VCA Inc.
VCA INC (Form: 10-Q, Received: 11/06/2015 15:22:03)

 
 
 
 
 
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 September 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, 80,641,801 shares as of November 2, 2015 .
 
 
 
 
 



VCA Inc. and Subsidiaries
Form 10-Q
September 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)
 
September 30, 2015
 
December 31, 2014
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
74,992

 
$
81,383

Trade accounts receivable, less allowance for uncollectible accounts of $22,065 and $19,846 at September 30, 2015 and December 31, 2014, respectively
74,654

 
60,482

Inventory
51,597

 
56,050

Prepaid expenses and other
30,827

 
36,924

Deferred income taxes
30,329

 
30,331

Prepaid income taxes

 
18,277

Total current assets
262,399

 
283,447

Property and equipment, net
492,532

 
468,041

Goodwill
1,489,843

 
1,415,861

Other intangible assets, net
100,939

 
88,175

Notes receivable
2,345

 
2,807

Deferred financing costs, net
6,568

 
7,874

Other
76,564

 
65,815

Total assets
$
2,431,190

 
$
2,332,020

Liabilities and Equity
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
34,043

 
$
19,356

Accounts payable
45,512

 
46,284

Accrued payroll and related liabilities
82,966

 
64,359

Income tax payable
1,827

 

Other accrued liabilities
75,179

 
67,219

Total current liabilities
239,527

 
197,218

Long-term debt, less current portion
847,112

 
775,412

Deferred income taxes
104,425

 
103,502

Other liabilities
31,969

 
33,190

Total liabilities
1,223,033

 
1,109,322

Commitments and contingencies

 

Redeemable noncontrolling interests
11,273

 
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, 80,567 and 82,937 shares outstanding as of September 30, 2015 and December 31, 2014, respectively
81

 
83

Additional paid-in capital
16,135

 
155,802

Retained earnings
1,211,612

 
1,064,158

Accumulated other comprehensive loss
(43,909
)
 
(19,397
)
Total VCA Inc. stockholders’ equity
1,183,919

 
1,200,646

Noncontrolling interests
12,965

 
10,975

Total equity
1,196,884

 
1,211,621

Total liabilities and equity
$
2,431,190

 
$
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
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
Revenue
$
551,717

 
$
499,577

 
$
1,599,955

 
$
1,438,556

Direct costs
414,051

 
375,820

 
1,207,580

 
1,092,933

Gross profit
137,666

 
123,757

 
392,375

 
345,623

Selling, general and administrative expense
44,860

 
42,792

 
133,743

 
124,163

Impairment of goodwill and other long-lived assets

 
27,019

 

 
27,019

Business interruption insurance gain
(4,523
)
 

 
(4,523
)
 

Net loss (gain) on sale or disposal of assets
250

 
470

 
(234
)
 
(173
)
Operating income
97,079

 
53,476

 
263,389

 
194,614

Interest expense, net
5,455

 
4,367

 
15,396

 
12,564

Debt retirement costs

 
1,709

 

 
1,709

Other expense
59

 
188

 
88

 
178

Income before provision for income taxes
91,565

 
47,212

 
247,905

 
180,163

Provision for income taxes
35,097

 
18,261

 
95,961

 
69,389

Net income
56,468

 
28,951

 
151,944

 
110,774

Net income attributable to noncontrolling interests
1,614

 
1,499

 
4,490

 
3,695

Net income attributable to VCA Inc.
$
54,854

 
$
27,452

 
$
147,454

 
$
107,079

Basic earnings per share
$
0.68

 
$
0.32

 
$
1.80

 
$
1.22

Diluted earnings per share
$
0.67

 
$
0.31

 
$
1.78

 
$
1.21

Weighted-average shares outstanding for basic earnings per share
80,815

 
86,274

 
81,700

 
87,543

Weighted-average shares outstanding for diluted earnings per share
81,795

 
87,360

 
82,744

 
88,665



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
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
Net income (1)  
$
56,468

 
$
28,951

 
$
151,944

 
$
110,774

Other comprehensive income:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(14,005
)
 
(6,207
)
 
(25,274
)
 
(6,919
)
Other comprehensive loss
(14,005
)
 
(6,207
)
 
(25,274
)
 
(6,919
)
Total comprehensive income
42,463

 
22,744

 
126,670

 
103,855

Comprehensive income attributable to noncontrolling interests (1) 
1,187

 
1,021

 
3,728

 
3,167

Comprehensive income attributable to VCA Inc.
$
41,276

 
$
21,723

 
$
122,942

 
$
100,688

____________________________
(1)  
Includes approximately $2.5 million and $1.9 million of net income related to redeemable and mandatorily redeemable noncontrolling interests for the nine months ended September 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 $723 and $1,172 related to redeemable and mandatorily redeemable noncontrolling interests, respectively)

 

 

 
107,079

 

 
1,800

 
108,879

Other comprehensive loss (excludes $358 related to mandatorily redeemable noncontrolling interests)

 

 

 

 
(6,391
)
 
(170
)
 
(6,561
)
Formation of noncontrolling interests

 

 

 

 

 
933

 
933

Distribution to noncontrolling interests

 

 

 

 

 
(1,627
)
 
(1,627
)
Purchase of noncontrolling interests

 

 
29

 

 

 

 
29

Share-based compensation

 

 
12,234

 

 

 

 
12,234

Issuance of common stock under stock incentive plans
614

 

 
926

 

 

 

 
926

Stock repurchases
(3,830
)
 
(4
)
 
(139,906
)
 

 

 

 
(139,910
)
Excess tax benefit from stock based compensation

 

 
3,808

 

 

 

 
3,808

Balances, September 30, 2014
85,292

 
$
85

 
$
261,888

 
$
1,035,799

 
$
(12,581
)
 
$
11,136

 
$
1,296,327

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances, December 31, 2014
82,937

 
$
83

 
$
155,802

 
$
1,064,158

 
$
(19,397
)
 
$
10,975

 
$
1,211,621

Net income (excludes $1,392 and $1,088 related to redeemable and mandatorily redeemable noncontrolling interests, respectively)

 

 

 
147,454

 

 
2,010

 
149,464

Other comprehensive loss (excludes $338 related to mandatorily redeemable noncontrolling interests)

 

 

 

 
(24,512
)
 
(424
)
 
(24,936
)
Formation of noncontrolling interests

 

 

 

 

 
2,661

 
2,661

Distribution to noncontrolling interests

 

 

 

 

 
(1,784
)
 
(1,784
)
Purchase of noncontrolling interests

 

 
(217
)
 

 

 
(473
)
 
(690
)
Share-based compensation

 

 
12,086

 

 

 

 
12,086

Issuance of common stock under stock incentive plans
633

 
1

 
1,570

 

 

 

 
1,571

Stock repurchases
(3,003
)
 
(3
)
 
(161,114
)
 

 

 

 
(161,117
)
Excess tax benefit from stock based compensation

 

 
8,008

 

 

 

 
8,008

Balances, September 30, 2015
80,567

 
$
81

 
$
16,135

 
$
1,211,612

 
$
(43,909
)
 
$
12,965

 
$
1,196,884


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)

 
Nine Months Ended
September 30,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net income
$
151,944

 
$
110,774

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Impairment of goodwill and other long-lived assets

 
27,019

Depreciation and amortization
60,634

 
59,659

Amortization of debt issue costs
1,306

 
957

Provision for uncollectible accounts
6,723

 
4,388

Debt retirement costs

 
1,709

Net gain on sale or disposal of assets
(234
)
 
(173
)
Share-based compensation
12,086

 
12,234

Excess tax benefits from stock based compensation
(8,008
)
 
(3,808
)
Other
(431
)
 
381

Changes in operating assets and liabilities:
 
 
 
Trade accounts receivable
(20,568
)
 
(9,678
)
Inventory, prepaid expenses and other assets
(931
)
 
(8,233
)
Accounts payable and other accrued liabilities
(2,451
)
 
2,920

Accrued payroll and related liabilities
18,892

 
14,761

Income taxes
28,054

 
12,137

Net cash provided by operating activities
247,016

 
225,047

Cash flows from investing activities:
 
 
 
Business acquisitions, net of cash acquired
(119,336
)
 
(65,415
)
Property and equipment additions
(61,470
)
 
(50,093
)
Proceeds from sale or disposal of assets
6,469

 
4,464

Other
(434
)
 
(202
)
Net cash used in investing activities
(174,771
)
 
(111,246
)
Cash flows from financing activities:
 
 
 
Repayment of long-term obligations
(20,174
)
 
(563,976
)
Proceeds from issuance of long-term obligations

 
600,000

Proceeds from revolving credit facility
97,000

 

Payment of financing costs

 
(7,987
)
Distributions to noncontrolling interest partners
(3,810
)
 
(3,577
)
Purchase of noncontrolling interests
(1,493
)
 
(326
)
Proceeds from issuance of common stock under stock incentive plans
1,571

 
926

Excess tax benefits from stock based compensation
8,008

 
3,808

Stock repurchases
(161,117
)
 
(139,910
)
Other
2,210

 
(838
)
Net cash used in financing activities
(77,805
)
 
(111,880
)
Effect of currency exchange rate changes on cash and cash equivalents
(831
)
 
(443
)
(Decrease) increase in cash and cash equivalents
(6,391
)
 
1,478

Cash and cash equivalents at beginning of period
81,383

 
125,029

Cash and cash equivalents at end of period
$
74,992

 
$
126,507

 
 
 
 
 
 
 
 
 
 
 
 

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)

 
Nine Months Ended
September 30,
 
2015
 
2014
Supplemental disclosures of cash flow information:
 
 
 
Interest paid
$
13,674

 
$
10,633

Income taxes paid
$
67,814

 
$
57,108

 
 
 
 
Supplemental schedule of noncash investing and financing activities:
 
 
 
Detail of acquisitions:
 
 
 
Fair value of assets acquired and liabilities assumed
$
138,160

 
$
79,979

Fair value of pre-existing investment

 
(2,014
)
Noncontrolling interest

 
(1,705
)
Cash paid for acquisitions, net of acquired cash
(119,336
)
 
(65,415
)
Assumed debt
(12,402
)
 
(4,483
)
Contingent consideration
(476
)
 
(2,531
)
Holdbacks
(4,497
)
 
(2,900
)
Liabilities assumed
$
1,449

 
$
931



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

6


VCA Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements
September 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 September 30, 2015 , we operated or managed 674 animal hospitals throughout 41 states and four Canadian provinces.
We operate a full-service veterinary diagnostic laboratory network serving all 50 states and certain areas in Canada. Our laboratory network provides sophisticated testing and consulting services used by veterinarians in the detection, diagnosis, evaluation, monitoring, treatment and prevention of diseases and other conditions affecting animals. At September 30, 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 September 30, 2015 , there were 128 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 three and nine months ended September 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)
September 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 nine months ended September 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
89,473

 
4,172

 
255

 
93,900

Foreign translation adjustment
(18,157
)
 
(71
)
 

 
(18,228
)
Other (1)
(1,686
)
 
(4
)
 

 
(1,690
)
Balance as of September 30, 2015
 
 
 
 
 
 
 
Goodwill
1,375,188

 
101,632

 
143,080

 
1,619,900

Accumulated impairment losses

 

 
(130,057
)
 
(130,057
)
Subtotal
$
1,375,188

 
$
101,632

 
$
13,023

 
$
1,489,843

 ____________________________

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

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

 
As of September 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
$
117,689

 
$
(48,249
)
 
$
69,440

 
$
101,056

 
$
(45,295
)
 
$
55,761

Covenants not-to-compete
12,163

 
(4,818
)
 
7,345

 
10,093

 
(4,422
)
 
5,671

Favorable lease assets
9,451

 
(5,330
)
 
4,121

 
9,576

 
(4,962
)
 
4,614

Trademarks
12,691

 
(4,138
)
 
8,553

 
13,503

 
(4,015
)
 
9,488

Contracts
100

 
(36
)
 
64

 
100

 
(11
)
 
89

Technology
1,627

 
(670
)
 
957

 
1,627

 
(414
)
 
1,213

Franchise rights
11,730

 
(1,271
)
 
10,459

 
11,730

 
(391
)
 
11,339

Total
$
165,451

 
$
(64,512
)
 
$
100,939

 
$
147,685

 
$
(59,510
)
 
$
88,175









8


VCA Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
September 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
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
Aggregate amortization expense
$
5,811

 
$
5,231

 
$
17,195

 
$
15,605

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

Finite-lived intangible assets:
 
Remainder of 2015
$
6,092

2016
22,584

2017
16,816

2018
13,421

2019
10,363

Thereafter
30,623

Total
$
99,899

Indefinite-lived intangible assets:
 
Trademarks
1,040

Total intangible assets
$
100,939

 

4.
Acquisitions

The table below reflects the activity related to the acquisitions and dispositions of our animal hospitals and laboratories during the nine months ended September 30, 2015 and 2014 , respectively:

 
Nine Months Ended
September 30,
 
2015
 
2014
Animal Hospitals:
 
 
 
Acquisitions
42

 
23

Acquisitions, merged
(4
)
 
(4
)
Sold, closed or merged
(7
)
 
(6
)
Net increase
31

 
13

 
 
 
 
Laboratories:
 
 
 
Acquisitions
1

 

Acquisitions, merged
(1
)
 

New facilities

 
3

Net increase

 
3







9


VCA Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
September 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 nine months ended September 30, 2015 and 2014 , respectively, (in thousands):

 
Nine Months Ended
September 30,
 
2015
 
2014
Consideration:
 
 
 
  Cash, net of cash acquired
$
119,036

 
$
46,948

  Assumed debt
12,402

 
4,160

  Holdbacks
4,497

 
1,400

  Earn-outs
476

 
721

      Fair value of total consideration transferred
$
136,411

 
$
53,229

 
 
 
 
Allocation of the Purchase Price:
 
 
 
  Tangible assets
$
10,060

 
$
2,317

  Identifiable intangible assets (1)
34,130

 
8,176

  Goodwill (2)
93,645

 
46,502

  Other liabilities assumed
(1,424
)
 
(47
)
      Fair value of assets acquired and liabilities assumed
$
136,411

 
$
56,948

Noncontrolling interest

 
(1,705
)
Fair value of pre-existing investment

 
(2,014
)
Total
$
136,411

 
$
53,229

____________________________

(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 twelve years . The weighted-average amortization period for customer relationships, trademarks and covenants is approximately thirteen years , nine years and five years , respectively.

(2)  
We expect that $73.8 million and $36.6 million of the goodwill recorded for these acquisitions, as of September 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 AVRL for total consideration of $21.0 million . At the time of the acquisition, we allocated the full purchase price of AVRL to goodwill. During the quarter ended June 30, 2015, 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)
September 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 September 30, 2015 , there were 128 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-outs
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 September 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)
September 30, 2015
(Unaudited)

5.
Other Accrued Liabilities
Other accrued liabilities consisted of the following at September 30, 2015 and December 31, 2014 (in thousands):

 
September 30, 2015
 
December 31, 2014
Deferred revenue
$
16,526

 
$
14,304

Accrued health insurance
5,113

 
5,194

Deferred rent
4,702

 
4,535

Accrued other insurance
4,735

 
4,381

Miscellaneous accrued taxes (1)
4,446

 
3,025

Accrued accounting and legal fees
2,952

 
2,900

Accrued workers' compensation
5,856

 
2,781

Holdbacks and earn-outs
10,629

 
7,878

Customer deposits
2,129

 
2,229

Accrued consulting fees
3,655

 
3,172

Accrued lease payments
1,378

 
1,657

Other
13,058

 
15,163

 
$
75,179

 
$
67,219

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


6.
Long-Term Obligations

Long-term obligations consisted of the following at September 30, 2015 and December 31, 2014 (in thousands):
 
 
 
 
September 30, 2015
 
December 31, 2014
Senior term notes
 
Notes payable, maturing in 2019, secured by assets, variable interest rate (1.69% and 1.67% at September 30, 2015 and December 31, 2014, respectively)
 
592,500

 
600,000

Revolving credit
 
Revolving line of credit, maturing in 2019, secured by assets, variable interest rate (1.69% and 1.67% at September 30, 2015 and December 31, 2014, respectively)
 
232,000

 
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
 
824,730

 
735,230

 
 
Capital lease obligations and other debt
 
56,425

 
59,538

 
 
 
 
881,155

 
794,768

 
 
Less — current portion
 
(34,043
)
 
(19,356
)
 
 
 
 
$
847,112

 
$
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)
September 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 September 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 December 31, 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 September 30, 2015 , we had borrowings of $232.0 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
 
$
7,500

 
$
30,000

 
$
37,500

 
$
52,500

 
$
465,000

Revolving loans
 

 

 

 

 
232,000

 
 
$
7,500

 
$
30,000

 
$
37,500

 
$
52,500

 
$
697,000


Guarantees and Security. We and each of our wholly-owned domestic subsidiaries guarantee the outstanding indebtedness under the 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.













13


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

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):  

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
Net income attributable to VCA Inc.
$
54,854

 
$
27,452

 
$
147,454

 
$
107,079

Weighted-average common shares outstanding:
 
 
 
 
 
 
 
Basic
80,815

 
86,274

 
81,700

 
87,543

Effect of dilutive potential common shares:
 
 
 
 
 
 
 
Stock options
338

 
324

 
338

 
285

Non-vested shares and units
642

 
762

 
706

 
837

Diluted
81,795

 
87,360

 
82,744

 
88,665

Basic earnings per common share
$
0.68

 
$
0.32

 
$
1.80

 
$
1.22

Diluted earnings per common share
$
0.67

 
$
0.31

 
$
1.78

 
$
1.21


For the three months ended September 30, 2015 and 2014 there were no potential common shares excluded from the computation of diluted earnings per share.
For the nine months ended September 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 nine months ended September 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)
September 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 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)
September 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
September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
External revenue
$
441,924

 
$
84,129

 
$
24,544

 
$

 
$
1,120

 
$
551,717

Intercompany revenue

 
16,180

 
6,294

 

 
(22,474
)
 

Total revenue
441,924

 
100,309

 
30,838

 

 
(21,354
)
 
551,717

Direct costs
366,983

 
48,901

 
19,077

 

 
(20,910
)
 
414,051

Gross profit
74,941

 
51,408

 
11,761

 

 
(444
)
 
137,666

Selling, general and administrative expense
10,677

 
9,542

 
7,660

 
16,981

 

 
44,860

Operating income (loss) before sale or disposal of assets
64,264

 
41,866

 
4,101

 
(16,981
)
 
(444
)
 
92,806

Business interruption insurance gain

 

 
(4,523
)
 

 

 
(4,523
)
Net loss on sale or disposal of assets
175

 

 
72

 
3

 

 
250

Operating income (loss)
$
64,089

 
$
41,866

 
$
8,552

 
$
(16,984
)
 
$
(444
)
 
$
97,079

Depreciation and amortization
$
16,520

 
$
2,731

 
$
1,181

 
$
588

 
$
(549
)
 
$
20,471

Property and equipment additions
$
19,429

 
$
5,735

 
$
127

 
$
2,773

 
$
(1,115
)
 
$
26,949

Three Months Ended
September 30, 2014
 
 
 
 
 
 
 
 
 
 
 
External revenue
$
395,820

 
$
77,394

 
$
25,397

 
$

 
$
966

 
$
499,577

Intercompany revenue

 
14,509

 
4,684

 

 
(19,193
)
 

Total revenue
395,820

 
91,903

 
30,081

 

 
(18,227
)
 
499,577

Direct costs
327,283

 
46,879

 
19,945

 

 
(18,287
)
 
375,820

Gross profit
68,537

 
45,024

 
10,136

 

 
60

 
123,757

Selling, general and administrative expense
9,269

 
8,610

 
8,023

 
16,890

 

 
42,792

Operating income (loss) before sale or disposal of assets
59,268

 
36,414

 
2,113

 
(16,890
)
 
60

 
80,965

Impairment of goodwill and other long-lived assets

 

 
27,019

 

 

 
27,019

Net loss (gain) on sale or disposal of assets
598

 
7

 

 
(135
)
 

 
470

Operating income (loss)
$
58,670


$
36,407

 
$
(24,906
)
 
$
(16,755
)
 
$
60

 
$
53,476

Depreciation and amortization
$
15,201

 
$
2,671

 
$
1,781

 
$
688

 
$
(479
)
 
$
19,862

Property and equipment additions
$
17,224

 
$
2,391

 
$
1,123

 
$
2,025

 
$
(649
)
 
$
22,114











16


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

8. Lines of Business, continued

 
Animal
Hospital
 
Laboratory
 
All Other
 
Corporate
 

Eliminations
 
Total
Nine Months Ended
September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
External revenue
$
1,270,326

 
$
252,645

 
$
73,895

 
$

 
$
3,089

 
$
1,599,955

Intercompany revenue

 
47,858

 
19,839

 

 
(67,697
)
 

Total revenue
1,270,326

 
300,503

 
93,734

 

 
(64,608
)
 
1,599,955

Direct costs
1,066,516

 
144,410

 
59,160

 

 
(62,506
)
 
1,207,580

Gross profit
203,810

 
156,093

 
34,574

 

 
(2,102
)
 
392,375

Selling, general and administrative expense
32,351

 
27,894

 
24,088

 
49,410

 

 
133,743

Operating income (loss) before charges
171,459

 
128,199

 
10,486

 
(49,410
)
 
(2,102
)
 
258,632

Business interruption insurance gain

 

 
(4,523
)
 

 

 
(4,523
)
Net (gain) loss on sale or disposal of assets
(445
)
 
41

 
92

 
78

 

 
(234
)
Operating income (loss)
$
171,904

 
$
128,158

 
$
14,917

 
$
(49,488
)
 
$
(2,102
)
 
$
263,389

Depreciation and amortization
$
49,032

 
$
7,940

 
$
3,509

 
$
1,755

 
$
(1,602
)
 
$
60,634

Property and equipment additions
$
45,506

 
$
11,813

 
$
1,427

 
$
5,349

 
$
(2,625
)
 
$
61,470

Nine Months Ended
September 30, 2014
 
 
 
 
 
 
 
 
 
 
 
External revenue
$
1,134,184

 
$
233,497

 
$
68,055

 
$

 
$
2,820

 
$
1,438,556

Intercompany revenue

 
42,895

 
13,859

 

 
(56,754
)
 

Total revenue
1,134,184

 
276,392

 
81,914

 

 
(53,934
)
 
1,438,556

Direct costs
953,511

 
139,245

 
54,161

 

 
(53,984
)
 
1,092,933

Gross profit
180,673

 
137,147

 
27,753

 

 
50

 
345,623

Selling, general and administrative expense
28,261

 
24,909

 
23,782

 
47,211

 

 
124,163

Operating income (loss) before charges
152,412

 
112,238

 
3,971

 
(47,211
)
 
50

 
221,460

Impairment of goodwill and other long-lived assets

 

 
27,019

 

 

 
27,019

Net loss (gain) on sale or disposal of assets
1,180

 
(71
)
 
(1,087
)
 
(195
)
 

 
(173
)
Operating income (loss)
$
151,232

 
$
112,309

 
$
(21,961
)
 
$
(47,016
)
 
$
50

 
$
194,614

Depreciation and amortization
$
45,053

 
$
7,769

 
$
5,921

 
$
2,333

 
$
(1,417
)
 
$
59,659

Property and equipment additions
$
38,411

 
$
5,676

 
$
2,801

 
$
4,769

 
$
(1,564
)
 
$
50,093

 
 
 
 
 
 
 
 
 
 
 
 
At September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
Total assets
$
2,147,136

 
$
304,807

 
$
76,969

 
$
391,471

 
$
(489,193
)
 
$
2,431,190