VCA Inc.
VCA INC (Form: 10-Q, Received: 08/07/2015 14:26:58)

 
 
 
 
 
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, 2015
 
¨
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 Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [  ].
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.:
Large accelerated filer [X]
  
Accelerated filer [  ]
 
 
 
Non-accelerated filer [  ]
  
Smaller reporting company [  ]
(Do not check if a smaller reporting company)
  
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X].
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: common stock, $0.001 par value, 81,153,273 shares as of August 3, 2015 .
 
 
 
 
 



VCA Inc. and Subsidiaries
Form 10-Q
June 30, 2015
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, 2015
 
December 31, 2014
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
74,326

 
$
81,383

Trade accounts receivable, less allowance for uncollectible accounts of $19,713 and $19,846 at June 30, 2015 and December 31, 2014, respectively
81,593

 
60,482

Inventory
53,789

 
56,050

Prepaid expenses and other
27,874

 
36,924

Deferred income taxes
30,324

 
30,331

Prepaid income taxes
6,472

 
18,277

Total current assets
274,378

 
283,447

Property and equipment, net
477,929

 
468,041

Goodwill
1,452,370

 
1,415,861

Other intangible assets, net
98,908

 
88,175

Notes receivable
2,471

 
2,807

Deferred financing costs, net
7,004

 
7,874

Other
84,050

 
65,815

Total assets
$
2,397,110

 
$
2,332,020

Liabilities and Equity
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
33,881

 
$
19,356

Accounts payable
42,071

 
46,284

Accrued payroll and related liabilities
72,697

 
64,359

Other accrued liabilities
73,093

 
67,219

Total current liabilities
221,742

 
197,218

Long-term debt, less current portion
819,380

 
775,412

Deferred income taxes
103,424

 
103,502

Other liabilities
31,862

 
33,190

Total liabilities
1,176,408

 
1,109,322

Commitments and contingencies

 

Redeemable noncontrolling interests
11,183

 
11,077

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, 81,448 and 82,937 shares outstanding as of June 30, 2015 and December 31, 2014, respectively
81

 
83

Additional paid-in capital
72,590

 
155,802

Retained earnings
1,156,758

 
1,064,158

Accumulated other comprehensive loss
(30,331
)
 
(19,397
)
Total VCA Inc. stockholders’ equity
1,199,098

 
1,200,646

Noncontrolling interests
10,421

 
10,975

Total equity
1,209,519

 
1,211,621

Total liabilities and equity
$
2,397,110

 
$
2,332,020



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

1


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



 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2015
 
2014
 
2015
 
2014
Revenue
$
548,785

 
$
489,472

 
$
1,048,238

 
$
938,979

Direct costs
407,938

 
369,057

 
793,529

 
717,113

Gross profit
140,847

 
120,415

 
254,709

 
221,866

Selling, general and administrative expense
44,485

 
39,931

 
88,883

 
81,371

Net (gain) loss on sale or disposal of assets
(819
)
 
578

 
(484
)
 
(643
)
Operating income
97,181

 
79,906

 
166,310

 
141,138

Interest expense, net
5,104

 
4,030

 
9,941

 
8,197

Other (income) expense
(37
)
 
43

 
29

 
(10
)
Income before provision for income taxes
92,114

 
75,833

 
156,340

 
132,951

Provision for income taxes
36,191

 
28,925

 
60,864

 
51,128

Net income
55,923

 
46,908

 
95,476

 
81,823

Net income attributable to noncontrolling interests
1,624

 
1,324

 
2,876

 
2,196

Net income attributable to VCA Inc.
$
54,299

 
$
45,584

 
$
92,600

 
$
79,627

Basic earnings per share
$
0.66

 
$
0.52

 
$
1.13

 
$
0.90

Diluted earnings per share
$
0.65

 
$
0.51

 
$
1.11

 
$
0.89

Weighted-average shares outstanding for basic earnings per share
81,956

 
88,041

 
82,150

 
88,188

Weighted-average shares outstanding for diluted earnings per share
83,084

 
89,191

 
83,227

 
89,312



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,
 
2015
 
2014
 
2015
 
2014
Net income (1)  
$
55,923

 
$
46,908

 
$
95,476

 
$
81,823

Other comprehensive income:
 
 
 
 
 
 
 
Foreign currency translation adjustments
4,411

 
4,809

 
(11,269
)
 
(712
)
Other comprehensive income (loss)
4,411

 
4,809

 
(11,269
)
 
(712
)
Total comprehensive income
60,334

 
51,717

 
84,207

 
81,111

Comprehensive income attributable to noncontrolling interests (1) 
1,761

 
1,702

 
2,541

 
2,146

Comprehensive income attributable to VCA Inc.
$
58,573

 
$
50,015

 
$
81,666

 
$
78,965

____________________________
(1)  
Includes approximately $1.6 million and $1.2 million of net income related to redeemable and mandatorily redeemable noncontrolling interests for the six months ended June 30, 2015 and 2014 , 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, 2013
88,508

 
$
89

 
$
384,797

 
$
928,720

 
$
(6,190
)
 
$
10,200

 
$
1,317,616

Net income (excludes $417 and $739 related to redeemable and mandatorily redeemable noncontrolling interests, respectively)

 

 

 
79,627

 

 
1,040

 
80,667

Other comprehensive loss (excludes $30 related to mandatorily redeemable noncontrolling interests)

 

 

 

 
(662
)
 
(20
)
 
(682
)
Formation of noncontrolling interests

 

 

 

 

 
933

 
933

Distribution to noncontrolling interests

 

 

 

 

 
(970
)
 
(970
)
Purchase of noncontrolling interests

 

 
30

 

 

 

 
30

Share-based compensation

 

 
8,571

 

 

 

 
8,571

Issuance of common stock under stock incentive plans
377

 

 
467

 

 

 

 
467

Stock repurchases
(1,471
)
 
(2
)
 
(49,089
)
 

 

 

 
(49,091
)
Excess tax benefit from stock based compensation

 

 
2,092

 

 

 

 
2,092

Balances, June 30, 2014
87,414

 
$
87

 
$
346,868

 
$
1,008,347

 
$
(6,852
)
 
$
11,183

 
$
1,359,633

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances, December 31, 2014
82,937

 
$
83

 
$
155,802

 
$
1,064,158

 
$
(19,397
)
 
$
10,975

 
$
1,211,621

Net income (excludes $877 and $749 related to redeemable and mandatorily redeemable noncontrolling interests, respectively)

 

 

 
92,600

 

 
1,250

 
93,850

Other comprehensive loss (excludes $136 related to mandatorily redeemable noncontrolling interests)

 

 

 

 
(10,934
)
 
(199
)
 
(11,133
)
Formation of noncontrolling interests

 

 

 

 

 
(14
)
 
(14
)
Distribution to noncontrolling interests

 

 

 

 

 
(1,118
)
 
(1,118
)
Purchase of noncontrolling interests

 

 
(217
)
 

 

 
(473
)
 
(690
)
Share-based compensation

 

 
8,269

 

 

 

 
8,269

Issuance of common stock under stock incentive plans
376

 

 
679

 

 

 

 
679

Stock repurchases
(1,865
)
 
(2
)
 
(96,672
)
 

 

 

 
(96,674
)
Excess tax benefit from stock based compensation

 

 
4,729

 

 

 

 
4,729

Balances, June 30, 2015
81,448

 
$
81

 
$
72,590

 
$
1,156,758

 
$
(30,331
)
 
$
10,421

 
$
1,209,519


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,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net income
$
95,476

 
$
81,823

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
40,163

 
39,797

Amortization of debt issue costs
870

 
604

Provision for uncollectible accounts
3,379

 
2,612

Net gain on sale or disposal of assets
(484
)
 
(643
)
Share-based compensation
8,269

 
8,571

Excess tax benefits from stock based compensation
(4,729
)
 
(2,092
)
Other
(658
)
 
(53
)
Changes in operating assets and liabilities:
 
 
 
Trade accounts receivable
(24,217
)
 
(8,945
)
Inventory, prepaid expenses and other assets
(8,942
)
 
(6,610
)
Accounts payable and other accrued liabilities
(4,196
)
 
1,171

Accrued payroll and related liabilities
8,300

 
3,816

Income taxes
16,525

 
8,062

Net cash provided by operating activities
129,756

 
128,113

Cash flows from investing activities:
 
 
 
Business acquisitions, net of cash acquired
(66,529
)
 
(30,764
)
Property and equipment additions
(34,521
)
 
(27,979
)
Proceeds from sale or disposal of assets
6,164

 
4,456

Other
205

 
55

Net cash used in investing activities
(94,681
)
 
(54,232
)
Cash flows from financing activities:
 
 
 
Repayment of long-term obligations
(7,924
)
 
(26,218
)
Proceeds from revolving credit facility
61,000

 

Distributions to noncontrolling interest partners
(2,447
)
 
(2,259
)
Purchase of noncontrolling interests
(1,493
)
 
(326
)
Proceeds from issuance of common stock under stock incentive plans
679

 
467

Excess tax benefits from stock based compensation
4,729

 
2,092

Stock repurchases
(96,674
)
 
(49,091
)
Other
(80
)
 
(838
)
Net cash used in financing activities
(42,210
)
 
(76,173
)
Effect of currency exchange rate changes on cash and cash equivalents
78

 
(202
)
Decrease in cash and cash equivalents
(7,057
)
 
(2,494
)
Cash and cash equivalents at beginning of period
81,383

 
125,029

Cash and cash equivalents at end of period
$
74,326

 
$
122,535

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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,
 
2015
 
2014
Supplemental disclosures of cash flow information:
 
 
 
Interest paid
$
8,907

 
$
7,491

Income taxes paid
$
44,253

 
$
42,950

 
 
 
 
Supplemental schedule of noncash investing and financing activities:
 
 
 
Detail of acquisitions:
 
 
 
Fair value of assets acquired
$
75,973

 
$
34,329

Noncontrolling interest

 
(1,705
)
Cash paid for acquisitions, net of acquired cash
(66,529
)
 
(30,764
)
Assumed debt
(6,250
)
 
(736
)
Contingent consideration

 
(374
)
Holdbacks
(2,522
)
 
(750
)
Liabilities assumed
$
672

 
$



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, 2015
(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 five operating segments: Animal Hospital, Laboratory, Medical Technology, Vetstreet and Camp Bow Wow. Our operating segments are aggregated into two reportable segments: Animal Hospital and Laboratory. Our Medical Technology, Vetstreet and Camp Bow Wow operating segments are combined in our All Other category. See Footnote 8, 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, 2015 , we operated or managed 657 animal hospitals throughout 41 states and four Canadian provinces.
We operate a full-service veterinary diagnostic laboratory network serving all 50 states and certain areas in Canada. Our laboratory network provides sophisticated testing and consulting services used by veterinarians in the detection, diagnosis, evaluation, monitoring, treatment and prevention of diseases and other conditions affecting animals. At June 30, 2015 , we operated 59 laboratories of various sizes located strategically throughout the United States and Canada.
Our Medical Technology business sells digital radiography and ultrasound imaging equipment, provides education and training on the use of that equipment, provides consulting and mobile imaging services, and sells software and ancillary services to the veterinary market.
Our Vetstreet business provides several different services to the veterinary community including, online communications, professional education, marketing solutions and a home delivery platform for independent animal hospitals.
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 service mark Camp Bow Wow ® .  As of June 30, 2015 , there were 127 Camp Bow Wow® franchise locations operating in 35 states and one Canadian province. 
The practice of veterinary medicine is subject to seasonal fluctuation. In particular, demand for veterinary services is significantly higher during the warmer months because pets spend a greater amount of time outdoors where they are more likely to be injured and are more susceptible to disease and parasites. In addition, use of veterinary services may be affected by levels of flea infestation, heartworms and ticks, and the number of daylight hours.

2.
Basis of Presentation
Our accompanying unaudited, condensed, consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information and in accordance with the rules and regulations of the United States Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the disclosures required by GAAP for annual financial statements as permitted under applicable rules and regulations. In the opinion of management, all normal recurring adjustments considered necessary for a fair presentation have been included. The results of operations for the six months ended June 30, 2015 are not necessarily indicative of the results to be expected for the full year ending December 31, 2015 . For further information, refer to our audited consolidated financial statements and notes thereto included in our 2014 Annual Report on Form 10-K.

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





7


VCA Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
June 30, 2015
(Unaudited)


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, 2015 (in thousands):
 
 
Animal
Hospital
 
Laboratory
 
All Other
 
Total
Balance as of December 31, 2014
 
 
 
 
 
 
 
Goodwill
$
1,305,558

 
$
97,535

 
$
142,825

 
$
1,545,918

Accumulated impairment losses

 

 
(130,057
)
 
(130,057
)
Subtotal
1,305,558

 
97,535

 
12,768

 
1,415,861

Goodwill acquired
42,268

 
4,172

 
255

 
46,695

Foreign translation adjustment
(7,844
)
 
(34
)
 

 
(7,878
)
Other (1)
(2,304
)
 
(4
)
 

 
(2,308
)
Balance as of June 30, 2015
 
 
 
 
 
 
 
Goodwill
1,337,678

 
101,669

 
143,080

 
1,582,427

Accumulated impairment losses

 

 
(130,057
)
 
(130,057
)
Subtotal
$
1,337,678

 
$
101,669

 
$
13,023

 
$
1,452,370

 ____________________________

(1)  
"Other" primarily includes write-offs related to the sale of two animal hospitals partially offset by measurement period adjustments.

Other Intangible Assets
Our acquisition related amortizable intangible assets at June 30, 2015 and December 31, 2014 are as follows (in thousands):

 
As of June 30, 2015
 
As of December 31, 2014
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Non-contractual customer relationships
$
118,231

 
$
(50,879
)
 
$
67,352

 
$
101,056

 
$
(45,295
)
 
$
55,761

Covenants not-to-compete
11,772

 
(5,072
)
 
6,700

 
10,093

 
(4,422
)
 
5,671

Favorable lease assets
9,477

 
(5,191
)
 
4,286

 
9,576

 
(4,962
)
 
4,614

Trademarks
12,659

 
(3,957
)
 
8,702

 
13,503

 
(4,015
)
 
9,488

Contracts
100

 
(28
)
 
72

 
100

 
(11
)
 
89

Technology
1,627

 
(584
)
 
1,043

 
1,627

 
(414
)
 
1,213

Franchise rights
11,730

 
(977
)
 
10,753

 
11,730

 
(391
)
 
11,339

Total
$
165,596

 
$
(66,688
)
 
$
98,908

 
$
147,685

 
$
(59,510
)
 
$
88,175









8


VCA Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
June 30, 2015
(Unaudited)


3.
Goodwill and Other Long-Lived Assets, continued

The following table summarizes our aggregate amortization expense related to acquisition related intangible assets (in thousands):
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2015
 
2014
 
2015
 
2014
Aggregate amortization expense
$
5,858

 
$
5,227

 
$
11,384

 
$
10,374

The estimated amortization expense related to acquisition related intangible assets for the remainder of 2015 and each of the succeeding years thereafter, as of June 30, 2015 , is as follows (in thousands):

Finite-lived intangible assets:
 
Remainder of 2015
$
11,611

2016
21,084

2017
15,137

2018
11,781

2019
8,757

Thereafter
29,498

Total
$
97,868

Indefinite-lived intangible assets:
 
Trademarks
1,040

Total intangible assets
$
98,908

 

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, 2015 and 2014 , respectively:

 
Six Months Ended
June 30,
 
2015
 
2014
Animal Hospitals:
 
 
 
Acquisitions
23

 
10

Acquisitions, merged
(2
)
 
(2
)
Sold, closed or merged
(7
)
 
(5
)
Net increase
14

 
3

 
 
 
 
Laboratories:
 
 
 
Acquisitions
1

 

Acquisitions, merged
(1
)
 

New facilities

 
3

Net increase

 
3







9


VCA Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
June 30, 2015
(Unaudited)


4.
Acquisitions, continued

Animal Hospital and Laboratory Acquisitions
The purchase price allocations for some of the 2015 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 for our independent animal hospitals and the Abaxis Veterinary Reference Laboratory ("AVRL") acquired during the six months ended June 30, 2015 and 2014 , respectively, (in thousands):

 
Six Months Ended
June 30,
 
2015
 
2014
Consideration:
 
 
 
  Cash, net of cash acquired
$
66,229

 
$
30,764

  Assumed debt
6,250

 
736

  Holdbacks
2,522

 
750

  Earn-out contingent consideration

 
374

      Fair value of total consideration transferred
$
75,001

 
$
32,624

 
 
 
 
Allocation of the Purchase Price:
 
 
 
  Tangible assets
$
5,064

 
$
2,688

  Identifiable intangible assets (1)
24,144

 
4,880

  Goodwill (2)
46,440

 
26,761

  Other liabilities assumed
(647
)
 

      Fair value of assets acquired
$
75,001

 
$
34,329

Noncontrolling interest

 
(1,705
)
Total
$
75,001

 
$
32,624

____________________________

(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 fifteen years . The weighted-average amortization period for customer relationships, trademarks and covenants is approximately sixteen years , eight years and five years , respectively.

(2)  
We expect that $35.8 million and $16.3 million of the goodwill recorded for these acquisitions, as of June 30, 2015 and 2014 , respectively, will be fully deductible for income tax purposes.

Included in the table above is Antech Diagnostics, Inc.'s March 31, 2015 acquisition of the AVRL from Abaxis, Inc., for total consideration of $21.0 million . At the time of the acquisition, we allocated the full purchase price of the AVRL to goodwill. During the current quarter, the fair market value of identifiable intangible assets was finalized which resulted in a reclassification of the majority of the goodwill to these identifiable intangible assets. Of the goodwill recorded, $15.3 million was reclassified as customer relationships with an amortization period of 20 years . The purchase price allocation is pending the finalization of fixed asset valuations.
    





10


VCA Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
June 30, 2015
(Unaudited)


4.
Acquisitions, continued

Camp Bow Wow

On August 15, 2014, we acquired 100% of D.O.G. Enterprises, LLC for $17.0 million in cash and contingent consideration of up to $3.0 million that may be earned over the next three years . Camp Bow Wow 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, principally under the service mark Camp Bow Wow ® .  As of June 30, 2015 , there were 127 Camp Bow Wow ® franchise locations operating in 35 states and one Canadian province. 

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

Consideration:
 
  Cash, net of cash acquired
$
15,174

  Assumed debt
323

  Holdbacks
1,500

  Earn-out contingent consideration
760

      Fair value of total consideration transferred
$
17,757

 
 
Allocation of the Purchase Price:
 
  Tangible assets
$
637

  Identifiable intangible assets (1)
13,420

  Goodwill (2)
4,219

  Other liabilities assumed
(519
)
Total
$
17,757

____________________________

(1)  
Identifiable intangible assets primarily include franchise rights, trademarks, covenants-not-to-compete and existing technology. The weighted-average amortization period for the total identifiable intangible assets is approximately ten years . The weighted-average amortization periods for the franchise rights, covenants and existing technology is approximately ten years , three years and four years , respectively. The trademarks have an indefinite life and will be assessed annually for impairment.

(2)  
As of June 30, 2015 , we expect that the full amount of goodwill recorded for this acquisition will be deductible for income tax purposes.






11


VCA Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
June 30, 2015
(Unaudited)


5.
Other Accrued Liabilities
Other accrued liabilities consisted of the following (in thousands):

 
As of June 30, 2015
 
As of December 31, 2014
Deferred revenue
$
15,967

 
$
14,304

Accrued health insurance
4,910

 
5,194

Deferred rent
4,648

 
4,535

Accrued other insurance
4,397

 
4,381

Miscellaneous accrued taxes (1)
4,597

 
3,025

Accrued accounting and legal fees
2,609

 
2,900

Accrued workers' compensation
2,938

 
2,781

Holdbacks and earn-outs
9,247

 
7,878

Customer deposits
2,590

 
2,229

Accrued consulting fees
3,494

 
3,172

Accrued lease payments
1,496

 
1,657

Other
16,200

 
15,163

 
$
73,093

 
$
67,219

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


6.
Long-Term Obligations

Long-term obligations consisted of the following at June 30, 2015 and December 31, 2014 (in thousands):
 
 
 
 
June 30, 2015
 
December 31, 2014
Senior term notes
 
Notes payable, maturing in 2019, secured by assets, variable interest rate (1.68% and 1.67% at June 30, 2015 and December 31, 2014, respectively)
 
600,000

 
600,000

Revolving credit
 
Revolving line of credit, maturing in 2019, secured by assets, variable interest rate (1.68% and 1.67% at June 30, 2015 and December 31, 2014, respectively)
 
196,000

 
135,000

Secured seller notes
 
Notes payable matures in 2015, secured by assets and stock of certain subsidiaries, with interest rate of 10.0%
 
230

 
230

 
 
Total debt obligations
 
796,230

 
735,230

 
 
Capital lease obligations and other debt
 
57,031

 
59,538

 
 
 
 
853,261

 
794,768

 
 
Less — current portion
 
(33,881
)
 
(19,356
)
 
 
 
 
$
819,380

 
$
775,412


Interest Rate. In general, borrowings under the 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 4, see table below) per annum; or

the Eurodollar rate (as defined below), plus a margin of 1.50% (Pricing Tier 4, see table below) per annum





12


VCA Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
June 30, 2015
(Unaudited)


6.
Long-Term Obligations, continued

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, 2015 , 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:

Pricing Tier
 
Consolidated Leverage Ratio
 
Applicable Margin for Eurodollar Loans/Letter of Credit Fees
 
Applicable Margin for Base Rate Loans
 
Commitment Fee
1
 
≥ 4.00:1.00
 
2.25
%
 
1.25
%
 
0.45
%
2
 
< 4.00:1.00 and ≥ 3.25:1.00
 
2.00
%
 
1.00
%
 
0.40
%
3
 
< 3.25:1.00 and ≥ 2.50:1.00
 
1.75
%
 
0.75
%
 
0.35
%
4
 
< 2.50:1.00 and ≥ 1.75:1.00
 
1.50
%
 
0.50
%
 
0.30
%
5
 
< 1.75:1.00 and ≥ 1.00:1.00
 
1.25
%
 
0.25
%
 
0.25
%
6
 
< 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 August 27, 2019 . Principal payments on the senior term notes of $7.5 million are due each calendar quarter from September 30, 2015 to and including June 30, 2017, $11.3 million are due each calendar quarter from September 30, 2017 to and including June 30, 2018 and $15.0 million are 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 as set forth in the table above and is applied to the unused portion of the commitment. The revolving credit facility matures on August 27, 2019. Principal payments on the revolving credit facility are made at our discretion with the entire unpaid amount due at maturity. At June 30, 2015 , we had borrowings of $196.0 million under our revolving credit facility.

The following table sets forth the scheduled principal payments for the Senior Credit Facility (in thousands):
 
 
2015
 
2016
 
2017
 
2018
 
2019
Senior term notes
 
$
15,000

 
$
30,000

 
$
37,500

 
$
52,500

 
$
465,000

Revolving loans
 

 

 

 

 
196,000

 
 
$
15,000

 
$
30,000

 
$
37,500

 
$
52,500

 
$
661,000


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.

7.    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):  





13


VCA Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
June 30, 2015
(Unaudited)


7.
Calculation of Earnings per Share, continued
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2015
 
2014
 
2015
 
2014
Net income attributable to VCA Inc.
$
54,299

 
$
45,584

 
$
92,600

 
$
79,627

Weighted-average common shares outstanding:
 
 
 
 
 
 
 
Basic
81,956

 
88,041

 
82,150

 
88,188

Effect of dilutive potential common shares:
 
 
 
 
 
 
 
Stock options
334

 
265

 
337

 
260

Non-vested shares and units
794

 
885

 
740

 
864

Diluted
83,084

 
89,191

 
83,227

 
89,312

Basic earnings per common share
$
0.66

 
$
0.52

 
$
1.13

 
$
0.90

Diluted earnings per common share
$
0.65

 
$
0.51

 
$
1.11

 
$
0.89


For the three months ended June 30, 2015 and 2014 there were no potential common shares excluded from the computation of diluted earnings per share.
For the six months ended June 30, 2015 , an immaterial amount of potential common shares 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, 2014 there were no potential common shares excluded from the computation of diluted earnings per share.





14


VCA Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
June 30, 2015
(Unaudited)


8.
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, our Vetstreet business, which provides online and printed communications, professional education, marketing solutions to the veterinary community and an ecommerce platform for independent animal hospitals, 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 our other segments.
The accounting policies of our segments are the same as those described in the summary of significant accounting policies included in our 2014 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.



15


VCA Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
June 30, 2015
(Unaudited)


8. 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, 2015
 
 
 
 
 
 
 
 
 
 
 
External revenue
$
435,376

 
$
89,707

 
$
22,818

 
$

 
$
884

 
$
548,785

Intercompany revenue

 
16,515

 
5,851

 

 
(22,366
)
 

Total revenue
435,376

 
106,222

 
28,669

 

 
(21,482
)
 
548,785

Direct costs
361,991

 
49,519

 
17,280

 

 
(20,852
)
 
407,938

Gross profit
73,385

 
56,703

 
11,389

 

 
(630
)
 
140,847

Selling, general and administrative expense
10,453

 
9,487

 
7,741

 
16,804

 

 
44,485

Operating income (loss) before sale or disposal of assets
62,932

 
47,216

 
3,648

 
(16,804
)
 
(630
)
 
96,362

Net (gain) loss on sale or disposal of assets
(914
)
 
35

 
11

 
49

 

 
(819
)
Operating income (loss)
$
63,846

 
$
47,181

 
$
3,637

 
$
(16,853
)
 
$
(630
)
 
$
97,181

Depreciation and amortization
$
16,440

 
$
2,705

 
$
1,176

 
$
575

 
$
(530
)
 
$
20,366

Property and equipment additions
$
13,995

 
$
2,862

 
$
500

 
$
1,512

 
$
(874
)
 
$
17,995

Three Months Ended
June 30, 2014
 
 
 
 
 
 
 
 
 
 
 
External revenue
$
386,776

 
$
81,320

 
$
20,457

 
$

 
$
919

 
$
489,472

Intercompany revenue

 
14,635

 
3,255

 

 
(17,890
)
 

Total revenue
386,776

 
95,955

 
23,712

 

 
(16,971
)
 
489,472

Direct costs
323,440

 
46,863

 
16,064

 

 
(17,310
)
 
369,057

Gross profit
63,336

 
49,092

 
7,648

 

 
339

 
120,415

Selling, general and administrative expense
9,864

 
8,281

 
7,411

 
14,375

 

 
39,931

Operating income (loss) before sale or disposal of assets
53,472

 
40,811

 
237

 
(14,375
)
 
339

 
80,484

Net loss (gain) on sale or disposal of assets
414

 
(7
)
 
97

 
74

 

 
578

Operating income (loss)
$
53,058


$
40,818

 
$
140

 
$
(14,449
)
 
$
339

 
$
79,906

Depreciation and amortization
$
15,110

 
$
2,563

 
$
2,004

 
$
826

 
$
(473
)
 
$
20,030

Property and equipment additions
$
8,119

 
$
1,304

 
$
920

 
$
1,333

 
$
(316
)
 
$
11,360















16


VCA Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
June 30, 2015
(Unaudited)


8. Lines of Business, continued

 
Animal
Hospital
 
Laboratory
 
All Other
 
Corporate
 

Eliminations
 
Total
Six Months Ended
June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
External revenue
$
828,402

 
$
168,516

 
$
49,351

 
$

 
$
1,969

 
$
1,048,238

Intercompany revenue

 
31,678

 
13,545

 

 
(45,223
)
 

Total revenue
828,402

 
200,194

 
62,896

 

 
(43,254
)
 
1,048,238

Direct costs
699,533

 
95,509

 
40,083

 

 
(41,596
)
 
793,529

Gross profit
128,869

 
104,685

 
22,813

 

 
(1,658
)
 
254,709

Selling, general and administrative expense
21,674

 
18,352

 
16,428

 
32,429

 

 
88,883

Operating income (loss) before charges
107,195

 
86,333

 
6,385

 
(32,429
)
 
(1,658
)
 
165,826

Net (gain) loss on sale or disposal of assets
(620
)
 
41

 
20

 
75

 

 
(484
)
Operating income (loss)
$
107,815

 
$
86,292

 
$
6,365

 
$
(32,504
)
 
$
(1,658
)
 
$
166,310

Depreciation and amortization
$
32,512

 
$
5,209

 
$
2,328

 
$
1,167

 
$
(1,053
)
 
$
40,163

Property and equipment additions
$
26,077

 
$
6,078

 
$
1,300

 
$
2,576

 
$
(1,510
)
 
$
34,521

Six Months Ended
June 30, 2014
 
 
 
 
 
 
 
 
 
 
 
External revenue
$
738,364

 
$
156,103

 
$
42,658

 
$

 
$
1,854

 
$
938,979

Intercompany revenue

 
28,386

 
9,175

 

 
(37,561
)
 

Total revenue
738,364

 
184,489

 
51,833

 

 
(35,707
)
 
938,979

Direct costs
626,228

 
92,366

 
34,216

 

 
(35,697
)
 
717,113

Gross profit
112,136

 
92,123

 
17,617

 

 
(10
)
 
221,866

Selling, general and administrative expense
18,992

 
16,299

 
15,759

 
30,321

 

 
81,371

Operating income (loss) before charges
93,144

 
75,824

 
1,858

 
(30,321
)
 
(10
)
 
140,495

Net loss (gain) on sale or disposal of assets
582

 
(78
)
 
(1,087
)
 
(60
)
 

 
(643
)
Operating income (loss)
$
92,562

 
$
75,902

 
$
2,945

 
$
(30,261
)
 
$
(10
)
 
$
141,138

Depreciation and amortization
$
29,852

 
$
5,098

 
$
4,140

 
$
1,645

 
$
(938
)
 
$
39,797

Property and equipment additions
$
21,187

 
$
3,285

 
$
1,678

 
$
2,744

 
$
(915
)
 
$
27,979

 
 
 
 
 
 
 
 
 
 
 
 
At June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
Total assets
$
2,092,935

 
$
304,685

 
$
80,994

 
$
340,002

 
$
(421,506
)
 
$
2,397,110

At December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
Total assets
$
2,021,725

 
$
258,550

 
$
89,596

 
$
270,414

 
$
(308,265
)
 
$
2,332,020





17


VCA Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
June 30, 2015
(Unaudited)


9.
Commitments and Contingencies

We have certain commitments including operating leases, purchase agreements and acquisition agreements. These items are discussed in detail in our consolidated financial statements and notes thereto included in our 2014 Annual Report on Form 10-K. We also have contingencies as follows:

a.
Earn-Out Payments

We have contractual arrangements in connection with certain acquisitions, whereby additional cash may be paid to former owners of acquired companies upon fulfillment of specified financial criteria as set forth in the respective agreements. The amount to be paid cannot be determined until the earn-out periods have expired. If the specified financial criteria are satisfied, we will be obligated to pay an additional $5.6 million .
In accordance with business combination accounting guidance, contingent consideration, such as earn-out agreements, are recognized as part of the consideration transferred on the acquisition date. A liability is initially recorded based upon its acquisition date fair value. The changes in fair value are recognized in earnings where applicable for each reporting period. The fair value is determined using a contractually stated formula using either a multiple of revenue or Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA"). The formulas used to determine the estimated fair value are Level 3 inputs. The changes in fair value were immaterial to our condensed, consolidated financial statements when taken as a whole. We recorded $3.1 million and $ 3.2 million in earn-out liabilities as of June 30, 2015 and December 31, 2014 , respectively, which are included in other accrued liabilities in our condensed, consolidated balance sheets.

b.
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 regular and 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. On May 7, 2014, we obtained partial summary judgment, dismissing four of the eight claims of the complaint, including the claims for failure to pay regular and overtime wages. We intend to continue to vigorously defend against the remaining claim in this action. At this time, we are unable to estimate the reasonably possible loss or range of possible loss, but do not believe losses, if any, would have a material effect on our results of operations or financial position taken as a whole.

On July 16, 2014, two additional former veterinary assistants filed a purported class action lawsuit against us in the Superior Court of the State of California for the County of Los Angeles, titled La Kimba Bradsbery and Cheri Brakensiek vs. Vicar Operating, Inc., et. al. The lawsuit seeks to assert claims on behalf of current and former veterinary assistants, kennel assistants, and client service representatives employed by us in California, and alleges, among other allegations, that we improperly failed to pay regular and overtime wages, improperly failed to provide proper meal and rest periods, improperly failed to pay reporting time pay, improperly failed to reimburse for certain business-related expenses, and engaged in unfair business practices. The lawsuit seeks damages, statutory penalties, and other relief, including attorneys’ fees and costs. These two actions are related before the same judge hearing the Duran action discussed above.

In September 2014, the court issued an order staying the La Kimba Bradsbery lawsuit until class certification is completed in the Duran case. Plaintiff Duran filed his class certification motion and supporting documentation in January 2015. A class certification hearing was held on June 2, 2015.

On June 25, 2015, the Court entered an Order denying class certification to veterinary assistants who were allegedly not given proper meal or rest periods. The plaintiff continues to have a PAGA claim. We intend to continue to vigorously defend against the remaining claim in this action. At this time, we are unable to estimate the reasonably possible loss or range of possible loss, but do not believe losses, if any, would have a material effect on our results of operations or financial position taken as a whole.





18


VCA Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
June 30, 2015
(Unaudited)


9.
Commitments and Contingencies, continued

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 periods. The lawsuit seeks damages, statutory penalties, and other relief, including attorneys' fees and costs. The parties have an agreement in principle to settle the action, on a class-wide basis, for an amount not to exceed $1,250,000 . Logistics Delivery Solutions, LLC, has agreed to pay half of the claim. Accordingly, as of June 30, 2015 , we have accrued the remaining fifty percent . The proposed settlement, when and if it becomes effective, would not be an admission of wrongdoing or acceptance of fault by any of the defendants named in the complaint. Antech Diagnostics and Logistics Delivery Solutions have agreed upon the terms of this proposed settlement to eliminate the uncertainties, risk, distraction and expense associated with protracted litigation. The proposed settlement remains subject to court approval and class notice administration before it will be effective.

On May 12, 2014, an individual client who purchased goods and services from one of our animal hospitals filed a purported class action lawsuit against us in the United States District Court for the Northern District of California, titled Tony M. Graham vs. VCA Antech, Inc. and VCA Animal Hospitals, Inc. The lawsuit seeks to assert claims on behalf of the plaintiff and other individuals who purchased similar goods and services from our animal hospitals and alleges, among other allegations, that we improperly charged such individuals for “biohazard waste management” in connection with the services performed. The lawsuit seeks compensatory and punitive damages in unspecified amounts, and other relief, including attorneys' fees and costs. VCA successfully had the venue transferred to the Southern District of California. This case is in an early procedural stage and we intend to vigorously defend this action. At this time, we are unable to estimate the reasonably possible loss or range of possible loss, but do not believe losses, if any, would have a material effect on our results of operations or financial position taken as a whole.
In addition to the lawsuits described above, we are party to ordinary routine legal proceedings and claims incidental to our 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, results of operations, or cash flows.

c.
Other Contingencies

On May 14, 2014, the headquarters of our Medical Technology business in Carlsbad, California was severely damaged by wildfires. There were no injuries to personnel. However, the fire caused severe damage to a substantial portion of the facility. We maintain standard insurance coverage for both property damage and business interruption losses. During the six months ended June 30, 2015 , there were no additional estimated losses recorded in connection with this event. Subsequent to the June 30, 2015 quarter end we received a final insurance payment of approximately $6.0 million bringing the total insurance settlement received to approximately $26.0 million .