VCA Inc.
VCA INC (Form: 10-Q, Received: 08/05/2016 12:38:30)
 
 
 
 
 
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, 2016
 
¨
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, 80,865,923 shares as of August 1, 2016 .
 
 
 
 
 



VCA Inc. and Subsidiaries
Form 10-Q
June 30, 2016
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, 2016
 
December 31, 2015
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
109,684

 
$
98,888

Trade accounts receivable, less allowance for uncollectible accounts of $22,715 and $21,775 at June 30, 2016 and December 31, 2015, respectively
83,157

 
76,634

Inventory
61,829

 
51,523

Prepaid expenses and other
36,221

 
30,521

Prepaid income taxes
1,153

 
24,598

Total current assets
292,044

 
282,164

Property and equipment, net
564,034

 
507,753

Goodwill
1,963,377

 
1,517,650

Other intangible assets, net
257,648

 
97,377

Notes receivable
2,173

 
2,194

Other
99,851

 
93,994

Total assets
$
3,179,127

 
$
2,501,132

Liabilities and Equity
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
25,980

 
$
33,623

Accounts payable
53,177

 
52,337

Accrued payroll and related liabilities
80,817

 
75,519

Other accrued liabilities
81,907

 
70,828

Total current liabilities
241,881

 
232,307

Long-term debt, net
1,279,453

 
832,718

Deferred income taxes, net
130,209

 
131,478

Other liabilities
39,236

 
36,084

Total liabilities
1,690,779

 
1,232,587

Commitments and contingencies

 

Redeemable noncontrolling interests
12,053

 
11,511

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, 80,863 and 80,764 shares outstanding as of June 30, 2016 and December 31, 2015, respectively
81

 
81

Additional paid-in capital
28,696

 
19,708

Retained earnings
1,385,484

 
1,275,207

Accumulated other comprehensive loss
(37,827
)
 
(50,034
)
Total VCA Inc. stockholders’ equity
1,376,434

 
1,244,962

Noncontrolling interests
99,861

 
12,072

Total equity
1,476,295

 
1,257,034

Total liabilities and equity
$
3,179,127

 
$
2,501,132



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,
 
2016
 
2015
 
2016
 
2015
Revenue
$
653,489

 
$
548,785

 
$
1,216,928

 
$
1,048,238

Direct costs
489,541

 
407,938

 
916,200

 
793,529

Gross profit
163,948

 
140,847

 
300,728

 
254,709

Selling, general and administrative expense
48,190

 
44,485

 
98,318

 
88,883

Net (gain) loss on sale or disposal of assets
(271
)
 
(819
)
 
292

 
(484
)
Operating income
116,029

 
97,181

 
202,118

 
166,310

Interest expense, net
7,867

 
5,104

 
14,962

 
9,941

Debt retirement costs
1,600

 

 
1,600

 

Other (income) expense
(600
)
 
(37
)
 
(864
)
 
29

Income before provision for income taxes
107,162

 
92,114

 
186,420

 
156,340

Provision for income taxes
40,736

 
36,191

 
72,272

 
60,864

Net income
66,426

 
55,923

 
114,148

 
95,476

Net income attributable to noncontrolling interests
2,376

 
1,624

 
3,871

 
2,876

Net income attributable to VCA Inc.
$
64,050

 
$
54,299

 
$
110,277

 
$
92,600

Basic earnings per share
$
0.79

 
$
0.66

 
$
1.36

 
$
1.13

Diluted earnings per share
$
0.78

 
$
0.65

 
$
1.35

 
$
1.11

Weighted-average shares outstanding for basic earnings per share
80,835

 
81,956

 
80,806

 
82,150

Weighted-average shares outstanding for diluted earnings per share
81,729

 
83,084

 
81,630

 
83,227



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,
 
2016
 
2015
 
2016
 
2015
Net income (1)  
$
66,426

 
$
55,923

 
$
114,148

 
$
95,476

Other comprehensive income:
 
 
 
 
 
 
 
Foreign currency translation adjustments
32

 
4,411

 
12,630

 
(11,269
)
Other comprehensive income (loss)
32

 
4,411

 
12,630

 
(11,269
)
Total comprehensive income
66,458

 
60,334

 
126,778

 
84,207

Comprehensive income attributable to noncontrolling interests (1) 
2,446

 
1,761

 
4,294

 
2,541

Comprehensive income attributable to VCA Inc.
$
64,012

 
$
58,573

 
$
122,484

 
$
81,666

____________________________
(1)  
Includes approximately $2.1 million and $1.6 million of net income related to redeemable and mandatorily redeemable noncontrolling interests for the six months ended June 30, 2016 and 2015 , 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, 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 share-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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
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

Distribution 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


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,
 
2016
 
2015
Cash flows from operating activities:
 
 
 
Net income
$
114,148

 
$
95,476

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
46,978

 
40,163

Amortization of debt issue costs
865

 
870

Provision for uncollectible accounts
2,891

 
3,379

Debt retirement costs
1,600

 

Net loss (gain) on sale or disposal of assets
292

 
(484
)
Share-based compensation
9,104

 
8,269

Excess tax benefits from share-based compensation
(1,421
)
 
(4,729
)
Other
6,665

 
(658
)
Changes in operating assets and liabilities:
 
 
 
Trade accounts receivable
(7,065
)
 
(24,217
)
Inventory, prepaid expenses and other assets
(15,607
)
 
(8,942
)
Accounts payable and other accrued liabilities
5,889

 
(4,196
)
Accrued payroll and related liabilities
2,817

 
8,300

Income taxes
23,557

 
16,525

Net cash provided by operating activities
190,713

 
129,756

Cash flows from investing activities:
 
 
 
Business acquisitions, net of cash acquired
(540,878
)
 
(66,529
)
Property and equipment additions
(58,814
)
 
(34,521
)
Proceeds from sale or disposal of assets
282

 
6,164

Other
(4,924
)
 
205

Net cash used in investing activities
(604,334
)
 
(94,681
)
Cash flows from financing activities:
 
 
 
Repayment of long-term obligations
(1,256,250
)
 
(7,924
)
Proceeds from issuance of long-term obligations
1,255,000

 

Proceeds from revolving credit facility
435,000

 
61,000

Payment of financing costs
(3,829
)
 

Distribution to noncontrolling interests
(2,554
)
 
(2,447
)
Purchase of noncontrolling interests
(3,730
)
 
(1,493
)
Proceeds from issuance of common stock under stock incentive plans
1,122

 
679

Excess tax benefits from share-based compensation
1,421

 
4,729

Stock repurchases
(843
)
 
(96,674
)
Other
(1,233
)
 
(80
)
Net cash provided by (used in) financing activities
424,104

 
(42,210
)
Effect of currency exchange rate changes on cash and cash equivalents
313

 
78

Increase (decrease) in cash and cash equivalents
10,796

 
(7,057
)
Cash and cash equivalents at beginning of period
98,888

 
81,383

Cash and cash equivalents at end of period
$
109,684

 
$
74,326

 
 
 
 
 
 
 
 
 
 
 
 

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,
 
2016
 
2015
Supplemental disclosures of cash flow information:
 
 
 
Interest paid
$
12,272

 
$
8,907

Income taxes paid
$
47,326

 
$
44,253



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, 2016
(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 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, 2016 , we operated or managed 767 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, 2016 , we operated 60 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, 2016 , there were 129 Camp Bow Wow franchise locations operating in 34 states and one Canadian province. 
On December 31, 2015, our company sold substantially all of the assets of Vetstreet Inc. ("Vetstreet") to a subsidiary of Henry Schein, Inc.. Concurrent with the sale of Vetstreet, we purchased a 19.9% interest in the continuing Vetstreet business. Prior to the sale of Vetstreet, its results of operations were included in our "All Other" category.
On May 1, 2016 , we acquired an 80% ownership interest in Companion Animal Practices, North America ("CAPNA"). CAPNA, founded in 2010 , is located in Las Vegas, Nevada and operates a network of 56 free standing animal hospitals in 18 states. 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.

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, 2016 are not necessarily indicative of the results to be expected for the full year ending December 31, 2016 . For further information, refer to our audited consolidated financial statements and notes thereto included in our 2015 Annual Report on Form 10-K.






7


VCA Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
June 30, 2016
(Unaudited)

2.
Basis of Presentation, continued

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, 2016 (in thousands):
 
 
Animal
Hospital
 
Laboratory
 
All Other
 
Total
Balance as of December 31, 2015
 
 
 
 
 
 
 
Goodwill
$
1,402,106

 
$
101,269

 
$
144,332

 
$
1,647,707

Accumulated impairment losses

 

 
(130,057
)
 
(130,057
)
Subtotal
1,402,106

 
101,269

 
14,275

 
1,517,650

Goodwill acquired
434,323

 

 
512

 
434,835

Foreign translation adjustment
9,034

 
32

 

 
9,066

Other (1)
1,826

 

 

 
1,826

Balance as of June 30, 2016
 
 
 
 
 
 
 
Goodwill
1,847,289

 
101,301

 
144,844

 
2,093,434

Accumulated impairment losses

 

 
(130,057
)
 
(130,057
)
Subtotal
$
1,847,289

 
$
101,301

 
$
14,787

 
$
1,963,377

 ____________________________

(1)  
"Other" consists primarily of measurement period adjustments.

Other Intangible Assets
Our acquisition related amortizable intangible assets at June 30, 2016 and December 31, 2015 are as follows (in thousands):
 
As of June 30, 2016
 
As of December 31, 2015
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Non-contractual customer relationships
$
265,385

 
$
(61,093
)
 
$
204,292

 
$
116,082

 
$
(48,821
)
 
$
67,261

Covenants not-to-compete
20,785

 
(6,083
)
 
14,702

 
12,435

 
(4,779
)
 
7,656

Favorable lease assets
9,461

 
(5,644
)
 
3,817

 
9,441

 
(5,440
)
 
4,001

Technology
1,377

 
(697
)
 
680

 
1,377

 
(589
)
 
788

Trademarks
25,866

 
(5,328
)
 
20,538

 
10,551

 
(4,086
)
 
6,465

Franchise rights
11,730

 
(2,151
)
 
9,579

 
11,730

 
(1,564
)
 
10,166

Total
$
334,604

 
$
(80,996
)
 
$
253,608

 
$
161,616

 
$
(65,279
)
 
$
96,337






8


VCA Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
June 30, 2016
(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,
 
2016
 
2015
 
2016
 
2015
Aggregate amortization expense
$
9,798

 
$
5,858

 
$
16,026

 
$
11,384

The estimated amortization expense related to acquisition related intangible assets for the remainder of 2016 and each of the succeeding years thereafter, as of June 30, 2016 , is as follows (in thousands):

Finite-lived intangible assets:
 
Remainder of 2016
$
21,950

2017
39,150

2018
35,719

2019
32,723

2020
27,868

Thereafter
96,198

Total
$
253,608

Indefinite-lived intangible assets:
 
Trademarks
4,040

Total intangible assets
$
257,648

 

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, 2016 and 2015 , respectively:

 
Six Months Ended
June 30,
 
2016
 
2015
Animal Hospitals:
 
 
 
Acquisitions
93

 
23

Acquisitions, merged
(3
)
 
(2
)
Sold, closed or merged
(5
)
 
(7
)
Net increase
85

 
14

 
 
 
 
Laboratories:
 
 
 
Acquisitions

 
1

Acquisitions, merged

 
(1
)
Net increase

 








9


VCA Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
June 30, 2016
(Unaudited)

4.
Acquisitions, continued

Animal Hospital and Laboratory Acquisitions
The purchase price allocations for some of the 2016 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 labs acquired during the six months ended June 30, 2016 and 2015 , respectively, (in thousands):

 
Six Months Ended
June 30,
 
2016
 
2015
Consideration:
 
 
 
  Cash
$
188,329

 
$
66,229

  Cash acquired
(970
)
 

  Cash, net of cash acquired
$
187,359

 
$
66,229

  Assumed debt
2,601

 
6,250

  Holdbacks
4,148

 
2,522

  Earn-outs
4,002

 

      Fair value of total consideration transferred
$
198,110

 
$
75,001

 
 
 
 
Allocation of the Purchase Price:
 
 
 
  Tangible assets
$
21,521

 
$
5,064

  Identifiable intangible assets (1)
24,325

 
24,144

  Goodwill (2)
153,012

 
46,440

  Other liabilities assumed
(437
)
 
(647
)
      Fair value of assets acquired and liabilities assumed
$
198,421

 
$
75,001

Noncontrolling interest
(311
)
 

Total
$
198,110

 
$
75,001

____________________________

(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 is approximately five years, seven years and five years, respectively.

(2)  
We expect that $146.9 million and $35.5 million of the goodwill recorded for these acquisitions, as of June 30, 2016 and 2015 , respectively, will be fully deductible for income tax purposes.

Included in the table above is Antech Diagnostics, Inc.'s March 31, 2015 acquisition of Abaxis Veterinary Reference Laboratory ("AVRL") for total consideration of $21.0 million .







10


VCA Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
June 30, 2016
(Unaudited)

4.
Acquisitions, continued

CAPNA Acquisition
On May 1, 2016 , we acquired an 80% ownership interest in CAPNA for a preliminary purchase price of $351.1 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 preliminary purchase price and the preliminary allocation of the purchase price (in thousands):

Consideration:
 
  Cash
$
353,554

  Cash acquired
(3,405
)
  Cash, net of cash acquired
$
350,149

  Holdbacks
1,000

      Fair value of total consideration transferred
$
351,149

 
 
Allocation of the Purchase Price:
 
  Tangible assets
$
13,548

  Identifiable intangible assets (1)
147,500

  Goodwill (2)
281,311

  Other liabilities assumed
(2,572
)
 Fair value of assets acquired and liabilities assumed
$
439,787

  Noncontrolling interest
(88,638
)
Total
$
351,149

____________________________

(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 nine years. The amortization periods for customer relationships, trademarks and covenants is ten years, five years and five years, respectively.

(2)  
As of June 30, 2016, we expect that $225.0 million of goodwill recorded for this acquisition will be deductible for income tax purposes.

The purchase price allocation for CAPNA is preliminary and is pending the valuation of certain items including, but not limited to, tangible and intangible assets, capital leases, operating leases, deferred income taxes and the noncontrolling interest. The final valuation of the net assets acquired, liabilities assumed and noncontrolling interest is expected to be completed as soon as practicable, but no later than one year from the date of acquisition.

Pro Forma Information
The following pro forma financial information for the three and six months ended June 30, 2016 and 2015 presents (i) the actual results of operations of our 2016 acquisitions and (ii) the combined results of operations for our company and our 2016 acquisitions as if those acquisitions had been completed on April 1, 2015 and January 1, 2015 , the first day of the comparable prior reporting periods, respectively. The pro forma financial information considers principally (i) our company’s financial results, (ii) the historical financial results of our acquisitions, and (iii) select pro forma adjustments to the historical financial results of our acquisitions. Such pro forma adjustments represent principally estimates of (i) the impact of the hypothetical




11


VCA Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
June 30, 2016
(Unaudited)

4. Acquisitions, continued

amortization of acquired intangible assets, (ii) the recognition of fair value adjustments relating to tangible assets, (iii) adjustments reflecting the new capital structure, including additional financing or repayments of debt as part of the acquisitions and (iv) the tax effects of the acquisitions and related adjustments as if those acquisitions had been completed on April 1, 2015 and January 1, 2015 . The pro forma financial information is not necessarily indicative of what our consolidated results of operations would have been had we completed the acquisition at the beginning of the comparable prior reporting periods.

In addition, the pro forma financial information does not attempt to project the future results of operations of our company:  
 
 
Revenue
 
Net Income
(In thousands):
 
 
 
 
Results of acquired businesses included in our three months ended
 
 
 
 
  June 30, 2016 actuals
 
$
57,148

 
$
3,864

2016 supplemental pro forma from April 1, 2016 to June 30, 2016 (1)
 
$
670,796

 
$
64,324

2015 supplemental pro forma from April 1, 2015 to June 30, 2015 (1)
 
$
624,277

 
$
57,579

 
 
 
 
 
Results of acquired businesses included in our six months ended
 
 
 
 
  June 30, 2016 actuals
 
$
68,776

 
$
4,749

2016 supplemental pro forma from January 1, 2016 to June 30, 2016 (2)
 
$
1,293,470

 
$
112,222

2015 supplemental pro forma from January 1, 2015 to June 30, 2015 (2)
 
$
1,205,712

 
$
97,319

____________________________
(1)  
2016 supplemental pro forma net income attributable to VCA was adjusted to exclude $0.2 million of acquisition-related costs incurred during the three months ended June 30, 2016 . 2015 supplemental pro forma net income attributable to VCA was adjusted to include these charges.
(2)  
2016 supplemental pro forma net income attributable to VCA was adjusted to exclude $1.2 million of acquisition-related costs incurred during the six months ended June 30, 2016 . 2015 supplemental pro forma net income attributable to VCA was adjusted to include these charges.



12


VCA Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
June 30, 2016
(Unaudited)

5.
Other Accrued Liabilities
Other accrued liabilities consisted of the following at June 30, 2016 and December 31, 2015 (in thousands):

 
June 30, 2016
 
December 31, 2015
Deferred revenue
$
16,645

 
$
14,647

Holdbacks and earn-outs
13,674

 
9,959

Accrued other insurance
5,950

 
5,013

Deferred rent
5,371

 
4,791

Accrued health insurance
5,014

 
4,952

Miscellaneous accrued taxes (1)
5,001

 
3,317

Accrued workers' compensation
4,019

 
3,212

Accrued accounting and legal fees
3,415

 
2,697

Customer deposits
1,966

 
2,971

Accrued lease payments
1,988

 
1,536

Other
18,864

 
17,733

 
$
81,907

 
$
70,828

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


6.
Long-Term Obligations
New 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, National Association 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.

During the current fiscal year, 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, 2016
(Unaudited)

6.
Long-Term Obligations, continued

Long-term obligations consisted of the following at June 30, 2016 and December 31, 2015 (in thousands):

 
 
 
 
June 30, 2016
 
December 31, 2015
Senior term notes
 
Principal amount
 
$
880,000

 
$
585,000

 
 
Less unamortized debt issuance costs
 
(2,937
)
 
(2,408
)
 
 
Senior term notes less unamortized debt issuance costs, secured by assets, variable interest rate (2.22% and 1.92% at June 30, 2016 and December 31, 2015, respectively) (1)
 
$
877,063

 
$
582,592

Revolving credit
 
Principal amount
 
$
375,000

 
$
232,000

 
 
Less unamortized debt issuance costs
 
(4,549
)
 
(3,725
)
 
 
Revolving line of credit less unamortized debt issuance costs, secured by assets, variable interest rate (2.24% and 1.92% at June 30, 2016 and December 31, 2015, respectively) (1)
 
$
370,451

 
$
228,275

Secured seller note
 
Notes payable matures in 2016, secured by assets and stock of certain subsidiaries, with interest rate of 10.0%
 
230

 
230

 
 
Total debt obligations
 
1,247,744

 
811,097

 
 
Capital lease obligations and other debt
 
57,689

 
55,244

 
 
 
 
1,305,433

 
866,341

 
 
Less — current portion
 
(25,980
)
 
(33,623
)
 
 
 
 
$
1,279,453

 
$
832,718

____________________________
(1)
Notes payable and the revolving line of credit at June 30, 2016 mature in 2021 under the New Senior Credit Facility. Notes payable and the revolving line of credit at December 31, 2015 were due to mature in 2019 under the previous senior credit facility dated August 27, 2014.

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 0.75% (Pricing Tier 2, see table below) per annum; or

the Eurodollar rate (as defined below), plus a margin of 1.75% (Pricing Tier 2, 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 September 30, 2016 , 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, 2016
(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 of $5.5 million are due each calendar quarter from September 30, 2016 to and including June 30, 2017 , $11.0 million are due each calendar quarter from September 30, 2017 to and including June 30, 2019 , $16.5 million are due each calendar quarter from September 30, 2019 to and including June 30, 2020 and $22.0 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 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, 2016 , we had borrowings of $375.0 million under our revolving credit facility.

The following table sets forth the scheduled principal payments for our senior credit facility (in thousands):
 
 
2016
 
2017
 
2018
 
2019
 
2020
 
Thereafter
Senior term notes
 
$
11,000

 
$
33,000

 
$
44,000

 
$
55,000

 
$
77,000

 
$
660,000

Revolving loans
 

 

 

 

 

 
375,000

 
 
$
11,000

 
$
33,000

 
$
44,000

 
$
55,000

 
$
77,000

 
$
1,035,000


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, 2016 , we had a interest coverage ratio of 19.09 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 2.68 to 1.00, which was in compliance with the required ratio of no more than 4.00 to 1.00.


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-





15


VCA Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
June 30, 2016
(Unaudited)


7.    Calculation of Earnings per Share, continued
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,
 
2016
 
2015
 
2016
 
2015
Net income attributable to VCA Inc.
$
64,050

 
$
54,299

 
$
110,277

 
$
92,600

Weighted-average common shares outstanding:
 
 
 
 
 
 
 
Basic
80,835

 
81,956

 
80,806

 
82,150

Effect of dilutive potential common shares:
 
 
 
 
 
 
 
Stock options
295

 
334

 
294

 
337

Non-vested shares and units
599

 
794

 
530

 
740

Diluted
81,729

 
83,084

 
81,630

 
83,227

Basic earnings per common share
$
0.79

 
$
0.66

 
$
1.36

 
$
1.13

Diluted earnings per common share
$
0.78

 
$
0.65

 
$
1.35

 
$
1.11

For the three months ended June 30, 2016 , there were 21,122 potential shares excluded from the computation of diluted earnings per share because their inclusion would have had an antidilutive effect. There were no potential common shares excluded from the computation of diluted earnings per share for the three months ended June 30, 2015 .
For the six months ended June 30, 2016 and 2015, potential common shares of 24,047 and 38,120 , respectively, were excluded from the computation of diluted earnings per share because their inclusion would have had an antidilutive effect.





16


VCA Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
June 30, 2016
(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, 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 2015 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.






































17


VCA Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
June 30, 2016
(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, 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

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















18


VCA Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
June 30, 2016
(Unaudited)

8.
Lines of Business, continued

 
Animal
Hospital
 
Laboratory
 
All Other
 
Corporate
 

Eliminations
 
Total
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
)
 
(458
)
 
202,410

Net loss (gain) on sale or disposal of assets
443

 
(35
)
 
3

 
(119
)
 

 
292

Operating income (loss)
$
141,291

 
$
97,300

 
$
4,503

 
$
(40,518
)
 
$
(458
)
 
$
202,118

Depreciation and amortization
$
39,448

 
$
5,620

 
$
1,787

 
$
1,306

 
$
(1,183
)
 
$
46,978

Property and equipment additions
$
44,030

 
$
9,402

 
$
2,092

 
$
5,187

 
$
(1,897
)
 
$
58,814

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 sale or disposal of assets
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