VCA Inc.
VCA ANTECH INC (Form: 10-Q, Received: 05/08/2009 13:18:55)
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2009
     
o   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 þ       No o .
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). (Not yet applicable to the registrant)
Yes o       No o .
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. (Check one):
             
Large accelerated filer þ     Accelerated filer o     Non-accelerated filer   o
(Do not check if a smaller reporting company)
  Smaller reporting company o  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o       No þ .
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, 84,711,360 shares as of May 4, 2009.
 
 

 


 

VCA Antech, Inc.
Form 10-Q
March 31, 2009
Table of Contents
             
        Page
        Number
Part I.          
 
Item 1.          
 
        1  
 
        2  
 
        3  
 
        4  
 
        5  
 
Item 2.       17  
 
Item 3.       31  
 
Item 4.       31  
 
Part II.          
 
Item 1.       32  
 
Item 1A.       32  
 
Item 2.       32  
 
Item 3.       32  
 
Item 4.       32  
 
Item 5.       32  
 
Item 6.       32  
 
        33  
 
        34  
  EX-31.1
  EX-31.2
  EX-32.1

 


Table of Contents

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,     December 31,  
    2009     2008  
Assets
Current assets:
               
Cash and cash equivalents
  $ 109,084     $ 88,959  
Trade accounts receivable, less allowance for uncollectible accounts of $11,540 and $11,025 at March 31, 2009 and December 31, 2008, respectively
    47,929       43,453  
Inventory
    26,366       26,631  
Prepaid expenses and other
    18,112       18,800  
Deferred income taxes
    16,566       15,938  
Prepaid income taxes
          5,287  
 
           
Total current assets
    218,057       199,068  
Property and equipment, less accumulated depreciation and amortization of $144,722 and $138,431 at March 31, 2009 and December 31, 2008, respectively
    273,230       263,443  
Goodwill
    940,124       922,057  
Other intangible assets, net
    36,600       35,645  
Notes receivable, net
    4,719       12,893  
Deferred financing costs, net
    947       1,067  
Other
    20,849       14,865  
 
           
Total assets
  $ 1,494,526     $ 1,449,038  
 
           
 
               
Liabilities and Equity
Current liabilities:
               
Current portion of long-term obligations
  $ 8,117     $ 7,771  
Accounts payable
    23,704       26,087  
Accrued payroll and related liabilities
    39,795       42,840  
Income taxes payable
    9,370        
Other accrued liabilities
    43,699       46,424  
 
           
Total current liabilities
    124,685       123,122  
Long-term obligations, less current portion
    542,670       544,860  
Deferred income taxes
    54,255       47,331  
Other liabilities
    10,174       9,890  
 
           
Total liabilities
    731,784       725,203  
 
               
Commitments and contingencies
               
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, 84,704 and 84,633 shares outstanding as of March 31, 2009 and December 31, 2008, respectively
    85       85  
Additional paid-in capital
    310,782       308,674  
Accumulated earnings
    440,552       408,582  
Accumulated other comprehensive loss
    (4,986 )     (6,352 )
 
           
Total VCA Antech, Inc. stockholders’ equity
    746,433       710,989  
Noncontrolling interest
    16,309       12,846  
 
           
Total equity
    762,742       723,835  
 
           
Total liabilities and equity
  $ 1,494,526     $ 1,449,038  
 
           
The accompanying notes are an integral part of these condensed, consolidated financial statements.

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Table of Contents

VCA Antech, Inc. and Subsidiaries
Condensed, Consolidated Income Statements
(Unaudited)
(In thousands, except per share amounts)
                 
    Three Months Ended  
    March 31,  
    2009     2008  
Revenue
  $ 315,850     $ 307,832  
Direct costs
    233,409       224,801  
 
           
Gross profit
    82,441       83,031  
Selling, general and administrative expense
    23,189       23,178  
Gain on sale of assets
    (248 )     (184 )
 
           
Operating income
    59,500       60,037  
Interest expense, net
    6,118       7,615  
Other (income) expense
    (110 )     177  
 
           
Income before provision for income taxes
    53,492       52,245  
Provision for income taxes
    20,611       20,086  
 
           
Net income
    32,881       32,159  
Net income attributable to noncontrolling interests
    911       957  
 
           
Net income attributable to VCA Antech, Inc.
  $ 31,970     $ 31,202  
 
           
 
               
Basic earnings per share
  $ 0.38     $ 0.37  
 
           
Diluted earnings per share
  $ 0.37     $ 0.36  
 
           
 
               
Weighted-average shares outstanding for basic earnings per share
    84,680       84,348  
 
           
Weighted-average shares outstanding for diluted earnings per share
    85,386       85,865  
 
           
The accompanying notes are an integral part of these condensed, consolidated financial statements.

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Table of Contents

VCA Antech, Inc. and Subsidiaries
Condensed, Consolidated Statements of Equity
(Unaudited)
(In thousands)
                                                         
                                    Accumulated              
                    Additional             Other              
    Common Stock     Paid-In     Accumulated     Comprehensive     Noncontrolling        
    Shares     Amount     Capital     Earnings     Income (Loss)     Interest     Total  
Balances, December 31, 2007
    84,335     $ 84     $ 296,037     $ 275,598     $ (3,335 )   $ 10,207     $ 578,591  
Net income
                      31,202             957       32,159  
Unrealized loss on hedging instruments, net of tax
                            (3,323 )           (3,323 )
Losses on hedging instruments reclassified to income, net of tax
                            420             420  
Formation of noncontrolling interest
                                  1,769       1,769  
Distribution to noncontrolling interest
                                  (760 )     (760 )
Purchase of noncontrolling interest
                                  (158 )     (158 )
Share-based compensation
                1,309                         1,309  
Exercise of stock options
    15             214                         214  
Tax benefit from stock options exercised
                113                         113  
 
                                         
Balances, March 31, 2008
    84,350     $ 84     $ 297,673     $ 306,800     $ (6,238 )   $ 12,015     $ 610,334  
 
                                         
 
                                                       
Balances, December 31, 2008
    84,633     $ 85     $ 308,674     $ 408,582     $ (6,352 )   $ 12,846     $ 723,835  
Net income
                      31,970             911       32,881  
Foreign currency translation adjustment
                            (178 )           (178 )
Unrealized loss on foreign currency, net of tax
                            (58 )           (58 )
Unrealized loss on hedging instruments, net of tax
                            (374 )           (374 )
Losses on hedging instruments reclassified to income, net of tax
                            1,976             1,976  
Formation of noncontrolling interest
                                  3,440       3,440  
Distribution to noncontrolling interest
                                  (888 )     (888 )
Share-based compensation
                1,976                         1,976  
Exercise of stock options
    71             557                         557  
Stock repurchases
                (180 )                       (180 )
Tax shortfall from stock options exercised
                (245 )                       (245 )
 
                                         
Balances, March 31, 2009
    84,704     $ 85     $ 310,782     $ 440,552     $ (4,986 )   $ 16,309     $ 762,742  
 
                                         
The accompanying notes are an integral part of these condensed, consolidated financial statements.

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Table of Contents

VCA Antech, Inc. and Subsidiaries
Condensed, Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
                 
    Three Months Ended  
    March 31,  
    2009     2008  
Cash flows from operating activities:
               
Net income
  $ 32,881     $ 32,159  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    9,152       7,263  
Amortization of debt issue costs
    120       116  
Provision for uncollectible accounts
    1,559       820  
Gain on sale of assets
    (248 )     (184 )
Share-based compensation
    1,976       1,309  
Deferred income taxes
    5,304       2,329  
Excess tax benefit from exercise of stock options
          (133 )
Other
    (148 )     86  
Changes in operating assets and liabilities:
               
Accounts receivable
    (5,455 )     (6,463 )
Inventory, prepaid expenses and other assets
    (2,790 )     (2,351 )
Accounts payable and other accrued liabilities
    (2,362 )     2,767  
Accrued payroll and related liabilities
    (3,204 )     (5,629 )
Income taxes
    14,413       16,946  
 
           
Net cash provided by operating activities
    51,198       49,035  
 
           
Cash flows from investing activities:
               
Business acquisitions, net of cash acquired
    (14,467 )     (47,826 )
Real estate acquired in connection with business acquisitions
    (963 )     (3,612 )
Property and equipment additions
    (12,886 )     (9,463 )
Proceeds from sale of assets
    74       1,747  
Other
    (373 )     (12,124 )
 
           
Net cash used in investing activities
    (28,615 )     (71,278 )
 
           
Cash flows from financing activities:
               
Repayment of long-term obligations
    (1,946 )     (1,966 )
Distributions to noncontrolling interest partners
    (888 )     (760 )
Proceeds from issuance of common stock under stock option plans
    557       214  
Excess tax benefit from exercise of stock options
          133  
Stock repurchases
    (180 )      
 
           
Net cash used in financing activities
    (2,457 )     (2,379 )
 
           
Effect of currency exchange rate changes on cash and cash equivalents
    (1 )      
 
           
Increase (decrease) in cash and cash equivalents
    20,125       (24,622 )
Cash and cash equivalents at beginning of period
    88,959       110,866  
 
           
Cash and cash equivalents at end of period
  $ 109,084     $ 86,244  
 
           
 
               
Supplemental disclosures of cash flow information:
               
Interest paid
  $ 6,430     $ 8,422  
Income taxes paid
  $ 894     $ 811  
 
               
Supplemental schedule of non-cash investing and financing activites:
               
Detail of acquisitions:
               
Fair value of assets acquired
  $ 23,333     $ 48,183  
Cash paid for acquisitions
    (13,095 )     (45,789 )
Non-cash note conversion to equity interest in subsidiary
    (5,700 )      
 
           
Liabilities assumed
  $ 4,538     $ 2,394  
 
           
The accompanying notes are an integral part of these condensed, consolidated financial statements.

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Table of Contents

VCA Antech, Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements
March 31, 2009
(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 three strategic segments: animal hospitals (“Animal Hospital”), veterinary diagnostic laboratories (“Laboratory”) and veterinary medical technology (“Medical Technology”).
     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, 2009, we operated 478 animal hospitals throughout 39 states.
     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, 2009, we operated 46 laboratories of various sizes located strategically throughout the United States and Canada.
     Our Medical Technology segment sells digital radiography and ultrasound imaging equipment, provides education and training on the use of that equipment, and provides consulting and mobile imaging services.
2. Basis of Presentation
     Our accompanying unaudited, condensed, consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States for interim financial information and in accordance with the rules and regulations of the United States Securities and Exchange Commission. Accordingly, they do not include all of the information and notes required by GAAP in the United States 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. Certain reclassifications have been made herein to 2008 amounts to conform to the current year presentation. These include the adoption of Statement of Financial Accounting Standards (“SFAS”) No. 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment of Accounting Research Bulletins (ARB) No. 51 (“SFAS No. 160”). The results of operations for the three months ended March 31, 2009, are not necessarily indicative of the results to be expected for the full year ending December 31, 2009. For further information, refer to our consolidated financial statements and notes thereto included in our 2008 Annual Report on Form 10-K.
     The preparation of our condensed, consolidated financial statements in accordance with GAAP in the United States 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. Acquisitions
     Effective January 1, 2009, we adopted the provisions of SFAS 141(R), Business Combinations (revised 2007) (“SFAS 141(R)”). SFAS 141(R) retains the underlying concepts of SFAS 141, Business Combinations (“SFAS 141”) in that all business combinations continue to be accounted for at fair value under the acquisition method of accounting. SFAS 141(R) changes the application of the acquisition method in a number of significant respects. Acquisition costs will generally be expensed as incurred; non-controlling interests will be valued at fair value at the acquisition date; restructuring costs associated with a business combination will generally be expensed subsequent to the acquisition date; and changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense. SFAS 141(R) is effective on a prospective basis for all of our business combinations for which the acquisition date is on or after January 1, 2009, with the exception of the accounting for valuation allowances on deferred taxes and acquired tax contingencies. SFAS 141(R) amends SFAS No. 109, Accounting for Income Taxes (“SFAS 109”) such that adjustments made to valuation allowances on deferred taxes and acquired tax contingencies associated with acquisitions that closed prior to the effective date of SFAS 141(R) would also apply the provisions of SFAS 141(R).

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VCA Antech, Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
3. Acquisitions, continued
     We acquired the following animal hospitals during the three months ended March 31, 2009:
         
Animal Hospitals:
       
Acquisitions
    9  
Acquisitions relocated into our existing animal hospitals
    (2 )
 
       
Total
    7  
 
       
     During the three months ended March 31, 2009 we acquired one pathology office. Pathology offices are not included in our laboratory count.
Animal Hospital and Laboratory Acquisitions
     The following table summarizes the preliminary purchase price paid by us for the nine animal hospitals and one pathology office we acquired during the three months ended March 31, 2009, and the preliminary allocation of the purchase price (in thousands):
         
Preliminary Purchase Price:
       
Cash
  $ 13,095  
Non-cash note conversion to equity interest in subsidiary
    5,700  
Other liabilities assumed
    4,538  
 
     
Total
  $ 23,333  
 
     
 
       
Preliminary Allocation of the Purchase Price:
       
Tangible assets
  $ 6,134  
Identifiable intangible assets
    3,063  
Goodwill (1)
    14,136  
 
     
Total
  $ 23,333  
 
     
 
(1)   We expect that $7.0 million of the goodwill recorded for these acquisitions as of March 31, 2009 will be fully deductible for income tax purposes.
     In addition to the purchase price listed above we made cash payments for real estate acquired in connection with our purchase of animal hospitals totaling $963,000 for the three months ended March 31, 2009. We did not recognize any material assets or liabilities arising from contingencies at the acquisition date in connection with any of our acquisitions.
Other Acquisition Payments
     In connection with substantially all of our acquisitions, we withheld a portion of the purchase price (“holdback”) as security for indemnification obligations of the sellers under the acquisition agreement. We paid $1.4 million to sellers for the unused portion of holdbacks during the three months ended March 31, 2009. The total outstanding holdbacks at March 31, 2009 and December 31, 2008 were $3.9 million and $4.9 million, respectively.
     We made no earn-out payments during the three months ended March 31, 2009.

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VCA Antech, Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
4. Goodwill and Other Intangible Assets
     In April 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) Financial Accounting Standards (“FAS”) 142-3, Determination of the Useful Life of Intangible Assets (“FSP FAS 142-3”). FSP FAS 142-3 amends SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS No. 142”), to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141(R), and other U.S. GAAP. We adopted FSP FAS 142-3 on January 1, 2009. The adoption of FSP FAS 142-3 did not have a material impact on our consolidated financial statements.
Goodwill
     Goodwill represents the excess of the aggregate of the consideration transferred, the fair value of any non-controlling interest in the acquiree and for a business combination achieved in stages, the acquisition-date fair value of any previously held equity interest over the net of the fair value of identifiable assets acquired and liabilities assumed. The following table presents the changes in the carrying amount of our goodwill for the three months ended March 31, 2009 (in thousands):
                                 
    Animal             Medical        
    Hospital     Laboratory     Technology     Total  
Balance as of December 31, 2008
  $ 807,203     $ 95,694     $ 19,160     $ 922,057  
Goodwill acquired
    14,044       92             14,136  
Goodwill related to noncontrolling interests
    3,440                   3,440  
Other (1)
    507       (16 )           491  
 
                       
Balance as of March 31, 2009
  $ 825,194     $ 95,770     $ 19,160     $ 940,124  
 
                       
 
(1)   Other includes purchase price adjustments, buy-outs and currency translation adjustments.
Other Intangible Assets
     In addition to goodwill, we have amortizable intangible assets at March 31, 2009 and December 31, 2008 as follows (in thousands):
                                                 
    As of March 31, 2009     As of December 31, 2008  
    Gross             Net     Gross             Net  
    Carrying     Accumulated     Carrying     Carrying     Accumulated     Carrying  
    Amount     Amortization     Amount     Amount     Amortization     Amount  
Non-contractual customer relationships
  $ 28,674     $ (4,611 )   $ 24,063     $ 26,412     $ (3,689 )   $ 22,723  
Covenants not-to-compete
    16,033       (8,087 )     7,946       16,195       (8,001 )     8,194  
Favorable lease asset
    4,119       (153 )     3,966       4,689       (629 )     4,060  
Technology
    1,270       (1,139 )     131       1,270       (1,076 )     194  
Trademarks
    748       (273 )     475       699       (251 )     448  
Client lists
    76       (57 )     19       84       (58 )     26  
 
                                   
Total
  $ 50,920     $ (14,320 )   $ 36,600     $ 49,349     $ (13,704 )   $ 35,645  
 
                                   

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VCA Antech, Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
4. Goodwill and Other Intangible Assets, continued
     The following table summarizes our aggregate amortization expense related to other intangible assets (in thousands):
                 
    Three Months Ended  
    March 31,  
    2009     2008  
Aggregate amortization expense
  $ 1,807     $ 1,204  
 
           
     The estimated amortization expense related to intangible assets for the remainder of fiscal 2009 and each of the succeeding years thereafter as of March 31, 2009 is as follows (in thousands):
         
Remainder of 2009
  $ 5,524  
2010
    6,713  
2011
    5,895  
2012
    5,011  
2013
    2,963  
Thereafter
    10,494  
 
     
Total
  $ 36,600  
 
     
5. Noncontrolling Interests
     Effective January 1, 2009, we adopted the provisions of SFAS No. 160 on a retrospective basis. SFAS No. 160 changes the accounting and reporting for minority interests which have been re-characterized as noncontrolling interests and are now classified as a component of equity in our Condensed, Consolidated Balance Sheets. The adoption of SFAS No. 160 also resulted in new presentation and disclosure requirements for noncontrolling interests within our Condensed, Consolidated Income Statements, Statements of Equity and Statements of Cash Flows.
6. Other Accrued Liabilities
     Other accrued liabilities consisted of the following (in thousands):
                 
    March 31,     December 31,  
    2009     2008  
Accrued workers’ compensation insurance
  $ 4,302     $ 4,436  
Deferred revenue
    6,937       7,303  
Interest rate swap liability
    6,218       8,899  
Other
    26,242       25,786  
 
           
 
  $ 43,699     $ 46,424  
 
           
7. Interest Rate Swap Agreements
     In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133 (“SFAS No. 161”). SFAS No. 161 changed the disclosure requirements for derivative instruments and hedging activities to enhance the current disclosure framework in SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities . The additional disclosures require information about how our interest rate swap agreements and hedging activities affect our financial position, financial performance, and cash flows. We adopted SFAS No. 161 on January 1, 2009 and have included the applicable disclosures below and in Note 8.

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VCA Antech, Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
7. Interest Rate Swap Agreements, continued
     In accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, all investments in derivatives are recorded at fair value. A derivative is typically defined as an instrument whose value is “derived” from an underlying instrument, index or rate, has a notional amount, requires little or no initial investment and can be net settled. Our derivatives are reported as current assets and liabilities or other non-current assets or liabilities as appropriate.
     We use interest rate swap agreements to mitigate our exposure to increasing interest rates as well as to maintain an appropriate mix of fixed-rate and variable-rate debt.
     If we determine that contracts are effective at meeting our risk reduction and correlation criteria, we account for them using hedge accounting. Under hedge accounting, we recognize the effective portion of changes in the fair value of the contracts in other comprehensive income and the ineffective portion in earnings. If we determine that contracts do not, or no longer meet our risk reduction and correlation criteria, we account for them under a fair-value method recognizing changes in the fair value in earnings in the period of change. If we determine that a contract no longer meets our risk reduction and correlation criteria or if the derivative expires, we recognize in earnings any accumulated balance in other comprehensive income related to this contract in the period of determination. For interest rate swap agreements accounted for under hedge accounting, we assess the effectiveness based on changes in their intrinsic value with changes in the time value portion of the contract reflected in earnings. All cash payments made or received under the contracts are recognized in interest expense.
     Credit exposure associated with non-performance by the counterparties to derivative instruments is generally limited to the uncollateralized fair value of the asset related to instruments recognized in the consolidated balance sheets. We attempt to mitigate the risk of non-performance by selecting counterparties with high credit ratings and monitoring their creditworthiness and by diversifying derivative amounts with multiple counterparties.
     The contractual or notional amounts for derivatives are used to calculate the exchange of contractual payments under the agreements and are not representative of the potential for gain or loss on these instruments. Interest rates affect the fair value of derivatives. The fair values generally represent the estimated amounts that we would expect to receive or pay upon termination of the contracts at the reporting date. The fair values are based upon dealer quotes when available or an estimate using values obtained from independent pricing services, costs to settle or quoted market prices of comparable instruments.
     We have entered into interest rate swap agreements whereby we pay to the counterparties amounts based on fixed interest rates and set notional principal amounts in exchange for the receipt of payments from counterparties based on current London Interbank Offer Rates (“LIBOR”) and the same set notional principal amounts. The purpose of these hedges is to offset the variability of cash flows due to our outstanding variable rate debt under our senior term notes. A summary of these agreements is as follows:
                 
    Interest Rate Swap Agreements
Fixed interest rate
  5.51%   4.95%   5.34%   2.64%
Notional amount (in millions)
  $50.0   $75.0   $100.0   $100.0
Effective date
  6/20/2006   4/30/2007   6/11/2007   2/12/2008
Expiration date
  6/30/2009   4/30/2009   12/31/2009   2/26/2010
Counterparty
  Goldman Sachs   Wells Fargo   Goldman Sachs   Wells Fargo
Qualifies for hedge accounting
  Yes   Yes   Yes   Yes

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VCA Antech, Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
7. Interest Rate Swap Agreements, continued
     The following table summarizes cash received or cash paid and ineffectiveness reported in earnings as a result of our interest rate swap agreements (in thousands):
                 
    Three Months Ended
    March 31,
    2009   2008
Cash paid (1)
  $ 3,245     $ 688  
Recognized (gain) loss from ineffectiveness (2)
  $ (49 )   $ 177  
 
(1)   Our interest rate swap agreements effectively convert a certain amount of our variable-rate debt under our senior credit facility to fixed-rate debt for purposes of controlling cash paid for interest. The above table depicts both cash payments to and receipts from the counterparties on our swap agreements. These payments and receipts are offset by a corresponding decrease or increase in interest paid on our variable-rate debt under our senior credit facility.
 
(2)   These recognized losses are included in other (income) expense in our Condensed, Consolidated Income Statements.
8. Fair Value Measurements
     On January 1, 2008, we adopted the applicable provisions of SFAS No. 157, Fair Value Measurement s (“SFAS No. 157”), which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements related to financial instruments. On January 1, 2009 we adopted SFAS No. 157 for our non-financial assets and non-financial liabilities measured on a non-recurring basis. As of March 31, 2009, we do not have any applicable non-recurring measurements of non-financial assets and non-financial liabilities.
     SFAS No. 157 includes a fair value 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. SFAS No. 157 establishes a three-tiered fair value hierarchy which prioritizes the inputs used in measuring fair value as follows:
    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.

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VCA Antech, Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
8. Fair Value Measurements, continued
Fair Value of Financial Instruments
     In April 2009, the FASB issued FSP 107-1, which amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments , to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This FSP also amends Accounting Principles Board Opinions (“APB”) No. 28, Interim Financial Reporting , to require those disclosures in summarized financial information at interim reporting periods. The FSP is effective for interim periods ending after June 15, 2009. We early adopted the provisions of this FSP and all other related guidance for the quarter ended March 31, 2009.
     SFAS No. 107 requires disclosure of fair value information about financial instruments, whether or not recognized in the accompanying consolidated balance sheets. Fair value as defined by SFAS No. 157 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 and Accounts Payable. Due to their short-term nature, fair value approximates carrying value.
      Long-Term Debt. We believe the carrying values of our variable-rate debt at March 31, 2009 are not reasonable estimates of fair value due to changes in the credit markets during 2008 and 2009. We have estimated the fair value of our variable-rate debt using discounted cash flow techniques utilizing current market rates.
     The following table reflects the carrying value and fair values of our long-term debt (in thousands):
                                 
    As of March 31, 2009     As of December 31, 2008  
    Carrying     Fair     Carrying     Fair  
    Value     Value     Value     Value  
 
Variable-rate long-term debt
  $ 520,934     $ 474,085     $ 522,282     $ 499,025  
      Interest Rate Swap Agreements . We use the market approach to measure fair value for our interest rate swap agreements. The market approach uses prices and other relevant information generated by market transactions involving comparable assets or liabilities.
     The following table reflects the fair value as defined by SFAS No. 157, of our interest rate swap agreements which are measured on a recurring basis (in thousands):
                                 
            Basis of Fair Value Measurement  
            Quoted Prices     Significant Other     Significant  
            In Active Markets     Observable     Unobservable  
            for Identical Items     Inputs     Inputs  
    Balance     (Level 1)     (Level 2)     (Level 3)  
At March 31, 2009
                               
Other accrued liabilities
  $ (6,218 )   $     $ (6,218 )   $  
 
                       
 
                               
At December 31, 2008
                               
Other accrued liabilities
  $ (8,899 )   $     $ (8,899 )   $  
 
                       

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VCA Antech, Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
9. Share-Based Compensation
Stock Option Activity
     There were no stock options granted during the three months ended March 31, 2009. The aggregate intrinsic value of our stock options exercised during the three months ended March 31, 2009 was $126,000 and the actual tax benefit realized on options exercised during the period was $49,000.
     At March 31, 2009 there was $5.5 million of total unrecognized compensation cost related to our stock options. This cost is expected to be recognized over a weighted-average period of 3.1 years.
     The compensation cost that has been charged against income for stock options for the three months ended March 31, 2009 and 2008 was $507,000 and $437,000, respectively. The corresponding income tax benefit recognized was $198,000 and $170,000 for the three months ended March 31, 2009 and 2008, respectively.
Non-vested Stock Activity
     There were no shares of non-vested common stock issued during the three months ended March 31, 2009.
     Total compensation cost charged against income related to non-vested stock awards was $1.5 million and $872,000 for the three months ended March 31, 2009 and 2008, respectively. The corresponding income tax benefit recognized in the income statement was $574,000 and $339,000 for the three months ended March 31, 2009 and 2008, respectively.
     At March 31, 2009, there was $13.0 million of unrecognized compensation cost related to these non-vested shares, which will be recognized over a weighted-average period of 2.5 years, assuming the performance conditions are met. A summary of our non-vested stock activity for the three months ended March 31, 2009 is as follows:
                 
            Weighted-
            Average Fair
            Value
    Shares   Per Share
Outstanding at December 31, 2008
    724,235     $ 31.52  
Granted
        $  
Vested
    (44,873 )   $ 32.77  
Forfeited/Canceled
    (5,625 )   $ 35.78  
 
               
Outstanding at March 31, 2009
    673,737     $ 31.40  
 
               

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VCA Antech, Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
10. 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 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,  
    2009     2008  
Net income attributable to VCA Antech, Inc.
  $ 31,970     $ 31,202  
 
           
 
               
Weighted-average common shares outstanding:
               
Basic
    84,680       84,348  
Effect of dilutive potential common shares:
               
Stock options
    568       1,414  
Non-vested shares
    138       103  
 
           
Diluted
    85,386       85,865  
 
           
 
               
Basic earnings per share
  $ 0.38     $ 0.37  
 
           
Diluted earnings per share
  $ 0.37     $ 0.36  
 
           
     For the three months ended March 31, 2009 and 2008, potential common shares of 2,417,761 and 39,997, respectively, were excluded from the computation of diluted earnings per share because their inclusion would have had an anti-dilutive effect.
11. Comprehensive Income
     Total comprehensive income consists of net income and the other comprehensive gain (loss) during the three months ended March 31, 2009 and 2008. The following table provides a summary of comprehensive income (in thousands):
                 
    Three Months Ended  
    March 31,  
    2009     2008  
Net income
  $ 32,881     $ 32,159  
Other comprehensive (loss) income:
               
Foreign currency translation adjustments
    (178 )      
Unrealized loss on foreign currency
    (95 )      
Tax benefit
    37        
Unrealized loss on hedging instruments
    (614 )     (5,440 )
Tax benefit
    240       2,117  
Losses on hedging instruments reclassified to income
    3,245       688  
Tax benefit
    (1,269 )     (268 )
 
           
Other comprehensive income (loss)
    1,366       (2,903 )
 
           
Total comprehensive income
    34,247       29,256  
Comprehensive income attributable to noncontrolling interests
    (911 )     (957 )
 
           
Comprehensive income attributable to VCA Antech, Inc.
  $ 33,336     $ 28,299  
 
           

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VCA Antech, Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
12. Lines of Business
     Our reportable segments are Animal Hospital, Laboratory and Medical Technology. These 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. 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 Medical Technology segment sells digital radiography and ultrasound imaging equipment, related computer hardware, software and ancillary services to the veterinary market. We also operate a corporate office that provides general and administrative support services for our other segments.
     The accounting policies of our segments are the same as those described in the summary of significant accounting policies included in our 2008 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 accounted for as if they were transactions with independent third parties at current market prices.
     The following is a summary of certain financial data for each of our segments (in thousands):
                                                 
    Animal             Medical             Intercompany        
    Hospital     Laboratory     Technology     Corporate     Eliminations     Total  
Three Months Ended March 31, 2009
                                               
External revenue
  $ 238,358     $ 69,492     $ 8,000     $     $     $ 315,850  
Intercompany revenue
          7,997       1,158             (9,155 )      
 
                                   
Total revenue
    238,358       77,489       9,158             (9,155 )     315,850  
Direct costs
    195,194       41,483       5,633             (8,901 )     233,409  
 
                                   
Gross profit
    43,164       36,006       3,525             (254 )     82,441  
Selling, general and administrative expense
    5,384       5,567       3,084       9,154             23,189  
(Gain) loss on sale of assets
    (259 )     2       1       8             (248 )
 
                                   
Operating income (loss)
  $ 38,039     $ 30,437     $ 440     $ (9,162 )   $ (254 )   $ 59,500  
 
                                   
 
                                               
Depreciation and amortization
  $ 6,299     $ 2,183     $ 369     $ 488     $ (187 )   $ 9,152  
Capital expenditures
  $ 9,123     $ 2,129     $ 1,121     $ 885     $ (372 )   $ 12,886  
 
                                               
Three Months Ended March 31, 2008
                                               
External revenue
  $ 226,100     $ 69,058     $ 12,674     $     $     $ 307,832  
Intercompany revenue
          7,671       1,175             (8,846 )      
 
                                   
Total revenue
    226,100       76,729       13,849             (8,846 )     307,832  
Direct costs
    184,963       39,387       8,936             (8,485 )     224,801  
 
                                   
Gross profit
    41,137       37,342       4,913             (361 )     83,031  
Selling, general and administrative expense
    5,478       4,951       3,434       9,315             23,178  
(Gain) loss on sale of assets
    (193 )     (11 )     20                   (184 )
 
                                   
Operating income (loss)
  $ 35,852     $ 32,402     $ 1,459     $ (9,315 )   $ (361 )   $ 60,037  
 
                                   
Depreciation and amortization
  $ 4,883     $ 1,647     $ 397     $ 459     $ (123 )   $ 7,263  
Capital expenditures
  $ 7,055     $ 1,778     $ 82     $ 825     $ (277 )   $ 9,463  
 
                                               
At March 31, 2009
                                               
Total assets
  $ 1,096,347     $ 202,582     $ 42,245     $ 163,034     $ (9,682 )   $ 1,494,526  
 
                                   
At December 31, 2008
                                               
Total assets
  $ 1,069,963     $ 194,164     $ 42,839     $ 150,891     $ (8,819 )   $ 1,449,038  
 
                                   

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VCA Antech, Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
13. Commitments and Contingencies
     We have certain commitments, including operating leases and purchase agreements. These items are discussed in detail in our consolidated financial statements and notes thereto included in our 2008 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 expire and the attainment of criteria is established. If the specified financial criteria are attained, at March 31, 2009, we will be obligated to pay an additional $1.7 million.
b. Officers’ Compensation
     Each of our Chief Executive Officer (“CEO”), Chief Operating Officer (“COO”) and Chief Financial Officer (“CFO”) has entered into an employment agreement with our company. The agreements provide for a base salary and annual bonuses set by our Compensation Committee of the Board of Directors. As of any given date, under their contracts, each officer has the following remaining term: five years for the CEO, three years for the COO and two years for the CFO. Our Senior Vice President (“SVP”) has entered into a letter agreement with the Company pursuant to which certain payments will be made to our SVP in the event his employment is terminated.
     In the event any of these officers’ employment is terminated due to death or disability, each officer, or each officer’s estate, is entitled to receive the remaining base salary during the remaining scheduled term of his employment agreement (and in the case of our SVP, for two years), the continued vesting of his non-vested stock, the acceleration of the vesting of his options that would have vested during the 24 months following the date of termination, which options shall remain exercisable for the full term, and the right to continue receiving specified benefits and perquisites.
     In the event any of these officers terminate their employment agreements for cause (or, in the case of our SVP, he terminates his employment for good reason), we terminate any of their employment agreements (or, in the case of our SVP, we terminate his employment) without cause or a change of control occurs (in which case such employment agreements, and our SVP’s employment with us, terminate automatically), each officer is entitled to receive the remaining base salary during the remaining scheduled term of his employment agreement (and in the case of our SVP, for two years), a bonus based on past bonuses, the continued vesting of his non-vested stock, the acceleration of the vesting of his options, which options shall remain exercisable for the full term, and the right to continue receiving specified benefits and perquisites. Notwithstanding the foregoing, if the CFO’s employment agreement or our SVP’s employment is terminated by us without cause, accelerated vesting of their respective options will be limited to those options that would have vested during the 24 months following the date of termination.
     In the event of a change of control, the cash value of all benefits due under their employment contracts (or, in the case of our SVP, his letter agreement) as a result of the termination would be immediately payable to the officers. In addition, if any of the amounts payable to these officers under these provisions constitute “excess parachute payments” under the Internal Revenue Code, each officer is entitled to an additional payment to cover the tax consequences associated with the excess parachute payment.
c. Other Contingencies
     We have certain contingent liabilities resulting from litigation and claims incident to the ordinary course of our business. We believe that the probable resolution of such contingencies will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.

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VCA Antech, Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
14. Recent Accounting Pronouncements
     In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments (“FSP FAS 107-1 and APB 28-1”). FSP FAS 107-1 and APB 28-1 require disclosures about fair value of financial instruments in interim and annual financial statements. FSP FAS 107-1 and APB 28-1 is effective for periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. We elected to adopt FSP FAS 107-1 and APB 28-1 effective March 31, 2009 and we have included the required disclosures in Note 7.
     In April 2009, the FASB issued FSP FAS 141R-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies (“FSP FAS 141R-1”). FSP FAS 141R-1 amends SFAS No. 141R regarding the initial recognition and measurement of contingencies acquired or assumed in a business combination. FSP FAS 141R-1 requires recognition at fair value of such contingencies if the acquisition-date fair value can be determined during the measurement period. FSP FAS 141R-1 became effective for us for contingent assets and liabilities arising from business combinations with acquisition dates on or after January 1, 2009. Our adoption of FSP FAS 141R-1 did not have a material impact on our consolidated financial statements.
15. Subsequent Events
     On April 17, 2009, we granted 84,757 restricted stock units under the 2006 Equity Incentive Plan to each of our four senior executive officers for services performed in fiscal year 2008. The restricted stock units were fully vested on the grant date. The fair value of the units is $22.90 per share resulting in a total value of $1.9 million.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
         
    Page
    Number
    18  
 
    18  
 
    19  
 
    20  
 
    21  
 
    26  
 
    30  

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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 8, 2009, and we undertake no duty to update this information. Shareholders and prospective investors can find information filed with the SEC after May 8, 2009 at our website at http://investor.vcaantech.com or at the SEC’s website at www.sec.gov .
     We are a leading national animal healthcare company. We provide veterinary services and diagnostic testing to support veterinary care and we sell diagnostic imaging equipment, other medical technology products and related services to veterinarians. 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, 2009, our animal hospital network consisted of 478 animal hospitals in 39 states.
 
    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, 2009, our Laboratory network consisted of 46 laboratories serving all 50 states and certain areas in Canada.
 
    Our Medical Technology segment sells digital radiography and ultrasound imaging equipment, related computer hardware, software and ancillary services.
     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, heartworm and ticks, and the number of daylight hours.
Executive Overview
     During the three months ended March 31, 2009 our Laboratory internal revenue growth was 1.7% while our Animal Hospital same-store growth was negative 2.7%. Although our organic revenue growth rates have been impacted by the economic crisis, we have continued our long history of earnings growth as a result of our continued focus on our core business strategy and by maintaining a strong emphasis on expense management.

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Acquisitions and Facilities
     Our growth strategy includes the acquisition of independent animal hospitals. We currently anticipate that we will acquire $60.0 million to $70.0 million of annualized Animal Hospital revenue by the end of 2009. In addition, we also evaluate the acquisition of animal hospital chains, laboratories or related businesses if favorable opportunities are presented. 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, 2009:
         
Animal Hospitals:
       
Beginning of period
    471  
Acquisitions
    9  
Acquisitions relocated into our existing animal hospitals
    (2 )
 
       
End of period
    478  
 
       
 
       
Laboratories:
       
Beginning of period
    44  
Acquisitions (1)
     
Created
    2  
 
       
End of period
    46  
 
       
 
(1)   During the three months ended March 31, 2009 we acquired one pathology office, bringing the total number of pathology offices to four. Pathology offices are not included in our laboratory count.
Critical Accounting Policies
     Our consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States, 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 consolidated financial statements. A discussion of such critical accounting policies, which include revenue recognition, valuation of goodwill and other intangible assets, income taxes, and self-insured liabilities can be found in our 2008 Annual Report on Form 10-K. There have been no material changes to those policies as of this Quarterly Report on Form 10-Q for the period ended March 31, 2009.
Valuation of Goodwill
     In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets (“SFAS No. 142”), we are required to test our goodwill for impairment annually, or sooner if circumstances indicate an impairment may exist. During the quarter ended March 31, 2009, as a result of a decline in the sales volume at our Medical Technology reporting unit we evaluated the related goodwill for impairment. We calculated an estimate of the fair value of the Medical Technology reporting unit which indicated that currently there was no impairment. However, the fair value did not significantly exceed its respective book value. It is considered at least reasonably possible that our determination that goodwill is not impaired could change in the near term should the current economic crisis continue or worsen. We will continue to monitor the results of all of our business segments and perform additional valuations as necessary. Otherwise we will perform our regularly scheduled annual impairment analysis of all our reporting units in October 2009 which will include both discounted cash flow techniques and market comparables.

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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,
    2009   2008
Revenue:
               
Animal Hospital
    75.5 %     73.4 %
Laboratory
    24.5       24.9  
Medical Technology
    2.9       4.5  
Intercompany
    (2.9 )     (2.8 )
 
               
Total revenue
    100.0       100.0  
Direct costs
    73.9       73.0  
 
               
Gross profit
    26.1       27.0  
Selling, general and administrative expense
    7.3       7.5  
Gain on sale of assets
           
 
               
Operating income
    18.8       19.5  
Interest expense, net
    1.9       2.5  
 
               
Income before provision for income taxes
    16.9       17.0  
Provision for income taxes
    6.5       6.6  
 
               
Net income
    10.4       10.4  
Net income attributable to noncontrolling interests
    0.3       0.3  
 
               
Net income attributable to VCA Antech, Inc.
    10.1 %     10.1 %
 
               
Revenue
     The following table summarizes our revenue (in thousands, except percentages):
                                         
    Three Months Ended March 31,  
    2009     2008        
            % of             % of     %  
    $     Total     $     Total     Change  
Animal Hospital
  $ 238,358       75.5 %   $ 226,100       73.4 %     5.4 %
Laboratory
    77,489       24.5 %     76,729       24.9 %     1.0 %
Medical Technology
    9,158       2.9 %     13,849       4.5 %     (33.9 )%
Intercompany
    (9,155 )     (2.9 )%     (8,846 )     (2.8 )%     3.5 %
 
                                   
Total revenue
  $ 315,850       100.0 %   $ 307,832       100.0 %     2.6 %
 
                                   
     Consolidated revenue increased $8.0 million for the three months ended March 31, 2009 as compared to the same period in the prior year. The increase in consolidated revenue was attributable to revenue from acquired animal hospitals and, to a lesser extent, internal growth in our Laboratory segment. Our Animal Hospital same-store revenue growth, adjusted for one fewer business day in the current period, was negative 2.7% for the three months ended March 31, 2009. Our Laboratory internal revenue growth was 1.7% for the three months ended March 31, 2009. The decline in our revenue growth rates is due primarily to the aforementioned changes in our economic environment.

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Gross Profit
     The following table summarizes our gross profit in both dollars and as a percentage of applicable revenue, or gross margin (in thousands, except percentages):
                                         
    Three Months Ended March 31,  
    2009     2008        
            Gross             Gross     %  
    $     Margin     $     Margin     Change  
Animal Hospital
  $ 43,164       18.1 %   $ 41,137       18.2 %     4.9 %
Laboratory
    36,006       46.5 %     37,342       48.7 %     (3.6 )%
Medical Technology
    3,525       38.5 %     4,913       35.5 %     (28.3 )%
Intercompany
    (254 )             (361 )                
 
                                   
Total gross profit
  $ 82,441       26.1 %   $ 83,031       27.0 %     (0.7 )%
 
                                   
     Consolidated gross profit decreased $590,000 for the three months ended March 31, 2009. The decrease was primarily due to a decline in Medical Technology revenue and a decline in Laboratory gross margins. The decline was partially offset by an increase in Animal Hospital gross profit attributable to the acquisition of additional animal hospitals and, to a lesser extent, internal revenue growth in the Laboratory segment.
Segment Results
Animal Hospital Segment
     The following table summarizes revenue and gross profit for the Animal Hospital segment (in thousands, except percentages):
                         
    Three Months Ended March 31,
    2009   2008   % Change
Revenue
  $ 238,358     $ 226,100       5.4 %
Gross profit
  $ 43,164     $ 41,137       4.9 %
Gross margin
    18.1 %     18.2 %        
     Animal Hospital revenue increased $12.3 million for the three months ended March 31, 2009 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 price per order):
                         
    Three Months Ended March 31,  
    2009     2008     % Change  
Same-store facilities:
                       
Orders (1)(2)
    1,391       1,491       (6.7 )%
Average revenue per order (3)
  $ 150.75     $ 144.49       4.3 %
 
                   
Same-store revenue (1)
  $ 209,652     $ 215,370       (2.7 )%
Business day adjustment (4)
          2,709          
Net acquired revenue (5)
    28,706       8,021          
 
                   
Total
  $ 238,358     $ 226,100       5.4 %
 
                   

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(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 period and adjusted for the impact resulting from any differences in the number of business days in the comparable period. Same-store revenue also includes revenue generated by customers referred from our relocated or combined animal hospitals, including those merged upon acquisition.
 
(2)   The change in orders may not calculate exactly due to rounding.
 
(3)   Computed by dividing same-store revenue by same-store orders. The average revenue per order may not calculate exactly due to rounding.
 
(4)   The 2008 business day adjustment reflects the impact of one fewer business day in 2009 as compared to 2008.
 
(5)   Net acquired revenue represents the revenue from those animal hospitals acquired, net of revenue from those animal hospitals sold or closed, on or after the beginning of the comparable period, which was January 1, 2008. 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.
     During the three months ended March 31, 2009, our volume of same-store orders declined primarily as a result of current economic conditions and changes in our overall business environment. Over the last few years, some pet-related products traditionally sold in our animal hospitals are now widely available in retail stores and other distribution channels such as the Internet. There has also been a decline in the number of vaccinations as some recent professional literature and research has suggested that vaccinations can be given to pets less frequently.
     Our average revenue per order increased however during the three months ended March 31, 2009. 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 mentioned above and our emphasis on comprehensive wellness visits has resulted in a decrease in lower-priced orders and an increase in higher-priced orders.
     Price increases also contributed to the increase in the average revenue per order. Prices at each of our hospitals are reviewed regularly and adjustments are made based on market considerations, demographics and our costs. These adjustments historically have approximated 3% to 6% on most services at the majority of our hospitals and are typically implemented in February of each year.
     Animal Hospital gross profit is calculated as Animal Hospital revenue less Animal Hospital direct costs. Animal Hospital direct costs are comprised of 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 expenses incurred by each individual animal hospital and costs of goods sold associated with the retail sales of pet food and pet supplies.
     Our Animal Hospital gross margin remained essentially unchanged totaling 18.1% for the three months ended March 31, 2009 as compared to 18.2% in the prior year. Our Animal Hospital same-store gross margin increased to 18.8% for the three months ended March 31, 2009 as compared to 18.5% in the prior year. The increase in the same-store gross margin is primarily attributable to the implementation of cost controls. The increase in same-store gross margins has been largely offset by lower gross margins from our acquired hospitals.
     Over the last several years we have acquired a significant number of animal hospitals. Many of these newly acquired animal hospitals had lower gross margins at the time of acquisition than those previously operated by us. We have improved these lower gross margins, in the aggregate, subsequent to the acquisition by improving animal hospital revenue, reducing costs, and increasing operating leverage.

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      Laboratory Segment
     The following table summarizes revenue and gross profit for our Laboratory segment (in thousands, except percentages):
                         
    Three Months Ended March 31,
    2009   2008   % Change
Revenue
  $ 77,489     $ 76,729       1.0 %
Gross profit
  $ 36,006     $ 37,342       (3.6 )%
Gross margin
    46.5 %     48.7 %        
     Laboratory revenue increased $760,000 for the three months ended March 31, 2009 as compared to the same period in the prior year. The components of the increase in Laboratory revenue are detailed below (in thousands, except percentages and average price per requisition):
                         
    Three Months Ended March 31,  
    2009     2008     % Change  
Internal growth:
                       
Number of requisitions (1)
    3,279       3,198       2.5 %
Average revenue per reqisition (2)
  $ 23.48     $ 23.68       (0.8 )%
 
                   
Total internal revenue (1)
  $ 77,001     $ 75,732       1.7 %
Billing day adjustment (3)
          997          
Acquired revenue (4)
    488                
 
                 
Total
  $ 77,489     $ 76,729       1.0 %
 
                   
 
(1)   Internal revenue and requisitions were calculated using Laboratory operating results, adjusted to exclude the operating results of acquired laboratories for the comparable periods that we did not own them in the prior year and adjusted for the impact resulting from any differences in the number of billing days in comparable periods.
 
(2)   Computed by dividing internal revenue by the number of requisitions.
 
(3)   The billing day adjustment reflects the impact of differences in the number of billing days in 2009 as compared to 2008.
 
(4)   Acquired revenue represents the revenue of the laboratories acquired subsequent to April 1, 2008.
     The increase in requisitions from internal growth is the result of a continued trend in veterinary medicine to focus on the importance of laboratory diagnostic testing in the diagnosis, early detection and treatment of diseases, and the migration of certain tests to outside laboratories that have historically been performed in veterinary hospitals. This trend is driven by an increase in the number of specialists in the veterinary industry relying on diagnostic testing, the increased focus on diagnostic testing in veterinary schools and general increased awareness through ongoing marketing and continuing education programs provided by us, pharmaceutical companies and other service providers in the industry.
     We derive our Laboratory revenue from services provided to over 16,000 clients and shifts in the purchasing habits of any individual animal hospital or small group of animal hospitals is not material to our Laboratory revenue. Other companies are developing networks of animal hospitals, however, and shifts in the purchasing habits of these networks have the potential of a greater impact on our Laboratory revenue.
     The decline in the average revenue per requisition is attributable to many factors including changes in the mix, performing lower-priced tests historically performed at the veterinary hospitals, and a decrease in higher-priced tests which have resulted from the current economic environment. The decline in the average revenue per requisition was partially offset by price increases which ranged from 3% to 4% in both February 2009 and February 2008.

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     Laboratory gross profit is calculated as Laboratory revenue less Laboratory direct costs. Laboratory direct costs are comprised of all costs of laboratory services, including but not limited to, salaries of veterinarians, specialists, technicians and other laboratory-based personnel, transportation and delivery costs, facilities rent, occupancy costs, depreciation and amortization and supply costs.
     The decrease in Laboratory margins experienced during the three months ended March 31, 2009 was primarily due to costs incurred in advance of projected revenue related to our expansion into Canada, in addition to increased depreciation and amortization expense and repairs and maintenance expense related to new equipment purchases and leasehold improvements.
Medical Technology Segment
     The following table summarizes revenue and gross profit for the Medical Technology segment (in thousands, except percentages):
                         
    Three Months Ended March 31,
                    %
    2009   2008   Change
Revenue
  $ 9,158     $ 13,849       (33.9 )%
Gross profit
  $ 3,525     $ 4,913       (28.3 )%
Gross margin
    38.5 %     35.5 %        
     As a result of current economic trends, many members of the veterinary community have delayed their expenditures for capital assets such as digital radiography and ultrasound equipment. Accordingly, Medical Technology revenue decreased $4.7 million for the three months ended March 31, 2009. The decline in digital radiography and ultrasound equipment was partially offset by an increase in customer support revenues related to an increase in the base of installed digital radiography units and an overall increase in renewal rates. As we have stated previously we believe the business life cycle for ultrasound equipment is maturing, however the decline in revenues experienced during the quarter ended March 31, 2009 was predominately due to current economic conditions.
     Medical Technology gross profit is calculated as Medical Technology revenue less Medical Technology direct costs. Medical Technology direct costs are comprised of all product and service costs, including, but not limited to, all costs of equipment, related products and services, salaries of technicians, support personnel, trainers, consultants and other non-administrative personnel, depreciation and amortization and supply costs.
     Medical Technology gross profit decreased $1.4 million for the three months ended March 31, 2009 as compared to the prior year primarily due to the decrease in revenue as discussed above offset by increases in small animal digital radiography and warranty margins.
Intercompany Revenue
     Laboratory revenue for the three months ended March 31, 2009 included intercompany revenue of $8.0 million that was generated by providing laboratory services to our animal hospitals. Medical Technology revenue for the three months ended March 31, 2009 included intercompany revenue of $1.2 million that was generated by providing products and services to our animal hospitals and laboratories. For purposes of reviewing the operating performance of our business segments, all intercompany transactions are accounted for as if the transaction was with an independent third party at current market prices. For financial reporting purposes, intercompany transactions are eliminated as part of our consolidation.

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Selling, General and Administrative Expense
     The following table summarizes our selling, general and administrative expense (“SG&A”) in both dollars and as a percentage of applicable revenue (in thousands, except percentages):
                                         
    Three Months Ended March 31,  
    2009     2008        
            % of             % of     %  
    $     Revenue     $     Revenue     Change  
Animal Hospital
  $ 5,384       2.3 %   $ 5,478       2.4 %     (1.7 )%
Laboratory
    5,567       7.2 %     4,951       6.5 %     12.4 %
Medical Technology
    3,084       33.7 %     3,434       24.8 %     (10.2 )%
Corporate
    9,154       2.9 %     9,315       3.0 %     (1.7 )%
 
                                   
Total SG&A
  $ 23,189       7.3 %   $ 23,178       7.5 %     0.0 %
 
                                   
     Consolidated SG&A remained essentially unchanged for the three months ended March 31, 2009. Our Laboratory segment SG&A increased due to costs incurred related to our expansion into Canada and the development of new products. This increase was almost fully offset by decreases in our Animal Hospital, Medical Technology and corporate SG&A. These decreases are due to reductions in marketing expense, reductions in workers’ compensation insurance rates, and decreased bonuses and commissions as a result of the current economic environment. These decreases were partially offset by increases in share-based compensation due to additional grants.
Operating Income
     The following table summarizes our operating income in both dollars and as a percentage of applicable revenue (in thousands, except percentages):
                                         
    Three Months Ended March 31,  
    2009     2008        
            % of             % of     %  
    $     Revenue     $     Revenue     Change  
Animal Hospital
  $ 38,039       16.0 %   $ 35,852       15.9 %     6.1 %
Laboratory
    30,437       39.3 %     32,402       42.2 %     (6.1 )%
Medical Technology
    440       4.8 %     1,459       10.5 %     (69.8 )%
Corporate
    (9,162 )     (2.9 )%     (9,315 )     (3.0 )%     (1.6 )%
Intercompany
    (254 )     2.8 %     (361 )     4.1 %     (29.6 )%
 
                                   
Total operating income
  $ 59,500       18.8 %   $ 60,037       19.5 %     (0.9 )%
 
                                   
     The decrease in our consolidated operating income was primarily due to the aforementioned decrease in gross profit.

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Interest Expense, Net
     The following table summarizes our interest expense, net of interest income (in thousands):
                 
    Three Months Ended  
    March 31,  
    2009     2008  
Interest expense (income):
               
Senior term notes
  $ 2,587     $ 7,013  
Interest rate hedging agreements
    3,245       782  
Capital leases and other
    580       641  
Amortization of debt costs
    120       116  
 
           
 
    6,532       8,552  
Interest income
    (414 )     (937 )
 
           
Total interest expense, net of interest income
  $ 6,118     $ 7,615  
 
           
     The decrease in net interest expense for the three months ended March 31, 2009 was primarily attributable to a decrease in the weighted average interest rate in comparison to the prior year.
Provision for Income Taxes
     Our effective tax rate was 39.2% for both the three months ended March 31, 2009 and the three months ended March 31, 2008. The effective tax rate is subject to ongoing review and evaluation by management and could change in future quarters.
Liquidity and Capital Resources
Introduction
     We generate cash primarily from payments made by customers for our veterinary services, payments from animal hospitals and other clients for our laboratory services, and from proceeds received from the sale of our imaging equipment and other related services. Our business historically has experienced strong liquidity, as fees for services provided in our animal hospitals are due at the time of service and fees for laboratory services are collected under standard industry terms. Our cash disbursements are primarily for payments related to the compensation of our employees, supplies and inventory purchases for our operating segments, occupancy and other administrative costs, interest expense, payments on long-term borrowings, capital expenditures and animal hospital acquisitions. Cash outflows fluctuate with the amount and timing of the settlement of these transactions.
     We manage our cash, investments and capital structure so we are able to meet the short-term and long-term obligations of our business while maintaining financial flexibility and liquidity. We forecast, analyze and monitor our cash flows to enable investment and financing within the overall constraints of our financial strategy.
     At March 31, 2009, our consolidated cash and cash equivalents totaled $109.1 million, representing an increase of $20.1 million as compared to December 31, 2008. In addition, cash flows generated from operating activities totaled $51.2 million in 2009, representing an increase of $2.2 million as compared to the three months ended March 31, 2008.
     We have historically funded our working capital requirements, capital expenditures and investment in animal hospital acquisitions from internally generated cash flows and we expect to do so in the future. As of March 31, 2009, we have access to an unused $75.0 million revolving credit facility, which allows us to maintain further operating and financial flexibility. Historically, we have been able to obtain cash from other additional borrowings. The availability of financing in the form of debt or equity however is influenced by many factors including our profitability, operating cash flows, debt levels, debt ratings, contractual restrictions, and market conditions. Although in the past we have been able to obtain financing for material transactions on terms that we believe to be reasonable, there is a possibility that we may not be able to obtain financing on favorable terms in the future.

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Future Cash Flows
Short-term
     Other than our acquisitions of hospital chains, we historically have funded our working capital requirements, capital expenditures and investments in animal hospital acquisitions from internally generated cash flow. We anticipate that our cash on hand and net cash provided by operations will be sufficient to meet our anticipated cash requirements for the next 12 months. If we consummate one or more significant acquisitions of animal hospital chains during this period, we may seek additional debt or equity financing.
     For the year ended December 31, 2009, we expect to spend $60.0 million to $70.0 million, excluding real estate, related to the acquisition of independent animal hospitals. The ultimate number of acquisitions and cash used is largely dependent upon the attractiveness of the candidates and the strategic fit within our operations. From January 1, 2009 through March 31, 2009, we spent $13.1 million in connection with the acquisition of eight animal hospitals and one pathology office, as well as $963,000 for the related real estate. In addition, we expect to spend approximately $80.0 million in 2009 for both property and equipment additions and capital costs necessary to maintain our existing facilities.
Long-term
     Our long-term liquidity needs, other than those related to the day-to-day operations of our business, including commitments for operating leases, generally are comprised of scheduled principal and interest payments for our outstanding long-term indebtedness, capital expenditures related to the expansion of our business and acquisitions in accordance with our growth strategy. In addition to the scheduled payments on our senior term notes, we are required to make mandatory prepayments in the event we have excess cash flow. Pursuant to the terms of our senior credit facility, mandatory prepayments are due on our senior term notes equal to 75% of any excess cash flow at the end of 2009 and 2010. Excess cash flow is defined as earnings before interest, taxes, depreciation and amortization less voluntary and scheduled debt repayments, capital expenditures, interest payable in cash, taxes payable in cash and cash paid for acquisitions. These payments reduce on a pro rata basis the remaining scheduled principal payments.
     We expect that our long-term cash flow from operations will not be sufficient to repay our long-term debt when it comes due in May 2011. We anticipate that we will refinance such indebtedness, amend its terms to extend the maturity dates, or issue common stock in our company. Our management cannot make any assurances that such refinancing or amendments, if necessary, will be available on attractive terms, if at all.
Debt Related Covenants
     Our senior credit facility contains certain financial covenants pertaining to fixed charge coverage and leverage ratios. In addition, the senior credit facility has restrictions pertaining to capital expenditures, acquisitions and the payment of cash dividends. As of March 31, 2009, we were in compliance with these covenants.
     At March 31, 2009, we had a fixed charge coverage ratio of 1.60 to 1.00, which was in compliance with the required ratio of no less than 1.20 to 1.00. The senior credit facility defines the fixed charge coverage ratio as that ratio that is calculated on a last 12-month basis by dividing pro forma earnings before interest, taxes, depreciation and amortization, as defined by the senior credit facility (“pro forma earnings”), by fixed charges. Fixed charges are defined as cash interest expense, scheduled principal payments on debt obligations, capital expenditures, and provision for income taxes. Pro forma earnings include 12 months of operating results for businesses acquired during the period.
     At March 31, 2009, we had a leverage ratio of 1.85 to 1.00, which was in compliance with the required ratio of no more than 2.75 to 1.00. The senior credit facility defines the leverage ratio as that ratio which is calculated as total debt divided by pro forma earnings.

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Historical Cash Flows
     The following table summarizes our cash flows (in thousands):
                 
    Three Months Ended  
    March 31,  
    2009     2008  
Cash provided by (used in):
               
Operating activities
  $ 51,198     $ 49,035  
Investing activities
    (28,615 )     (71,278 )
Financing activities
    (2,457 )     (2,379 )
Effect of exchange rate changes on cash and cash equivalents
    (1 )      
 
           
Increase (decrease) in cash and cash equivalents
    20,125       (24,622 )
Cash and cash equivalents at beginning of period
    88,959       110,866  
 
           
Cash and cash equivalents at end of period
  $ 109,084     $ 86,244  
 
           
Cash Flows from Operating Activities
     Net cash provided by operating activities increased $2.2 million in the three months ended March 31, 2009 as compared to the same period in the prior year. This increase was due primarily to additional cash generated from acquired businesses, improved operating performance and a decrease in cash paid for interest.
Cash Flows from Investing Activities
     The table below presents the components of the changes in investing cash flows (in thousands):
                         
    Three Months Ended        
    March 31,        
    2009     2008     Variance  
Investing Cash Flows:
                       
Acquisition of independent animal hospitals and laboratories
  $ (13,095 )   $ (45,789 )   $ 32,694  (1)
Other
    (1,372 )     (2,037 )     665  
 
                 
Total cash used for acquisitions
    (14,467 )     (47,826 )     33,359  
 
                       
Property and equipment additions
    (12,886 )     (9,463 )     (3,423)  (2)
Real estate acquired with acquisitions
    (963 )     (3,612 )     2,649  (3)
Proceeds from sale of assets
    74       1,747       (1,673)  (4)
Other
    (373 )     (12,124 )     11,751  (5)
 
                 
Net cash used in investing activities
  $ (28,615 )   $ (71,278 )   $ 42,663  
 
                 
 
(1)   The number of acquisitions will vary from year to year based upon the available pool of suitable candidates. A discussion of our acquisitions is provided above in the Executive Overview .
 
(2)   The increase in cash used to acquire property and equipment was primarily due to costs related to maintaining the quality or expanding our existing animal hospital and laboratory facilities.
 
(3)   Due to the lower return on investment realized on acquired real estate we are highly selective in our decision to acquire real estate. The decrease in cash used to acquire real estate is due to a decrease in opportunities that met our selective criteria.
 
(4)   The decrease in proceeds from sale of assets is primarily due to a significant land sale in 2008.
 
(5)   The decrease in other investing cash flows was primarily due to investments made in 2008 related to our expansion into other markets.

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Cash Flows from Financing Activities
     The table below presents the components of the changes in financing cash flows (in thousands):
                         
    Three Months Ended        
    March 31,        
    2009     2008     Variance  
Financing Cash Flows:
                       
Repayment of long-term obligations
  $ (1,946 )   $ (1,966 )   $ 20  
Distributions to noncontrolling interest partners
    (888 )     (760 )     (128)  (1)
Proceeds from stock options exercises
    557       214       343  (2)
Excess tax benefits from stock options
          133       (133)  (2)
Stock repurchases
    (180 )           (180)  (3)
 
                 
Net cash used in financing activities
  $ (2,457 )   $ (2,379 )   $ (78 )
 
                 
 
(1)   The distributions to noncontrolling interest partners represents cash payments to noncontrolling interest partners for their portion of partnership income. As mentioned in Note 6 in our March 31, 2009 Notes to Condensed, Consolidated Financial Statements, we adopted SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment of Accounting Research Bulletins (ARB) No. 51 (“SFAS No. 160”) effective January 1, 2009, which resulted in a reclassification of these distributions from operating activities to financing activities.
 
(2)   The number of stock option exercises has increased in comparison to the prior year. Although there was an increase, we had a tax shortfall on the exercise of stock options. This shortfall was caused by the decline in current market prices.
 
(3)   The stock repurchases in fiscal 2009 represent cash paid for taxes by VCA on behalf of employees who elected to settle their income tax withholdings on vested stock awards with stock.
Off-Balance Sheet Arrangements
     Other than operating leases as of March 31, 2009, we do not have any off-balance sheet financing arrangements.
Interest Rate Swap Agreements
     We have interest rate swap agreements whereby we pay counterparties amounts based on fixed interest rates and set notional principal amounts in exchange for the receipt of payments from the counterparties based on London Interbank Offer Rates (“LIBOR”) and the same set notional principal amounts. We entered into these interest rate swap agreements to hedge against the risk of increasing interest rates. The contracts effectively convert a certain amount of our variable-rate debt under our senior credit facility to fixed-rate debt for purposes of controlling cash paid for interest. That amount is equal to the notional principal amount of the interest rate swap agreements, and the fixed-rate conversion period is equal to the terms of the contract. All of our interest rate swap agreements qualify for hedge accounting and are summarized as follows:
             
    Interest Rate Swap Agreements
Fixed interest rate
  5.51%   5.34%   2.64%
Notional amount (in millions)
  $50.0   $100.0   $100.0
Effective date
  6/20/2006   6/11/2007   2/12/2008
Expiration date
  6/30/2009   12/31/2009   2/26/2010
Counterparty
  Goldman Sachs   Goldman Sachs   Wells Fargo
Qualifies for hedge accounting
  Yes   Yes   Yes
     In the future, we may enter into additional interest rate strategies. However, we have not yet determined what those strategies will be or their possible impact.

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Description of Indebtedness
      Senior Credit Facility
     At March 31, 2009, we had $520.9 million principal amount outstanding under our senior term notes and no borrowings outstanding under our revolving credit facility.
     We pay interest on our senior term notes based on the interest rate offered to our administrative agent on LIBOR plus a margin of 1.50% per annum. We pay interest on our revolving credit facility based upon Wells Fargo’s prime rate plus the margin of 0.50%.
     The senior term notes mature in May 2011 and the revolving credit facility matures in May 2010.
      Other Debt and Capital Lease Obligations
     At March 31, 2009, we had seller notes secured by assets of certain animal hospitals, unsecured debt and capital leases that totaled $29.9 million.
Recent Accounting Pronouncements
     In April 2009, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) Financial Accounting Standards (“FAS”) 107-1 and Accounting Principles Board Opinions (“APB”) 28-1, Interim Disclosures about Fair Value of Financial Instruments (“FSP FAS 107-1 and APB 28-1”). FSP FAS 107-1 and APB 28-1 require disclosures about fair value of financial instruments in interim and annual financial statements. FSP FAS 107-1 and APB 28-1 is effective for periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. We early adopted the provisions of this FSP and all other related guidance for the quarter ended March 31, 2009 and we have included the required disclosures in Note 8 in our March 31, 2009 Notes to Condensed, Consolidated Financial Statements.
     In April 2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of Intangible Assets (“FSP FAS 142-3”). FSP FAS 142-3 amends SFAS No. 142 to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141, Business Combinations , and other U.S. generally accepted accounting principals (“GAAP”). We adopted FSP FAS 142-3 on January 1, 2009. The adoption of FSP FAS 142-3 did not have a material impact on our consolidated financial statements.
     In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133 (“SFAS No. 161”). SFAS No. 161 changed the disclosure requirements for derivative instruments and hedging activities to enhance the current disclosure framework in SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities . The additional disclosures require information about how our interest rate swap agreements and hedging activities affect our financial position, financial performance, and cash flows. We adopted SFAS No. 161 on January 1, 2009 and have included the applicable disclosures in Note 7 and Note 8 in our March 31, 2009 Notes to Condensed, Consolidated Financial Statements . The adoption of SFAS No. 161 did not have a material impact on our consolidated financial statements.
     In April 2009, the FASB issued FSP FAS 141R-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies (“FSP FAS 141R-1”). FSP FAS 141R-1 amends FAS 141R regarding the initial recognition and measurement of contingencies acquired or assumed in a business combination. FSP FAS 141R-1 requires recognition at fair value of such contingencies if the acquisition-date fair value can be determined during the measurement period. FSP FAS 141R-1 became effective for us for contingent assets and liabilities arising from business combinations with acquisition dates on or after January 1, 2009. Our adoption of FSP FAS 141R-1 did not have a material impact on our consolidated financial statements.
     In December 2007, the FASB issued SFAS No. 160. SFAS No. 160 changes the accounting and reporting for minority interests, which are re-characterized as noncontrolling interests and classified as a component of equity. We adopted SFAS No. 160 on January 1, 2009. The adoption of SFAS No. 160 did not have a material impact on our consolidated financial statements.

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     In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS No. 157”), which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements. However, it eliminates inconsistencies in the guidance provided in previous accounting pronouncements. In December 2007, the FASB provided a one-year deferral of SFAS No. 157 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value on a recurring basis, at least annually. Accordingly, we adopted SFAS No. 157 on January 1, 2008, as required for our financial assets and financial liabilities, which did not have a material impact on our consolidated financial statements. We adopted SFAS No. 157 on January 1, 2009 for our non-financial assets and non-financial liabilities, which did not have a material impact on our consolidated financial statements. We have included the applicable disclosures in Note 8 in our March 31, 2009 Notes to Condensed, Consolidated Financial Statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
     At March 31, 2009, we had borrowings of $520.9 million under our senior credit facility with fluctuating interest rates based on market benchmarks such as LIBOR. For our variable-rate debt, changes in interest rates generally do not affect the fair market value, but do impact earnings and cash flow. To reduce the risk of increasing interest rates, we entered into the following interest rate swap agreements:
             
    Interest Rate Swap Agreements
Fixed interest rate
  5.51%   5.34%   2.64%
Notional amount (in millions)
  $50.0   $100.0   $100.0
Effective date
  6/20/2006   6/11/2007   2/12/2008
Expiration date
  6/30/2009   12/31/2009   2/26/2010
Counterparty
  Goldman Sachs   Goldman Sachs   Wells Fargo
Qualifies for hedge accounting
  Yes   Yes   Yes
     These interest rate swap agreements have the effect of reducing the amount of our debt exposed to variable interest rates. For every 1.0% increase in LIBOR we will pay an additional $3.3 million in pre-tax interest expense on an annualized basis for the unhedged portion of our senior term notes. Conversely for every 1.0% decrease in LIBOR we will save $3.3 million in pre-tax interest expense on an annualized basis. This represents an increase of $600,000 in both additional interest payments and interest savings, in comparison to our estimate included in Item 7A of our 2008 Annual Report on Form 10-K, due to the expiration of all of our swaps in the next 12 months.
     In the future, we may enter into additional interest rate strategies. However, we have not yet determined what those strategies may be or their possible impact.
ITEM 4. CONTROLS AND PROCEDURES
     We carried out an evaluation required by the Exchange Act, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a-15(e) of the Exchange Act, as of the end of the period covered by this report. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and to provide reasonable assurance that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
     During our most recent fiscal quarter, there were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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     Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives as specified above. Management does not expect, however, that our disclosure controls and procedures will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur, or that all control issues and instances of fraud, if any, within the company have been detected.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
     We are not subject to any legal proceedings other than ordinarily routine litigation incidental to the conduct of our business.
ITEM 1A. RISK FACTORS
     There have been no material changes in our risk factors from those disclosed in our 2008 Annual Report on Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
     None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
     None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
     None
ITEM 5. OTHER INFORMATION
     None
ITEM 6. EXHIBITS
  31.1   Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
  31.2   Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
  32.1   Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURE
     Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on May 8, 2009.
         
     
Date: May 8, 2009  By:   /s/ Tomas W. Fuller    
  Tomas W. Fuller    
  Chief Financial Officer   
 

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EXHIBIT INDEX
     
Exhibit No.   Description
 
   
31.1
  Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
   
31.2
  Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
   
32.1
  Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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EXHIBIT 31.1
Certification of
Chief Executive Officer
of VCA Antech, Inc.
I, Robert L. Antin, certify that:
1.   I have reviewed this quarterly report on Form 10-Q of VCA Antech, Inc.;
2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.   The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
  a.   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
  b.   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
  c.   Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
  d.   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.   The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the Audit Committee of the registrant’s Board of Directors (or persons performing the equivalent functions):
  a.   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
  b.   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: May 8, 2009
 
/s/ Robert L. Antin
Robert L. Antin
Chief Executive Officer

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EXHIBIT 31.2
Certification of
Chief Financial Officer
of VCA Antech, Inc.
I, Tomas W. Fuller, certify that:
1.   I have reviewed this quarterly report on Form 10-Q of VCA Antech, Inc.;
2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.   The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
  a.   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
  b.   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
  c.   Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
  d.   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.   The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the Audit Committee of the registrant’s Board of Directors (or persons performing the equivalent functions):
  a.   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
  b.   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: May 8, 2009
 
/s/ Tomas W. Fuller
Tomas W. Fuller
Chief Financial Officer

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EXHIBIT 32.1
Certification of
Chief Executive Officer & Chief Financial Officer
of VCA Antech, Inc.
     This certification is provided pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and accompanies this quarterly report on Form 10-Q (the “Report”) for the period ended March 31, 2009 of VCA Antech, Inc. (the “Issuer”).
     Each of the undersigned, who are the Chief Executive Officer and Chief Financial Officer, respectively, of VCA Antech, Inc., hereby certify that, to the best of each such officer’s knowledge:
  (i)   the Report fully complies with the requirements of section 13(a) or section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and
 
  (ii)   the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Issuer.
Dated: May 8, 2009
         
     
  /s/ Robert L. Antin    
  Robert L. Antin   
  Chief Executive Officer   
 
     
  /s/ Tomas W. Fuller    
  Tomas W. Fuller    
  Chief Financial Officer   
 

37