VCA Inc.
VCA INC (Form: 10-Q, Received: 11/07/2016 14:06:45)
 
 
 
 
 
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, 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, 81,138,143 shares as of November 1, 2016 .
 
 
 
 
 



VCA Inc. and Subsidiaries
Form 10-Q
September 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)
 
September 30, 2016
 
December 31, 2015
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
72,914

 
$
98,888

Trade accounts receivable, less allowance for uncollectible accounts of $22,569 and $21,775 at September 30, 2016 and December 31, 2015, respectively
82,166

 
76,634

Inventory
60,811

 
51,523

Prepaid expenses and other
33,905

 
30,521

Prepaid income taxes

 
24,598

Total current assets
249,796

 
282,164

Property and equipment, net
582,840

 
507,753

Goodwill
2,063,494

 
1,517,650

Other intangible assets, net
209,095

 
97,377

Notes receivable
2,142

 
2,194

Other
101,695

 
93,994

Total assets
$
3,209,062

 
$
2,501,132

Liabilities and Equity
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
32,512

 
$
33,623

Accounts payable
54,150

 
52,337

Accrued payroll and related liabilities
70,213

 
75,519

Income tax payable
8,359

 

Other accrued liabilities
85,607

 
70,828

Total current liabilities
250,841

 
232,307

Long-term debt, net
1,246,122

 
832,718

Deferred income taxes, net
127,104

 
131,478

Other liabilities
39,509

 
36,084

Total liabilities
1,663,576

 
1,232,587

Commitments and contingencies

 

Redeemable noncontrolling interests
12,079

 
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, 81,075 and 80,764 shares outstanding as of September 30, 2016 and December 31, 2015, respectively
81

 
81

Additional paid-in capital
32,958

 
19,708

Retained earnings
1,443,715

 
1,275,207

Accumulated other comprehensive loss
(41,028
)
 
(50,034
)
Total VCA Inc. stockholders’ equity
1,435,726

 
1,244,962

Noncontrolling interests
97,681

 
12,072

Total equity
1,533,407

 
1,257,034

Total liabilities and equity
$
3,209,062

 
$
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
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Revenue
$
656,854

 
$
551,717

 
$
1,873,782

 
$
1,599,955

Direct costs
500,277

 
414,051

 
1,416,477

 
1,207,580

Gross profit
156,577

 
137,666

 
457,305

 
392,375

Selling, general and administrative expense
49,343

 
44,860

 
147,661

 
133,743

Business interruption insurance gain

 
(4,523
)
 

 
(4,523
)
Net loss (gain) on sale or disposal of assets
236

 
250

 
528

 
(234
)
Operating income
106,998

 
97,079

 
309,116

 
263,389

Interest expense, net
9,300

 
5,455

 
24,262

 
15,396

Debt retirement costs

 

 
1,600

 

Other (income) expense
(121
)
 
59

 
(985
)
 
88

Income before provision for income taxes
97,819

 
91,565

 
284,239

 
247,905

Provision for income taxes
37,040

 
35,097

 
109,312

 
95,961

Net income
60,779

 
56,468

 
174,927

 
151,944

Net income attributable to noncontrolling interests
2,548

 
1,614

 
6,419

 
4,490

Net income attributable to VCA Inc.
$
58,231

 
$
54,854

 
$
168,508

 
$
147,454

Basic earnings per share
$
0.72

 
$
0.68

 
$
2.08

 
$
1.80

Diluted earnings per share
$
0.71

 
$
0.67

 
$
2.06

 
$
1.78

Weighted-average shares outstanding for basic earnings per share
80,924

 
80,815

 
80,845

 
81,700

Weighted-average shares outstanding for diluted earnings per share
81,812

 
81,795

 
81,695

 
82,744



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,
 
2016
 
2015
 
2016
 
2015
Net income (1)  
$
60,779

 
$
56,468

 
$
174,927

 
$
151,944

Other comprehensive income:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(3,389
)
 
(14,005
)
 
9,241

 
(25,274
)
Other comprehensive (loss) income
(3,389
)
 
(14,005
)
 
9,241

 
(25,274
)
Total comprehensive income
57,390

 
42,463

 
184,168

 
126,670

Comprehensive income attributable to noncontrolling interests (1) 
2,360

 
1,187

 
6,654

 
3,728

Comprehensive income attributable to VCA Inc.
$
55,030

 
$
41,276

 
$
177,514

 
$
122,942

____________________________
(1)  
Includes approximately $3.1 million and $2.5 million of net income related to redeemable and mandatorily redeemable noncontrolling interests for the nine months ended September 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 $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

Distributions 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 share-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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances, December 31, 2015
80,764

 
$
81

 
$
19,708

 
$
1,275,207

 
$
(50,034
)
 
$
12,072

 
$
1,257,034

Net income (excludes $1,852 and $1,220 related to redeemable and mandatorily redeemable noncontrolling interests, respectively)

 

 

 
168,508

 

 
3,347

 
171,855

Other comprehensive income (excludes $117 related to mandatorily redeemable noncontrolling interests)

 

 

 

 
9,006

 
118

 
9,124

Formation of noncontrolling interests

 

 

 

 

 
86,951

 
86,951

Distributions to noncontrolling interests

 

 

 

 

 
(2,667
)
 
(2,667
)
Purchase of noncontrolling interests

 

 
(2,075
)
 

 

 
(2,066
)
 
(4,141
)
Share-based compensation

 

 
13,669

 

 

 

 
13,669

Issuance of common stock under stock incentive plans
458

 

 
3,949

 

 

 

 
3,949

Stock repurchases
(147
)
 

 
(9,887
)
 

 

 

 
(9,887
)
Excess tax benefit from share-based compensation

 

 
7,588

 

 

 

 
7,588

Other

 

 
6

 

 

 
(74
)
 
(68
)
Balances, September 30, 2016
81,075

 
$
81

 
$
32,958

 
$
1,443,715

 
$
(41,028
)
 
$
97,681

 
$
1,533,407


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,
 
2016
 
2015
Cash flows from operating activities:
 
 
 
Net income
$
174,927

 
$
151,944

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
74,072

 
60,634

Amortization of debt issue costs
1,247

 
1,306

Provision for uncollectible accounts
4,949

 
6,723

Debt retirement costs
1,600

 

Net loss (gain) on sale or disposal of assets
528

 
(234
)
Share-based compensation
13,669

 
12,086

Excess tax benefits from share-based compensation
(7,588
)
 
(8,008
)
Other
7,668

 
(431
)
Changes in operating assets and liabilities:
 
 
 
Trade accounts receivable
(8,033
)
 
(20,568
)
Inventory, prepaid expenses and other assets
(11,684
)
 
(931
)
Accounts payable and other accrued liabilities
11,142

 
(2,451
)
Accrued payroll and related liabilities
(7,783
)
 
18,892

Income taxes
36,168

 
28,054

Net cash provided by operating activities
290,882

 
247,016

Cash flows from investing activities:
 
 
 
Business acquisitions, net of cash acquired
(599,655
)
 
(119,336
)
Property and equipment additions
(90,546
)
 
(61,470
)
Proceeds from sale or disposal of assets
1,699

 
6,469

Other
(7,634
)
 
(434
)
Net cash used in investing activities
(696,136
)
 
(174,771
)
Cash flows from financing activities:
 
 
 
Repayment of long-term obligations
(1,263,394
)
 
(20,174
)
Proceeds from issuance of long-term obligations
1,255,000

 

Proceeds from revolving credit facility
465,000

 
97,000

Repayment of revolving credit facility
(65,000
)
 

Payment of financing costs
(3,817
)
 

Distributions to noncontrolling interests
(4,752
)
 
(3,810
)
Purchase of noncontrolling interests
(4,239
)
 
(1,493
)
Proceeds from issuance of common stock under stock incentive plans
3,949

 
1,571

Excess tax benefits from share-based compensation
7,588

 
8,008

Stock repurchases
(9,887
)
 
(161,117
)
Other
(1,310
)
 
2,210

Net cash provided by (used in) financing activities
379,138

 
(77,805
)
Effect of currency exchange rate changes on cash and cash equivalents
142

 
(831
)
Decrease in cash and cash equivalents
(25,974
)
 
(6,391
)
Cash and cash equivalents at beginning of period
98,888

 
81,383

Cash and cash equivalents at end of period
$
72,914

 
$
74,992

 
 
 
 

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,
 
2016
 
2015
Supplemental disclosures of cash flow information:
 
 
 
Interest paid
$
17,847

 
$
13,674

Income taxes paid
$
68,748

 
$
67,814



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, 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 10 , 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, 2016 , we operated or managed 776 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 September 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 September 30, 2016 , there were 128 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 , and at the time of acquisition, operated 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 nine months ended September 30, 2016 are not necessarily indicative of the results to be expected for the full year ending December 31, 2016 . The year end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. For further information, refer to our audited consolidated financial statements and notes thereto included in our 2015 Annual Report on Form 10-K.





7


VCA Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
September 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 nine months ended September 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
536,060

 

 
941

 
537,001

Foreign translation adjustment
6,657

 
24

 

 
6,681

Other (1)
2,162

 

 

 
2,162

Balance as of September 30, 2016
 
 
 
 
 
 
 
Goodwill
1,946,985

 
101,293

 
145,273

 
2,193,551

Accumulated impairment losses

 

 
(130,057
)
 
(130,057
)
Subtotal
$
1,946,985

 
$
101,293

 
$
15,216

 
$
2,063,494

 ____________________________

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

Other Intangible Assets
Our acquisition related amortizable intangible assets at September 30, 2016 and December 31, 2015 are as follows (in thousands):
 
As of September 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
$
214,050

 
$
(61,153
)
 
$
152,897

 
$
116,082

 
$
(48,821
)
 
$
67,261

Covenants not-to-compete
22,613

 
(6,997
)
 
15,616

 
12,435

 
(4,779
)
 
7,656

Favorable lease assets
9,457

 
(5,751
)
 
3,706

 
9,441

 
(5,440
)
 
4,001

Technology
1,377

 
(748
)
 
629

 
1,377

 
(589
)
 
788

Trademarks
29,525

 
(6,604
)
 
22,921

 
10,551

 
(4,086
)
 
6,465

Franchise rights
11,730

 
(2,444
)
 
9,286

 
11,730

 
(1,564
)
 
10,166

Total
$
288,752

 
$
(83,697
)
 
$
205,055

 
$
161,616

 
$
(65,279
)
 
$
96,337






8


VCA Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
September 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
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Aggregate amortization expense
$
10,682

 
$
5,811

 
$
26,709

 
$
17,195

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

Finite-lived intangible assets:
 
Remainder of 2016
$
11,109

2017
40,011

2018
36,554

2019
33,544

2020
28,711

Thereafter
55,126

Total
$
205,055

Indefinite-lived intangible assets:
 
Trademarks
4,040

Total intangible assets
$
209,095

 

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, 2016 and 2015 , respectively:

 
Nine Months Ended
September 30,
 
2016
 
2015
Animal Hospitals:
 
 
 
Acquisitions
105

 
42

Acquisitions, merged
(3
)
 
(4
)
Sold, closed or merged
(8
)
 
(7
)
Net increase
94

 
31

 
 
 
 
Laboratories:
 
 
 
Acquisitions

 
1

Acquisitions, merged

 
(1
)
Net increase

 








9


VCA Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
September 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 nine months ended September 30, 2016 and 2015 , respectively, (in thousands):

 
Nine Months Ended
September 30,
 
2016
 
2015
Consideration:
 
 
 
  Cash
$
247,733

 
$
116,428

  Cash acquired
(876
)
 
(67
)
  Cash, net of cash acquired
$
246,857

 
$
116,361

  Assumed debt
2,860

 
12,402

  Holdbacks
6,972

 
4,497

  Earn-outs
4,155

 
476

      Fair value of total consideration transferred
$
260,844

 
$
133,736

 
 
 
 
Allocation of the Purchase Price:
 
 
 
  Tangible assets
$
24,761

 
$
10,060

  Identifiable intangible assets (1)
32,016

 
34,130

  Goodwill (2)
205,394

 
93,645

  Other liabilities assumed
(376
)
 
(1,424
)
      Fair value of assets acquired and liabilities assumed
$
261,795

 
$
136,411

Noncontrolling interest
(951
)
 
(2,675
)
Total
$
260,844

 
$
133,736

____________________________

(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, six years and five years, respectively.

(2)  
We expect that $199.1 million and $73.5 million of the goodwill recorded for these acquisitions, as of September 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)
September 30, 2016
(Unaudited)

4.
Acquisitions, continued

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

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

Consideration:
 
  Cash
$
352,829

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

  Holdbacks
1,000

      Fair value of total consideration transferred
$
350,424

 
 
Allocation of the Purchase Price:
 
  Tangible assets
$
21,118

  Identifiable intangible assets (1)
102,300

  Goodwill (2)
330,668

  Other liabilities assumed
(17,662
)
 Fair value of assets acquired and liabilities assumed
$
436,424

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

____________________________

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

(2)  
As of September 30, 2016, we expect that $265.8 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, 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. During the three months ended September 30, 2016, significant measurement period adjustments included the finalization of the valuation of intangible assets, the recording of the preliminary deferred income tax adjustment, as well as the true-up of the noncontrolling interest.

Pro Forma Information
The following pro forma financial information for the three and nine months ended September 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 July 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





11


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

4. Acquisitions, continued

financial results of our acquisitions. Such pro forma adjustments represent principally estimates of (i) the impact of the hypothetical 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 July 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
 
 
 
 
  September 30, 2016 actuals
 
$
64,517

 
$
4,661

2016 supplemental pro forma from July 1, 2016 to September 30, 2016 (1)
 
$
662,840

 
$
58,922

2015 supplemental pro forma from July 1, 2015 to September 30, 2015 (1)
 
$
623,568

 
$
59,070

 
 
 
 
 
Results of acquired businesses included in our nine months ended
 
 
 
 
  September 30, 2016 actuals
 
$
128,710

 
$
9,523

2016 supplemental pro forma from January 1, 2016 to September 30, 2016 (2)
 
$
1,947,799

 
$
172,866

2015 supplemental pro forma from January 1, 2015 to September 30, 2015 (2)
 
$
1,844,007

 
$
154,880

____________________________
(1)  
2016 supplemental pro forma net income attributable to VCA was adjusted to exclude $0.1 million of acquisition-related costs incurred during the three months ended September 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 $1.3 million of acquisition-related costs incurred during the nine months ended September 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)
September 30, 2016
(Unaudited)

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

 
September 30, 2016
 
December 31, 2015
Deferred revenue
$
18,647

 
$
14,647

Holdbacks and earn-outs
14,042

 
9,959

Accrued workers' compensation
7,329

 
3,212

Accrued other insurance
5,988

 
5,013

Accrued health insurance
5,702

 
4,952

Deferred rent
5,469

 
4,791

Miscellaneous accrued taxes (1)
4,867

 
3,317

Accrued accounting and legal fees
3,143

 
2,697

Customer deposits
2,393

 
2,971

Accrued lease payments
2,111

 
1,536

Other
15,916

 
17,733

 
$
85,607

 
$
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, N.A. as co-syndication agents (the "New Senior Credit Facility"). The New Senior Credit Facility replaced our previous senior credit facility which provided for $600 million of term notes and an $800 million revolving credit facility. The New Senior Credit Facility provides for $880 million of senior secured term notes and an $800 million senior secured revolving facility, which may be used to borrow, on a same-day notice under a swing line, the lesser of $25 million and the aggregate unused amount of the revolving credit facility then in effect. In addition to refinancing all outstanding amounts under our previous senior credit facility, borrowings under our New Senior Credit Facility may be used for general corporate purchases, including permitted share repurchases. At June 30, 2016 , we had $375 million in outstanding borrowings under the new senior secured revolving facility, which funds were used together with the proceeds from the $880 million of new senior secured term notes to refinance amounts outstanding under our previous senior credit facility.

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

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)
September 30, 2016
(Unaudited)

6.
Long-Term Obligations, continued

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

 
 
 
 
September 30, 2016
 
December 31, 2015
Senior term notes
 
Principal amount
 
$
874,500

 
$
585,000

 
 
Less unamortized debt issuance costs
 
(2,781
)
 
(2,408
)
 
 
Senior term notes less unamortized debt issuance costs, secured by assets, variable interest rate (2.27% and 1.92% at September 30, 2016 and December 31, 2015, respectively) (1)
 
$
871,719

 
$
582,592

Revolving credit
 
Principal amount
 
$
340,000

 
$
232,000

 
 
Less unamortized debt issuance costs
 
(4,321
)
 
(3,725
)
 
 
Revolving line of credit less unamortized debt issuance costs, secured by assets, variable interest rate (2.31% and 1.92% at September 30, 2016 and December 31, 2015, respectively) (1)
 
$
335,679

 
$
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
 
1,207,628

 
811,097

 
 
Capital lease obligations and other debt
 
71,006

 
55,244

 
 
 
 
1,278,634

 
866,341

 
 
Less — current portion
 
(32,512
)
 
(33,623
)
 
 
 
 
$
1,246,122

 
$
832,718

____________________________
(1)
Notes payable and the revolving line of credit at September 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)
September 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 September 30, 2016 , we had borrowings of $340.0 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
 
$
5,500

 
$
33,000

 
$
44,000

 
$
55,000

 
$
77,000

 
$
660,000

Revolving loans
 

 

 

 

 

 
340,000

 
 
$
5,500

 
$
33,000

 
$
44,000

 
$
55,000

 
$
77,000

 
$
1,000,000


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 September 30, 2016 , we had a interest coverage ratio of 16.88 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 2.58 to 1.00, which was in compliance with the required ratio of no more than 4.00 to 1.00.

7.
Fair Value

Current fair value accounting guidance includes a hierarchy that is intended to increase consistency and comparability in fair value measurements and related disclosures. The fair value hierarchy is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity’s pricing based upon their own market assumptions. The current guidance establishes a three-tiered fair value hierarchy which prioritizes the inputs used in measuring fair value as follows:



15


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

7.
Fair Value, continued

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

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

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

Non-Recurring Financial Measurements

Non-financial assets such as property, plant and equipment, land, goodwill and intangible assets are subject to non-recurring fair value measurements if they are deemed to be impaired. The impairment models used for nonfinancial assets depend on the type of asset and are accounted for in accordance with FASB’s guidance on fair value measurement. During the quarter ended September 30, 2016 , there were no changes to our non-recurring fair value measurements.

Fair Value of Financial Instruments

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

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

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

Long-Term Debt.     The fair value of debt at September 30, 2016 and December 31, 2015 is based upon the ask price quoted from an external source, which is considered a Level 2 input.

The following table reflects the carrying value and fair value of our variable-rate long-term debt (in thousands):
 
 
As of September 30,
 
As of December 31,
 
 
2016
 
2015
 
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
Variable-rate long-term debt
 
$
1,214,500

 
$
1,214,500

 
$
817,000

 
$
817,000



8.
Share-Based Compensation

Stock Option Activity
There were no stock options granted during the nine months ended September 30, 2016 . The aggregate intrinsic value of our stock options exercised during the three and nine months ended September 30, 2016 was $8.0 million and $11.2 million , respectively, and the actual tax benefit realized on options exercised during these periods was $3.1 million and $4.4 million , respectively.



16


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


8.
Share-Based Compensation, continued
As of September 30, 2016 we have fully recognized compensation cost for our outstanding options.
The compensation cost charged against income, for stock options for the three months ended September 30, 2016 and 2015 , was $100,000 and $376,000 , respectively. The corresponding income tax benefit recognized was $39,000 and $147,000 , for the three months ended September 30, 2016 and 2015 , respectively.
The compensation cost charged against income, for stock options for the nine months ended September 30, 2016 and 2015 , was $415,000 and $1.1 million , respectively. The corresponding income tax benefit recognized was $162,000 and $436,000 , for the nine months ended September 30, 2016 and 2015 , respectively.
Nonvested Stock Activity
During the nine months ended September 30, 2016 , we granted 122,733 shares of nonvested common stock to our directors and our non-executive employees. In April 2016 we granted 4,992 of these shares to our directors. Assuming continued service through each vesting date, the awards granted to our directors will vest in three equal annual installments beginning April 2017 to April 2019. In September 2016, we granted 117,741 shares to our non-executive employees. Assuming continued service through each vesting date, the awards granted to our non-executive employees will vest in four equal annual installments beginning September 2017 to September 2020.
Total compensation cost charged against income related to nonvested stock awards was $1.5 million and $1.2 million , for three months ended September 30, 2016 and 2015 , respectively. The corresponding income tax benefit recognized in the income statement was $577,000 and $454,000 , for the three months ended September 30, 2016 and 2015 , respectively.
Total compensation cost charged against income related to nonvested stock awards was $4.6 million and $4.2 million , for the nine months ended September 30, 2016 and 2015 , respectively. The corresponding income tax benefit recognized in the income statement was $1.8 million and $1.6 million , for the nine months ended September 30, 2016 and 2015 , respectively.
At September 30, 2016 , there was $19.2 million of unrecognized compensation cost related to these nonvested shares, which will be recognized over a weighted-average period of 3.1 years. A summary of our nonvested stock activity for the nine months ended September 30, 2016 is as follows (in thousands, except per share amounts):  

 
Shares    
 
Grant Date
Weighted-
Average Fair
Value
Per Share
Outstanding at December 31, 2015
417

 
$
38.28

Granted
123

 
$
68.49

Vested
(18
)
 
$
27.58

Forfeited/Canceled
(5
)
 
$
39.05

Outstanding at September 30, 2016
517

 
$
45.83

 
Restricted Stock Unit Activity
During the nine months ended September 30, 2016 , we granted 228,202 performance based restricted stock units ("RSUs") to our executive and non executive officers representing the right to receive one share of common stock. These RSUs will be earned upon the achievement of applicable performance criteria during the performance periods, from fiscal period 2016 to 2019, as set forth in the 2016 equity performance award agreements. Assuming achievement of the required performance conditions and continued service through each vesting date, these awards will further vest in four equal annual installments on the later to occur of the certification of the applicable results or the annual anniversary of the grant date.




17


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


8.
Share-Based Compensation, continued
Total compensation cost charged against income related to RSU awards was $3.0 million and $2.3 million for the three months ended September 30, 2016 and 2015 , respectively. The corresponding income tax benefit recognized in the income statement was $1.2 million and $892,000 , for the three months ended September 30, 2016 and 2015 , respectively.
Total compensation cost charged against income related to RSU awards was $8.6 million and $6.8 million for the nine months ended September 30, 2016 and 2015 , respectively. The corresponding income tax benefit recognized in the income statement was $3.4 million and $2.7 million , for the nine months ended September 30, 2016 and 2015 , respectively.
At September 30, 2016 , there was $20.2 million of unrecognized compensation cost related to these RSUs, which will be recognized over a weighted-average period of 3.5 years. A summary of our restricted stock unit activity for the nine months ended September 30, 2016 is as follows (in thousands, except per share amounts):  
 
Shares    
 
Grant Date
Weighted-
Average Fair
Value
Per Share
Outstanding at December 31, 2015
747

 
$
37.91

Granted
228

 
$
56.01

Paid Out
(216
)
 
$
25.81

Forfeited/Canceled
(1
)
 
$
21.04

Outstanding at September 30, 2016
758

 
$
46.82



9.
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,
 
2016
 
2015
 
2016
 
2015
Net income attributable to VCA Inc.
$
58,231

 
$
54,854

 
$
168,508

 
$
147,454

Weighted-average common shares outstanding:
 
 
 
 
 
 
 
Basic
80,924

 
80,815

 
80,845

 
81,700

Effect of dilutive potential common shares:
 
 
 
 
 
 
 
Stock options
270

 
338

 
287

 
338

Non-vested shares and units
618

 
642

 
563

 
706

Diluted
81,812

 
81,795

 
81,695

 
82,744

Basic earnings per common share
$
0.72

 
$
0.68

 
$
2.08

 
$
1.80

Diluted earnings per common share
$
0.71

 
$
0.67

 
$
2.06

 
$
1.78







18


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


9.
Calculation of Earnings per Share, continued
For the three months ended September 30, 2016 , there were 10,256 potential common 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 September 30, 2015 .
For the nine months ended September 30, 2016 , there were 18,739 potential common shares 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, 2015 , there were 24,735 potential common shares excluded from the computation of diluted earnings per share because their inclusion would have had an antidilutive effect.
 



19


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


10.
Lines of Business

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






































20


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

10.
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, 2016
 
 
 
 
 
 
 
 
 
 
 
External revenue
$
553,378

 
$
84,970

 
$
17,450

 
$

 
$
1,056

 
$
656,854

Intercompany revenue

 
20,170

 
5,537

 

 
(25,707
)
 

Total revenue
553,378

 
105,140

 
22,987

 

 
(24,651
)
 
656,854

Direct costs
459,242

 
50,934

 
14,066

 

 
(23,965
)
 
500,277

Gross profit
94,136

 
54,206

 
8,921

 

 
(686
)
 
156,577

Selling, general and administrative expense
15,541

 
9,728

 
6,064

 
18,010

 

 
49,343

Operating income (loss) before sale or disposal of assets
78,595

 
44,478

 
2,857

 
(18,010
)
 
(686
)
 
107,234

Net loss (gain) on sale or disposal of assets
304

 
1

 
1

 
(70
)
 

 
236

Operating income (loss)
$
78,291

 
$
44,477

 
$
2,856

 
$
(17,940
)
 
$
(686
)
 
$
106,998

Depreciation and amortization
$
23,363

 
$
2,826

 
$
848

 
$
679

 
$
(622
)
 
$
27,094

Property and equipment additions
$
24,917

 
$
4,953

 
$
383

 
$
2,794

 
$
(1,315
)
 
$
31,732

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 charges
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













21


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


10.
Lines of Business, continued

 
Animal
Hospital
 
Laboratory
 
All Other
 
Corporate
 

Eliminations
 
Total
Nine Months Ended
September 30, 2016
 
 
 
 
 
 
 
 
 
 
 
External revenue
$
1,552,377

 
$
267,475

 
$
50,560

 
$

 
$
3,370

 
$
1,873,782

Intercompany revenue

 
56,452

 
15,237

 

 
(71,689
)
 

Total revenue
1,552,377

 
323,927

 
65,797

 

 
(68,319
)