WOOF-2015.3.31-10Q

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________________ 
FORM 10-Q 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2015
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-16783
___________________________________________________ 
VCA Inc.
(Exact name of registrant as specified in its charter)
 
Delaware
 
95-4097995
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
12401 West Olympic Boulevard
Los Angeles, California 90064-1022
(Address of principal executive offices)
(310) 571-6500
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ].
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [  ].
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.:
Large accelerated filer [X]
  
Accelerated filer [  ]
 
 
 
Non-accelerated filer [  ]
  
Smaller reporting company [  ]
(Do not check if a smaller reporting company)
  
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X].
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: common stock, $0.001 par value, 82,162,448 shares as of May 4, 2015.
 
 
 
 
 


VCA Inc. and Subsidiaries
Form 10-Q
March 31, 2015
Table of Contents

Page
Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


PART I.
FINANCIAL INFORMATION

ITEM 1.
FINANCIAL STATEMENTS

VCA Inc. and Subsidiaries
Condensed, Consolidated Balance Sheets
(Unaudited)
(In thousands, except par value)
 
March 31, 2015
 
December 31, 2014
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
59,278

 
$
81,383

Trade accounts receivable, less allowance for uncollectible accounts of $18,712 and $19,846 at March 31, 2015 and December 31, 2014, respectively
73,766

 
60,482

Inventory
55,142

 
56,050

Prepaid expenses and other
30,425

 
36,924

Deferred income taxes
30,324

 
30,331

Prepaid income taxes
—

 
18,277

Total current assets
248,935

 
283,447

Property and equipment, net
472,944

 
468,041

Goodwill
1,439,598

 
1,415,861

Other intangible assets, net
82,913

 
88,175

Notes receivable
2,695

 
2,807

Deferred financing costs, net
7,440

 
7,874

Other
70,477

 
65,815

Total assets
$
2,325,002

 
$
2,332,020

Liabilities and Equity
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
26,598

 
$
19,356

Accounts payable
40,997

 
46,284

Accrued payroll and related liabilities
78,159

 
64,359

Income tax payable
2,570

 
—

Other accrued liabilities
69,979

 
67,219

Total current liabilities
218,303

 
197,218

Long-term debt, less current portion
766,591

 
775,412

Deferred income taxes
103,162

 
103,502

Other liabilities
31,745

 
33,190

Total liabilities
1,119,801

 
1,109,322

Commitments and contingencies

 

Redeemable noncontrolling interests
11,108

 
11,077

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

 
—

VCA Inc. stockholders’ equity:
 
 
 
Common stock, par value $0.001, 175,000 shares authorized, 82,135 and 82,937 shares outstanding as of March 31, 2015 and December 31, 2014, respectively
82

 
83

Additional paid-in capital
116,068

 
155,802

Retained earnings
1,102,459

 
1,064,158

Accumulated other comprehensive loss
(34,605
)
 
(19,397
)
Total VCA Inc. stockholders’ equity
1,184,004

 
1,200,646

Noncontrolling interests
10,089

 
10,975

Total equity
1,194,093

 
1,211,621

Total liabilities and equity
$
2,325,002

 
$
2,332,020



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

1

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



 
Three Months Ended
March 31,
 
2015
 
2014
Revenue
$
499,453

 
$
449,507

Direct costs
385,591

 
348,056

Gross profit
113,862

 
101,451

Selling, general and administrative expense
44,398

 
41,440

Net loss (gain) on sale or disposal of assets
335

 
(1,221
)
Operating income
69,129

 
61,232

Interest expense, net
4,837

 
4,167

Other expense (income)
66

 
(53
)
Income before provision for income taxes
64,226

 
57,118

Provision for income taxes
24,673

 
22,203

Net income
39,553

 
34,915

Net income attributable to noncontrolling interests
1,252

 
872

Net income attributable to VCA Inc.
$
38,301

 
$
34,043

Basic earnings per share
$
0.47

 
$
0.39

Diluted earnings per share
$
0.46

 
$
0.38

Weighted-average shares outstanding for basic earnings per share
82,347

 
88,338

Weighted-average shares outstanding for diluted earnings per share
83,373

 
89,421



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

2

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

 
 
Three Months Ended
March 31,
 
2015
 
2014
Net income(1) 
$
39,553

 
$
34,915

Other comprehensive income:
 
 
 
Foreign currency translation adjustments
(15,680
)
 
(5,521
)
Other comprehensive loss
(15,680
)
 
(5,521
)
Total comprehensive income
23,873

 
29,394

Comprehensive income attributable to noncontrolling interests(1) 
780

 
444

Comprehensive income attributable to VCA Inc.
$
23,093

 
$
28,950

 ____________________________
(1) 
Includes approximately $0.8 million and $0.5 million of net income related to redeemable and mandatorily redeemable noncontrolling interests for the three months ended March 31, 2015 and 2014, respectively.



































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

3

VCA Inc. and Subsidiaries
Condensed, Consolidated Statements of Equity
(Unaudited)
(In thousands)


 
Common Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income
 
Noncontrolling
Interests
 
 Total
 
Shares
 
Amount
 
 
 
 
 
Balances, December 31, 2013
88,508

 
$
89

 
$
384,797

 
$
928,720

 
$
(6,190
)
 
$
10,200

 
$
1,317,616

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

 
—

 
—

 
34,043

 
—

 
353

 
34,396

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

 
—

 
—

 
—

 
(5,093
)
 
(110
)
 
(5,203
)
Formation of noncontrolling interests
—

 
—

 
—

 
—

 
—

 
81

 
81

Distribution to noncontrolling interests
—

 
—

 
—

 
—

 
—

 
(502
)
 
(502
)
Purchase of noncontrolling interests
—

 
—

 
30

 
—

 
—

 
—

 
30

Share-based compensation
—

 
—

 
4,544

 
—

 
—

 
—

 
4,544

Issuance of common stock under stock incentive plans
87

 
—

 
372

 
—

 
—

 
—

 
372

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

 
—

 
—

 
(9,793
)
Excess tax benefit from stock based compensation
—

 
—

 
392

 
—

 
—

 
—

 
392

Balances, March 31, 2014
88,288

 
$
88

 
$
380,343

 
$
962,763

 
$
(11,283
)
 
$
10,022

 
$
1,341,933

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances, December 31, 2014
82,937

 
$
83

 
$
155,802

 
$
1,064,158

 
$
(19,397
)
 
$
10,975

 
$
1,211,621

Net income (excludes $417 and $359 related to redeemable and mandatorily redeemable noncontrolling interests, respectively)
—

 
—

 
—

 
38,301

 
—

 
476

 
38,777

Other comprehensive loss (excludes $195 related to mandatorily redeemable noncontrolling interests)
—

 
—

 
—

 
—

 
(15,208
)
 
(277
)
 
(15,485
)
Formation of noncontrolling interests
—

 
—

 
—

 
—

 
—

 
(14
)
 
(14
)
Distribution to noncontrolling interests
—

 
—

 
—

 
—

 
—

 
(598
)
 
(598
)
Purchase of noncontrolling interests
—

 
—

 
(217
)
 
—

 
—

 
(473
)
 
(690
)
Share-based compensation
—

 
—

 
4,132

 
—

 
—

 
—

 
4,132

Issuance of common stock under stock incentive plans
76

 
—

 
404

 
—

 
—

 
—

 
404

Stock repurchases
(878
)
 
(1
)
 
(44,844
)
 
—

 
—

 
—

 
(44,845
)
Excess tax benefit from stock based compensation
—

 
—

 
791

 
—

 
—

 
—

 
791

Balances, March 31, 2015
82,135

 
$
82

 
$
116,068

 
$
1,102,459

 
$
(34,605
)
 
$
10,089

 
$
1,194,093


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

4

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

 
Three Months Ended
March 31,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net income
$
39,553

 
$
34,915

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
19,797

 
19,767

Amortization of debt issue costs
434

 
304

Provision for uncollectible accounts
1,183

 
890

Net loss (gain) on sale or disposal of assets
335

 
(1,221
)
Share-based compensation
4,132

 
4,544

Excess tax benefits from stock based compensation
(791
)
 
(392
)
Other
(989
)
 
(905
)
Changes in operating assets and liabilities:
 
 
 
Trade accounts receivable
(14,570
)
 
(5,825
)
Inventory, prepaid expenses and other assets
2,862

 
(1,389
)
Accounts payable and other accrued liabilities
(6,954
)
 
(3,773
)
Accrued payroll and related liabilities
14,052

 
6,247

Income taxes
21,581

 
15,165

Net cash provided by operating activities
80,625

 
68,327

Cash flows from investing activities:
 
 
 
Business acquisitions, net of cash acquired
(32,150
)
 
(17,295
)
Real estate acquired in connection with business acquisitions
(1,502
)
 
—

Property and equipment additions
(16,526
)
 
(16,619
)
Proceeds from sale or disposal of assets
92

 
859

Other
(576
)
 
520

Net cash used in investing activities
(50,662
)
 
(32,535
)
Cash flows from financing activities:
 
 
 
Repayment of long-term obligations
(5,165
)
 
(12,806
)
Distributions to noncontrolling interest partners
(1,325
)
 
(1,090
)
Purchase of noncontrolling interests
(1,483
)
 
(326
)
Proceeds from issuance of common stock under stock incentive plans
404

 
372

Excess tax benefits from stock based compensation
791

 
392

Stock repurchases
(44,845
)
 
(9,793
)
Other
(80
)
 
—

Net cash used in financing activities
(51,703
)
 
(23,251
)
Effect of currency exchange rate changes on cash and cash equivalents
(365
)
 
(282
)
(Decrease) increase in cash and cash equivalents
(22,105
)
 
12,259

Cash and cash equivalents at beginning of period
81,383

 
125,029

Cash and cash equivalents at end of period
$
59,278

 
$
137,288

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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

5

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

 
Three Months Ended
March 31,
 
2015
 
2014
Supplemental disclosures of cash flow information:
 
 
 
Interest paid
$
4,482

 
$
3,708

Income taxes paid
$
3,077

 
$
6,853

 
 
 
 
Supplemental schedule of noncash investing and financing activities:
 
 
 
Detail of acquisitions:
 
 
 
Fair value of assets acquired
$
38,490

 
$
18,550

Noncontrolling interest
—

 
(855
)
Cash paid for acquisitions, net of acquired cash
(32,150
)
 
(17,295
)
Assumed debt
(4,446
)
 
—

Holdbacks
(1,722
)
 
(400
)
Liabilities assumed
$
172

 
$
—



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

6

VCA Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements
March 31, 2015
(Unaudited)

 
1.
Nature of Operations
Our company, VCA Inc. (“VCA”) is a Delaware corporation formed in 1986 and is based in Los Angeles, California. We are an animal healthcare company with the following five operating segments: Animal Hospital, Laboratory, Medical Technology, Vetstreet and Camp Bow Wow. Our operating segments are aggregated into two reportable segments: Animal Hospital and Laboratory. Our Medical Technology, Vetstreet and Camp Bow Wow operating segments are combined in our All Other category. See Footnote 7, Lines of Business within these notes to unaudited condensed, consolidated financial statements.
Our animal hospitals offer a full range of general medical and surgical services for companion animals. Our animal hospitals treat diseases and injuries, provide pharmaceutical products and perform a variety of pet-wellness programs, including health examinations, diagnostic testing, vaccinations, spaying, neutering and dental care. At March 31, 2015, we operated or managed 650 animal hospitals throughout 41 states and four Canadian provinces.
We operate a full-service veterinary diagnostic laboratory network serving all 50 states and certain areas in Canada. Our laboratory network provides sophisticated testing and consulting services used by veterinarians in the detection, diagnosis, evaluation, monitoring, treatment and prevention of diseases and other conditions affecting animals. At March 31, 2015, we operated 59 laboratories of various sizes located strategically throughout the United States and Canada.
Our Medical Technology business sells digital radiography and ultrasound imaging equipment, provides education and training on the use of that equipment, provides consulting and mobile imaging services, and sells software and ancillary services to the veterinary market.
Our Vetstreet business provides several different services to the veterinary community including, online communications, professional education, marketing solutions and a home delivery platform for independent animal hospitals.
Our Camp Bow Wow business franchises a premier provider of pet services including dog day care, overnight boarding, grooming and other ancillary services at specially designed pet care facilities, principally under the trademark Camp Bow Wow®.  As of March 31, 2015, there were 129 Camp Bow Wow® franchise locations operating in 36 states and one Canadian province. 
The practice of veterinary medicine is subject to seasonal fluctuation. In particular, demand for veterinary services is significantly higher during the warmer months because pets spend a greater amount of time outdoors where they are more likely to be injured and are more susceptible to disease and parasites. In addition, use of veterinary services may be affected by levels of flea infestation, heartworms and ticks, and the number of daylight hours.

2.
Basis of Presentation
Our accompanying unaudited, condensed, consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information and in accordance with the rules and regulations of the United States Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the disclosures required by GAAP for annual financial statements as permitted under applicable rules and regulations. In the opinion of management, all normal recurring adjustments considered necessary for a fair presentation have been included. The results of operations for the three months ended March 31, 2015 are not necessarily indicative of the results to be expected for the full year ending December 31, 2015. For further information, refer to our audited consolidated financial statements and notes thereto included in our 2014 Annual Report on Form 10-K.

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





7

VCA Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
March 31, 2015
(Unaudited)


3.
Goodwill and Other Long-Lived Assets
Goodwill
The following table presents the changes in the carrying amount of our goodwill for the three months ended March 31, 2015 (in thousands):
 
 
Animal
Hospital
 
Laboratory
 
All Other
 
Total
Balance as of December 31, 2014
 
 
 
 
 
 
 
Goodwill
$
1,305,558

 
$
97,535

 
$
142,825

 
$
1,545,918

Accumulated impairment losses
—

 
—

 
(130,057
)
 
(130,057
)
Subtotal
1,305,558

 
97,535

 
12,768

 
1,415,861

Goodwill acquired
13,563

 
21,000

 
255

 
34,818

Foreign translation adjustment
(10,981
)
 
(47
)
 
—

 
(11,028
)
Other (1)
(49
)
 
(4
)
 
—

 
(53
)
Balance as of March 31, 2015
 
 
 
 
 
 
 
Goodwill
1,308,091

 
118,484

 
143,080

 
1,569,655

Accumulated impairment losses
—

 
—

 
(130,057
)
 
(130,057
)
Subtotal
$
1,308,091

 
$
118,484

 
$
13,023

 
$
1,439,598

 ____________________________

(1) 
"Other" primarily includes measurement period adjustments, a partnership buyout and a write-off related to the sale of an animal hospital.

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

 
As of March 31, 2015
 
As of December 31, 2014
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Non-contractual customer relationships
$
99,522

 
$
(47,541
)
 
$
51,981

 
$
101,056

 
$
(45,295
)
 
$
55,761

Covenants not-to-compete
10,260

 
(4,656
)
 
5,604

 
10,093

 
(4,422
)
 
5,671

Favorable lease assets
9,467

 
(5,078
)
 
4,389

 
9,576

 
(4,962
)
 
4,614

Trademarks
12,306

 
(3,622
)
 
8,684

 
13,503

 
(4,015
)
 
9,488

Contracts
100

 
(19
)
 
81

 
100

 
(11
)
 
89

Technology
1,627

 
(499
)
 
1,128

 
1,627

 
(414
)
 
1,213

Franchise rights
11,730

 
(684
)
 
11,046

 
11,730

 
(391
)
 
11,339

Total
$
145,012

 
$
(62,099
)
 
$
82,913

 
$
147,685

 
$
(59,510
)
 
$
88,175









8

VCA Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
March 31, 2015
(Unaudited)


3.
Goodwill and Other Long-Lived Assets, continued

The following table summarizes our aggregate amortization expense related to acquisition related intangible assets (in thousands):
 
 
Three Months Ended
March 31,
 
2015
 
2014
Aggregate amortization expense
$
5,526

 
$
5,147

The estimated amortization expense related to acquisition related intangible assets for the remainder of 2015 and each of the succeeding years thereafter, as of March 31, 2015, is as follows (in thousands):

Finite-lived intangible assets:
 
Remainder of 2015
$
16,156

2016
18,936

2017
13,102

2018
9,773

2019
6,770

Thereafter
17,136

Total
$
81,873

Indefinite-lived intangible assets:
 
Trademarks
1,040

Total intangible assets
$
82,913

 

4.
Acquisitions

The table below reflects the activity related to the acquisitions and dispositions of our animal hospitals and laboratories during the three months ended March 31, 2015 and 2014, respectively:

 
Three Months Ended
March 31,
 
2015
 
2014
Animal Hospitals:
 
 
 
Acquisitions
11

 
4

Acquisitions, merged
(2
)
 
(1
)
Sold, closed or merged
(2
)
 
(4
)
Net increase (decrease)
7

 
(1
)
 
 
 
 
Laboratories:
 
 
 
Acquisitions
1

 
—

Acquisitions, merged
(1
)
 
—

New facilities
—

 
1

Net increase
—

 
1







9

VCA Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
March 31, 2015
(Unaudited)


4.
Acquisitions, continued

Animal Hospital and Laboratory Acquisitions
The purchase price allocations for some of the 2015 animal hospital acquisitions included in the table below are preliminary; however, adjustments, if any, are not expected to be material. The measurement periods for purchase price allocations do not exceed 12 months from the acquisition date. The following table summarizes the aggregate consideration for our independent animal hospitals and certain assets of Abaxis Veterinary Reference Laboratory acquired during the three months ended March 31, 2015 and 2014, respectively, (in thousands):

 
Three Months Ended
March 31,
 
2015
 
2014
Consideration:
 
 
 
  Cash, net of cash acquired
$
31,850

 
$
17,295

  Assumed debt
4,446

 
—

  Holdbacks
1,722

 
400

      Fair value of total consideration transferred
$
38,018

 
$
17,695

 
 
 
 
Allocation of the Purchase Price:
 
 
 
  Tangible assets
$
764

 
$
701

  Identifiable intangible assets (1)
2,838

 
2,734

  Goodwill (2)
34,563

 
15,115

  Other liabilities assumed
(147
)
 
—

      Fair value of assets acquired
$
38,018

 
$
18,550

Noncontrolling interest
—

 
(855
)
Total
$
38,018

 
$
17,695

____________________________

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

(2)  
We expect that $30.6 million and $10.3 million of the goodwill recorded for these acquisitions, as of March 31, 2015 and 2014, respectively, will be fully deductible for income tax purposes.

Included in the table above is Antech Diagnostics, Inc.'s March 31, 2015 acquisition of certain assets of Abaxis Veterinary Reference Laboratory from Abaxis, Inc., for total consideration of $21.0 million. The purchase price allocation for the acquisition is preliminary pending our determination of the fair market value of all related assets and liabilities. We expect that the majority of the goodwill recorded for this transaction will be reclassed to identifiable intangible assets, primarily customer relationships.
    
    






10

VCA Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
March 31, 2015
(Unaudited)


4.
Acquisitions, continued

Camp Bow Wow

On August 15, 2014, we acquired 100% of D.O.G. Enterprises, LLC for $17.0 million in cash and contingent consideration of up to $3.0 million that may be earned over the next three years. Camp Bow Wow primarily franchises a premier provider of pet services including dog day care, overnight boarding, grooming and other ancillary services at specially designed pet care facilities, principally under the trademark Camp Bow Wow®.  As of March 31, 2015, there were 129 Camp Bow Wow® franchise locations operating in 36 states and one Canadian province. 

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

Consideration:
 
  Cash, net of cash acquired
$
15,174

  Assumed debt
323

  Holdbacks
1,500

  Earn-out contingent consideration
760

      Fair value of total consideration transferred
$
17,757

 
 
Allocation of the Purchase Price:
 
  Tangible assets
$
637

  Identifiable intangible assets (1)
13,420

  Goodwill (2)
4,219

  Other liabilities assumed
(519
)
Total
$
17,757

____________________________

(1) 
Identifiable intangible assets primarily include franchise rights, trademarks, covenants-not-to-compete and existing technology. The weighted-average amortization period for the total identifiable intangible assets is approximately ten years. The weighted-average amortization periods for the franchise rights, covenants and existing technology is approximately ten years, three years and four years, respectively. The trademarks have an indefinite life and will be assessed annually for impairment.

(2)  
As of March 31, 2015, we expect that the full amount of goodwill recorded for this acquisition will be deductible for income tax purposes.






11

VCA Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
March 31, 2015
(Unaudited)


5.
Other Accrued Liabilities
Other accrued liabilities consisted of the following (in thousands):
 
 
As of March 31, 2015
 
As of December 31, 2014
Deferred revenue
$
14,852

 
$
14,304

Accrued health insurance
4,791

 
5,194

Deferred rent
4,635

 
4,535

Accrued other insurance
4,185

 
4,381

Miscellaneous accrued taxes(1)
3,522

 
3,025

Accrued accounting and legal fees
2,447

 
2,900

Accrued workers' compensation
2,548

 
2,781

Holdbacks and earn-outs
8,824

 
7,878

Customer deposits
2,442

 
2,229

Accrued consulting fees
3,333

 
3,172

Accrued lease payments
1,638

 
1,657

Other
16,762

 
15,163

 
$
69,979

 
$
67,219

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



6.
Calculation of Earnings per Share
Basic earnings per share is calculated by dividing net income by the weighted-average number of shares outstanding during the period. Diluted earnings per share is calculated by dividing net income attributable to VCA Inc. by the weighted-average number of common shares outstanding, after giving effect to all dilutive potential common shares outstanding during the period. Basic and diluted earnings per share were calculated as follows (in thousands, except per share amounts): 
 
Three Months Ended
March 31,
 
2015
 
2014
Net income attributable to VCA Inc.
$
38,301

 
$
34,043

Weighted-average common shares outstanding:
 
 
 
Basic
82,347

 
88,338

Effect of dilutive potential common shares:
 
 
 
Stock options
340

 
254

Non-vested shares and units
686

 
829

Diluted
83,373

 
89,421

Basic earnings per common share
$
0.47

 
$
0.39

Diluted earnings per common share
$
0.46

 
$
0.38


For the three months ended March 31, 2015, there was an immaterial amount of potential common shares excluded from the computation of diluted earnings per share because their inclusion would have had an antidilutive effect. For the three months ended March 31, 2014, there were no potential common shares excluded from the computation of diluted earnings per share.




12

VCA Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
March 31, 2015
(Unaudited)


7.
Lines of Business

Our Animal Hospital and Laboratory business segments are each considered reportable segments in accordance with the FASB's guidance related to Segment Reporting. Our Animal Hospital segment provides veterinary services for companion animals and sells related retail and pharmaceutical products. Our Laboratory segment provides diagnostic laboratory testing services for veterinarians, both associated with our animal hospitals and those independent of us. Our other operating segments included in the “All Other” category in the following tables are our Medical Technology business, which sells digital radiography and ultrasound imaging equipment, related computer hardware, software and ancillary services to the veterinary market, our Vetstreet business, which provides online and printed communications, professional education, marketing solutions to the veterinary community and an ecommerce platform for independent animal hospitals, and our Camp Bow Wow business, which primarily franchises a premier provider of pet services including dog day care, overnight boarding, grooming and other ancillary services at specially designed pet care facilities. These operating segments do not meet the quantitative requirements for reportable segments. Our operating segments are strategic business units that have different services, products and/or functions. The segments are managed separately because each is a distinct and different business venture with unique challenges, risks and rewards. We also operate a corporate office that provides general and administrative support services for our other segments.
The accounting policies of our segments are the same as those described in the summary of significant accounting policies included in our 2014 Annual Report on Form 10-K. We evaluate the performance of our segments based on gross profit and operating income. For purposes of reviewing the operating performance of our segments, all intercompany sales and purchases are generally accounted for as if they were transactions with independent third parties at current market prices.



13

VCA Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
March 31, 2015
(Unaudited)


7.
Lines of Business, continued

The following is a summary of certain financial data for each of our segments (in thousands):

 
Animal
Hospital
 
Laboratory
 
All Other
 
Corporate
 

Eliminations
 
Total
Three Months Ended
March 31, 2015
 
 
 
 
 
 
 
 
 
 
 
External revenue
$
393,026

 
$
78,809

 
$
26,533

 
$
—

 
$
1,085

 
$
499,453

Intercompany revenue
—

 
15,163

 
7,694

 
—

 
(22,857
)
 
—

Total revenue
393,026

 
93,972

 
34,227

 
—

 
(21,772
)
 
499,453

Direct costs
337,542

 
45,990

 
22,803

 
—

 
(20,744
)
 
385,591

Gross profit
55,484

 
47,982

 
11,424

 
—

 
(1,028
)
 
113,862

Selling, general and administrative expense
11,221

 
8,865

 
8,687

 
15,625

 
—

 
44,398

Operating income (loss) before sale or disposal of assets
44,263

 
39,117

 
2,737

 
(15,625
)
 
(1,028
)
 
69,464

Net loss on sale or disposal of assets
294

 
6

 
9

 
26

 
—

 
335

Operating income (loss)
$
43,969

 
$
39,111

 
$
2,728

 
$
(15,651
)
 
$
(1,028
)
 
$
69,129

Depreciation and amortization
$
16,072

 
$
2,504

 
$
1,152

 
$
592

 
$
(523
)
 
$
19,797

Property and equipment additions
$
12,082

 
$
3,216

 
$
800

 
$
1,064

 
$
(636
)
 
$
16,526

Three Months Ended
March 31, 2014
 
 
 
 
 
 
 
 
 
 
 
External revenue
$
351,588

 
$
74,783

 
$
22,201

 
$
—

 
$
935

 
$
449,507

Intercompany revenue
—

 
13,751

 
5,920

 
—

 
(19,671
)
 
—

Total revenue
351,588

 
88,534

 
28,121

 
—

 
(18,736
)
 
449,507

Direct costs
302,788

 
45,503

 
18,152

 
—

 
(18,387
)
 
348,056

Gross profit
48,800

 
43,031

 
9,969

 
—

 
(349
)
 
101,451

Selling, general and administrative expense
9,128

 
8,018

 
8,348

 
15,946

 
—

 
41,440

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

 
35,013

 
1,621

 
(15,946
)
 
(349
)
 
60,011

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

 
(71
)
 
(1,184
)
 
(134
)
 
—

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


$
35,084

 
$
2,805

 
$
(15,812
)
 
$
(349
)
 
$
61,232

Depreciation and amortization
$
14,742

 
$
2,535

 
$
2,136

 
$
819

 
$
(465
)
 
$
19,767

Property and equipment additions
$
13,068

 
$
1,981

 
$
758

 
$
1,411

 
$
(599
)
 
$
16,619

At March 31, 2015
 
 
 
 
 
 
 
 
 
 
 
Total assets
$
2,037,578

 
$
294,826

 
$
85,645

 
$
273,051

 
$
(366,098
)
 
$
2,325,002

At December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
Total assets
$
2,021,725

 
$
258,550

 
$
89,596

 
$
270,414

 
$
(308,265
)
 
$
2,332,020





14

VCA Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
March 31, 2015
(Unaudited)


8.
Commitments and Contingencies

We have certain commitments including operating leases, purchase agreements and acquisition agreements. These items are discussed in detail in our consolidated financial statements and notes thereto included in our 2014 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 fulfillment of specified financial criteria as set forth in the respective agreements. The amount to be paid cannot be determined until the earn-out periods have expired. If the specified financial criteria are satisfied, we will be obligated to pay an additional $5.5 million.
In accordance with business combination accounting guidance, contingent consideration, such as earn-out agreements, are recognized as part of the consideration transferred on the acquisition date. A liability is initially recorded based upon its acquisition date fair value. The changes in fair value are recognized in earnings where applicable for each reporting period. The fair value is determined using a contractually stated formula using either a multiple of revenue or Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA"). The formulas used to determine the estimated fair value are Level 3 inputs. The changes in fair value were immaterial to our condensed, consolidated financial statements when taken as a whole. We recorded $3.0 million and $3.2 million in earn-out liabilities as of March 31, 2015 and December 31, 2014, respectively, which are included in other accrued liabilities in our condensed, consolidated balance sheets.
 
b.
Legal Proceedings

On May 29, 2013, a former veterinary assistant at one of our animal hospitals filed a purported class action lawsuit against us in the Superior Court of the State of California for the County of Los Angeles, titled Jorge Duran vs. VCA Animal Hospitals, Inc., et. al. The lawsuit seeks to assert claims on behalf of current and former veterinary assistants employed by us in California, and alleges, among other allegations, that we improperly failed to pay regular and overtime wages, improperly failed to provide proper meal and rest periods, and engaged in unfair business practices. The lawsuit seeks damages, statutory penalties, and other relief, including attorneys’ fees and costs. On May 7, 2014, we obtained partial summary judgment, dismissing four of the eight claims of the complaint, including the claims for failure to pay regular and overtime wages. We intend to continue to vigorously defend against the remaining claims in this action. At this time, we are unable to estimate the reasonably possible loss or range of possible loss, but do not believe losses, if any, would have a material effect on our results of operations or financial position taken as a whole.

On July 16, 2014, two additional former veterinary assistants filed a purported class action lawsuit against us in the Superior Court of the State of California for the County of Los Angeles, titled La Kimba Bradsbery and Cheri Brakensiek vs. Vicar Operating, Inc., et. al. The lawsuit seeks to assert claims on behalf of current and former veterinary assistants, kennel assistants, and client service representatives employed by us in California, and alleges, among other allegations, that we improperly failed to pay regular and overtime wages, improperly failed to provide proper meal and rest periods, improperly failed to pay reporting time pay, improperly failed to reimburse for certain business-related expenses, and engaged in unfair business practices. The lawsuit seeks damages, statutory penalties, and other relief, including attorneys’ fees and costs. We currently expect that these two actions will be consolidated with, or related before the same judge hearing, the Duran action discussed above.

In September 2014, the court issued an order staying the La Kimba Bradsbery lawsuit until class certification is completed in the Duran case. Plaintiff Duran filed his class certification motion and supporting documentation in January 2015. A class certification hearing is scheduled for June 2, 2015. At this time, we are unable to estimate the reasonably possible loss or range of possible loss, but do not believe losses, if any, would have a material effect on our results of operations or financial position taken as a whole.








15

VCA Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
March 31, 2015
(Unaudited)


8.
Commitments and Contingencies, continued

On July 12, 2013, an individual who provided courier services with respect to our laboratory clients in California filed a purported class action lawsuit against us in the Superior Court of the State of California for the County of Santa Clara - San Jose Branch, titled Carlos Lopez vs. Logistics Delivery Solutions, LLC, Antech Diagnostics, Inc., et. al. Logistics Delivery Solutions, LLC, a co-defendant in the lawsuit, is a company with which Antech has contracted to provide courier services in California. The lawsuit seeks to assert claims on behalf of individuals who were engaged by Logistics Delivery Solutions, LLC to perform such courier services and alleges, among other allegations, that Logistics Delivery Solutions and Antech Diagnostics improperly classified the plaintiffs as independent contractors, improperly failed to pay overtime wages, and improperly failed to provide proper meal periods. The lawsuit seeks damages, statutory penalties, and other relief, including attorneys' fees and costs. We filed our answer to the complaint on September 13, 2013. On July 18, 2014, we filed a motion for summary judgment, and on October 3, 2014 the court denied our request for summary judgment. Although we believed this lawsuit was without merit and have vigorously defended against the claims, the parties engaged in mediation on December 18, 2014. As a result of the mediation, the parties reached an agreement in principle to settle the action, on a class-wide basis, for an amount not to exceed $1,250,000. Logistics Delivery Solutions, LLC, has agreed to pay half of the claim. Accordingly, as of December 31, 2014, we have accrued the remaining fifty percent. The proposed settlement, when and if it becomes effective, would not be an admission of wrongdoing or acceptance of fault by any of the defendants named in the complaint. Antech Diagnostics and Logistics Delivery Solutions have agreed upon the terms of this proposed settlement to eliminate the uncertainties, risk, distraction and expense associated with protracted litigation. The proposed settlement remains subject to court approval and class notice administration before it will be effective.

On May 12, 2014, an individual client who purchased goods and services from one of our animal hospitals filed a purported class action lawsuit against us in the United States District Court for the Northern District of California, titled Tony M. Graham vs. VCA Antech, Inc. and VCA Animal Hospitals, Inc. The lawsuit seeks to assert claims on behalf of the plaintiff and other individuals who purchased similar goods and services from our animal hospitals and alleges, among other allegations, that we improperly charged such individuals for “biohazard waste management” in connection with the services performed. The lawsuit seeks compensatory and punitive damages in unspecified amounts, and other relief, including attorneys' fees and costs. VCA successfully had the venue transferred to the Southern District of California. This case is in an early procedural stage and we intend to vigorously defend this action. At this time, we are unable to estimate the reasonably possible loss or range of possible loss, but do not believe losses, if any, would have a material effect on our results of operations or financial position taken as a whole.
In addition to the lawsuits described above, we are party to ordinary routine legal proceedings and claims incidental to our business, but we are not currently a party to any legal proceeding that we believe would have a material adverse effect on our financial position, results of operations, or cash flows.

c.
Other Contingencies

On May 14, 2014, the headquarters of our Medical Technology business in Carlsbad, California was severely damaged by wildfires. There were no injuries to personnel. However, the fire caused severe damage to a substantial portion of the facility. We maintain standard insurance coverage for both property damage and business interruption losses. During the three months ended March 31, 2015, there were no additional estimated losses recorded in connection with this event. However, we continue to assess our financial losses and related insurance coverage.




16

VCA Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
March 31, 2015
(Unaudited)


9.
Noncontrolling Interests
We own some of our animal hospitals in partnerships with noncontrolling interest holders. We consolidate our partnerships in our condensed, consolidated financial statements because our ownership interest in these partnerships is equal to or greater than 50.1% and we control these entities. We record noncontrolling interest in income of subsidiaries equal to our partners’ percentage ownership of the partnerships’ income. We also record changes in the redemption value of our redeemable noncontrolling interests in net income attributable to noncontrolling interests in our condensed, consolidated income statements. We reflect our noncontrolling partners’ cumulative share in the equity of the respective partnerships as either noncontrolling interests in equity, mandatorily redeemable noncontrolling interests in other liabilities, or redeemable noncontrolling interests in temporary equity (mezzanine) in our condensed, consolidated balance sheets.
 
a.
Mandatorily Redeemable Noncontrolling Interests
The terms of some of our partnership agreements require us to purchase the partner’s equity in the partnership in the event of the partner’s death. We report these redeemable noncontrolling interests at their estimated redemption value, which approximates fair value, and classify them as liabilities due to the certainty of the related event. Estimated redemption value is determined using either a contractually stated formula or a discounted cash flow technique, both of which are used as an approximation of fair value. The discounted cash flow inputs used to determine the redemption value are Level 3 and include forecasted growth rates, valuation multiples, and the weighted average cost of capital. We recognize changes in the obligation as interest cost in our condensed, consolidated income statement.

The following table provides a summary of mandatorily redeemable noncontrolling interests included in other liabilities in our condensed, consolidated balance sheets (in thousands):
 
Income
Statement
Impact
 
Mandatorily Redeemable
Noncontrolling
Interests
Balance as of December 31, 2013
 
 
$
9,355

Noncontrolling interest expense
$
368

 
 
Redemption value change
5

 
373

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

 
 
 
 
Balance as of December 31, 2014
 
 
$
9,405

Noncontrolling interest expense
$
359

 
 
Redemption value change
(86
)
 
273

Purchase of noncontrolling interests
 
 
(803
)
Distribution to noncontrolling interests
 
 
(346
)
Currency translation adjustment
 
 
(195
)
Balance as of March 31, 2015
 
 
$
8,334




17

VCA Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
March 31, 2015
(Unaudited)


9.
Noncontrolling Interests, continued

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

 
Income
Statement
Impact
 
Redeemable
Noncontrolling
Interests
Balance as of December 31, 2013
 
 
$
10,678

Noncontrolling interest expense
$
303

 
 
Redemption value change
(152
)
 
151

Formation of noncontrolling interests
 
 
855

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

 
 
 
 
Balance as of December 31, 2014
 
 
$
11,077

Noncontrolling interest expense
$
322

 
 
Redemption value change
95

 
417

Distribution to noncontrolling interests
 
 
(386
)
Balance as of March 31, 2015
 
 
$
11,108

 



18

VCA Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
March 31, 2015
(Unaudited)


10.
Recent Accounting Pronouncements

In April 2015, the FASB issued Accounting Standards Update (ASU) 2015-03 - “Interest - Imputation of Interest (Subtopic 2015-03): Simplifying the Presentation of Debt Issuance Costs” which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability instead of being presented as an asset, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by ASU 2015-03. This ASU is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted for financial statements that have not been previously issued. We do not expect this adoption to have a significant impact on our consolidated financial statements.

In February 2015, the FASB issued ASU 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis.”  The amendments in this update affect reporting entities that are required to evaluate whether they should consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. Specifically, the amendments (i) modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities, (ii) eliminate the presumption that a general partner should consolidate a limited partnership, (iii) affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships, and (iv) provide a scope exception from consolidation guidance for reporting entities with interests in certain legal entities. This ASU is effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. We do not expect this adoption to have a significant impact on our consolidated financial statements.

In May 2014, the FASB issued guidance creating Accounting Standards Codification (ASC) Section 606, “Revenue from Contracts with Customers”. The new section will replace Section 605, “Revenue Recognition” and create modifications to various other revenue accounting standards for specialized transactions and industries. The guidance in this update is intended to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and International Financial Reporting Standards (IFRS) that would remove inconsistencies and weaknesses in revenue requirements, provide a more robust framework for addressing revenue issues, and improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets.
    
The new accounting guidance will require companies to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. This update creates a five-step model that requires companies to exercise judgment when considering the terms of the contract(s) which include (i) identifying the contract(s) with the customer, (ii) identifying the separate performance obligations in the contract, (iii) determining the transaction price, (iv) allocating the transaction price to the separate performance obligations, and (v) recognizing revenue when each performance obligation is satisfied. The update allows for either full retrospective adoption, meaning the standard is applied to all of the periods presented, or modified retrospective adoption, meaning the standard is applied only to the most current period presented in the financial statements.

The updated guidance was originally effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. However, on April 29, 2015, the FASB issued for public comment a proposed ASU that would defer the effective date of the new revenue recognition standard by one year. Based on the Board’s proposed decision, public organizations would apply the new revenue standard to annual reporting periods beginning after December 15, 2017. Additionally, the Board decided to permit both public and nonpublic organizations to adopt the new revenue standard early, but not before the original public organization effective date. Accordingly, we will adopt the new provisions of this accounting standard at the beginning of fiscal year 2018. We will further study the implications of this statement in order to evaluate the expected impact on the consolidated financial statements and evaluate the method of adoption we would apply.
    




19

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




20

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, 2015, and we undertake no duty to update this information unless required by law. Shareholders and prospective investors can find information filed with the SEC after May 8, 2015 at our website at http://investor.vca.com or at the SEC’s website at www.sec.gov.
We are a leading North American animal healthcare company. We provide veterinary services and diagnostic testing services to support veterinary care and we sell diagnostic imaging equipment and other medical technology products and related services to veterinarians. We also provide both online and printed communications, education and information, and analytical-based marketing solutions to the veterinary community. Additionally, we franchise a premier provider of pet services including dog day care, overnight boarding, grooming and other ancillary services at specially designed pet care facilities.
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, 2015, our animal hospital network consisted of 650 animal hospitals in 41 states and in four Canadian provinces.
•
Our Laboratory segment operates the largest network of veterinary diagnostic laboratories in the nation. Our laboratories provide sophisticated testing and consulting services used by veterinarians in the detection, diagnosis, evaluation, monitoring, treatment and prevention of diseases and other conditions affecting animals. At March 31, 2015, our laboratory network consisted of 59 laboratories serving all 50 states and certain areas in Canada.
Our “All Other” category includes the results of our Medical Technology, Vetstreet and Camp Bow Wow operating segments. Each of these segments did not meet the materiality thresholds to be considered reportable segments.
The practice of veterinary medicine is subject to seasonal fluctuation. In particular, demand for veterinary services is significantly higher during the warmer months because pets spend a greater amount of time outdoors where they are more likely to be injured and are more susceptible to disease and parasites. In addition, use of veterinary services may be affected by levels of flea infestation, heartworms and ticks, and the number of daylight hours.




21

Use of Supplemental Non-GAAP Financial Measures

In this management's discussion and analysis, we use supplemental measures of our performance, which are derived from our consolidated financial information, but which are not presented in our consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). These financial measures, which are considered “Non-GAAP financial measures” under SEC rules, include our Non-GAAP gross profit and our Non-GAAP gross margin on a consolidated basis for our Animal Hospital segment, and the same measures expressed on a same-store basis. Additionally, our Non-GAAP financial measures include our Non-GAAP operating income and Non-GAAP operating margin on a consolidated basis. Lastly, our Non-GAAP financial measures also include our Non-GAAP consolidated net income and Non-GAAP diluted earnings per share. See Consolidated Results of Operations - Non-GAAP Financial Measures below for information about our use of these Non-GAAP financial measures, including our reasons for including the measures, material limitations with respect to the usefulness of the measures, and a reconciliation of each Non-GAAP financial measure to the most directly comparable GAAP financial measure.
Executive Overview
During the three months ended March 31, 2015, we experienced increases in both consolidated revenue and gross profit. The increases were primarily driven by revenue from our acquisitions and organic growth in our Animal Hospital and Laboratory segments. Our Animal Hospital same-store revenue increased 5.3% for the three months ended March 31, 2015, as compared to the same period in the prior year. Our Laboratory internal revenue increased 6.1% for the three months ended March 31, 2015, as compared to the same period in the prior year. Our consolidated operating income increased 12.9% for the three months ended March 31, 2015, as compared to the same period in the prior year. Our consolidated operating margin increased 0.2% for the three months ended March 31, 2015, as compared to the same period in the prior year. Our Non-GAAP consolidated operating income, which excludes the impact of intangible asset amortization associated with acquisitions, increased 12.5% for the three months ended March 31, 2015, and our Non-GAAP consolidated operating margin increased 0.1% for the three months ended March 31, 2015, as compared to the same period in the prior year. The increase in Non-GAAP consolidated operating income was primarily due to improved results from our Animal Hospital and Laboratory business segments.
Share Repurchase Program
In April 2013, our Board of Directors authorized a share repurchase for up to $125 million of our common shares, which was completed in August 2014. In August 2014, our Board of Directors authorized the continuance of that share repurchase program, authorizing us to repurchase up to an additional $400 million of our common shares. These repurchases may be made from time to time through various methods, including open market transactions, block trades, accelerated share repurchases, privately negotiated transactions or otherwise and may be effected through Rule 10b5-1 and Rule 10b-18 plans. The timing and number of shares repurchased will depend on a variety of factors, including price, capital availability, legal requirements and economic and market conditions. The Company is not obligated to purchase any shares under the repurchase program, and repurchases may be suspended or discontinued at any time without prior notice. The repurchases have been and will continue to be funded by existing cash balances and by our revolving credit facility. Refer to Item 2. Unregistered Sales of Equity Securities and the Use of Proceeds in Part II of this report.
Acquisitions
Our annual growth strategy includes the acquisition of independent animal hospitals. We also evaluate the acquisition of animal hospital chains, laboratories and related businesses if favorable opportunities are presented. For the three months ended March 31, 2015, we acquired $16.3 million of annualized Animal Hospital revenue.
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, 2015 and 2014, respectively:
 



22

 
Three Months Ended
March 31,
 
2015
 
2014
Animal Hospitals:
 
 
 
Beginning of period
643

 
609

Acquisitions
11

 
4

Acquisitions, merged
(2
)
 
(1
)
Sold, closed or merged
(2
)
 
(4
)
End of period
650

 
608

 
 
 
 
Laboratories:
 
 
 
Beginning of period
59

 
56

Acquisitions
1

 
—

Acquisitions, merged
(1
)
 
—

New facilities
—

 
1

End of period
59

 
57


Critical Accounting Policies
Our condensed, consolidated financial statements have been prepared in accordance with GAAP, which require management to make estimates and assumptions that affect reported amounts. The estimates and assumptions are based on historical experience and on other factors that management believes to be reasonable. Actual results may differ from those estimates. Critical accounting policies represent the areas where more significant judgments and estimates are used in the preparation of our condensed, consolidated financial statements. A discussion of such critical accounting policies, which include revenue recognition, goodwill, other intangible assets, and income taxes, can be found in our 2014 Annual Report on Form 10-K. There have been no material changes to the policies noted above as of this quarterly report on Form 10-Q for the period ended March 31, 2015.

Recent Accounting Pronouncements
 
A discussion of recent accounting pronouncements is included in Note 10, Recent Accounting Pronouncements to the Unaudited Condensed, Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
  



23

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,
 
2015
 
2014
Revenue:
 
 
 
Animal Hospital
78.7
 %
 
78.2
 %
Laboratory
18.8

 
19.7

All Other
6.9

 
6.3

Intercompany
(4.4
)
 
(4.2
)
Total revenue
100.0

 
100.0

Direct costs
77.2

 
77.4

Gross profit
22.8

 
22.6

Selling, general and administrative expense
8.9

 
9.2

Net loss (gain) on sale or disposal of assets
0.1

 
(0.2
)
Operating income
13.8

 
13.6

Interest expense, net
0.9

 
0.9

Income before provision for income taxes
12.9

 
12.7

Provision for income taxes
5.0

 
4.9

Net income
7.9

 
7.8

Net income attributable to noncontrolling interests
0.2

 
0.2

Net income attributable to VCA Inc.
7.7
 %
 
7.6
 %
Revenue
The following table summarizes our revenue (in thousands, except percentages):
 
 
Three Months Ended
March 31,
 
2015
 
2014
 
 
 
$
 
% of
Total
 
$
 
% of
Total
 
%
Change
Animal Hospital
$
393,026

 
78.7
 %
 
$
351,588

 
78.2
 %
 
11.8
 %
Laboratory
93,972

 
18.8
 %
 
88,534

 
19.7
 %
 
6.1
 %
All Other
34,227

 
6.9
 %
 
28,121

 
6.3
 %
 
21.7
 %
Intercompany
(21,772
)
 
(4.4
)%
 
(18,736
)
 
(4.2
)%
 
(16.2
)%
Total revenue
$
499,453

 
100.0
 %
 
$
449,507

 
100.0
 %
 
11.1
 %

Consolidated revenue increased $49.9 million for the three months ended March 31, 2015, as compared to the same period in the prior year. The increase was primarily attributable to revenue from animal hospitals acquired since the beginning of the comparable period in the prior year. Excluding the impact of acquisitions, revenue increased $20.3 million for the three months ended March 31, 2015, primarily due to organic growth in our Animal Hospital and Laboratory segments. The increase was partially offset by the impact of foreign currency translation. Our Animal Hospital same-store revenue increased 5.3% for the three months ended March 31, 2015. Our Laboratory internal revenue growth was 6.1% for the three months ended March 31, 2015.



24

Direct Costs
The following table summarizes our direct costs (in thousands, except percentages):
 
Three Months Ended
March 31, 2015
 
2015
 
2014
 
 
 
$
 
% of
Revenue
 
$
 
% of
Revenue
 
%
Change
Animal Hospital
$
337,542

 
85.9
 %
 
$
302,788

 
86.1
 %
 
11.5
 %
Laboratory
45,990

 
48.9
 %
 
45,503

 
51.4
 %
 
1.1
 %
All Other
22,803

 
66.6
 %
 
18,152

 
64.5
 %
 
25.6
 %
Intercompany
(20,744
)
 
(4.2
)%
 
(18,387
)
 
(4.1
)%
 
(12.8
)%
Total direct costs
$
385,591

 
77.2
 %
 
$
348,056

 
77.4
 %
 
10.8
 %

Consolidated direct costs increased $37.5 million for the three months ended March 31, 2015, as compared to the same period in the prior year. The increase was primarily attributable to compensation related costs, supplies, rent and acquisitions related depreciation and amortization, predominately in the animal hospital segment and discussed further under Segment Results.

Gross Profit
The following table summarizes our consolidated gross profit and consolidated Non-GAAP gross profit in dollars and as a percentage of applicable revenue (in thousands, except percentages):
 
 
Three Months Ended
March 31,
 
2015
 
2014
 
 
 
$
 
Gross
Margin
 
$
 
Gross
Margin
 
%
Change
Animal Hospital
$
55,484

 
14.1
%
 
$
48,800

 
13.9
%
 
13.7
%
Laboratory
47,982

 
51.1
%
 
43,031

 
48.6
%
 
11.5
%
All Other
11,424

 
33.4
%
 
9,969

 
35.5
%
 
14.6
%
Intercompany
(1,028
)
 
 
 
(349
)
 
 
 
 
Consolidated gross profit
$
113,862

 
22.8
%
 
$
101,451

 
22.6
%
 
12.2
%
Intangible asset amortization associated with acquisitions
5,465

 
 
 
5,080

 
 
 
 
Non-GAAP consolidated gross profit and Non-GAAP gross margin(1)
$
119,327

 
23.9
%
 
$
106,531

 
23.7
%
 
12.0
%
 ____________________________
(1) 
Non-GAAP consolidated gross profit and Non-GAAP gross margin are not measurements of financial performance prepared in accordance with GAAP. See Non-GAAP Financial Measures below for information about these Non-GAAP financial measures, including our reasons for including the measures, material limitations with respect to the usefulness of the measures, and a reconciliation of each Non-GAAP financial measure to the most directly comparable GAAP financial measure.
Consolidated gross profit increased $12.4 million for the three months ended March 31, 2015, as compared to the same period in the prior year. Non-GAAP consolidated gross profit, which excludes the impact of intangible asset amortization associated with acquisitions, increased $12.8 million for the three months ended March 31, 2015, as compared to the same period in the prior year. The increase in Non-GAAP consolidated gross profit was primarily attributable to organic revenue growth and increased gross margins in our Animal Hospital and Laboratory business segments. The increase also included $4.3 million of gross profit related to acquisitions consummated since the beginning of the comparable period in the prior year.



25

Segment Results
Animal Hospital Segment
Revenue
Animal Hospital revenue increased $41.4 million for the three months ended March 31, 2015, as compared to the same period in the prior year. The components of the increase are summarized in the following table (in thousands, except percentages and average revenue per order): 
 
Three Months Ended
March 31,
 
2015
 
2014
 
% Change
Same-store facilities:
 
 
 
 
 
Orders (1) 
2,032

 
1,996

 
1.8
%
Average revenue per order (2) 
$
181.00

 
$
175.06

 
3.4
%
Same-store revenue (1) 
$
367,740

 
$
349,348

 
5.3
%
Acquisitions
29,814

 
1,115

 
 
Closures
32

 
1,125

 
 
Net acquired revenue (3) 
$
29,846

 
$
2,240

 
 
Foreign currency impact
(4,560
)
 
—

 
 
Total
$
393,026

 
$
351,588

 
11.8
%
____________________________
(1) 
Same-store revenue and orders were calculated using Animal Hospital operating results, adjusted to exclude the operating results for newly acquired animal hospitals that we did not own, as of the beginning of the comparable period in the prior year. Same-store revenue also includes revenue generated by customers referred from our relocated or combined animal hospitals, including those merged upon acquisition.
(2) 
Computed by dividing same-store revenue by same-store orders. The average revenue per order may not calculate exactly due to rounding.
(3) 
Net acquired revenue represents the revenue from animal hospitals acquired, net of revenue from animal hospitals sold or closed, on or after the beginning of the comparable period in the prior year. Fluctuations in net acquired revenue occur due to the volume, size, and timing of acquisitions and dispositions.
During the three months ended March 31, 2015, as compared to the same period in the prior year, our volume of same-store orders increased primarily due to the combination of an overall improvement in the economy during the quarter and the impact of certain previously implemented initiatives in our animal hospitals.

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 as a result of increasing competition and our emphasis on comprehensive wellness visits has, over the past several years, resulted in a decrease in lower priced orders and an increase in higher priced orders. However, during the three months ended March 31, 2015, we experienced an increase in both the number of lower-priced orders and higher-priced orders.
Price increases as well as the aforementioned mix in year over year growth rates of low to high-priced orders contributed to the overall increase in the average revenue per order. Prices at each of our animal hospitals are reviewed regularly and adjustments are made based on market considerations, demographics and our costs. These adjustments historically approximated 3% to 6% on most services at the majority of our animal hospitals and are typically implemented in November of each year; however, price increases in November 2014 generally ranged between 3% and 4%.





26

Direct Costs

Animal Hospital direct costs increased $34.8 million for the three months ended March 31, 2015, as compared to the same period in the prior year. The increase was primarily due to an increase in compensation related expenses of $21.5 million, supplies of $5.2 million, rent of $1.5 million and depreciation and amortization of $1.4 million. The remainder of the increase was due to numerous items, all of which were individually immaterial. The increases in compensation related-costs and supplies generally are related to revenue growth and acquisitions. The increase in depreciation and amortization is related to acquired animal hospitals.


Gross Profit

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

The following table summarizes gross profit, gross margin, Non-GAAP gross profit and Non-GAAP gross margin for our Animal Hospital segment (in thousands, except percentages) and the same measures on a same-store basis:
 
Three Months Ended
March 31,
 
2015
 
2014
 
% Change
Gross profit
$
55,484

 
$
48,800

 
13.7
%
Intangible asset amortization associated with acquisitions
4,570

 
3,945

 
 
Non-GAAP gross profit(1)
$
60,054

 
$
52,745

 
13.9
%
Gross margin
14.1
%
 
13.9
%
 
 
Non-GAAP gross margin(1)
15.3
%
 
15.0
%
 
 
 
 
 
 
 
 
Same-store gross profit
$
53,810

 
$
49,138

 
9.5
%
Intangible asset amortization associated with acquisitions
3,470

 
3,936

 
 
Non-GAAP same-store gross profit(1)
$
57,280

 
$
53,074

 
7.9
%
Same-store gross margin
14.6
%
 
14.1
%
 
 
Non-GAAP same-store gross margin(1)
15.6
%
 
15.2
%
 
 
____________________________
(1) 
Non-GAAP gross profit and Non-GAAP gross margin and the same measures expressed on a same store basis, are not measurements of financial performance prepared in accordance with GAAP. See Non-GAAP Financial Measures below for information about these Non-GAAP financial measures, including our reasons for including the measures, material limitations with respect to the usefulness of the measures, and a reconciliation of each Non-GAAP financial measure to the most directly comparable GAAP financial measure.
Consolidated Animal Hospital gross profit increased $6.7 million for the three months ended March 31, 2015, as compared to the same period in the prior year. Non-GAAP gross profit, which excludes the impact of intangible asset amortization associated with acquisitions, increased $7.3 million for the three months ended March 31, 2015, as compared to the same period in the prior year. The increase in Non-GAAP consolidated gross profit was primarily attributable to an increase in Animal Hospital same-store gross margin, which increased as a result of leverage gained from higher same-store revenue and an additional $3.5 million of gross profit from acquired animal 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 primarily through cost efficiencies.






27

Laboratory Segment
The following table summarizes revenue and gross profit for our Laboratory segment (in thousands, except percentages):
 
 
Three Months Ended
March 31,
 
2015
 
2014
 
% Change
Revenue
$
93,972

 
$
88,534

 
6.1
%
Gross profit
$
47,982

 
$
43,031

 
11.5
%
Gross margin
51.1
%
 
48.6
%
 
 
Laboratory revenue increased $5.4 million for the three months ended March 31, 2015, 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 revenue per requisition):
 
 
Three Months Ended
March 31,
 
2015
 
2014
 
% Change
Internal growth:
 
 
 
 
 
Number of requisitions (1) 
3,140

 
3,109

 
1.0
%
Average revenue per requisition (2) 
$
29.92

 
$
28.48

 
5.1
%
Total internal revenue (1) 
$
93,942

 
$
88,534

 
6.1
%
Acquired revenue (3) 
30

 
—

 
 
Total
$
93,972

 
$
88,534

 
6.1
%
  ____________________________

(1) 
Internal revenue and requisitions were calculated using Laboratory operating results, which are adjusted (i) to exclude the operating results of acquired laboratories that we did not own as of the beginning of the comparable period in the prior year , and (ii) for the impact resulting from any differences in the number of billing days in the comparable period, if applicable.

(2) 
Computed by dividing internal revenue by the number of requisitions.

(3) 
Acquired revenue represents the current-year period revenue recognized from our acquired laboratories that we did not own as of the beginning of the comparable period in the prior year .
The increase in Laboratory revenue for the three months ended March 31, 2015, as compared to the same period in the prior year, was due to an increase in average revenue per requisition, primarily as a result of price increases in February 2015 and changes in product mix.
Laboratory gross profit is calculated as Laboratory revenue less direct costs. Laboratory direct cost comprises 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.
Our Laboratory gross margin increased to 51.1% for the three months ended March 31, 2015, as compared to 48.6% for the same period in the prior year. The improvement in gross margins is primarily attributable to leverage on labor and transportation costs.











28

Intercompany Revenue
Laboratory revenue for the three months ended March 31, 2015 included intercompany revenue of $15.2 million, generated by providing laboratory services to our animal hospitals, as compared to $13.8 million for the respective prior year period. All Other revenue for the three months ended March 31, 2015 included intercompany revenue of $7.7 million, generated by