was in compliance with the required ratio of no more than 3.75 to 1.00.
7.
Fair Value

Current fair value accounting guidance includes a hierarchy that is intended to increase consistency and comparability in fair value measurements and related disclosures. The fair value hierarchy is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs






15


VCA Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
June 30, 2017
(Unaudited)

7.
Fair Value, continued

reflect a reporting entity’s pricing based upon their own market assumptions. The current guidance establishes a three-tiered fair value hierarchy which prioritizes the inputs used in measuring fair value as follows:

Level 1.     Observable inputs such as quoted prices in active markets;

Level 2.     Inputs, other than quoted prices, that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active; and

Level 3.     Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

Non-Recurring Financial Measurements

Non-financial assets such as property, plant and equipment, land, goodwill and intangible assets are subject to non-recurring fair value measurements if they are deemed to be impaired. The impairment models used for nonfinancial assets depend on the type of asset and are accounted for in accordance with FASB’s guidance on fair value measurement. During the quarter ended June 30, 2017 , there were no changes to our non-recurring fair value measurements.

Fair Value of Financial Instruments

The FASB accounting guidance requires disclosure of fair value information about financial instruments, whether or not recognized in the accompanying consolidated balance sheets. Fair value as defined by the guidance is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value estimates of financial instruments are not necessarily indicative of the amounts we might pay or receive in actual market transactions. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

Cash and Cash Equivalents.     These balances include cash and cash equivalents with maturities of less than three months. The carrying amount approximates fair value due to the short-term maturities of these instruments.

Receivables, Less Allowance for Doubtful Accounts, Accounts Payable and Certain Other Accrued Liabilities.     Due to their short-term nature, fair value approximates carrying value.

Long-Term Debt.     The fair value of debt at June 30, 2017 and December 31, 2016 is based upon the ask price quoted from an external source, which is considered a Level 2 input.

The following table reflects the carrying value and fair value of our variable-rate long-term debt (in thousands):
 
 
As of June 30,
 
As of December 31,
 
 
2017
 
2016
 
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
Variable-rate long-term debt
 
$
1,298,000

 
$
1,298,000

 
$
1,269,000

 
$
1,269,000












16


VCA Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
June 30, 2017
(Unaudited)

8.
Calculation of Earnings per Share
Basic earnings per share is calculated by dividing net income by the weighted-average number of shares outstanding during the period. Diluted earnings per share is calculated by dividing net income attributable to VCA Inc. by the weighted- average number of common shares outstanding, after giving effect to all dilutive potential common shares outstanding during the period. Basic and diluted earnings per share were calculated as follows (in thousands, except per share amounts):  

 
Three Months Ended
June 30,
Six Months Ended
June 30,
 
2017
 
2016
2017
 
2016
Net income attributable to VCA Inc.
$
67,712

 
$
64,050

$
118,805

 
$
110,277

Weighted-average common shares outstanding:
 
 
 
 
 
 
Basic
81,267

 
80,835

81,256

 
80,806

Effect of dilutive potential common shares:
 
 
 
 
 
 
Stock options
361

 
295

361

 
294

Non-vested shares and units
600

 
599

587

 
530

Diluted
82,228

 
81,729

82,204

 
81,630

Basic earnings per common share
$
0.83

 
$
0.79

$
1.46

 
$
1.36

Diluted earnings per common share
$
0.82

 
$
0.78

$
1.45

 
$
1.35

For the three months ended June 30, 2017 and 2016 , potential common shares of 58,359 and 21,122 , respectively, were excluded from the computation of diluted earnings per share because their inclusion would have had an antidilutive effect.
For the six months ended June 30, 2017 and 2016, potential common shares of 68,938 and 24,047 , respectively, were excluded from the computation of diluted earnings per share because their inclusion would have had an antidilutive effect.
In March 2016, the FASB issued ASU 2016-09, “ Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, ”, requiring all tax benefits and tax deficiencies be recognized as income tax
expense or benefit in the income statement. Since excess tax benefits are no longer recognized in additional paid-in capital, we amended our calculation of earnings per share to exclude the excess tax benefits that would be included in additional paid-in capital under the treasury stock method. We elected to adopt this standard prospectively effective January 1, 2017. The adoption of this standard did not have a material impact on the weighted average number of diluted shares outstanding during the period.





17


VCA Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
June 30, 2017
(Unaudited)

9.
Lines of Business

Our Animal Hospital and Laboratory business segments are each considered reportable segments in accordance with the FASB's guidance related to Segment Reporting. Our Animal Hospital segment provides veterinary services for companion animals and sells related retail and pharmaceutical products. Our Laboratory segment provides diagnostic laboratory testing services for veterinarians, both associated with our animal hospitals and those independent of us. Our other operating segments included in the “All Other” category in the following tables are our Medical Technology business, which sells digital radiography and ultrasound imaging equipment, related computer hardware, software and ancillary services to the veterinary market, and our Camp Bow Wow business, which primarily franchises a premier provider of pet services including dog day care, overnight boarding, grooming and other ancillary services at specially designed pet care facilities. These operating segments do not meet the quantitative requirements for reportable segments. Our operating segments are strategic business units that have different services, products and/or functions. The segments are managed separately because each is a distinct and different business venture with unique challenges, risks and rewards. We also operate a corporate office that provides general and administrative support services for each of our segments.
The accounting policies of our segments are the same as those described in the summary of significant accounting policies included in our 2016 Annual Report on Form 10-K. We evaluate the performance of our segments based on gross profit and operating income. For purposes of reviewing the operating performance of our segments, all intercompany sales and purchases are generally accounted for as if they were transactions with independent third parties at current market prices.






18


VCA Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
June 30, 2017
(Unaudited)

9.
Lines of Business, continued

The following is a summary of certain financial data for each of our segments (in thousands):
 
Animal
Hospital
 
Laboratory
 
All Other
 
Corporate
 

Eliminations
 
Total
Three Months Ended
June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
External revenue
$
628,798

 
$
95,269

 
$
18,225

 
$

 
$
840

 
$
743,132

Intercompany revenue

 
21,932

 
4,308

 

 
(26,240
)
 

Total revenue
628,798

 
117,201

 
22,533

 

 
(25,400
)
 
743,132

Direct costs
516,239

 
53,777

 
13,177

 

 
(25,154
)
 
558,039

Gross profit
112,559

 
63,424

 
9,356

 

 
(246
)
 
185,093

Selling, general and administrative expense
16,745

 
9,975

 
7,512

 
25,544

 

 
59,776

Operating income (loss) before sale or disposal of assets
95,814

 
53,449

 
1,844

 
(25,544
)
 
(246
)
 
125,317

Net loss on sale or disposal of assets
225

 
3

 
2

 

 

 
230

Operating income (loss)
$
95,589

 
$
53,446

 
$
1,842

 
$
(25,544
)
 
$
(246
)
 
$
125,087

Depreciation and amortization
$
26,486

 
$
3,173

 
$
849

 
$
715

 
$
(704
)
 
$
30,519

Property and equipment additions
$
19,965

 
$
5,042

 
$
359

 
$
1,259

 
$
(906
)
 
$
25,719

Three Months Ended
June 30, 2016
 
 
 
 
 
 
 
 
 
 
 
External revenue
$
540,376

 
$
93,265

 
$
18,656

 
$

 
$
1,192

 
$
653,489

Intercompany revenue

 
18,795

 
4,741

 

 
(23,536
)
 

Total revenue
540,376

 
112,060

 
23,397

 

 
(22,344
)
 
653,489

Direct costs
445,697

 
51,513

 
14,480

 

 
(22,149
)
 
489,541

Gross profit
94,679

 
60,547

 
8,917

 

 
(195
)
 
163,948

Selling, general and administrative expense
14,277

 
9,702

 
6,022

 
18,189

 

 
48,190

Operating income (loss) before sale or disposal of assets
80,402

 
50,845

 
2,895

 
(18,189
)
 
(195
)
 
115,758

Net (gain) loss on sale or disposal of assets
(132
)
 
(35
)
 
3

 
(107
)
 

 
(271
)
Operating income (loss)
$
80,534

 
$
50,880

 
$
2,892

 
$
(18,082
)
 
$
(195
)
 
$
116,029

Depreciation and amortization
$
21,875

 
$
2,839

 
$
904

 
$
668

 
$
(597
)
 
$
25,689

Property and equipment additions
$
25,486

 
$
4,750

 
$
1,485

 
$
2,336

 
$
(1,049
)
 
$
33,008
















19


VCA Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
June 30, 2017
(Unaudited)

9.
Lines of Business, continued

 
Animal
Hospital
 
Laboratory
 
All Other
 
Corporate
 

Eliminations
 
Total
Six Months Ended
June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
External revenue
$
1,196,979

 
$
185,818

 
$
36,864

 
$

 
$
1,722

 
$
1,421,383

Intercompany revenue

 
42,531

 
8,238

 

 
(50,769
)
 

Total revenue
1,196,979

 
228,349

 
45,102

 

 
(49,047
)
 
1,421,383

Direct costs
998,110

 
105,332

 
27,060

 

 
(48,680
)
 
1,081,822

Gross profit
198,869

 
123,017

 
18,042

 

 
(367
)
 
339,561

Selling, general and administrative expense
34,356

 
19,881

 
14,152

 
49,788

 

 
118,177

Operating income (loss) before sale or disposal of assets
164,513

 
103,136

 
3,890

 
(49,788
)
 
(367
)
 
221,384

Net loss on sale or disposal of assets
436

 
41

 
3

 

 

 
480

Operating income (loss)
$
164,077

 
$
103,095

 
$
3,887

 
$
(49,788
)
 
$
(367
)
 
$
220,904

Depreciation and amortization
$
53,144

 
$
6,081

 
$
1,678

 
$
1,407

 
$
(1,390
)
 
$
60,920

Property and equipment additions
$
39,568

 
$
12,682

 
$
1,477

 
$
2,880

 
$
(1,969
)
 
$
54,638

Six Months Ended
June 30, 2016
 
 
 
 
 
 
 
 
 
 
 
External revenue
$
998,999

 
$
182,505

 
$
33,110

 
$

 
$
2,314

 
$
1,216,928

Intercompany revenue

 
36,282

 
9,700

 

 
(45,982
)
 

Total revenue
998,999

 
218,787

 
42,810

 

 
(43,668
)
 
1,216,928

Direct costs
830,903

 
101,524

 
26,983

 

 
(43,210
)
 
916,200

Gross profit
168,096

 
117,263

 
15,827

 

 
(458
)
 
300,728

Selling, general and administrative expense
26,362

 
19,998

 
11,321

 
40,637

 

 
98,318

Operating income (loss) before sale or disposal of assets
141,734

 
97,265

 
4,506

 
(40,637
)