VCA Inc.
VCA ANTECH INC (Form: 10-Q, Received: 05/09/2014 06:01:04)

 
 
 
 
 
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 March 31, 2014
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-16783
___________________________________________________ 
VCA Antech, 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, 88,302,956 shares as of May 5, 2014 .
 
 
 
 
 



VCA Antech, Inc. and Subsidiaries
Form 10-Q
March 31, 2014
Table of Contents
 
Page
Number
 
 
 
 
 
 
 
 
 
 
 
 
Condensed, Consolidated Statements of Income for the Three Months Ended March 31, 2014 and 2013
 
 
 
 
Condensed, Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2014 and 2013
 
 
 
 
Condensed, Consolidated Statements of Equity for the Three Months Ended March 31, 2014 and 2013
 
 
 
 
Condensed, Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2014 and 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



PART I.
FINANCIAL INFORMATION

ITEM 1.
FINANCIAL STATEMENTS

VCA Antech, Inc. and Subsidiaries
Condensed, Consolidated Balance Sheets
(Unaudited)
(In thousands, except par value)
 
March 31, 2014
 
December 31, 2013
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
137,288

 
$
125,029

Trade accounts receivable, less allowance for uncollectible accounts of $17,359 and $17,702 at March 31, 2014 and December 31, 2013, respectively
64,520

 
59,900

Inventory
54,227

 
55,067

Prepaid expenses and other
23,713

 
25,417

Deferred income taxes
29,075

 
28,907

Prepaid income taxes
454

 
15,434

Total current assets
309,277

 
309,754

Property and equipment, net
449,434

 
448,366

Goodwill
1,340,054

 
1,330,917

Other intangible assets, net
85,128

 
86,671

Notes receivable, net
3,225

 
3,454

Deferred financing costs, net
2,683

 
2,987

Other
60,130

 
55,632

Total assets
$
2,249,931

 
$
2,237,781

Liabilities and Equity
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
50,839

 
$
51,087

Accounts payable
36,240

 
36,962

Accrued payroll and related liabilities
63,535

 
57,337

Other accrued liabilities
54,830

 
58,762

Total current liabilities
205,444

 
204,148

Long-term debt, less current portion
555,592

 
568,558

Deferred income taxes
100,033

 
100,099

Other liabilities
35,953

 
36,758

Total liabilities
897,022

 
909,563

Commitments and contingencies

 

Redeemable noncontrolling interests
11,052

 
10,678

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

 

VCA Antech, Inc. stockholders’ equity:
 
 
 
Common stock, par value $0.001, 175,000 shares authorized, 88,288 and 88,508 shares outstanding as of March 31, 2014 and December 31, 2013, respectively
88

 
89

Additional paid-in capital
380,267

 
384,721

Retained earnings
962,763

 
928,720

Accumulated other comprehensive loss
(11,283
)
 
(6,190
)
Total VCA Antech, Inc. stockholders’ equity
1,331,835

 
1,307,340

Noncontrolling interests
10,022

 
10,200

Total equity
1,341,857

 
1,317,540

Total liabilities and equity
$
2,249,931

 
$
2,237,781



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

1


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



 
Three Months Ended
March 31,
 
2014
 
2013
Revenue
$
449,507

 
$
438,606

Direct costs
348,056

 
341,683

Gross profit
101,451

 
96,923

Selling, general and administrative expense
41,440

 
39,846

Net (gain) loss on sale or disposal of assets
(1,221
)
 
1,726

Operating income
61,232

 
55,351

Interest expense, net
4,167

 
4,307

Other income
(53
)
 
(9
)
Income before provision for income taxes
57,118

 
51,053

Provision for income taxes
22,203

 
19,230

Net income
34,915

 
31,823

Net income attributable to noncontrolling interests
872

 
1,338

Net income attributable to VCA Antech, Inc.
$
34,043

 
$
30,485

Basic earnings per share
$
0.39

 
$
0.34

Diluted earnings per share
$
0.38

 
$
0.34

Weighted-average shares outstanding for basic earnings per share
88,338

 
88,400

Weighted-average shares outstanding for diluted earnings per share
89,421

 
89,379



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

2


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

 
 
Three Months Ended
March 31,
 
2014
 
2013
Net income (1)  
$
34,915

 
$
31,823

Other comprehensive income:
 
 
 
Foreign currency translation adjustments
(5,521
)
 
(2,744
)
Other comprehensive loss
(5,521
)
 
(2,744
)
Total comprehensive income
29,394

 
29,079

Comprehensive income attributable to noncontrolling interests (1) 
444

 
1,338

Comprehensive income attributable to VCA Antech, Inc.
$
28,950

 
$
27,741

 ____________________________
(1)  
Includes approximately $0.5 million and $0.7 million of net income related to redeemable and mandatorily redeemable noncontrolling interests for the three months ended March 31, 2014 and 2013 , respectively.



































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

3


VCA Antech, 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, 2012
88,372

 
$
88

 
$
390,359

 
$
791,209

 
$
1,847

 
$
10,890

 
$
1,194,393

Net income (excludes $238 and $473 related to redeemable and mandatorily redeemable noncontrolling interests, respectively).

 

 

 
30,485

 

 
627

 
31,112

Other comprehensive loss

 

 

 

 
(2,744
)
 

 
(2,744
)
Distribution to noncontrolling interests

 

 

 

 

 
(452
)
 
(452
)
Purchase of noncontrolling interests

 

 
(470
)
 

 

 
(4,082
)
 
(4,552
)
Share-based compensation

 

 
3,770

 

 

 

 
3,770

Issuance of common stock under stock incentive plans
128

 

 
1,876

 

 

 

 
1,876

Stock repurchases
(6
)
 

 
(59
)
 

 

 

 
(59
)
Excess tax benefit from stock options

 

 
62

 

 

 

 
62

Tax benefit and other from stock options and awards

 

 
26

 

 

 

 
26

Balances, March 31, 2013
88,494

 
$
88

 
$
395,564

 
$
821,694

 
$
(897
)
 
$
6,983

 
$
1,223,432

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances, December 31, 2013
88,508

 
$
89

 
$
384,721

 
$
928,720

 
$
(6,190
)
 
$
10,200

 
$
1,317,540

Net income (excludes $151 and $368 related to redeemable and mandatorily redeemable noncontrolling interests, respectively).

 

 

 
34,043

 

 
353

 
34,396

Other comprehensive loss (excludes $318 related to mandatorily redeemable noncontrolling interests).

 

 

 

 
(5,093
)
 
(110
)
 
(5,203
)
Dissolution of noncontrolling interests

 

 

 

 

 
81

 
81

Distribution to noncontrolling interests

 

 

 

 

 
(502
)
 
(502
)
Purchase of noncontrolling interests

 

 
30

 

 

 

 
30

Share-based compensation

 

 
4,544

 

 

 

 
4,544

Issuance of common stock under stock incentive plans
87

 

 
372

 

 

 

 
372

Stock repurchases
(307
)
 
(1
)
 
(9,792
)
 

 

 

 
(9,793
)
Excess tax benefit from stock options

 

 
392

 

 

 

 
392

Balances, March 31, 2014
88,288

 
$
88

 
$
380,267

 
$
962,763

 
$
(11,283
)
 
$
10,022

 
$
1,341,857



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

4


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

 
Three Months Ended
March 31,
 
2014
 
2013
Cash flows from operating activities:
 
 
 
Net income
$
34,915

 
$
31,823

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
19,767

 
18,239

Amortization of debt issue costs
304

 
314

Provision for uncollectible accounts
890

 
1,093

Net (gain) loss on disposal of assets
(1,221
)
 
1,726

Share-based compensation
4,544

 
3,770

Deferred income taxes

 
2,868

Excess tax benefit from exercise of stock options
(392
)
 
(62
)
Other
(905
)
 
(414
)
Changes in operating assets and liabilities:
 
 
 
Trade accounts receivable
(5,825
)
 
(16,126
)
Inventory, prepaid expense and other assets
(1,389
)
 
(2,491
)
Accounts payable and other accrued liabilities
(3,773
)
 
12,127

Accrued payroll and related liabilities
6,247

 
9,149

Income taxes
15,165

 
13,235

Net cash provided by operating activities
68,327

 
75,251

Cash flows from investing activities:
 
 
 
Business acquisitions, net of cash acquired
(17,295
)
 
(6,756
)
Real estate acquired in connection with business acquisitions

 
(510
)
Capital expenditures
(16,619
)
 
(17,969
)
Proceeds from sale of assets
859

 
177

Other
520

 
(115
)
Net cash used in investing activities
(32,535
)
 
(25,173
)
Cash flows from financing activities:
 
 
 
Repayment of debt
(12,806
)
 
(8,733
)
Distributions to noncontrolling interest partners
(1,090
)
 
(1,197
)
Purchase of noncontrolling interests
(326
)
 
(5,032
)
Proceeds from issuance of common stock under stock option plans
372

 
1,876

Excess tax benefit from exercise of stock options
392

 
62

Stock repurchases
(9,793
)
 
(59
)
Net cash used in financing activities
(23,251
)
 
(13,083
)
Effect of currency exchange rate changes on cash and cash equivalents
(282
)
 
(144
)
Increase in cash and cash equivalents
12,259

 
36,851

Cash and cash equivalents at beginning of period
125,029

 
68,435

Cash and cash equivalents at end of period
$
137,288

 
$
105,286

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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

5


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

 
Three Months Ended
March 31,
 
2014
 
2013
Supplemental disclosures of cash flow information:
 
 
 
Interest paid
$
3,708

 
$
3,999

Income taxes paid
$
6,853

 
$
3,808

 
 
 
 
Supplemental schedule of noncash investing and financing activities:
 
 
 
Detail of acquisitions:
 
 
 
Fair value of assets acquired
$
18,550

 
$
6,969

Noncontrolling interest
(855
)
 

Cash paid for acquisitions, net of acquired cash
(17,295
)
 
(6,756
)
Contingent consideration

 
(53
)
Holdbacks
(400
)
 
(160
)
Liabilities assumed
$

 
$



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

6


VCA Antech, Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements
March 31, 2014
(Unaudited)

 
1.
Nature of Operations
Our company, VCA Antech, 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 Vetstreet. Our operating segments are aggregated into two reportable segments “Animal Hospital” and “Laboratory”. Our Medical Technology and Vetstreet operating segments are combined in our “All Other” category. See Footnote 8, “ Lines of Business within these notes to unaudited condensed, consolidated financial statements.
Our animal hospitals offer a full range of general medical and surgical services for companion animals. Our animal hospitals treat diseases and injuries, provide pharmaceutical products and perform a variety of pet-wellness programs, including health examinations, diagnostic testing, vaccinations, spaying, neutering and dental care. At March 31, 2014 , we operated or managed 608 animal hospitals throughout 41 states and four Canadian provinces.
We operate a full-service veterinary diagnostic laboratory network serving all 50 states and certain areas in Canada. Our laboratory network provides sophisticated testing and consulting services used by veterinarians in the detection, diagnosis, evaluation, monitoring, treatment and prevention of diseases and other conditions affecting animals. At March 31, 2014 , we operated 57 laboratories of various sizes located strategically throughout the United States and Canada.
Our Medical Technology business sells digital radiography and ultrasound imaging equipment, provides education and training on the use of that equipment, provides consulting and mobile imaging services, and sells software and ancillary services to the veterinary market.
Our Vetstreet business provides several different services to the veterinary community including, online communications, professional education, marketing solutions and a home delivery platform for independent animal hospitals.
The practice of veterinary medicine is subject to seasonal fluctuation. In particular, demand for veterinary services is significantly higher during the warmer months because pets spend a greater amount of time outdoors where they are more likely to be injured and are more susceptible to disease and parasites. In addition, use of veterinary services may be affected by levels of flea infestation, heartworms and ticks, and the number of daylight hours.

2.
Basis of Presentation
Our accompanying unaudited, condensed, consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information and in accordance with the rules and regulations of the United States Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the disclosures required by GAAP for annual financial statements as permitted under applicable rules and regulations. In the opinion of management, all normal recurring adjustments considered necessary for a fair presentation have been included. The results of operations for the three months ended March 31, 2014 are not necessarily indicative of the results to be expected for the full year ending December 31, 2014 . For further information, refer to our consolidated financial statements and notes thereto included in our 2013 Annual Report on Form 10-K.

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





7


VCA Antech, Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
March 31, 2014
(Unaudited)


3.
Goodwill and Other Intangible Assets
Goodwill
The following table presents the changes in the carrying amount of our goodwill for the three months ended March 31, 2014 (in thousands):
 
 
Animal
Hospital
 
Laboratory
 
All Other
 
Total
Balance as of December 31, 2013
 
 
 
 
 
 
 
Goodwill
$
1,216,581

 
$
96,871

 
$
138,276

 
$
1,451,728

Accumulated impairment losses

 

 
(120,811
)
 
(120,811
)
Subtotal
1,216,581

 
96,871

 
17,465

 
1,330,917

Goodwill acquired
15,115

 

 

 
15,115

Foreign translation adjustment
(4,030
)
 
(23
)
 

 
(4,053
)
Other (1)
(1,925
)
 

 

 
(1,925
)
Balance as of March 31, 2014
 
 
 
 
 
 
 
Goodwill
1,225,741

 
96,848

 
138,276

 
1,460,865

Accumulated impairment losses

 

 
(120,811
)
 
(120,811
)
Subtotal
$
1,225,741

 
$
96,848

 
$
17,465

 
$
1,340,054

 ____________________________

(1)  
"Other" primarily includes measurement period adjustments and an immaterial write-off related to a sale of an animal hospital.
Other Intangible Assets
Our acquisition related amortizable intangible assets at March 31, 2014 and December 31, 2013 are as follows (in thousands):
 
 
As of March 31, 2014
 
As of December 31, 2013
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Non-contractual customer relationships
$
109,330

 
$
(44,281
)
 
$
65,049

 
$
109,842

 
$
(41,895
)
 
$
67,947

Covenants not-to-compete
8,718

 
(4,361
)
 
4,357

 
8,843

 
(4,661
)
 
4,182

Favorable lease assets
9,537

 
(4,535
)
 
5,002

 
7,458

 
(4,373
)
 
3,085

Trademarks
12,655

 
(4,308
)
 
8,347

 
13,115

 
(4,194
)
 
8,921

Contracts
608

 
(326
)
 
282

 
608

 
(305
)
 
303

Technology
5,240

 
(3,153
)
 
2,087

 
5,240

 
(3,015
)
 
2,225

Client lists
50

 
(46
)
 
4

 
50

 
(42
)
 
8

Total
$
146,138

 
$
(61,010
)
 
$
85,128

 
$
145,156

 
$
(58,485
)
 
$
86,671


 



8


VCA Antech, Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
March 31, 2014
(Unaudited)


3.
Goodwill and Other Intangible Assets, continued

The following table summarizes our aggregate amortization expense related to acquisition related intangible assets (in thousands):
 
 
Three Months Ended
March 31,
 
2014
 
2013
Aggregate amortization expense
$
5,147

 
$
5,044

The estimated amortization expense related to acquisition related intangible assets for the remainder of 2014 and each of the succeeding years thereafter, as of March 31, 2014 , is as follows (in thousands):

Remainder of 2014
$
15,651

2015
19,094

2016
16,162

2017
9,924

2018
6,350

Thereafter
17,947

Total
$
85,128

 

4.
Acquisitions

The table below reflects the activity related to the acquisitions and dispositions of our animal hospitals and laboratories during the three months ended March 31, 2014 and 2013, respectively:

 
Three Months Ended
March 31,
 
2014
 
2013
Animal Hospitals:
 
 
 
Acquisitions
4

 
3

Acquisitions, merged
(1
)
 

Sold, closed or merged
(4
)
 
(8
)
Net decrease
(1
)
 
(5
)
 
 
 
 
Laboratories:
 
 
 
Acquisitions

 
1

Created
1

 

Net increase
1

 
1





9


VCA Antech, Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
March 31, 2014
(Unaudited)


4.
Acquisitions, continued
Animal Hospital Acquisitions
The purchase price allocations for the acquisitions 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 acquired during the three months ended March 31, 2014 and 2013, respectivel y, (in thousands):

 
Three Months Ended
March 31,
 
2014
 
2013
Consideration:
 
 
 
  Cash
$
17,295

 
$
6,756

  Holdbacks
400

 
160

  Earnout contingent consideration

 
53

      Fair value of total consideration transferred
$
17,695

 
$
6,969

 
 
 
 
Allocation of the Purchase Price:
 
 
 
  Tangible assets
$
701

 
$
491

  Identifiable intangible assets
2,734

 
1,506

  Goodwill (1)
15,115

 
4,972

      Fair value of assets acquired
$
18,550

 
$
6,969

Noncontrolling interest
(855
)
 

Total
$
17,695

 
$
6,969

____________________________

(1)  
We expect that $10.3 million and $4.1 million of the goodwill recorded for these acquisitions, as of March 31, 2014 and 2013 , respectively, will be fully deductible for income tax purposes.

In addition to the purchase price listed above, there were no cash payments made for real estate acquired in connection with our purchase of animal hospitals for the three months ended March 31, 2014 . There were $0.5 million in cash payments made for real estate for the three months ended March 31, 2013 .







10


VCA Antech, Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
March 31, 2014
(Unaudited)


5.
Other Accrued Liabilities
Other accrued liabilities consisted of the following (in thousands):
 
 
As of March 31, 2014
 
As of December 31, 2013
Deferred revenue
$
11,102

 
$
11,190

Accrued health insurance
4,241

 
5,479

Deferred rent
4,023

 
4,331

Accrued other insurance
4,048

 
4,381

Miscellaneous accrued taxes (1)
3,574

 
2,804

Accrued workers' compensation
3,757

 
3,267

Holdbacks and earnouts
3,150

 
3,040

Customer deposits
2,830

 
3,075

Accrued consulting fees
3,123

 
3,028

Accrued lease payments
2,268

 
2,547

Other
12,714

 
15,620

 
$
54,830

 
$
58,762

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

 
6. Fair Value Measurements
Fair Value of Financial Instruments
The FASB accounting guidance requires disclosure of fair value information about financial instruments, whether or not they are recognized in the accompanying condensed, 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 March 31, 2014 and December 31, 2013 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 March 31, 2014
 
As of December 31, 2013
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
Variable-rate long-term debt
$
545,078

 
$
545,078

 
$
556,914

 
$
556,914

At March 31, 2014 , we did not have any material applicable nonrecurring measurements of nonfinancial assets and nonfinancial liabilities.




11


VCA Antech, Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
March 31, 2014
(Unaudited)



7. Calculation of Earnings per Share
Basic earnings per share is calculated by dividing net income by the weighted-average number of shares outstanding during the period. Diluted earnings per share is calculated by dividing net income attributable to VCA Antech, 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
March 31,
 
2014
 
2013
Net income attributable to VCA Antech, Inc.
$
34,043

 
$
30,485

Weighted-average common shares outstanding:
 
 
 
Basic
88,338

 
88,400

Effect of dilutive potential common shares:
 
 
 
Stock options
254

 
284

Nonvested shares and units
829

 
695

Diluted
89,421

 
89,379

Basic earnings per share
$
0.39

 
$
0.34

Diluted earnings per share
$
0.38

 
$
0.34


There were no potential common shares excluded from the computation of diluted earnings per share for the three months ended March 31, 2014 . For the three months ended March 31, 2013 , potential common shares of 497,826 were excluded from the computation of diluted earnings per share because their inclusion would have had an antidilutive effect.

8.
Lines of Business

Our reportable segments are Animal Hospital and Laboratory. 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 “All Other” 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 Vetstreet business, which provides online and printed communications, professional education, marketing solutions to the veterinary community and an ecommerce platform for independent animal hospitals. 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 essentially the same as those described in the summary of significant accounting policies included in our 2013 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.
The segment information presented includes a reclassification to eliminate discounts on certain Laboratory contracts that were previously allocated to the All Other operating segment from Eliminations in the prior year financial data. These reclasses better represent the corresponding discounts and thus the operating results of our standalone entities. These changes in segment reporting only revised the presentation within the table below and did not impact our condensed, consolidated financial statements for any period presented.
 





12


VCA Antech, Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
March 31, 2014
(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
March 31, 2014
 
 
 
 
 
 
 
 
 
 
 
External revenue
$
351,588

 
$
74,783

 
$
22,201

 
$

 
$
935

 
$
449,507

Intercompany revenue

 
13,751

 
5,920

 

 
(19,671
)
 

Total revenue
351,588

 
88,534

 
28,121

 

 
(18,736
)
 
449,507

Direct costs
302,788

 
45,503

 
18,152

 

 
(18,387
)
 
348,056

Gross profit
48,800

 
43,031

 
9,969

 

 
(349
)
 
101,451

Selling, general and administrative expense
9,128

 
8,018

 
8,348

 
15,946

 

 
41,440

Operating income (loss) before sale or disposal of assets
39,672

 
35,013

 
1,621

 
(15,946
)
 
(349
)
 
60,011

Net loss (gain) on sale or disposal of assets
168

 
(71
)
 
(1,184
)
 
(134
)
 

 
(1,221
)
Operating income (loss)
$
39,504

 
$
35,084

 
$
2,805

 
$
(15,812
)
 
$
(349
)
 
$
61,232

Depreciation and amortization
$
14,742

 
$
2,535

 
$
2,136

 
$
819

 
$
(465
)
 
$
19,767

Capital expenditures
$
13,068

 
$
1,981

 
$
758

 
$
1,411

 
$
(599
)
 
$
16,619

Three Months Ended
March 31, 2013
 
 
 
 
 
 
 
 
 
 
 
External revenue
$
340,615

 
$
73,638

 
$
23,628

 
$

 
$
725

 
$
438,606

Intercompany revenue

 
13,697

 
4,895

 

 
(18,592
)
 

Total revenue
340,615

 
87,335

 
28,523

 

 
(17,867
)
 
438,606

Direct costs
295,416

 
44,870

 
18,889

 

 
(17,492
)
 
341,683

Gross profit
45,199

 
42,465

 
9,634

 

 
(375
)
 
96,923

Selling, general and administrative expense
8,325

 
8,005

 
8,914

 
14,602

 

 
39,846

Operating income (loss) before sale or disposal of assets
36,874

 
34,460

 
720

 
(14,602
)
 
(375
)
 
57,077

Net loss (gain) on sale or disposal of assets
1,729

 
(5
)
 
2

 

 

 
1,726

Operating income (loss)
$
35,145

 
$
34,465

 
$
718

 
$
(14,602
)
 
$
(375
)
 
$
55,351

Depreciation and amortization
$
13,387

 
$
2,507

 
$
1,965

 
$
819

 
$
(439
)
 
$
18,239

Capital expenditures
$
14,441

 
$
1,918

 
$
1,333

 
$
640

 
$
(363
)
 
$
17,969



At March 31, 2014
 
 
 
 
 
 
 
 
 
 
 
Total assets
$
1,864,993

 
$
261,178

 
$
94,145

 
$
70,046

 
$
(40,431
)
 
$
2,249,931

At December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
Total assets
$
1,854,609

 
$
247,591

 
$
96,245

 
$
77,153

 
$
(37,817
)
 
$
2,237,781





13


VCA Antech, Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
March 31, 2014
(Unaudited)


9.
Commitments and Contingencies
We have certain commitments including operating leases, purchase agreements and acquisition agreements. These items are discussed in detail in our consolidated financial statements and notes thereto included in our 2013 Annual Report on Form 10-K. We also have contingencies as follows:
 
a.
Earn-Out Payments
We have contractual arrangements in connection with certain acquisitions, whereby additional cash may be paid to former owners of acquired companies upon attainment of specified financial criteria as set forth in the respective agreements. The amount to be paid cannot be determined until the earn-out periods have expired and the attainment of criteria is established. If the specified financial criteria are attained, we will be obligated to pay an additional $2.3 million .
In accordance with business combination accounting guidance, contingent consideration, such as earn-out agreements, are recognized as part of the consideration transferred on the acquisition date. A liability is initially recorded based upon its acquisition date fair value. The changes in fair value are recognized in earnings where applicable for each reporting period. The fair value is determined using a contractually stated formula using either a multiple of revenue or Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA"). The formulas used to determine the estimated fair value are Level 3 inputs. The changes in fair value were immaterial to our condensed, consolidated financial statements when taken as a whole. We recorded $1.9 million and $ 2.2 million in earnout liabilities as of March 31, 2014 and December 31, 2013 , respectively, which are included in other accrued liabilities in our consolidated balance sheets.
 
b.
Other Contingencies

On May 29, 2013, a former veterinary assistant at one of our animal hospitals filed a purported class action lawsuit against us in the Superior Court of the State of California for the County of Los Angeles, titled Jorge Duran vs. VCA Animal Hospitals, Inc., et. al. The lawsuit seeks to assert claims on behalf of current and former veterinary assistants employed by us in California, and alleges, among other allegations, that we improperly failed to pay overtime wages, improperly failed to provide proper meal and rest periods, and engaged in unfair business practices. The lawsuit seeks damages, statutory penalties, and other relief, including attorneys' fees and costs.

Additionally, on July 12, 2013, an individual who provided courier services with respect to our laboratory clients in California filed a purported class action lawsuit against us in the Superior Court of the State of California for the County of Santa Clara - San Jose Branch, titled Carlos Lopez vs. Logistics Delivery Solutions, LLC, Antech Diagnostics, Inc., et. al. Logistics Delivery Solutions, LLC, a co-defendant in the lawsuit, is a company with which Antech Diagnostics has contracted to provide courier services in California. The lawsuit seeks to assert claims on behalf of individuals who were engaged by Logistics Delivery Solutions, LLC to perform such courier services and alleges, among other allegations, that Logistics Delivery Solutions, and Antech Diagnostics improperly classified the plaintiffs as independent contractors, improperly failed to pay overtime wages, and improperly failed to provide proper meal and rest periods. The lawsuit seeks damages, statutory penalties, and other relief, including attorneys' fees and costs.

We are vigorously defending these lawsuits. Because these lawsuits are in the initial stages, the financial impact to us, if any, cannot be predicted.

In addition to the lawsuits described above, we are party to ordinary routine legal proceedings and claims incidental to our business, but we are not currently a party to any legal proceeding that we believe would have a material adverse effect on our financial position.

10.
Income Taxes

The effective tax rate of income attributable to VCA for the three months ended March 31, 2014 was 39.5% , as compared to 38.9% for the year ended December 31, 2013 . The increase in the effective tax rate was primarily due to a decrease in income related to our Canadian operations which are taxed at a lower rate.




14


VCA Antech, Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
March 31, 2014
(Unaudited)


11.
Noncontrolling Interests
We own some of our animal hospitals in partnerships with noncontrolling interest holders. We consolidate our partnerships in our condensed, consolidated financial statements because our ownership interest in these partnerships is equal to or greater than 50.1% and we control these entities. We record noncontrolling interest in income of subsidiaries equal to our partners’ percentage ownership of the partnerships’ income. We also record changes in the redemption value of our redeemable noncontrolling interests in net income attributable to noncontrolling interests in our condensed, consolidated income statements. We reflect our noncontrolling partners’ cumulative share in the equity of the respective partnerships as either noncontrolling interests in equity, mandatorily redeemable noncontrolling interests in other liabilities, or redeemable noncontrolling interests in temporary equity (mezzanine) in our condensed, consolidated balance sheets.
 
a.
Mandatorily Redeemable Noncontrolling Interests
The terms of some of our partnership agreements require us to purchase the partner’s equity in the partnership in the event of the partner’s death. We report these redeemable noncontrolling interests at their estimated redemption value, which approximates fair value and classify them as liabilities due to the certainty of the related event. Estimated redemption value is determined using either a contractually stated formula or a discounted cash flow technique, both of which are used as an approximation of fair value. The discounted cash flow inputs used to determine the redemption value are Level 3 and include forecasted growth rates, valuation multiples, and the weighted average cost of capital. We recognize changes in the obligation as interest cost in our condensed, consolidated statements of income.

The following table provides a summary of mandatorily redeemable noncontrolling interests included in other liabilities in our condensed, consolidated balance sheets (in thousands):

 
Income
Statement
Impact
 
Mandatorily Redeemable
Noncontrolling
Interests
Balance as of December 31, 2012
 
 
$
11,047

Noncontrolling interest expense
$
473

 
 
Redemption value change
39

 
512

Purchase of noncontrolling interests
 
 
(658
)
Dissolution of noncontrolling interests
 
 
(358
)
Distribution to noncontrolling interests
 
 
(559
)
Currency translation adjustment
 
 
(219
)
Balance as of March 31, 2013
 
 
$
9,765

 
 
 
 
Balance as of December 31, 2013
 
 
$
9,355

Noncontrolling interest expense
$
368

 
 
Redemption value change
5

 
373

Distribution to noncontrolling interests
 
 
(312
)
Currency translation adjustment
 
 
(305
)
Balance as of March 31, 2014
 
 
$
9,111


b.
Redeemable Noncontrolling Interests
We also enter into partnership agreements whereby the minority partner is issued certain “put” rights. These rights are normally exercisable at the sole discretion of the minority partner. We report these redeemable noncontrolling interests at their estimated redemption value and classify them in temporary equity (mezzanine). We recognize changes in the obligation in net income attributable to noncontrolling interests in our condensed, consolidated statements of income.




15


VCA Antech, Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
March 31, 2014
(Unaudited)



11.
Noncontrolling Interests, continued
The following table provides a summary of redeemable noncontrolling interests (in thousands):

 
Income
Statement
Impact
 
Redeemable
Noncontrolling
Interests
Balance as of December 31, 2012
 
 
$
6,991

Noncontrolling interest expense
$
212

 
 
Redemption value change
26

 
238

Distribution to noncontrolling interests
 
 
(186
)
Balance as of March 31, 2013
 
 
$
7,043

 
 
 
 
Balance as of December 31, 2013
 
 
$
10,678

Noncontrolling interest expense
$
303

 
 
Redemption value change
(152
)
 
151

Formation of noncontrolling interests
 
 
855

Purchase of noncontrolling interests
 
 
(356
)
Distribution to noncontrolling interests
 
 
(276
)
Balance as of March 31, 2014
 
 
$
11,052

 




16


ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 




17


Introduction
The following discussion should be read in conjunction with our condensed, consolidated financial statements provided under Part I, Item I of this Quarterly report on Form 10-Q. We have included herein statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We generally identify forward-looking statements in this report using words like “believe,” “intend,” “expect,” “estimate,” “may,” “plan,” “should plan,” “project,” “contemplate,” “anticipate,” “predict,” “potential,” “continue,” or similar expressions. You may find some of these statements below and elsewhere in this report. These forward-looking statements are not historical facts and are inherently uncertain and outside of our control. Any or all of our forward-looking statements in this report may turn out to be wrong. They can be affected by inaccurate assumptions we might make, or by known or unknown risks and uncertainties. Many factors mentioned in our discussion in this report will be important in determining future results. Consequently, no forward-looking statement can be guaranteed. Actual future results may vary materially. Factors that may cause our plans, expectations, future financial condition and results to change are described throughout this report and in our Annual Report on Form 10-K, particularly in “Risk Factors,” Part I, Item 1A of that report.
The forward-looking information set forth in this Quarterly Report on Form 10-Q is as of May 9, 2014 , and we undertake no duty to update this information unless required by law. Shareholders and prospective investors can find information filed with the SEC after May 9, 2014 at our website at http://investor.vcaantech.com or at the SEC’s website at www.sec.gov .
We are a leading North American animal healthcare company. We provide veterinary services and diagnostic testing services to support veterinary care and we sell diagnostic imaging equipment and other medical technology products and related services to veterinarians. We also provide both online and printed communications, education and information, and analytical-based marketing solutions to the veterinary community.
Our reportable segments are as follows:  
Our Animal Hospital segment operates the largest network of freestanding, full-service animal hospitals in the nation. Our animal hospitals offer a full range of general medical and surgical services for companion animals. We treat diseases and injuries, offer pharmaceutical and retail products and perform a variety of pet wellness programs, including health examinations, diagnostic testing, routine vaccinations, spaying, neutering and dental care. At March 31, 2014 , our animal hospital network consisted of 608 animal hospitals in 41 states and in four Canadian provinces.
Our Laboratory segment operates the largest network of veterinary diagnostic laboratories in the nation. Our laboratories provide 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 March 31, 2014 , our laboratory network consisted of 57 laboratories serving all 50 states and certain areas in Canada.
Our “All Other” category includes the results of our Medical Technology and Vetstreet operating segments. Each of these segments did not meet the materiality thresholds to be reported individually.
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.
Consumer spending habits, including spending for pet healthcare, are affected by, among other things, prevailing economic conditions, levels of employment, salaries and wage rates, consumer confidence and consumer perception of economic conditions. These factors continue to impact consumer spending and may continue to cause levels of spending to remain depressed for the foreseeable future. Additionally, these factors may cause pet owners to elect to defer expensive treatment options or to forgo treatment for their pets altogether.




18


Use of Supplemental Non-GAAP Financial Measures

In this management's discussion and analysis, we use supplemental measures of our performance, which are derived from our consolidated financial information, but which are not presented in our consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). These financial measures, which are considered “Non-GAAP financial measures” under SEC rules, include our Non-GAAP gross profit, Non-GAAP gross margin, Non-GAAP gross profit, excluding acquisition related amortization and Non-GAAP gross margin, excluding acquisition related amortization on both a consolidated basis and with respect to our Animal Hospital segment. Additionally, our Non-GAAP financial measures include our Non-GAAP operating income, Non-GAAP operating margin, Non-GAAP operating income, excluding acquisition related amortization and Non-GAAP operating margin, excluding acquisition related amortization on a consolidated basis and lastly our Non-GAAP net income, Non-GAAP diluted earnings per share, Non-GAAP net income, excluding acquisition related amortization and Non-GAAP diluted earnings per share, excluding acquisition related amortization. See “Consolidated Results of Operations  Non-GAAP Financial Measures” below for information about our use of these Non-GAAP financial measures, including our reasons for including the measures, material limitations with respect to the usefulness of the measures, and a reconciliation of each Non-GAAP financial measure to the most directly comparable GAAP financial measure. All references to Non-GAAP figures in the discussion that follows refer to Non-GAAP results excluding acquisition related amortization.
Executive Overview
During the three months ended March 31, 2014 , we experienced increases in both consolidated revenue and gross profit. The increases were primarily driven by revenue from our acquisitions, as well as organic growth in our Animal Hospital and Laboratory segments. Our Animal Hospital same-store revenue increased 0.5% as compared to the same period in the prior year. Our Laboratory internal revenue increased 1.9%, adjusted for one-half less billing day in 2014, as compared to the same period in the prior year. Our consolidated operating income increased 10.6%, on a 100 basis point increase in consolidated operating margin, as compared to the same period in the prior year. Our Non-GAAP consolidated operating income, excluding acquisition related amortization, increased 3.4%, on a 20 basis point increase in Non-GAAP consolidated operating margin, excluding acquisition related amortization, as compared to the same period in the prior year. The increase in Non-GAAP consolidated operating income was primarily due to improved results from each of our operating segments.
Share Repurchase Program
In April 2013, our Board of Directors authorized a share repurchase program, authorizing us to repurchase up to $125.0 million of our common shares from time to time in open market purchases, pursuant to trading plans established in accordance with SEC rules or through privately negotiated transactions. The extent and timing of our repurchases will depend upon market conditions, our cash requirements to fund the long-term growth investments in our business and other corporate considerations. The repurchases have been and will continue to be be funded by existing cash balances and by our revolving credit facility. The share repurchase program has no expiration date. The repurchase program may be suspended or discontinued at any time. Refer to Item 2. Unregistered Sales of Equity Securities and the Use of Proceeds in Part II of this report.
Acquisitions
Our annual growth strategy includes the acquisition of independent animal hospitals. We also evaluate the acquisition of animal hospital chains, laboratories or related businesses if favorable opportunities are presented. For the three months ended March 31, 2014, we acquired $16.0 million of annualized Animal Hospital revenue. These acquisitions are immaterial individually and accordingly, have not been separately disclosed. We currently anticipate that during the year, we will acquire $ 50 million to $ 85 million of annualized Animal Hospital revenue.



19


The following table summarizes the changes in the number of facilities operated by our Animal Hospital and Laboratory segments during the three months ended March 31, 2014 and 2013 , respectively:
 
 
Three Months Ended
March 31,
 
2014
 
2013
Animal Hospitals:
 
 
 
Beginning of period
609

 
609

Acquisitions
4

 
3

Acquisitions, merged
(1
)
 

Sold, closed or merged
(4
)
 
(8
)
End of period
608

 
604

 
 
 
 
Laboratories:
 
 
 
Beginning of period
56

 
55

Acquired

 
1

Created
1

 

End of period
57

 
56


Groupe Veteri - Medic Inc.

On July 5, 2013, AVC acquired 90% of the shares of Groupe Veteri - Medic Inc. for approximately CDN $17.2 million, which included contingent consideration. Groupe Veteri - Medic operates three animal hospitals in Montreal, Quebec. The acquisition expanded AVC's presence within the Canadian market by increasing operations into a fourth province, Quebec.

Critical Accounting Policies
Our condensed, consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”), which require management to make estimates and assumptions that affect reported amounts. The estimates and assumptions are based on historical experience and on other factors that management believes to be reasonable. Actual results may differ from those estimates. Critical accounting policies represent the areas where more significant judgments and estimates are used in the preparation of our condensed, consolidated financial statements. A discussion of such critical accounting policies, which include revenue recognition, goodwill, other intangible assets, and income taxes, can be found in our 2013 Annual Report on Form 10-K. There have been no material changes to the policies noted above as of this quarterly report on Form 10-Q for the period ended March 31, 2014 . A summary of our valuation of goodwill accounting policy is discussed below.

Valuation of Goodwill

At March 31, 2014 , we had $ 1.3 billion of goodwill, accounting for 60% of our total assets. Our goodwill represents the excess of the cost of our acquired entities over the net of the amounts assigned to identifiable assets acquired and liabilities assumed.

We test our goodwill for impairment annually, or sooner if circumstances indicate impairment may exist, in accordance with goodwill guidance. We adopted the end of October as our annual impairment testing date, which allows us time to accurately complete our impairment testing process in order to incorporate the results in our annual financial statements and timely file those statements with the Securities and Exchange Commission (“SEC”) in accordance with our accelerated filing requirements.

The recognition and measurement of a goodwill impairment loss involves either a qualitative assessment of the fair value of each reporting unit or a more detailed two-step process. We have not presently elected to rely on a qualitative assessment, accordingly we measure our goodwill for impairment based upon the following two-step process:




20


First we identify potential impairment by comparing the estimated fair value of our reporting units with the carrying value of our reporting units, with carrying value defined as the reporting unit’s net assets, including goodwill. If the estimated
fair value of our reporting units is greater than our carrying value, there is no impairment and the second step is not needed.
  
If we identify a potential impairment in the first step, we then measure the amount of impairment. The amount of the impairment is determined by allocating the estimated fair value of the reporting unit, as determined in step one, to the reporting unit's net assets based on fair value as would be done in an acquisition. In this hypothetical purchase price allocation, the residual estimated fair value, after allocation to the reporting units' identifiable net assets, is the implied current fair value of goodwill. If the implied current fair value of goodwill is less than the carrying amount of goodwill, goodwill is considered impaired and written down to the implied current fair value with a corresponding charge to earnings. However, if the implied current fair value of goodwill is greater than the carrying amount of goodwill, goodwill is not considered impaired and is not adjusted to the implied current fair value. Determining the fair value of the net assets of our reporting units under this step requires significant estimates.
Our estimated fair values are calculated in accordance with generally accepted accounting principles related to fair value and utilize generally accepted valuation techniques, consisting primarily of discounted cash flow techniques and market comparables, where applicable. These valuation methods involve the use of significant assumptions and estimates such as forecasted growth rates, valuation multiples, the weighted-average cost of capital, and risk premiums, which are based upon the best available market information and are consistent with our long-term strategic plans. The performance of our reporting units, and in turn the risk of goodwill impairment, is subject to a number of risks and uncertainties, some of which are outside of our control.
Negative changes in the undiscounted cash flows related to variables such as revenue growth rates, margins, or the discount rate could result in a decrease in the estimated fair value of our reporting units and could ultimately result in a substantial goodwill impairment charge. We monitor our reporting units on a quarterly basis and have not identified any events subsequent to December 31, 2013, which would indicate any impairment may have occurred in any of our reporting units.

Our Vetstreet reporting unit's estimated fair value, which has a carrying value of approximately $9.2 million of goodwill as of March 31, 2014 , exceeded its carrying value by 10% during the 2013 testing. The fair value of the Vetstreet reporting unit was determined based upon estimated future cash flows generated by the business and market comparables. In the event that we are not able to timely deliver enhancements to our services necessary to reestablish our competitive advantage, our forecasted growth rates may not be attainable and therefore we could incur an impairment charge. We will continue to closely monitor the development of these enhancements in an effort to identify any potential expected further delays and their related impact on our impairment determination.

  



21


Consolidated Results of Operations
The following table sets forth components of our condensed, consolidated income statements expressed as a percentage of revenue:
 
 
Three Months Ended
March 31,
 
2014
 
2013
Revenue:
 
 
 
Animal Hospital
78.2
 %
 
77.7
 %
Laboratory
19.7

 
19.9

All Other
6.3

 
6.5

Intercompany
(4.2
)
 
(4.1
)
Total revenue
100.0

 
100.0

Direct costs
77.4

 
77.9

Gross profit
22.6

 
22.1

Selling, general and administrative expense
9.2

 
9.1

Net (gain) loss on sale of assets
(0.2
)
 
0.4

Operating income
13.6

 
12.6

Interest expense, net
0.9

 
1.0

Income before provision for income taxes
12.7

 
11.6

Provision for income taxes
4.9

 
4.4

Net income
7.8

 
7.2

Net income attributable to noncontrolling interests
0.2

 
0.3

Net income attributable to VCA Antech, Inc.
7.6
 %
 
6.9
 %
Revenue
The following table summarizes our revenue (in thousands, except percentages):
 
 
Three Months Ended
March 31,
 
2014
 
2013
 
 
 
$
 
% of
Total
 
$
 
% of
Total
 
%
Change
Animal Hospital
$
351,588

 
78.2
 %
 
$
340,615

 
77.7
 %
 
3.2
 %
Laboratory
88,534

 
19.7
 %
 
87,335

 
19.9
 %
 
1.4
 %
All Other
28,121

 
6.3
 %
 
28,523

 
6.5
 %
 
(1.4
)%
Intercompany
(18,736
)
 
(4.2
)%
 
(17,867
)
 
(4.1
)%
 
(4.9
)%
Total revenue
$
449,507

 
100.0
 %
 
$
438,606

 
100.0
 %
 
2.5
 %

Consolidated revenue increased $ 10.9 million for the three months ended March 31, 2014 , as compared to the same period in the prior year. The increase in revenue were primarily attributable to revenue from animal hospitals acquired since January 1, 2013. Excluding the impact of acquisitions, revenue decreased $1.6 million for the three months ended March 31, 2014 , primarily due to the impact of foreign currency translation, partially offset by an increase in organic growth in our Laboratory, Animal Hospital and Vetstreet operating segments.



22


Gross Profit
The following table summarizes our consolidated gross profit, Non-GAAP consolidated gross profit and Non-GAAP consolidated gross profit, excluding acquisition related amortization in dollars and as a percentage of applicable revenue (in
thousands, except percentages):
 
 
Three Months Ended
March 31,
 
2014
 
2013
 
 
 
$
 
Gross
Margin
 
$
 
Gross
Margin
 
%
Change
Animal Hospital
$
48,800

 
13.9
%
 
$
45,199

 
13.3
%
 
8.0
%
Laboratory
43,031

 
48.6
%
 
42,465

 
48.6
%
 
1.3
%
All Other
9,969

 
35.5
%
 
9,634

 
33.8
%
 
3.5
%
Intercompany
(349
)
 
 
 
(375
)
 
 
 
 
Consolidated gross profit and gross margin
$
101,451

 
22.6
%
 
$
96,923

 
22.1
%
 
4.7
%
Impact of vacant property adjustment

 
 
 
2,046

 
 
 
 
Non-GAAP consolidated gross profit and Non-GAAP gross margin (1)
$
101,451

 
22.6
%
 
$
98,969

 
22.6
%
 
2.5
%
Intangible asset amortization associated with acquisitions
5,080

 
 
 
5,063

 
 
 
 
Non-GAAP consolidated gross profit, excluding acquisition related amortization and Non-GAAP gross margin, excluding acquisition related amortization (1)
$
106,531

 
23.7
%
 
$
104,032

 
23.7
%
 
2.4
%
 ____________________________
(1)  
Non-GAAP consolidated gross profit, Non-GAAP gross margin, Non-GAAP consolidated gross profit, excluding acquisition related amortization and Non-GAAP gross margin, excluding acquisition related amortization, are not measurements of financial performance prepared in accordance with GAAP. See “Non-GAAP Financial Measures” below for information about these Non-GAAP financial measures, including our reasons for including the measures, material limitations with respect to the usefulness of the measures, and a reconciliation of each Non-GAAP financial measure to the most directly comparable GAAP financial measure.
Consolidated gross profit increased $ 4.5 million for the three months ended March 31, 2014 , as compared to the same period in the prior year. Excluding the impact of the Non-GAAP adjustments detailed in the table above, Non-GAAP consolidated gross profit, excluding acquisition related amortization, increased $2.5 million for the three months ended March 31, 2014 , as compared to the same period in the prior year. The increase in Non-GAAP consolidated gross profit, excluding acquisition related amortization, was primarily attributable to organic revenue growth and increased gross margins at our Animal Hospital segment and our Medical Technology business.



23


Segment Results
Animal Hospital Segment
Revenue
Animal Hospital revenue increased $11.0 million for the three months ended March 31, 2014 , as compared to the same period in the prior year. The components of the increase are summarized in the following table (in thousands, except percentages and average revenue per order):  
 
Three Months Ended
March 31,
 
2014
 
2013
 
% Change
Same-store facilities:
 
 
 
 
 
Orders (1)  
1,892

 
1,936

 
(2.3
)%
Average revenue per order  (2) 
$
179.07

 
$
174.10

 
2.9
 %
Same-store revenue (1) 
$
338,721

 
$
337,043

 
0.5
 %
Foreign currency impact
(3,047
)
 

 
 
Acquisitions
15,647

 
453

 
 
Closures
267

 
3,119

 
 
Net acquired revenue (3)  
$
15,914

 
$
3,572

 
 
Total
$
351,588

 
$
340,615

 
3.2
 %
____________________________
(1)  
Same-store revenue and orders were calculated using Animal Hospital operating results, adjusted to exclude the operating results for newly acquired animal hospitals that we did not own, as of the beginning of the comparable period in the prior year. Same-store revenue also includes revenue generated by customers referred from our relocated or combined animal hospitals, including those merged upon acquisition.
(2)  
Computed by dividing same-store revenue by same-store orders. The average revenue per order may not calculate exactly due to rounding.
(3)  
Net acquired revenue represents the revenue from animal hospitals acquired, net of revenue from animal hospitals sold or closed, on or after the beginning of the comparable period, which was January 1, 2013. Fluctuations in net acquired revenue occur due to the volume, size, and timing of acquisitions and dispositions during the periods from this date through the end of the applicable period.

Our business strategy is to place a greater emphasis on comprehensive wellness visits and advanced medical procedures, which typically generate higher priced orders. The migration of lower priced orders from our animal hospitals to other distribution channels and our emphasis on comprehensive wellness visits has, over the past several years, resulted in a decrease in lower priced orders and an increase in higher priced orders.

During the three months ended March 31, 2014 , we experienced a decrease in both the number of lower-priced and higher- priced orders. The decrease in higher-priced orders was primarily a consequence of the severe weather experienced in the Northeastern part of the United States during the current quarter. The decrease in lower-priced orders was primarily a consequence of the overall competitive environment and the impact of changes in our business environment on the mix of procedures performed.
Price increases as well as the aforementioned mix in year over year growth rates of low to high-priced orders contributed to the overall increase in the average revenue per order. Prices at each of our animal hospitals are reviewed regularly and adjustments are made based on market considerations, demographics and our costs. These adjustments historically approximated 3% to 6% on most services at the majority of our animal hospitals and are typically implemented in November of each year; however, price increases in 2013 generally ranged between 3% and 4%.






24


Gross Profit

Animal Hospital gross profit is calculated as Animal Hospital revenue less Animal Hospital direct costs. Animal Hospital direct costs comprise all costs of services and products at the animal hospitals including, but not limited to, salaries of veterinarians, technicians and all other animal hospital-based personnel, facilities rent, occupancy costs, supply costs, depreciation and amortization, certain marketing and promotional expense and costs of goods sold associated with the retail sales of pet food and pet supplies.

The following table summarizes gross profit, gross margin, Non-GAAP gross profit, Non-GAAP gross margin, Non-GAAP gross profit, excluding acquisition related amortization and Non-GAAP gross margin, excluding acquisition related amortization, for our Animal Hospital segment (in thousands, except percentages) and the same measures on a same-store basis:
 
Three Months Ended
March 31,
 
2014
 
2013
 
% Change
Gross profit
$
48,800

 
$
45,199

 
8.0
%
Impact of vacant property adjustment

 
2,046

 
 
Non-GAAP gross profit (1)
$
48,800

 
$
47,245

 
3.3
%
Intangible asset amortization associated with acquisitions
3,945

 
3,757

 
 
Non-GAAP gross profit, excluding acquisition related amortization (1)
$
52,745

 
$
51,002

 
3.4
%
Gross margin
13.9
%
 
13.3
%
 
 
Non-GAAP gross margin (1)
13.9
%
 
13.9
%
 
 
Non-GAAP gross margin, excluding acquisition related amortization (1)
15.0
%
 
15.0
%
 
 
 
 
 
 
 
 
Same-store gross profit
48,857

 
45,714

 
6.9
%
Impact of vacant property adjustment

 
1,768

 
 
Non-GAAP same-store gross profit (1)
$
48,857

 
$
47,482

 
2.9
%
Intangible asset amortization associated with acquisitions
3,273

 
3,763

 
 
Non-GAAP same-store gross profit, excluding acquisition related amortization (1)
$
52,130

 
$
51,245

 
1.7
%
Same-store gross margin
14.4
%
 
13.6
%
 
 
Non-GAAP same-store gross margin (1)
14.4
%
 
14.1
%
 
 
Non-GAAP same-store gross margin, excluding acquisition related amortization (1)
15.4
%
 
15.2
%
 
 
____________________________
(1)  
Non-GAAP gross profit, Non-GAAP gross margin, Non-GAAP gross profit, excluding acquisition related amortization and Non-GAAP gross margin, excluding acquisition related amortization and the same measures expressed on a same store basis, are not measurements of financial performance prepared in accordance with GAAP. See “Non-GAAP Financial Measures” below for information about these Non-GAAP financial measures, including our reasons for including the measures, material limitations with respect to the usefulness of the measures, and a reconciliation of each Non-GAAP financial measure to the most directly comparable GAAP financial measure.
Consolidated Animal Hospital gross profi