UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2011
¨ | 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
(Registrants 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 issuers classes of common stock, as of the latest practicable date: common stock, $0.001 par value, 86,701,838 shares as of November 1, 2011.
VCA Antech, Inc. and Subsidiaries
Form 10-Q
September 30, 2011
Part I. | Financial Information | Page Number | ||
Item 1. | ||||
Condensed, Consolidated Balance Sheets as of September 30, 2011 and December 31, 2010 |
1 | |||
2 | ||||
Condensed, Consolidated Statements of Equity for the Nine Months Ended September 30, 2011 and 2010 |
3 | |||
4 | ||||
5 | ||||
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
22 | ||
Item 3. | 35 | |||
Item 4. | 35 | |||
Part II. |
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Item 1. | 35 | |||
Item 1A. | 35 | |||
Item 2. | 36 | |||
Item 3. | 36 | |||
Item 5. | 36 | |||
Item 6. | 36 | |||
37 | ||||
38 |
PART 1. | FINANCIAL INFORMATION |
ITEM 1. | FINANCIAL STATEMENTS |
VCA Antech, Inc. and Subsidiaries
Condensed, Consolidated Balance Sheets
(Unaudited)
(In thousands, except par value)
September 30, 2011 |
December 31, 2010 |
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Assets | ||||||||
Current assets: |
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Cash and cash equivalents |
$ | 79,243 | $ | 97,126 | ||||
Trade accounts receivable, less allowance for uncollectible accounts of $14,661 and $13,801 at September 30, 2011 and December 31, 2010, respectively |
53,445 | 49,224 | ||||||
Inventory |
46,876 | 40,760 | ||||||
Prepaid expenses and other |
23,203 | 21,138 | ||||||
Deferred income taxes |
20,129 | 19,019 | ||||||
Prepaid income taxes |
10,765 | 19,047 | ||||||
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Total current assets |
233,661 | 246,314 | ||||||
Property and equipment, net |
361,451 | 331,687 | ||||||
Goodwill |
1,254,061 | 1,092,480 | ||||||
Other intangible assets, net |
94,072 | 46,986 | ||||||
Notes receivable, net |
6,441 | 6,429 | ||||||
Deferred financing costs, net |
5,711 | 6,700 | ||||||
Other |
41,417 | 35,826 | ||||||
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Total assets |
$ | 1,996,814 | $ | 1,766,422 | ||||
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Liabilities and Equity | ||||||||
Current liabilities: |
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Current portion of long-term debt |
$ | 28,480 | $ | 28,101 | ||||
Accounts payable |
34,178 | 31,970 | ||||||
Accrued payroll and related liabilities |
46,594 | 35,754 | ||||||
Other accrued liabilities |
45,179 | 45,769 | ||||||
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Total current liabilities |
154,431 | 141,594 | ||||||
Long-term debt, less current portion |
598,918 | 498,935 | ||||||
Deferred income taxes |
95,745 | 82,131 | ||||||
Other liabilities |
26,247 | 28,478 | ||||||
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Total liabilities |
875,341 | 751,138 | ||||||
Commitments and contingencies |
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Redeemable noncontrolling interests |
6,891 | 5,799 | ||||||
Preferred stock, par value $0.001, 11,000 shares authorized, none outstanding |
- | - | ||||||
VCA Antech, Inc. stockholders equity: |
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Common stock, par value $0.001, 175,000 shares authorized, 86,662 and 86,179 shares outstanding as of September 30, 2011 and December 31, 2010, respectively |
87 | 86 | ||||||
Additional paid-in capital |
355,077 | 347,848 | ||||||
Retained earnings |
748,873 | 650,253 | ||||||
Accumulated other comprehensive income |
138 | 737 | ||||||
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Total VCA Antech, Inc. stockholders equity |
1,104,175 | 998,924 | ||||||
Noncontrolling interests |
10,407 | 10,561 | ||||||
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Total equity |
1,114,582 | 1,009,485 | ||||||
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Total liabilities and equity |
$ | 1,996,814 | $ | 1,766,422 | ||||
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The accompanying notes are an integral part of these condensed, consolidated financial statements.
1
VCA Antech, Inc. and Subsidiaries
Condensed, Consolidated Income Statements
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended September 30, |
Nine Months Ended September 30, |
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2011 | 2010 | 2011 | 2010 | |||||||||||||
Revenue |
$ | 385,135 | $ | 358,703 | $ | 1,116,363 | $ | 1,043,356 | ||||||||
Direct costs |
294,998 | 273,404 | 849,616 | 781,778 | ||||||||||||
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Gross profit |
90,137 | 85,299 | 266,747 | 261,578 | ||||||||||||
Selling, general and administrative expense |
32,488 | 27,105 | 85,334 | 94,290 | ||||||||||||
Net (gain) loss on sale of assets |
(192 | ) | 152 | (43 | ) | 163 | ||||||||||
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Operating income |
57,841 | 58,042 | 181,456 | 167,125 | ||||||||||||
Interest expense, net |
4,222 | 3,619 | 12,816 | 9,564 | ||||||||||||
Debt retirement costs |
2,764 | 2,550 | 2,764 | 2,550 | ||||||||||||
Other expense (income) |
8 | (180 | ) | (1 | ) | (490 | ) | |||||||||
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Income before provision for income taxes |
50,847 | 52,053 | 165,877 | 155,501 | ||||||||||||
Provision for income taxes |
19,488 | 23,466 | 63,957 | 63,465 | ||||||||||||
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Net income |
31,359 | 28,587 | 101,920 | 92,036 | ||||||||||||
Net income attributable to noncontrolling interests |
1,190 | 1,156 | 3,300 | 3,266 | ||||||||||||
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Net income attributable to VCA Antech, Inc |
$ | 30,169 | $ | 27,431 | $ | 98,620 | $ | 88,770 | ||||||||
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Basic earnings per share |
$ | 0.35 | $ | 0.32 | $ | 1.14 | $ | 1.03 | ||||||||
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Diluted earnings per share |
$ | 0.35 | $ | 0.32 | $ | 1.13 | $ | 1.02 | ||||||||
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Weighted-average shares outstanding for basic earnings per share |
86,697 | 86,086 | 86,531 | 85,985 | ||||||||||||
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Weighted-average shares outstanding for diluted earnings per share |
87,253 | 86,964 | 87,293 | 86,998 | ||||||||||||
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The accompanying notes are an integral part of these condensed, consolidated financial statements.
2
VCA Antech, Inc. and Subsidiaries
Condensed, Consolidated Statements of Equity
(Unaudited)
(In thousands)
Common Stock | Additional Paid-In |
Retained | Accumulated Other Comprehensive |
Noncontrolling | ||||||||||||||||||||||||
Shares | Amount | Capital | Earnings | (Loss) Income | Interests | Total | ||||||||||||||||||||||
Balances, December 31, 2009 |
85,584 | $ | 86 | $ | 335,114 | $ | 540,010 | $ | (163 | ) | $ | 11,429 | $ | 886,476 | ||||||||||||||
Net income (excludes $582 and $333 related to redeemable and mandatorily redeemable noncontrolling interests, respectively) |
- | - | - | 88,770 | - | 2,351 | 91,121 | |||||||||||||||||||||
Foreign currency translation adjustment |
- | - | - | - | 103 | - | 103 | |||||||||||||||||||||
Unrealized gain on foreign currency, net of tax |
- | - | - | - | 175 | - | 175 | |||||||||||||||||||||
Unrealized loss on hedging instruments, net of tax |
- | - | - | - | (1 | ) | - | (1 | ) | |||||||||||||||||||
Losses on hedging instruments reclassified to income, net of tax |
- | - | - | - | 233 | - | 233 | |||||||||||||||||||||
Formation of noncontrolling interests |
- | - | - | - | - | 3,169 | 3,169 | |||||||||||||||||||||
Distribution to noncontrolling interests |
- | - | - | - | - | (2,479 | ) | (2,479 | ) | |||||||||||||||||||
Purchase of noncontrolling interests |
- | - | - | - | - | (484 | ) | (484 | ) | |||||||||||||||||||
Share-based compensation |
- | - | 7,490 | - | - | - | 7,490 | |||||||||||||||||||||
Issuance of common stock under stock incentive plans |
503 | - | 4,781 | - | - | - | 4,781 | |||||||||||||||||||||
Stock repurchases |
- | - | (2,292 | ) | - | - | - | (2,292 | ) | |||||||||||||||||||
Excess tax benefit from stock options |
- | - | 370 | - | - | - | 370 | |||||||||||||||||||||
Tax shortfall and other from stock options and awards |
- | - | (568 | ) | - | - | - | (568 | ) | |||||||||||||||||||
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Balances, September 30, 2010 |
86,087 | $ | 86 | $ | 344,895 | $ | 628,780 | $ | 347 | $ | 13,986 | $ | 988,094 | |||||||||||||||
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Balances, December 31, 2010 |
86,179 | $ | 86 | $ | 347,848 | $ | 650,253 | $ | 737 | $ | 10,561 | $ | 1,009,485 | |||||||||||||||
Net income (excludes $1,207 and $326 related to redeemable and mandatorily redeemable noncontrolling interests, respectively). |
- | - | - | 98,620 | - | 1,767 | 100,387 | |||||||||||||||||||||
Foreign currency translation adjustment |
- | - | - | - | (373 | ) | - | (373 | ) | |||||||||||||||||||
Unrealized loss on foreign currency, net of tax |
- | - | - | - | (226 | ) | - | (226 | ) | |||||||||||||||||||
Distribution to noncontrolling interests |
- | - | - | - | - | (1,046 | ) | (1,046 | ) | |||||||||||||||||||
Purchase of noncontrolling interests |
- | - | 263 | - | - | (875 | ) | (612 | ) | |||||||||||||||||||
Share-based compensation |
- | - | 6,610 | - | - | - | 6,610 | |||||||||||||||||||||
Issuance of common stock under stock incentive plans |
483 | 1 | 2,595 | - | - | - | 2,596 | |||||||||||||||||||||
Stock repurchases |
- | - | (2,663 | ) | - | - | - | (2,663 | ) | |||||||||||||||||||
Excess tax benefit from stock options |
- | - | 963 | - | - | - | 963 | |||||||||||||||||||||
Tax shortfall and other from stock options and awards |
- | - | (539 | ) | - | - | - | (539 | ) | |||||||||||||||||||
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Balances, September 30, 2011 |
86,662 | $ | 87 | $ | 355,077 | $ | 748,873 | $ | 138 | $ | 10,407 | $ | 1,114,582 | |||||||||||||||
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The accompanying notes are an integral part of these condensed, consolidated financial statements.
3
VCA Antech, Inc. and Subsidiaries
Condensed, Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
Nine Months
Ended September 30, |
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2011 | 2010 | |||||||
Cash flows from operating activities: |
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Net income |
$ | 101,920 | $ | 92,036 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
41,386 | 33,387 | ||||||
Amortization of debt issue costs |
1,169 | 461 | ||||||
Provision for uncollectible accounts |
4,510 | 5,388 | ||||||
Debt retirement costs |
2,764 | 2,550 | ||||||
Net (gain) loss on sale of assets |
(43 | ) | 163 | |||||
Share-based compensation |
6,610 | 7,490 | ||||||
Deferred income taxes |
14,649 | 10,992 | ||||||
Excess tax benefit from exercise of stock options |
(963 | ) | (370 | ) | ||||
Other |
(489 | ) | (550 | ) | ||||
Changes in operating assets and liabilities: |
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Trade accounts receivable |
(7,018 | ) | (7,533 | ) | ||||
Inventory, prepaid expense and other assets |
(9,806 | ) | (1,754 | ) | ||||
Accounts payable and other accrued liabilities |
(8,328 | ) | 7,038 | |||||
Accrued payroll and related liabilities |
8,523 | 3,717 | ||||||
Income taxes |
8,707 | (9,545 | ) | |||||
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Net cash provided by operating activities |
163,591 | 143,470 | ||||||
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Cash flows from investing activities: |
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Business acquisitions, net of cash acquired |
(190,363 | ) | (44,126 | ) | ||||
Real estate acquired in connection with business acquisitions |
(1,900 | ) | (5,834 | ) | ||||
Property and equipment additions |
(43,275 | ) | (47,675 | ) | ||||
Proceeds from sale of assets |
447 | 15 | ||||||
Other |
(723 | ) | 188 | |||||
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Net cash used in investing activities |
(235,814 | ) | (97,432 | ) | ||||
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Cash flows from financing activities: |
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Repayment of debt |
(90,945 | ) | (548,560 | ) | ||||
Proceeds from issuance of long-term debt |
150,000 | 500,000 | ||||||
Proceeds from revolving credit facility |
50,000 | - | ||||||
Repayment of revolving credit facility |
(50,000 | ) | - | |||||
Payment of financing costs |
(2,944 | ) | (9,112 | ) | ||||
Distributions to noncontrolling interest partners |
(1,959 | ) | (3,314 | ) | ||||
Proceeds from issuance of common stock under stock option plans |
2,596 | 4,781 | ||||||
Excess tax benefit from exercise of stock options |
963 | 370 | ||||||
Stock repurchases |
(2,663 | ) | (2,292 | ) | ||||
Other |
(345 | ) | (897 | ) | ||||
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Net cash provided by (used in) financing activities |
54,703 | (59,024 | ) | |||||
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Effect of currency exchange rate changes on cash and cash equivalents |
(363 | ) | 38 | |||||
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Decrease in cash and cash equivalents |
(17,883 | ) | (12,948 | ) | ||||
Cash and cash equivalents at beginning of period |
97,126 | 145,181 | ||||||
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Cash and cash equivalents at end of period |
$ | 79,243 | $ | 132,233 | ||||
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Supplemental disclosures of cash flow information: |
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Interest paid |
$ | 12,214 | $ | 9,207 | ||||
Income taxes paid |
$ | 40,601 | $ | 62,018 | ||||
Supplemental schedule of noncash investing and financing activities: |
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Detail of acquisitions: |
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Fair value of assets acquired |
$ | 241,688 | $ | 104,251 | ||||
Cash paid for acquisitions |
(189,255 | ) | (42,827 | ) | ||||
Cash paid to bondholders/debt holders |
(26,048 | ) | (29,532 | ) | ||||
Contingent consideration |
(481 | ) | (259 | ) | ||||
Holdbacks |
(800 | ) | - | |||||
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Liabilities assumed |
$ | 25,104 | $ | 31,633 | ||||
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The accompanying notes are an integral part of these condensed, consolidated financial statements.
4
VCA Antech, Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements
September 30, 2011
(Unaudited)
1. | Nature of Operations |
Our company, VCA Antech, Inc. (VCA) is a Delaware corporation formed in 1986 and is based in Los Angeles, California. We are an animal healthcare company with the following strategic operating segments: animal hospitals (Animal Hospital), veterinary diagnostic laboratories (Laboratory), veterinary medical technology (Medical Technology) and veterinary support group (Vetstreet).
Our animal hospitals offer a full range of general medical and surgical services for companion animals. Our animal hospitals treat diseases and injuries, provide pharmaceutical products and perform a variety of pet-wellness programs, including health examinations, diagnostic testing, vaccinations, spaying, neutering and dental care. At September 30, 2011, we operated 540 animal hospitals throughout 41 states and in Canada.
We operate a full-service veterinary diagnostic laboratory network serving all 50 states and certain areas in Canada. Our laboratory network provides sophisticated testing and consulting services used by veterinarians in the detection, diagnosis, evaluation, monitoring, treatment and prevention of diseases and other conditions affecting animals. At September 30, 2011, we operated 52 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 online communications, professional education, marketing solutions and an ecommerce platform for independent animal hospitals. In addition, Vetstreet.com provides a robust selection of products, information and services to the pet-owning community.
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 information and notes 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 and nine months ended September 30, 2011 are not necessarily indicative of the results to be expected for the full year ending December 31, 2011. For further information, refer to our consolidated financial statements and notes thereto included in our 2010 Annual Report on Form 10-K.
Certain reclassifications have been made herein to 2010 amounts to conform to the current year presentation. In our condensed, consolidated balance sheet as of December 31, 2010, we corrected certain errors in presentation by reclassifying $5.8 million to temporary equity (mezzanine) from noncontrolling interests included in permanent equity related to partnership agreements that contain certain terms which may require us to purchase the partners equity based upon certain contingencies. As these agreements do not contain a mandatory redemption clause, the balances are now correctly classified in temporary equity (mezzanine). Additionally, we reclassified $506,000 from noncontrolling interests in permanent equity to other liabilities related to our mandatorily redeemable partnership interests. The change in classification of our redeemable noncontrolling interests also impacts our condensed, consolidated statement of equity for the nine months ended September 30, 2010, accordingly, certain amounts related to redeemable noncontrolling interests were reclassified from the noncontrolling interests column in the statement, see Note 13, Noncontrolling Interests, which presents a summary of the amounts reclassified.
During the quarter ended March 31, 2011, we corrected an error related to our deferred revenue and related deferred cost for certain equipment sales governed by recently revised accounting guidance related to multiple element arrangements. The correction resulted in the recognition of $4.0 million of previously deferred revenue and $3.8 million of previously deferred costs.
5
VCA Antech, Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
(Unaudited)
2. | Basis of Presentation, continued |
The preparation of our condensed, consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in our condensed, consolidated financial statements and notes thereto. Actual results could differ from those estimates.
3. | Goodwill and Other Intangible Assets |
Goodwill
The following table presents the changes in the carrying amount of our goodwill for the nine months ended September 30, 2011 (in thousands):
Animal Hospital |
Laboratory | All Other | Total | |||||||||||||
Balance as of December 31, 2010 |
$ | 965,999 | $ | 96,818 | $ | 29,663 | $ | 1,092,480 | ||||||||
Goodwill acquired |
64,459 | 6 | 99,087 | 163,552 | ||||||||||||
Other (1) |
(1,807 | ) | (30 | ) | (134 | ) | (1,971 | ) | ||||||||
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Balance as of September 30, 2011 |
$ | 1,028,651 | $ | 96,794 | $ | 128,616 | $ | 1,254,061 | ||||||||
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(1) | Other includes acquisition-price adjustments which consist primarily of an adjustment related to deferred taxes, buy- outs and foreign currency translation adjustments. |
We had no accumulated impairment losses as of September 30, 2011.
Other Intangible Assets
Our amortizable intangible assets at September 30, 2011 and December 31, 2010 are as follows (in thousands):
As of September 30, 2011 | As of December 31, 2010 | |||||||||||||||||||||||
Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount |
Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount |
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Noncontractual customer relationships |
$ | 80,613 | $ | (18,297 | ) | $ | 62,316 | $ | 48,686 | $ | (14,188 | ) | $ | 34,498 | ||||||||||
Covenants not-to-compete |
12,990 | (8,030 | ) | 4,960 | 14,459 | (8,311 | ) | 6,148 | ||||||||||||||||
Favorable lease asset |
5,571 | (3,076 | ) | 2,495 | 5,486 | (2,672 | ) | 2,814 | ||||||||||||||||
Trademarks |
7,545 | (1,463 | ) | 6,082 | 3,749 | (986 | ) | 2,763 | ||||||||||||||||
Contracts |
3,500 | (74 | ) | 3,426 | - | - | - | |||||||||||||||||
Technology |
16,589 | (1,852 | ) | 14,737 | 2,189 | (1,447 | ) | 742 | ||||||||||||||||
Client lists |
84 | (28 | ) | 56 | 35 | (14 | ) | 21 | ||||||||||||||||
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Total |
$ | 126,892 | $ | (32,820 | ) | $ | 94,072 | $ | 74,604 | $ | (27,618 | ) | $ | 46,986 | ||||||||||
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6
VCA Antech, Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
(Unaudited)
3. | Goodwill and Other Intangible Assets, continued |
The following table summarizes our aggregate amortization expense related to other intangible assets (in thousands):
Three Months
Ended September 30, |
Nine Months
Ended September 30, |
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2011 | 2010 | 2011 | 2010 | |||||||||||||
Aggregate amortization expense |
$ | 3,833 | $ | 2,484 | $ | 9,092 | $ | 6,825 | ||||||||
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The estimated amortization expense related to intangible assets for the remainder of 2011 and each of the succeeding years thereafter as of September 30, 2011 is as follows (in thousands):
Remainder of 2011 |
$ | 4,403 | ||
2012 |
16,952 | |||
2013 |
14,680 | |||
2014 |
12,348 | |||
2015 |
10,492 | |||
Thereafter |
35,197 | |||
|
|
|||
Total |
$ | 94,072 | ||
|
|
4. | Acquisitions |
The table below reflects the activity related to the acquisitions and dispositions of our animal hospitals and laboratories during the nine months ended September 30, 2011:
Animal Hospitals: |
||||
Animal Hospital acquisitions, excluding BrightHeart |
10 | |||
Acquisitions, merged |
(1 | ) | ||
BrightHeart (1) |
9 | |||
Sold, closed or merged |
(6 | ) | ||
|
|
|||
Total |
12 | |||
|
|
|||
Laboratories: |
||||
Acquisitions |
1 | |||
Created |
1 | |||
|
|
|||
Total |
2 | |||
|
|
(1) | BrightHeart Veterinary Centers (BrightHeart) was acquired on July 11, 2011. |
Animal Hospital and Laboratory Acquisitions, excluding BrightHeart
The following table summarizes the aggregate consideration, including acquisition costs, paid by us for our acquired animal hospitals and laboratories, excluding BrightHeart and the final allocation of the purchase price (in thousands):
7
VCA Antech, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
4. | Acquisitions, continued |
Consideration: |
||||
Cash |
$ | 19,499 | ||
Holdback |
800 | |||
|
|
|||
Fair value of total consideration transferred |
$ | 20,299 | ||
|
|
|||
Allocation of the Purchase Price: |
||||
Tangible assets |
$ | 446 | ||
Identifiable intangible assets |
3,620 | |||
Goodwill (1) |
16,233 | |||
|
|
|||
Total |
$ | 20,299 | ||
|
|
(1) | We expect that $16.2 million, of the goodwill recorded for these acquisitions as of September 30, 2011 will be fully deductible for income tax purposes. |
In addition to the purchase price listed above are cash payments made for real estate acquired in connection with our purchase of animal hospitals totaling $1.9 million for the nine months ended September 30, 2011.
BrightHeart Acquisition
On July 11, 2011, we acquired 100% of the membership interests of BrightHeart for approximately $50 million in cash. BrightHeart operates nine animal hospitals, eight of which focus on the delivery of specialty and emergency medicine. The acquisition will increase our level of market recognition in areas where we have an existing market presence. Our consolidated financial statements reflect the operating results of BrightHeart since July 11, 2011.
The following table summarizes the preliminary purchase price and the preliminary allocation of the purchase price (in thousands):
Consideration: |
||||
Cash |
$ | 23,490 | ||
Cash paid to holders of debt |
26,048 | |||
Contingent consideration |
481 | |||
|
|
|||
Fair value of total consideration transferred |
$ | 50,019 | ||
|
|
|||
Allocation of the Purchase Price: |
||||
Tangible assets |
$ | 15,985 | ||
Identifiable intangible assets (1) |
7,335 | |||
Goodwill (2) |
47,431 | |||
Other liabilities assumed |
(20,732 | ) | ||
|
|
|||
Total |
$ | 50,019 | ||
|
|
(1) | Identifiable intangible assets primarily include customer relationships. The weighted average amortization period for both the total identifiable intangible assets and the customer-related intangible assets is approximately five years. |
8
VCA Antech, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
4. | Acquisitions, continued |
(2) | We expect that all of the goodwill related to the BrightHeart acquisition recorded as of September 30, 2011 will be fully deductible for income tax purposes. |
Acquisition-related costs, included in corporate selling, general and administrative expense in our income statement, for the three and nine months ended September 30, 2011, were approximately $851,000 and $1.1 million, respectively.
The preliminary purchase price is pending the finalization of the working capital calculation.
The preliminary purchase price allocation listed above is primarily pending the finalization of values related to deferred income taxes, capital leases and assumed liabilities. Our internal management review with respect to these items has not yet been completed. The final purchase price and the valuation of net assets acquired are expected to be completed as soon as practicable, but no later than one year from the date of acquisition. We believe that any adjustments would not be material to the consolidated financial statements and we expect this review to be completed by the end of the third quarter of 2012.
Other Acquisitions
MediMedia Animal Health, LLC (Vetstreet)
On August 9, 2011, we acquired 100% of the securities interests of Vetstreet, the nations largest provider of online communications, professional education and marketing solutions to the veterinary community. The acquisition of Vetstreet expands the breadth of our product offerings to the veterinary community and is expected to provide long-term synergies to our existing businesses. We acquired Vetstreet for a preliminary purchase price of $146.4 million, net of cash acquired. The following table summarizes the preliminary purchase price and allocation of the preliminary purchase price (in thousands):
Consideration: |
||||
Cash |
$ | 146,420 | ||
|
|
|||
Allocation of the Purchase Price: |
||||
Tangible assets |
$ | 5,952 | ||
Identifiable intangible assets (1) |
45,810 | |||
Goodwill (2) |
99,087 | |||
Other liabilities assumed |
(4,429 | ) | ||
|
|
|||
Total |
$ | 146,420 | ||
|
|
(1) | Identifiable intangible assets include customer relationships, technology, trademarks, non-compete agreements and contracts. The weighted average amortization period for the total identifiable intangible assets is approximately nine years, for the customer-related intangible assets approximately ten years, for the technology and trademarks approximately seven years, for the non-compete agreements approximately two years and for the contracts approximately eight years. |
(2) | We expect that all of the goodwill related to the Vetstreet acquisition recorded as of September 30, 2011 will be fully deductible for income tax purposes. |
Acquisition-related costs, included in corporate selling, general and administrative expense in our income statement, for the three and nine months ended September 30, 2011 were approximately $657,000 and $911,000, respectively.
The preliminary purchase price is pending the finalization of the working capital calculation, which at this time is under seller review.
The final purchase price allocation is pending the completion of the internal review of the final valuation. The provisional items pending finalization include, but are not limited to, accounts receivable, prepaid expenses, deferred income taxes, computer equipment, accounts payable and other accrued liabilities. The final purchase price and the valuation of the net assets acquired are expected to be completed as soon as practicable, but no later than one year from the date of acquisition. We believe that any adjustments would not be material to the consolidated financial statements and we expect this review to be completed by the end of the third quarter of 2012.
Vetstreet is reported within our All Other category in our segment disclosures combined with our Medical Technology operating segment.
9
VCA Antech, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
4. | Acquisitions, continued |
Pro Forma Information (unaudited)
The following unaudited pro forma financial information for the three and nine months ended September 30, 2011 and 2010 presents, (i) the actual results of operations of our 2011 acquisitions and (ii) the combined results of operations for our company and our 2011 acquisitions as if those acquisitions had been completed on January 1, 2010, the first day of the earliest period presented. The pro forma financial information considers principally (i) our companys unaudited financial results, (ii) the unaudited historical financial results of our acquisitions, and (iii) select pro forma adjustments to the historical financial results of our acquisitions. Such pro forma adjustments represent principally estimates of (i) the impact of the hypothetical amortization of acquired intangible assets, (ii) the recognition of fair value adjustments relating to tangible assets, (iii) adjustments reflecting the new capital structure, including additional financing or repayments of debt as part of the acquisitions and (iv) the tax effects of the acquisitions and related adjustments as if those acquisitions had been completed on January 1, 2010. The unaudited pro forma financial information is not necessarily indicative of what our consolidated results of operations would have been had we completed the acquisition at the beginning of each year presented. In addition, the unaudited pro forma financial information does not attempt to project the future results of operations of our company:
Revenue | Net Income | |||||||
(In thousands): | (Unaudited) | |||||||
Actual from July 1, 2011 to September 30, 2011 |
$ | 19,318 | $ | 1,108 | ||||
2011 supplemental pro forma from July 1, 2011 to September 30, 2011 (1) |
$ | 389,648 | $ | 30,624 | ||||
2010 supplemental pro forma from July 1, 2010 to September 30, 2010 |
$ | 383,333 | $ | 27,639 | ||||
Actual from January 1, 2011 to September 30, 2011 |
$ | 23,341 | $ | 1,616 | ||||
2011 supplemental pro forma from January 1, 2011 to September 30, 2011 (1) |
$ | 1,173,830 | $ | 99,611 | ||||
2010 supplemental pro forma from January 1, 2010 to September 30, 2010 (1) |
$ | 1,117,245 | $ | 87,375 |
(1) | The July 1, 2011 to September 30, 2011 and January 1, 2011 to September 30, 2011 supplemental pro forma net income was adjusted to exclude $1.5 million and $2.0 million, respectively of acquisition-related costs incurred in 2011. The January 1, 2010 to September 30, 2010 supplemental pro forma net income was adjusted to include the $2.0 million of year-to-date acquisition-related costs. |
5. | Other Accrued Liabilities |
Other accrued liabilities consisted of the following (in thousands):
September 30, 2011 |
December 31, 2010 |
|||||||
Deferred revenue |
$ | 6,533 | $ | 8,617 | ||||
Accrued health insurance |
5,594 | 4,970 | ||||||
Deferred rent |
3,918 | 3,456 | ||||||
Accrued consulting fees |
2,760 | 2,760 | ||||||
Holdbacks and earnouts |
2,536 | 2,447 | ||||||
Customer deposits |
2,517 | 2,966 | ||||||
Accrued lab service rebates |
212 | 2,535 | ||||||
Other |
21,109 | 18,018 | ||||||
|
|
|
|
|||||
$ | 45,179 | $ | 45,769 | |||||
|
|
|
|
10
VCA Antech, Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
(Unaudited)
6. | Long-Term Obligations |
Senior Credit Facility
On August 16, 2011, we amended and restated our existing senior credit facility to allow for additional senior term notes in the amount of $100 million and an additional $25.0 million aggregate principal amount of revolving commitments. The funds borrowed from the additional senior term notes were used to repay in full, amounts borrowed in connection with the acquisition of Vetstreet on August 9, 2011. The terms of the amended and restated senior credit facility are discussed below in this footnote. In connection with the amendment we incurred $2.9 million in financing costs, of which approximately $865,000 were recognized as part of income from continuing operations and approximately $2.0 million were capitalized as deferred financing costs. In addition, we expensed $1.1 million of previously deferred financing costs associated with lenders who exited the syndicate on the amendment date.
The following table summarizes our long-term obligations at September 30, 2011 and December 31, 2010 (in thousands):
September 30, 2011 |
December 31, 2010 |
|||||||
Revolver |
$ | - | $ | - | ||||
Senior term notes at LIBOR + 1.75% (1.99% at September 30, 2011) |
581,250 | - | ||||||
Senior term notes at LIBOR + 2.25% (2.51% at December 31, 2010) |
- | 493,750 | ||||||
Other debt and capital lease obligations |
46,148 | 33,286 | ||||||
|
|
|
|
|||||
Total debt obligations |
627,398 | 527,036 | ||||||
Less - current portion |
(28,480 | ) | (28,101 | ) | ||||
|
|
|
|
|||||
$ | 598,918 | $ | 498,935 | |||||
|
|
|
|
Interest Rate. In general, borrowings under the senior term notes and the revolving credit facility bear interest, at our option, on either:
| the base rate (as defined below) plus the applicable margin. The applicable margin for a base rate loan is an amount equal to the applicable margin for Eurodollar rate (as defined below) minus 1.00%; or |
| the adjusted Eurodollar rate (as defined below) plus a margin of 1.75% (Level II, see table below) per annum until the date of delivery of the compliance certificate and the financial statements for the period ending September 30, 2011, at which time the applicable margin will be determined by reference to the leverage ratio in effect from time to time as set forth in the following table: |
Level |
Leverage Ratio |
Applicable Margin for Eurodollar Rate Loans |
Applicable Revolving Commitment Fee % | |||
I |
> 2.50:1.00 | 2.25% | 0.50% | |||
II |
< 2.50:1.00 and > 1.75:1.00 | 1.75% | 0.375% | |||
III |
< 1.75:1.00 and > 1.00:1.00 | 1.50% | 0.25% | |||
IV |
< 1.00:1.00 | 1.25% | 0.20% |
The base rate for the senior term notes is a rate per annum equal to the greatest of Wells Fargos prime rate in effect on such day, the Federal funds effective rate in effect on such day plus 0.5% and the adjusted Eurodollar rate for a one-month interest period commencing on such day plus 1.0%. The adjusted Eurodollar rate is defined as the rate per annum obtained by dividing (1) the rate of interest offered to Wells Fargo on the London interbank market by (2) a percentage equal to 100% minus the stated maximum rate of all reserve requirements applicable to any member bank of the Federal Reserve System in respect of Eurocurrency liabilities.
11
VCA Antech, Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
(Unaudited)
6. | Long-Term Obligations, continued |
Maturity and Principal Payments. The amended and restated senior term notes mature on August 19, 2016. Principal payments on the senior term notes are paid quarterly in the amount of $7.3 million for the first two years beginning on December 31, 2011, quarterly payments of $10.9 million for the two years following, and quarterly payments of $14.5 million for the three quarters prior to maturity at which time the remaining balance is due. The following table sets forth the remaining scheduled principal payments for our senior term notes (in thousands):
2011 (1) |
$ | 7,266 | ||
2012 |
29,063 | |||
2013 |
32,695 | |||
2014 |
43,594 | |||
2015 |
47,227 | |||
Thereafter |
421,405 | |||
|
|
|||
Total |
$ | 581,250 | ||
|
|
(1) | Relates to the period from October 1, 2011 through December 31, 2011. |
The revolving credit facility matures on August 19, 2016. Principal payments on the revolving credit facility are made at our discretion with the entire unpaid amount due at maturity.
Guarantees and Security. We and each of our wholly-owned subsidiaries guarantee the outstanding debt under the senior credit facility. These borrowings, along with the guarantees of the subsidiaries, are further secured by substantially all of our consolidated assets. In addition, these borrowings are secured by a pledge of substantially all of the capital stock, or similar equity interests, of our wholly-owned subsidiaries.
Debt Covenants. The 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 on all classes of stock. We believe the most restrictive covenant is the fixed charge coverage ratio. At September 30, 2011 we had a fixed charge coverage ratio of 1.75 to 1.00, which was in compliance with the required ratio of no less than 1.20 to 1.00.
7. | Fair Value Measurements |
Fair Value of Financial Instruments
The FASB accounting guidance requires disclosure of fair value information about financial instruments, whether or not recognized in the accompanying condensed, consolidated balance sheets. Fair value as defined by the guidance is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value estimates of financial instruments are not necessarily indicative of the amounts we might pay or receive in actual market transactions. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
Cash and Cash Equivalents. These balances include cash and cash equivalents with maturities of less than three months. The carrying amount approximates fair value due to the short-term maturities of these instruments.
Receivables, Less Allowance for Doubtful Accounts, Accounts Payable and Certain Other Accrued Liabilities. Due to their short-term nature, fair value approximates carrying value.
Long-Term Debt. The fair value of debt at September 30, 2011 and December 31, 2010 is based upon the ask price quoted from an external source, which is considered a Level 2 input.
12
VCA Antech, Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
(Unaudited)
7. | Fair Value Measurements, continued |
The following table reflects the carrying value and fair value of our variable-rate long-term debt (in thousands):
As of September 30, 2011 | As of December 31, 2010 | |||||||||||||||
Carrying Value |
Fair Value |
Carrying Value |
Fair Value |
|||||||||||||
Variable-rate long-term debt |
$ | 581,250 | $ | 579,797 | $ | 493,750 | $ | 496,219 | ||||||||
|
|
|
|
|
|
|
|
At September 30, 2011 and December 31, 2010, we did not have any material applicable nonrecurring measurements of nonfinancial assets and nonfinancial liabilities.
8. | Share-Based Compensation |
Stock Option Activity
A summary of our stock option activity for the nine months ended September 30, 2011 is as follows (in thousands):
Stock Options |
Weighted- Average Exercise Price |
|||||||
Outstanding at December 31, 2010 |
3,323 | $ | 16.45 | |||||
Granted |
894 | $ | 15.98 | |||||
Exercised |
(262 | ) | $ | 9.90 | ||||
Canceled |
(3 | ) | $ | 17.04 | ||||
|
|
|
|
|||||
Outstanding at September 30, 2011 |
3,952 | $ | 16.78 | |||||
|
|
|
|
|||||
Exercisable at September 30, 2011 |
2,719 | $ | 17.00 | |||||
|
|
|
|
|||||
Vested and expected to vest at September 30, 2011 |
3,896 | $ | 16.78 | |||||
|
|
|
|
There were 894,000 stock options granted during the nine months ended September 30, 2011, which had an estimated weighted- average grant date fair value of approximately $6.00. The aggregate intrinsic value of our stock options exercised during the three and nine months ended September 30, 2011 was $194,000 and $3.2 million, respectively, and the actual tax benefit realized on options exercised during these periods was $76,000 and $1.2 million, respectively.
Calculation of Fair Value
The fair value of our options is estimated on the date of grant using the Black-Scholes option pricing model. We amortize the fair value of our options on a straight-line basis over the requisite service period. The following assumptions were used to determine the preliminary fair value of those options granted during the nine months ended September 30, 2011:
Expected volatility (1) |
41.6% | |||
Weighted-average volatility (1) |
42.0% | |||
Expected dividends |
0.0% | |||
Expected term |
4.85 years | |||
Risk-free rate (2) |
0.94% |
(1) | We estimated the volatility of our common stock on the date of grant based on using both historical and implied volatilities. |
13
VCA Antech, Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
(Unaudited)
8. | Share-Based Compensation, continued |
(2) | The risk-free interest rate is based on the implied yield in effect at the time of option grant on U.S. Treasury zero-coupon issues with equivalent remaining terms. |
At September 30, 2011 there was $5.7 million of total unrecognized compensation cost related to our stock options. This cost is expected to be recognized over a weighted-average period of 3.7 years.
The compensation cost that has been charged against income for stock options for the three months ended September 30, 2011 and 2010 was $347,000 and $414,000, respectively. The corresponding income tax benefit recognized was $136,000 and $161,000 for the three months ended September 30, 2011 and 2010, respectively.
The compensation cost that has been charged against income for stock options for the nine months ended September 30, 2011 and 2010 was $1.0 million and $2.2 million, respectively. The corresponding income tax benefit recognized was $407,000 and $872,000 for the nine months ended September 30, 2011 and 2010, respectively.
Nonvested Stock Activity
During the nine months ended September 30, 2011 we granted 1,225,046 shares of nonvested common stock, 1,130,000 of which were granted to certain of our executives and contain performance conditions. The performance-based awards provide that the number of shares that will ultimately vest will be between 0% and 100% of the total shares granted, based on the attainment of certain performance targets. Assuming continued service through each vesting date, these awards will vest in four equal annual installments beginning June 2012 through June 2015.
Total compensation cost charged against income related to nonvested stock awards was $3.7 million and $1.2 million for the three months ended September 30, 2011 and 2010, respectively. The corresponding income tax benefit recognized in the income statement was $1.5 million and $476,000 for the three months ended September 30, 2011 and 2010, respectively.
Total compensation cost charged against income related to nonvested stock awards was $5.6 million and $5.2 million for the nine months ended September 30, 2011 and 2010, respectively. The corresponding income tax benefit recognized in the income statement was $2.2 million and $2.0 million for the nine months ended September 30, 2011 and 2010, respectively.
At September 30, 2011, there was $25.8 million of unrecognized compensation cost related to these nonvested shares, which will be recognized over a weighted-average period of 3.5 years. A summary of our nonvested stock activity for the nine months ended September 30, 2011 is as follows:
Shares | Grant Date Weighted- Average Fair Value Per Share |
|||||||
Outstanding at December 31, 2010 |
686,511 | $ | 26.16 | |||||
Granted |
1,225,046 | $ | 20.00 | |||||
Vested |
(334,370 | ) | $ | 28.84 | ||||
Forfeited/Canceled |
(2,275 | ) | $ | 30.35 | ||||
|
|
|||||||
Outstanding at September 30, 2011 |
1,574,912 | $ | 20.80 | |||||
|
|
14
VCA Antech, Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
(Unaudited)
9. | Calculation of Earnings per Share |
Basic earnings per share is calculated by dividing net income by the weighted-average number of shares outstanding during the period. Diluted earnings per share is calculated by dividing net income attributable to VCA Antech, Inc. by the weighted-average number of common shares outstanding, after giving effect to all dilutive potential common shares outstanding during the period. Basic and diluted earnings per share were calculated as follows (in thousands, except per share amounts):
Three Months
Ended September 30, |
Nine Months
Ended September 30, |
|||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net income attributable to VCA Antech, Inc |
$ | 30,169 | $ | 27,431 | $ | 98,620 | $ | 88,770 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Weighted-average common shares outstanding: |
||||||||||||||||
Basic |
86,697 | 86,086 | 86,531 | 85,985 | ||||||||||||
Effect of dilutive potential common shares: |
||||||||||||||||
Stock options |
445 | 632 | 593 | 812 | ||||||||||||
Nonvested shares |
111 | 246 | 169 | 201 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Diluted |
87,253 | 86,964 | 87,293 | 86,998 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Basic earnings per share |
$ | 0.35 | $ | 0.32 | $ | 1.14 | $ | 1.03 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Diluted earnings per share |
$ | 0.35 | $ | 0.32 | $ | 1.13 | $ | 1.02 | ||||||||
|
|
|
|
|
|
|
|
For the three months ended September 30, 2011 and 2010, potential common shares of 2,104,547 and 1,162,389, respectively, were excluded from the computation of diluted earnings per share because their inclusion would have had an antidilutive effect. For the nine months ended September 30, 2011 and 2010, potential common shares of 1,139,567 and 13,919, respectively, were excluded from the computation of diluted earnings per share because their inclusion would have had an antidilutive effect.
10. | Comprehensive Income |
Total comprehensive income consists of net income and the other comprehensive income during the three and nine months ended September 30, 2011 and 2010. The following table provides a summary of comprehensive income (in thousands):
15
VCA Antech, Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
(Unaudited)
10. | Comprehensive Income, continued |
Three Months
Ended September 30, |
Nine Months
Ended September 30, |
|||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net income(1) |
$ | 31,359 | $ | 28,587 | $ | 101,920 | $ | 92,036 | ||||||||
Other comprehensive income: |
||||||||||||||||
Foreign currency translation adjustments |
(669 | ) | 172 | (373 | ) | 103 | ||||||||||
Unrealized (loss) gain on foreign currency |
(608 | ) | 364 | (371 | ) | 287 | ||||||||||
Tax benefit (expense) |
237 | (142 | ) | 145 | (112 | ) | ||||||||||
Unrealized loss on hedging instruments |
- | - | - | (2 | ) | |||||||||||
Tax benefit |
- | - | - | 1 | ||||||||||||
Losses on hedging instruments reclassified to income |
- | - | - | 382 | ||||||||||||
Tax benefit |
- | - | - | (149 | ) | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Other comprehensive (loss) income |
(1,040 | ) | 394 | (599 | ) | 510 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total comprehensive income |
30,319 | 28,981 | 101,321 | 92,546 | ||||||||||||
Comprehensive income attributable to noncontrolling interests(1) |
1,190 | 1,156 | 3,300 | 3,266 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Comprehensive income attributable to VCA Antech, Inc |
$ | 29,129 | $ | 27,825 | $ | 98,021 | $ | 89,280 | ||||||||
|
|
|
|
|
|
|
|
(1) | Includes $1.5 million and $915,000 for the nine months ended September 30, 2011 and September 30, 2010, respectively, related to redeemable and mandatorily redeemable noncontrolling interests. |
11. | Lines of Business |
Our reportable segments are Animal Hospital and Laboratory. Our Animal Hospital segment provides veterinary services for companion animals and sells related retail and pharmaceutical products. Our Laboratory segment provides diagnostic laboratory testing services for veterinarians, both associated with our animal hospitals and those independent of us. Our other operating segments included in All Other in the following tables are our Medical Technology business, which sells digital radiography and ultrasound imaging equipment, related computer hardware, software and ancillary services to the veterinary market and our Vetstreet business, which provides online communications, professional education, marketing solutions to the veterinary community and an ecommerce platform for independent animal hospitals. In addition, Vetstreet.com provides a selection of products, information and services to the pet-owning community. These operating segments do not meet the quantitative or qualitative requirements for reportable segments. Our operating segments are strategic business units that have different services, products and/or functions. The segments are managed separately because each is a distinct and different business venture with unique challenges, risks and rewards. We also operate a corporate office that provides general and administrative support services for our other segments.
The accounting policies of our segments are essentially the same as those described in the summary of significant accounting policies included in our 2010 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.
16
VCA Antech, Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
(Unaudited)
11. | 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 | Intercompany Eliminations |
Total | |||||||||||||||||||
Three Months Ended September 30, 2011 |
||||||||||||||||||||||||
External revenue |
$ | 303,203 | $ | 67,588 | $ | 14,344 | $ | - | $ | - | $ | 385,135 | ||||||||||||
Intercompany revenue |
- | 11,397 | 4,538 | - | (15,935 | ) | - | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total revenue |
303,203 | 78,985 | 18,882 | - | (15,935 | ) | 385,135 | |||||||||||||||||
Direct costs |
251,613 | 43,657 | 14,149 | - | (14,421 | ) | 294,998 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Gross profit |
51,590 | 35,328 | 4,733 | - | (1,514 | ) | 90,137 | |||||||||||||||||
Selling, general and administrative expense |
6,126 | 7,088 | 4,669 | 14,605 | - | 32,488 | ||||||||||||||||||
Net (gain) loss on sale and disposal of assets |
(213 | ) | 1 | 20 | - | - | (192 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Operating income (loss) |
$ | 45,677 | $ | 28,239 | $ | 44 | $ | (14,605 | ) | $ | (1,514 | ) | $ | 57,841 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Depreciation and amortization |
$ | 10,393 | $ | 2,563 | $ | 1,606 | $ | 702 | $ | (334 | ) | $ | 14,930 | |||||||||||
Property and equipment additions |
$ | 11,061 | $ | 1,085 | $ | 1,986 | $ | 1,338 | $ | (629 | ) | $ | 14,841 | |||||||||||
Three Months Ended September 30, 2010 |
||||||||||||||||||||||||
External revenue |
$ | 276,739 | $ | 67,872 | $ | 14,092 | $ | - | $ | - | $ | 358,703 | ||||||||||||
Intercompany revenue |
- | 9,420 | 3,314 | - | (12,734 | ) | - | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total revenue |
276,739 | 77,292 | 17,406 | - | (12,734 | ) | 358,703 | |||||||||||||||||
Direct costs |
230,113 | 42,579 | 12,152 | - | (11,440 | ) | 273,404 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Gross profit |
46,626 | 34,713 | 5,254 | - | (1,294 | ) | 85,299 | |||||||||||||||||
Selling, general and administrative expense |
5,599 | 6,804 | 3,731 | 10,971 | - | 27,105 | ||||||||||||||||||
Net loss on sale and disposal of assets |
114 | 20 | 17 | 1 | - | 152 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Operating income (loss) |
$ | 40,913 | $ | 27,889 | $ | 1,506 | $ | (10,972 | ) | $ | (1,294 | ) | $ | 58,042 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Depreciation and amortization |
$ | 8,258 | $ | 2,464 | $ | 606 | $ | 616 | $ | (263 | ) | $ | 11,681 | |||||||||||
Property and equipment additions |
$ | 16,969 | $ | 1,599 | $ | 428 | $ | 1,394 | $ | (640 | ) | $ | 19,750 |
17
VCA Antech, Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
(Unaudited)
11. | Lines of Business, continued |
Animal Hospital |
Laboratory | All Other | Corporate | Intercompany Eliminations |
Total | |||||||||||||||||||
Nine Months Ended September 30, 2011 |
||||||||||||||||||||||||
External revenue |
$ | 864,476 | $ | 209,639 | $ | 42,248 | $ | - | $ | - | $ | 1,116,363 | ||||||||||||
Intercompany revenue |
- | 33,280 | 11,939 | - | (45,219 | ) | - | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total revenue |
864,476 | 242,919 | 54,187 | - | (45,219 | ) | 1,116,363 | |||||||||||||||||
Direct costs |
720,393 | 130,192 | 40,206 | - | (41,175 | ) | 849,616 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Gross profit |
144,083 | 112,727 | 13,981 | - | (4,044 | ) | 266,747 | |||||||||||||||||
Selling, general and administrative expense |
18,253 | 20,577 | 11,809 | 34,695 | - | 85,334 | ||||||||||||||||||
Net (gain) loss on sale and disposal of assets |
(84 | ) | 19 | 22 | - | - | (43 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Operating income (loss) |
$ | 125,914 | $ | 92,131 | $ | 2,150 | $ | (34,695 | ) | $ | (4,044 | ) | $ | 181,456 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Depreciation and amortization |
$ | 29,799 | $ | 7,542 | $ | 2,931 | $ | 2,067 | $ | (953 | ) | $ | 41,386 | |||||||||||
Property and equipment additions |
$ | 33,832 | $ | 4,049 | $ | 3,003 | $ | 3,923 | $ | (1,532 | ) | $ | 43,275 | |||||||||||
Nine Months Ended September 30, 2010 |
||||||||||||||||||||||||
External revenue |
$ | 791,002 | $ | 210,531 | $ | 41,823 | $ | - | $ | - | $ | 1,043,356 | ||||||||||||
Intercompany revenue |
- | 27,913 | 5,982 | - | (33,895 | ) | - | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total revenue |
791,002 | 238,444 | 47,805 | - | (33,895 | ) | 1,043,356 | |||||||||||||||||
Direct costs |
653,671 | 126,647 | 33,373 | - | (31,913 | ) | 781,778 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Gross profit |
137,331 | 111,797 | 14,432 | - | (1,982 | ) | 261,578 | |||||||||||||||||
Selling, general and administrative expense |
16,859 | 19,485 | 10,650 | 47,296 | - | 94,290 | ||||||||||||||||||
Net loss on sale and disposal of assets |
63 | 21 | 71 | 8 | - | 163 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Operating income (loss) |
$ | 120,409 | $ | 92,291 | $ | 3,711 | $ | (47,304 | ) | $ | (1,982 | ) | $ | 167,125 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Depreciation and amortization |
$ | 23,240 | $ | 7,273 | $ | 1,812 | $ | 1,815 | $ | (753 | ) | $ | 33,387 | |||||||||||
Property and equipment additions |
$ | 39,946 | $ | 3,937 | $ | 634 | $ | 4,579 | $ | (1,421 | ) | $ | 47,675 | |||||||||||
At September 30, 2011 |
||||||||||||||||||||||||
Total assets |
$ | 1,417,062 | $ | 229,252 | $ | 220,964 | $ | 149,801 | $ | (20,265 | ) | $ | 1,996,814 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
At December 31, 2010 |
||||||||||||||||||||||||
Total assets |
$ | 1,320,619 | $ | 215,483 | $ | 69,082 | $ | 175,297 | $ | (14,059 | ) | $ | 1,766,422 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
12. | Commitments and Contingencies |
We have certain commitments, including operating leases and acquisition agreements. These items are discussed in detail in our consolidated financial statements and notes thereto included in our 2010 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 that were accounted for under previous business combinations accounting guidance, 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 we will be obligated to pay an additional $1.3 million. Under the current business combination accounting guidance contingent consideration, such as earn-out liabilities, are recognized as part of the consideration transferred on the acquisition date and a corresponding liability is recorded based on the fair value of the liability if the fair value is known or determinable. The changes in fair value are recognized in earnings where applicable at each reporting period.
18
VCA Antech, Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
(Unaudited)
12. | Commitments and Contingencies, continued |
b. | 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.
13. | Noncontrolling Interests |
We own some of our animal hospitals in partnerships with noncontrolling interest holders. We consolidate our partnerships in our 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).
a. | Mandatorily Redeemable Noncontrolling Interests |
The terms of some of our partnership agreements require us to purchase the partners equity in the partnership in the event of the partners death. We report these redeemable noncontrolling interests at their estimated redemption value and classify them as liabilities due to the certainty of the related event. We recognize redemption value changes in the obligation in interest expense. At September 30, 2011 and December 31, 2010, these liabilities were $3.1 million and $1.7 million, respectively, and are included in other liabilities in our consolidated balance sheets.
b. | Redeemable Noncontrolling Interests |
We also enter into partnership agreements whereby the minority partner is issued certain put rights. These rights are normally exercisable at the sole discretion of the minority partner. We report these redeemable noncontrolling interests at their estimated redemption value and classify them in temporary equity (mezzanine). We recognize changes in the obligation in net income attributable to noncontrolling interests.
The following table provides a summary of redeemable noncontrolling interests (in thousands):
19
VCA Antech, Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
(Unaudited)
13. | Noncontrolling Interests, continued |
Income Statement Impact |
Redeemable Noncontrolling Interests |
|||||||
Balance as of December 31, 2009 |
$ | 4,369 | ||||||
Noncontrolling interest |
$ | 582 | ||||||
Redemption value change |
- | 582 | ||||||
|
|
|||||||
Formation of noncontrolling interests |
1,390 | |||||||
Distribution to noncontrolling interests |
(515 | ) | ||||||
|
|
|||||||
Balance as of September 30, 2010 |
$ | 5,826 | ||||||
|
|
|||||||
Balance as of December 31, 2010 |
$ | 5,799 | ||||||
Noncontrolling interest |
$ | 660 | ||||||
Redemption value change |
547 | 1,207 | ||||||
|
|
|||||||
Formation of noncontrolling interests |
510 | |||||||
Distribution to noncontrolling interests |
(625 | ) | ||||||
|
|
|||||||
Balance as of September 30, 2011 |
$ | 6,891 | ||||||
|
|
14. | Recent Accounting Pronouncements |
In May 2011, the Financial Accounting Standards Board (FASB) amended the accounting guidance for Fair Value Measurement to achieve common fair value measurement and disclosure requirements in U.S. GAAP and IFRS (International Financial Reporting Standards). The amendments explain how to measure fair value, however they do not require additional fair value measurements and are not intended to establish valuation standards or affect valuation practices outside of financial reporting. The amendments are to be applied prospectively and are effective during interim and annual periods beginning after December 15, 2011. Early application by public entities is not permitted. The adoption of this new guidance is not expected to have a significant impact on our consolidated financial statements.
In June 2011, the FASB finalized the accounting guidance for the Presentation of Comprehensive Income. The objective of the new guidance is to improve the comparability, consistency, and transparency of financial reporting, to increase the prominence of the items reported in other comprehensive income and to facilitate convergence of GAAP and IFRS. The guidance eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders equity and requires that all nonowner changes in stockholders equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. The statement of other comprehensive income should immediately follow the statement of net income. Regardless of which option is chosen it is required that reclassification adjustments for items that are reclassified from other comprehensive income to net income be presented on the face of the financial statements.
The new guidance does not change the following: the items that must be reported in other comprehensive income; when an item of other comprehensive income must be reclassified to net income; the option for an entity to present components of other comprehensive income either net of related tax effects or before related tax effects; and does not affect how earnings per share is calculated or presented.
The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 and should be applied retrospectively. Early adoption is permitted. The adoption of the new disclosure requirements will have no effect on our consolidated financial statements other than the changes to presentation outlined.
20
VCA Antech, Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
(Unaudited)
14. | Recent Accounting Pronouncements, continued |
In September 2011, the FASB amended the accounting guidance on IntangiblesGoodwill and Other - Testing Goodwill for Impairment. The objective of this guidance is to reduce the cost and complexity of performing the annual goodwill impairment test and to improve the previous guidance by expanding the examples of events and circumstances that an entity should consider in the qualitative evaluation about the likelihood of goodwill impairment. The amendments allow an entity the option of first assessing qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The examples of events and circumstances included in the amendment that an entity should consider in performing its qualitative assessment about whether to proceed to the first step of the goodwill impairment test supersede the examples in the existing guidance. If it is determined that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. Under the amendments, an entity has the option to bypass the qualitative assessment for any reporting unit in any period and may resume performing the qualitative assessment in any subsequent period. An entity is no longer permitted to carry forward its detailed calculation of a reporting units fair value from a prior year as previously permitted under the existing guidance. The amended guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011 with early adoption permitted. The adoption of the amended goodwill impairment testing procedures will not significantly impact our consolidated financial statements.
21
ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Page | ||
23 | ||
23 | ||
25 | ||
25 | ||
26 | ||
30 |
22
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 November 9, 2011, 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 November 9, 2011 at our website at http://investor.vcaantech.com or at the SECs website at www.sec.gov.
We are a leading national animal healthcare company. We provide veterinary services and diagnostic testing to support veterinary care. We sell diagnostic imaging equipment, other medical technology products and related services to veterinarians, as well as, provide them with online communications, professional education, marketing solutions and an ecommerce platform. We also provide products, information and services to the pet owning community through Vetstreet.com. 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 September 30, 2011, our animal hospital network consisted of 540 animal hospitals in 41 states and in Canada. |
| 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 September 30, 2011, our laboratory network consisted of 52 laboratories serving all 50 states and certain areas in Canada. |
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.
Our revenue has been adversely impacted by the current economic recession and competition. We are unable to forecast the timing or degree of any economic recovery. Further, trends in the general economy may not be reflected in our business at the same time or in the same degree as in the general economy. The timing and degree of any economic recovery, and its impact on our business, are among the important factors that could cause our actual results to differ from our forward-looking information.
During the three and nine months ended September 30, 2011, we achieved an increase in consolidated revenue primarily from acquired animal hospitals. Our Animal Hospital same-store revenue, adjusted for one less business day, increased 1.0% and decreased 1.2% for the three and nine months ended September 30, 2011, respectively. Our Laboratory internal revenue increased 2.2% and 1.9% for the three and nine months ended September 30, 2011, respectively. Our acquired animal hospitals and continued cost control measures resulted in an increase in our operating income. Improved operating results in our Animal Hospital and Laboratory business segments was largely offset by increased selling, general and administrative expenses resulting in essentially flat operating income in comparison to the prior year quarter.
23
Financing Transaction
On August 16, 2011 we amended and restated our senior credit facility. The amended and restated senior credit facility provides for $100 million of additional senior term notes and a $25 million increase to our revolving credit facility. Both the senior term notes and the revolving credit facility are priced at LIBOR plus 175 basis points, a 50 basis point decrease from our existing credit facility, see Note 6, Long-Term Obligations, in our condensed, consolidated financial statements of this quarterly report on Form 10-Q for a more detailed discussion of applicable interest rates on our new debt. In conjunction with these refinancing transactions, we incurred $2.9 million in debt financing costs, of which approximately $865,000 were recognized as part of income from continuing operations for the three and nine months ended September 30, 2011, and approximately $2.0 million were capitalized as deferred financing costs which will be amortized over the amended term of the credit facility. In addition, we expensed $1.1 million of previously deferred financing costs associated with lenders who exited the syndicate on the amendment date.
Acquisitions
Our growth strategy includes the acquisition of independent animal hospitals. We currently anticipate that we will acquire $30 million to $40 million of annualized Animal Hospital revenue in 2011. We also evaluate the acquisition of animal hospital chains and 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 nine months ended September 30, 2011:
Animal Hospitals: |
||||
Beginning of period |
528 | |||
Acquisitions, excluding BrightHeart |
10 | |||
Acquisitions, merged |
(1 | ) | ||
BrightHeart |
9 | |||
Sold, closed or merged |
(6 | ) | ||
|
|
|||
End of period |
540 | |||
|
|
|||
Laboratories: |
||||
Beginning of period |
50 | |||
Acquisitions |
1 | |||
Created |
1 | |||
|
|
|||
End of period |
52 | |||
|
|
BrightHeart Veterinary Centers (BrightHeart) Acquisition
On July 11, 2011, we acquired BrightHeart for approximately $50.0 million in cash. BrightHeart operates nine animal hospitals, eight of which focus on the delivery of specialty and emergency medicine. We expect the acquisition will increase our level of market recognition in areas where we have an existing market presence. At the time of the acquisition BrightHeart had annualized revenue of approximately $53.0 million. Our consolidated financial statements reflect the operating results of BrightHeart since July 11, 2011.
Other Acquisitions
MediMedia Animal Health, LLC (Vetstreet)
On August 9, 2011, we acquired Vetstreet, the nations largest provider of online communications, professional education and marketing solutions to the veterinary community. The acquisition of Vetstreet expands the breadth of our product offerings to the veterinary community and provides long-term synergies to our existing businesses. At the time of the acquisition Vetstreet had annualized revenue of approximately $23.0 million. We acquired Vetstreet for a preliminary purchase price of $146 million. Our consolidated financial statements reflect the operating results of Vetstreet since August 9, 2011.
24
Our consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (GAAP), which require management to make estimates and assumptions that affect reported amounts. The estimates and assumptions are based on historical experience and on other factors that management believes to be reasonable. Actual results may differ from those estimates. Critical accounting policies represent the areas where more significant judgments and estimates are used in the preparation of our 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 2010 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 September 30, 2011.
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 September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Revenue: |
||||||||||||||||
Animal Hospital |
78.7 | % | 77.1 | % | 77.4 | % | 75.8 | % | ||||||||
Laboratory |
20.5 | 21.5 | 21.8 | 22.9 | ||||||||||||
All Other |
4.9 | 4.9 | 4.9 | 4.6 | ||||||||||||
Intercompany |
(4.1 | ) | (3.5 | ) | (4.1 | ) | (3.3 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total revenue |
100.0 | 100.0 | 100.0 | 100.0 | ||||||||||||
Direct costs |
76.6 | 76.2 | 76.1 | 74.9 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Gross profit |
23.4 | 23.8 | 23.9 | 25.1 | ||||||||||||
Selling, general and administrative expense |
8.4 | 7.6 | 7.6 | 9.0 | ||||||||||||
Net loss on sale of assets |
- | - | - | 0.1 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Operating income |
15.0 | 16.2 | 16.3 | 16.0 | ||||||||||||
Interest expense, net |
1.1 | 1.0 | 1.2 | 0.9 | ||||||||||||
Debt retirement costs |
0.7 | 0.7 | 0.2 | 0.2 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income before provision for income taxes |
13.2 | 14.5 | 14.9 | 14.9 | ||||||||||||
Provision for income taxes |
5.1 | 6.5 | 5.8 | 6.1 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income |
8.1 | 8.0 | 9.1 | 8.8 | ||||||||||||
Net income attributable to noncontrolling interests |
0.3 | 0.4 | 0.3 | 0.3 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income attributable to VCA Antech, Inc |
7.8 | % | 7.6 | % | 8.8 | % | 8.5 | % | ||||||||
|
|
|
|
|
|
|
|
Revenue
The following table summarizes our revenue (in thousands, except percentages):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||||||||||||||||||||||||||
$ | % of Total |
$ | % of Total |
% Change |
$ | % of Total |
$ | % of Total |
% Change |
|||||||||||||||||||||||||||||||
Animal Hospital |
$ | 303,203 | 78.7 | % | $ | 276,739 | 77.1 | % | 9.6 | % | $ | 864,476 | 77.4 | % | $ | 791,002 | 75.8 | % | 9.3 | % | ||||||||||||||||||||
Laboratory |
78,985 | 20.5 | % | 77,292 | 21.5 | % | 2.2 | % | 242,919 | 21.8 | % | 238,444 | 22.9 | % | 1.9 | % | ||||||||||||||||||||||||
All Other |
18,882 | 4.9 | % | 17,406 | 4.9 | % | 8.5 | % | 54,187 | 4.9 | % | 47,805 | 4.6 | % | 13.4 | % | ||||||||||||||||||||||||
Intercompany |
(15,935 | ) | (4.1 | )% | (12,734 | ) | (3.5 | )% | 25.1 | % | (45,219 | ) | (4.1 | )% | (33,895 | ) | (3.3 | )% | 33.4 | % | ||||||||||||||||||||
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Total revenue |
$ | 385,135 | 100.0 | % | $ | 358,703 | 100.0 | % | 7.4 | % | $ | 1,116,363 | 100.0 | % | $ | 1,043,356 | 100.0 | % | 7.0 | % | ||||||||||||||||||||
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25
Consolidated revenue increased $26.4 million for the three months ended September 30, 2011 and $73.0 million for the nine months ended September 30, 2011 as compared to the same periods in the prior year. The increase was primarily attributable to revenue from acquired animal hospitals and an increase in our laboratory revenue due to internal growth.
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 September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||||||||||||||||||||||||||
$ | Gross Margin |
$ | Gross Margin |
% Change |
$ | Gross Margin |
$ | Gross Margin |
% Change |
|||||||||||||||||||||||||||||||
Animal Hospital |
$ | 51,590 | 17.0 | % | $ | 46,626 | 16.8 | % | 10.6 | % | $ | 144,083 | 16.7 | % | $ | 137,331 | 17.4 | % | 4.9 | % | ||||||||||||||||||||
Laboratory |
35,328 | 44.7 | % | 34,713 | 44.9 | % | 1.8 | % | 112,727 | 46.4 | % | 111,797 | 46.9 | % | 0.8 | % | ||||||||||||||||||||||||
All Other |
4,733 | 25.1 | % | 5,254 | 30.2 | % | (9.9 | )% | 13,981 | 25.8 | % | 14,432 | 30.2 | % | (3.1 | )% | ||||||||||||||||||||||||
Intercompany |
(1,514 | ) | (1,294 | ) | (4,044 | ) | (1,982 | ) | ||||||||||||||||||||||||||||||||
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Total gross profit |
$ | 90,137 | 23.4 | % | $ | 85,299 | 23.8 | % | 5.7 | % | $ | 266,747 | 23.9 | % | $ | 261,578 | 25.1 | % | 2.0 | % | ||||||||||||||||||||
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Consolidated gross profit increased $4.8 million for the three months ended September 30, 2011 and $5.2 million for the nine months ended September 30, 2011 as compared to the same periods in the prior year. The increase was primarily due to gross profit from our acquired animal hospitals and to a lesser extent internal revenue growth at our Laboratory segment.
Animal Hospital Segment
The following table summarizes revenue, gross profit and gross margin for our Animal Hospital segment (in thousands, except percentages):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||
2011 | 2010 | % Change | 2011 | 2010 | % Change | |||||||||||||||||||
Revenue |
$ | 303,203 | $ | 276,739 | 9.6 | % | $ | 864,476 | $ | 791,002 | 9.3 | % | ||||||||||||
Gross profit |
$ | 51,590 | $ | 46,626 | 10.6 | % | $ | 144,083 | $ | 137,331 | 4.9 | % | ||||||||||||
Gross margin |
17.0 | % | 16.8 | % | 16.7 | % | 17.4 | % |
Animal Hospital revenue increased $26.5 million for the three months ended September 30, 2011 and $73.5 million for the nine months ended September 30, 2011, as compared to the same periods in the prior year. The components of the increases are summarized in the following table (in thousands, except percentages and average revenue per order):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||
2011 | 2010 | % Change | 2011 | 2010 | % Change | |||||||||||||||||||
Same-store facilities: |
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Orders (1) |
1,709 | 1,754 | (2.6 | )% | 4,688 | 4,883 | (4.0 | )% | ||||||||||||||||
Average revenue per order (2) |
$ | 159.04 | $ | 153.35 | 3.7 | % | $ | 160.01 | $ | 155.44 | 2.9 | % | ||||||||||||
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Same-store revenue (1) |
$ | 271,830 | $ | 269,007 | 1.0 | % | $ | 750,155 | $ | 758,974 | (1.2 | )% | ||||||||||||
Business day adjustment (3) |
- | 2,383 | - | 1,690 | ||||||||||||||||||||
Net acquired revenue (4) |
31,373 | 5,349 | 114,321 | 30,338 | ||||||||||||||||||||
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Total $ |
303,203 | $ | 276,739 | 9.6 | % | $ | 864,476 | $ | 791,002 | 9.3 | % | |||||||||||||
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26
(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) | The 2010 business day adjustment reflects the impact of one fewer business day in 2011 as compared to 2010. |
(4) | 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 July 1, 2010 for the three month analysis and January 1, 2010 for the nine month analysis. 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. |
We believe that factors contributing to the continued decline in our volume of same-store orders during the three and nine months ended September 30, 2011 include the continued impact of the current economic environment and the wide availability of many pet-related products, traditionally sold in our animal hospitals, in retail stores and other distribution channels such as the Internet.
In addition, 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 over the past several years resulted in a decrease in lower priced orders and an increase in higher priced orders. However, this trend did not continue during the three months ended September 30, 2011 when we experienced a decrease in the number of both lower and higher priced orders, which we believe is primarily a consequence of current economic conditions in the United States, and the impact of changes in our overall business environment on the mix of tests performed.
Price increases contributed to the 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. Price increases are typically implemented in February of each year. Price increases in 2011 approximated 3% to 4% on most services at the majority of our animal hospitals.
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 expense, and costs of goods sold associated with the retail sales of pet food and pet supplies.
Our combined Animal Hospital gross margin increased to 17.0% for the three months ended September 30, 2011 and decreased to 16.7% for the nine months ended September 30, 2011, as compared to 16.8% and 17.4% for the three and nine months ended September 30 2010, respectively. Our same-store gross margin increased to 17.1% for the three months ended September 30, 2011 and decreased to 16.9% for the nine months ended September 30, 2011, as compared to 17.0% and 17.6% for the respective prior year periods.
The increase in same-store gross margin, for the three months ended September 30, 2011, was primarily due to cost control measures offset by increased depreciation and amortization. The decrease in same-store gross margin, for the nine months ended September 30, 2011 was primarily due to the overall decline in same-store revenue, and the impact of increased depreciation and amortization. The combined Animal Hospital gross margin was further impacted by slightly lower gross margin from our acquired animal hospitals.
Over the last several years we have acquired a significant number of animal hospitals. Many of these newly acquired animal hospitals have a lower gross margin at the time of acquisition than our same-store facilities. Subsequently, we have improved the gross margin at our acquired animal hospitals, in the aggregate, by reducing costs and/or increasing operating leverage.
27
Laboratory Segment
The following table summarizes revenue and gross profit for our Laboratory segment (in thousands, except percentages):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||
2011 | 2010 | % Change | 2011 | 2010 | % Change | |||||||||||||||||||
Revenue |
$ | 78,985 | $ | 77,292 | 2.2 | % | $ | 242,919 | $ | 238,444 | 1.9 | % | ||||||||||||
Gross profit |
$ | 35,328 | $ | 34,713 | 1.8 | % | $ | 112,727 | $ | 111,797 | 0.8 | % | ||||||||||||
Gross margin |
44.7 | % | 44.9 | % | 46.4 | % | 46.9 | % |
Laboratory revenue increased $1.7 million for the three months ended September 30, 2011 and increased $4.5 million for the nine months ended September 30, 2011, as compared to the same periods in the prior year. The components of the changes in Laboratory revenue are detailed below (in thousands, except percentages and average revenue per requisition):
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||||||||||
2011 | 2010 | % Change | 2011 | 2010 | % Change | |||||||||||||||||||
Internal growth: |
||||||||||||||||||||||||
Number of requisitions (1) |
3,242 | 3,235 | 0.2 | % | 9,998 | 10,022 | (0.2 | )% | ||||||||||||||||
Average revenue per requisition (2) |
$ | 24.36 | $ | 23.89 | 2.0 | % | $ | 24.29 | $ | 23.79 | 2.1 | % | ||||||||||||
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Total internal revenue (1) |
$ | 78,964 | $ | 77,292 | 2.2 | % | $ | 242,859 | $ | 238,444 | 1.9 | % | ||||||||||||
Acquired revenue (3) |
21 | - | 60 | - | ||||||||||||||||||||
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Total |
$ | 78,985 | $ | 77,292 | 2.2 | % | $ | 242,919 | $ | 238,444 | 1.9 | % | ||||||||||||
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(1) | Internal revenue and requisitions were calculated using Laboratory operating results, adjusted 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 adjusted for the impact resulting from any differences in the number of billing days in comparable periods, 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 and nine months ended September 30, 2011, was due to an increase in internal revenue primarily attributable to an increase in average revenue per requisition. In prior years, requisitions from internal growth have been driven by an ongoing trend in veterinary medicine to focus on (i) the importance of laboratory diagnostic testing in the diagnosis, (ii) early detection and treatment of diseases, and (iii) the migration of certain tests to outside laboratories that have historically been performed in animal hospitals. While these factors historically have resulted in significant increases in internal requisitions, the economic environment and increased competition continue to impact requisitions in the current year.
The average revenue per requisition increased slightly for the three and nine months ended September 30, 2011, as compared to prior periods, due to price increases that occurred in February 2011. We estimate that the price increases yielded a 3% to 4% impact on the average price per requisition. The average revenue per requisition was also impacted by various factors including changes in the mix, performing lower-priced tests historically performed at the animal hospitals and a decrease in higher-priced tests as a result of the current economic environment.
Laboratory gross profit is calculated as Laboratory revenue less Laboratory direct costs. Laboratory direct costs 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 decreased to 44.7% and 46.4% for the three and nine months ended September 30, 2011, respectively, as compared to 44.9% and 46.9% in the prior year periods. The decrease in gross margin was primarily due to increased transportation costs.
28
Intercompany Revenue
Laboratory revenue for the three and nine months ended September 30, 2011, included intercompany revenue of $11.4 million and $33.3 million, respectively, generated by providing laboratory services to our animal hospitals. For purposes of reviewing the operating performance of our 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.
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 September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||||||||||||||||||||||||||
$ | % of Revenue |
$ | % of Revenue |
% Change |
$ | % of Revenue |
$ | % of Revenue |
% Change |
|||||||||||||||||||||||||||||||
Animal Hospital |
$ | 6,126 | 2.0% | $ | 5,599 | 2.0% | 9.4% | $ | 18,253 | 2.1% | $ | 16,859 | 2.1% | 8.3% | ||||||||||||||||||||||||||
Laboratory |
7,088 | 9.0% | 6,804 | 8.8% | 4.2% | 20,577 | 8.5% | 19,485 | 8.2% | 5.6% | ||||||||||||||||||||||||||||||
All Other |
4,669 | 24.7% | 3,731 | 21.4% | 25.1% | 11,809 | 21.8% | 10,650 | 22.3% | 10.9% | ||||||||||||||||||||||||||||||
Corporate |
14,605 | 3.8% | 10,971 | 3.1% | 33.1% | 34,695 | 3.1% | 47,296 | 4.5% | (26.6)% | ||||||||||||||||||||||||||||||
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Total SG&A |
$ | 32,488 | 8.4% | $ | 27,105 | 7.6% | 19.9% | $ | 85,334 | 7.6% | $ | 94,290 | 9.0% | (9.5)% | ||||||||||||||||||||||||||
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Consolidated SG&A increased by $5.4 million for the three months ended September 30, 2011, primarily due to increased Corporate SG&A related to $2.4 million of share-based compensation for non-vested stock granted at the end of the last quarter, see Note 8, Share-based Compensation, in our condensed, consolidated financial statements of this quarterly report on Form 10-Q for a more detailed discussion, and $1.5 million of transaction costs related to the Vetstreet and BrightHeart acquisitions. Consolidated SG&A decreased $9.0 million for the nine months ended September 30, 2011, primarily due to the prior year accrual of $14.5 million for estimated future consulting and SERP payments recorded in accordance with agreements entered into in the June 2010 quarter.
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 September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||||||||||||||||||||||||||
$ | % of Revenue |
$ | % of Revenue |
% Change |
$ | % of Revenue |
$ | % of Revenue |
% Change |
|||||||||||||||||||||||||||||||
Animal Hospital |
$ | 45,677 | 15.1% | $ | 40,913 | 14.8% | 11.6% | $ | 125,914 | 14.6% | $ | 120,409 | 15.2% | 4.6% | ||||||||||||||||||||||||||
Laboratory |
28,239 | 35.8% | 27,889 | 36.1% | 1.3% | 92,131 | 37.9% | 92,291 | 38.7% | (0.2)% | ||||||||||||||||||||||||||||||
All Other |
44 | 0.2% | 1,506 | 8.7% | (97.1)% | 2,150 | 4.0% | 3,711 | 7.8% | (42.1)% | ||||||||||||||||||||||||||||||
Corporate |
(14,605 | ) | (10,972 | ) | 33.1% | (34,695 | ) | (47,304 | ) | (26.7)% | ||||||||||||||||||||||||||||||
Intercompany |
(1,514 | ) | (1,294 | ) | 17.0% | (4,044 | ) | (1,982 | ) | 104.0% | ||||||||||||||||||||||||||||||
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Total operating income |
$ | 57,841 | 15.0% | $ | 58,042 | 16.2% | (0.3)% | $ | 181,456 | 16.3% | $ | 167,125 | 16.0% | 8.6% | ||||||||||||||||||||||||||
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The decrease in our consolidated operating income during the three months ended September 30, 2011, was primarily due to the aforementioned increase in SG&A, which more than offset increased gross profit. The increase in our consolidated operating income during the nine months ended September 30, 2011, was primarily due to the aforementioned decrease in SG&A and increased gross profit.
29
Interest Expense, Net
The following table summarizes our interest expense, net of interest income (in thousands):
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Interest expense: |
||||||||||||||||
Senior term notes |
$ | 3,086 | $ | 2,892 | $ | 9,267 | $ | 7,467 | ||||||||
Interest rate hedging agreements |
- | - | - | 382 | ||||||||||||
Capital leases and other |
872 | 732 | 2,846 | 1,855 | ||||||||||||
Amortization of debt costs |
395 | 222 | 1,169 | 461 | ||||||||||||
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4,353 | 3,846 | 13,282 | 10,165 | |||||||||||||
Interest income |
(131 | ) | (227 | ) | (466 | ) | (601 | ) | ||||||||
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Total interest expense, net of interest income |
$ | 4,222 | $ | 3,619 | $ | 12,816 | $ | 9,564 | ||||||||
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The increase in net interest expense for the three months ended September 30, 2011, was attributable to an increase in the average debt balance due to the amendment of our existing credit and guaranty agreement, which allowed for an increase to our senior term notes in the amount of $100 million. The increase in net interest for the nine months ended September 30, 2011 was attributable to an increase in the overall weighted average interest rate. See Note 6, Long-Term Obligations, in our condensed, consolidated financial statements of this quarterly report on Form 10-Q for a more detailed discussion of applicable interest rates on our amended debt.
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, proceeds received from the sale of our imaging equipment and other related services and payments received from participating hospitals for Vetstreet subscriptions and reminder notices. 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 September 30, 2011, our consolidated cash and cash equivalents totaled $79.2 million, representing a decrease of $17.9 million as compared to December 31, 2010. The decrease was primarily due to cash used for the acquisition of Vetstreet. Cash flows generated from operating activities totaled $163.6 million for the nine months ended September 30, 2011, representing an increase of $20.1 million as compared to the nine months ended September 30, 2010.
We have historically funded our working capital requirements, capital expenditures and investment in individual acquisitions from internally generated cash flows and we expect to continue to do so in the future. As of September 30, 2011, we have access to an unused $125 million revolving credit facility, which was increased by $25 million during the September 2011 quarter as part of the new terms under our August 16, 2011 amended and restated credit and guaranty agreement; this allows us to maintain further operating and financial flexibility.
In addition to the increase in our revolving credit facility, the aforementioned August 16, 2011 amended and restated credit and guaranty agreement provided for $100 million of additional senior term debt, which was used to pay in full amounts borrowed to partially fund our August 9, 2011 acquisition of Vetstreet. The new senior term notes and revolving credit facility bear interest based on the interest rate offered to our administrative agent on the London interbank market, or LIBOR, plus a current margin of 1.75% per annum. See Note 6, Long-Term Obligations, in our condensed, consolidated financial statements of this quarterly report on Form 10-Q for a more detailed discussion.
30
Historically we have been able to obtain cash from other 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 we believe to be reasonable, there is a possibility that we may not be able to obtain financing on favorable terms in the future.
Future Cash Flows
Short-Term
Other than our acquisitions of certain animal hospital chains, we historically have funded our working capital requirements, capital expenditures and investments in animal hospital acquisitions from internally generated cash flows. 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 significant acquisitions of animal hospital chains or other businesses during this period, we may seek additional debt or equity financing.
For the year ended December 31, 2011, we expect to spend $30 million to $40 million for animal hospital acquisitions, excluding real estate and animal hospital chains, such as BrightHeart. The ultimate number of acquisitions and cash used is largely dependent upon the attractiveness of the candidates and the strategic fit within our operations and as a consequence, our actual number of acquisitions and cash expenditures may be more or less than amounts currently estimated. From January 1, 2011 through September 30, 2011, we spent $19.5 million in connection with the acquisition of ten animal hospitals and one laboratory, as well as $1.9 million for the related real estate. In July 2011, we spent approximately $50 million for the acquisition of BrightHeart. In addition, we expect to spend approximately $75.0 million in 2011 for both property and equipment additions and capital costs necessary to maintain our existing facilities, of which approximately $43.3 million had been expended at September 30, 2011.
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 comprises 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.
We are unable to project with certainty whether our long-term cash flow from operations will be sufficient to repay our long-term debt when it comes due. If this cash flow is insufficient, we expect that we will need to refinance such indebtedness, amend its terms to extend maturity dates, or issue common stock of our company. Our management cannot make any assurances that such refinancing, amendments or equity offerings, 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 September 30, 2011, we were in compliance with these covenants, including the two covenant ratios, the fixed-charge coverage ratio and the leverage ratio.
At September 30, 2011, we had a fixed-charge coverage ratio of 1.75 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 September 30, 2011, we had a leverage ratio of 2.16 to 1.00, which was in compliance with the required ratio of no more than 3.00 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.
31
Historical Cash Flows
The following table summarizes our cash flows (in thousands):
Nine Months
Ended September 30, |
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2011 | 2010 | |||||||
Cash provided by (used in): |
||||||||
Operating activities |
$ | 163,591 | $ | 143,470 | ||||
Investing activities |
(235,814 | ) | (97,432 | ) (1) | ||||
Financing activities |
54,703 | (59,024 | ) (1) | |||||
Effect of currency exchange rate changes on cash and cash equivalents |
(363 | ) | 38 | |||||
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Decrease in cash and cash equivalents |
(17,883 | ) | (12,948 | ) | ||||
Cash and cash equivalents at beginning of period |
97,126 | 145,181 | ||||||
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Cash and cash equivalents at end of period |
$ | 79,243 | $ | 132,233 | ||||
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(1) | To conform to the current year presentation we have reclassed prior year cash paid for partnership buyouts and cash paid for earn-out payments from the cash flows from investing to the financing cash flows. |
Cash Flows from Operating Activities
Net cash provided by operating activities increased $20.1 million in the nine months ended September 30, 2011 as compared to the prior year period. Operating cash flow for the nine months ended September 30, 2011 included $101.9 million of net income and net non-cash expenses of $69.6 million, partially offset by net cash used as a result of changes in operating assets and liabilities of $7.9 million. The changes in operating assets and liabilities included a $9.8 million increase in inventory, prepaid expense and other assets, an $8.3 million decrease in accounts payable and other accrued liabilities and a $7.0 million increase in trade accounts receivable, partially offset by an $8.7 million increase in income taxes and an $8.5 million increase in accrued payroll and related liabilities. The increase in inventory, prepaid expense and other assets was primarily due to the build-up of inventory and an increase in lease receivables as a result of executing additional contracts. The decrease in accounts payable and other accrued liabilities and the increase in accrued payroll and related liabilities were all a result of timing of payment obligations. The increase in accounts receivable was primarily due to an increase in net revenues.
Cash provided by operating activities of $143.5 million for the nine months ended September 30, 2010 consisted of $92.0 million of net income and net non-cash expenses of $59.5 million, partially offset by net cash used as a result of changes in operating assets and liabilities of $8.0 million. The changes in operating assets and liabilities primarily included a $9.5 million decrease in income taxes and a $7.5 million increase in trade accounts receivable, partially offset by a $7.0 million increase in accounts payable and other accrued liabilities. The decrease in income taxes and the increase in accounts payable and other accrued liabilities were primarily due to the timing of payment obligations. The increase in trade accounts receivable was primarily due to an increase in net revenues.
Cash Flows from Investing Activities
The table below presents the components of the changes in investing cash flows (in thousands):
Nine Months Ended September 30, |
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Investing Cash Flows: | 2011 | 2010 | Variance | |||||||||
Acquisition of independent animal hospitals and laboratories |
$ | (19,499 | ) | $ | (38,294 | ) | $ | 18,795 | (1) | |||
Acquisition of BrightHeart |
(23,490 | ) | - | (23,490 | ) | |||||||
Acquisition of Pet DRx |
- | (4,520 | ) | 4,520 | ||||||||
Acquisition of Vetstreet |
(146,420 | ) | - | (146,420 | ) | |||||||
Other |
(954 | ) | (1,312 | ) | 358 | (2) | ||||||
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Total cash used for acquisitions |
(190,363 | ) | (44,126 | ) | (146,237 | ) | ||||||
Property and equipment additions |
(43,275 | ) | (47,675 | ) | 4,400 | (3) | ||||||
Real estate acquired with acquisitions |
(1,900 | ) | (5,834 | ) | 3,934 | |||||||
Proceeds from sale of assets |
447 | 15 | 432 | |||||||||
Other |
(723 | ) | 188 | (911 | ) | |||||||
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Net cash used in investing activities |
$ | (235,814 | ) | $ | (97,432 | ) | $ | (138,382 | ) | |||
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(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 our Executive Overview. |
(2) | In conformance with the current year presentation we have reclassed prior year cash paid for partnership buyouts and cash paid for earn-out payments to the cash flows from financing. |
(3) | The cash used to acquire property and equipment will vary from period to period based on upgrade requirements and expansion of our animal hospital and laboratory facilities. |
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Cash Flows from Financing Activities
The table below presents the components of the changes in financing cash flows (in thousands):
Nine Months
Ended September 30, |
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Financing Cash Flows: | 2011 | 2010 | Variance | |||||||||
Repayment of debt |
$ | (90,945 | ) | $ | (548,560 | ) | $ | 457,615 | (1) | |||
Proceeds from issuance of long-term debt |
150,000 | 500,000 | (350,000 | ) (2) | ||||||||
Proceeds from revolving credit facility |
50,000 | - | 50,000 | (3) | ||||||||
Repayment of revolving credit facility |
(50,000 | ) | - | (50,000 | ) (3) | |||||||
Payment of financing costs |
(2,944 | ) | (9,112 | ) | 6,168 | (4) | ||||||
Distributions to noncontrolling interest partners |
(1,959 | ) | (3,314 | ) | 1,355 | (5) | ||||||
Proceeds from issuance of common stock under stock option plans |
2,596 | 4,781 | (2,185 | ) (6) | ||||||||
Excess tax benefit from exercise of stock options |
963 | 370 | 593 | |||||||||
Stock repurchases |
(2,663 | ) | (2,292 | ) | (371 | ) | ||||||
Other |
(345 | ) | (897 | ) | 552 | (7) | ||||||
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Net cash used in financing activities |
$ | 54,703 | $ | (59,024 | ) | $ | 113,727 | |||||
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(1) | For the nine months ended September 30, 2011, we repaid $50 million borrowed from our incremental facilities as permitted under our August 19, 2010 credit and guaranty agreement. Additionally, we repaid $14.5 million of debt related to scheduled payments and we repaid approximately $26 million of debt related to the BrightHeart acquisition. The repayment of debt for the nine months ended September 30, 2010 was primarily attributable to the August 19, 2010 debt refinance. |
(2) | The proceeds from issuance of long term debt for the nine months ended September 30, 2011 included $50 million of new term loans borrowed pursuant to our incremental facilities permitted under our August 19, 2010 credit and guaranty agreement, and $100 million of additional borrowings received in accordance with the amended and restated credit and guaranty agreement dated August 16, 2011. The proceeds from issuance of long-term debt for the nine months ended September 30, 2010 related to the refinance of our credit facility on August 19, 2010. |
(3) | For the nine months ended September 30, 2011 we borrowed against our revolving credit facility to partially fund the Vetstreet acquisition, and subsequently repaid the funds with the proceeds from issuance of additional senior term debt under our August 16, 2011 restated and amended credit and guaranty agreement. |
(4) | The payment of financing costs during the nine months ended September 30, 2011, was attributable to the costs incurred with the August 16, 2011 amended and restated credit and guaranty agreement. The payment of financing costs during the nine months ended September 30, 2010, was attributable to the costs incurred upon entering a new credit and guaranty agreement dated August 19, 2010. |
(5) | The distributions to noncontrolling interest partners represent cash payments to noncontrolling interest partners for their portion of the partnerships excess cash. |
(6) | The number of stock option exercises has decreased in comparison to the prior year as the prior year amount was impacted by the expiration of certain stock option grants. |
(7) | In conformance with the current year presentation, we have reclassed prior year cash paid for partnership buyouts and cash paid for earn-out payments, from the cash flows from investing, to the financing cash flows. |
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Future Contractual Cash Requirements
The following table sets forth material changes from the amounts reported in our 2010 Form 10-K to our scheduled principal, interest and other contractual cash obligations due by us for each of the years indicated as of September 30, 2011 (in thousands):
Payment due by period | ||||||||||||||||||||
Total | Less than 1 year |
1-3 years |
3-5 years |
More than 5 years |
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Contractual Obligations: |
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Long-term debt |
$ | 581,250 | $ | 29,063 | $ | 72,656 | $ | 479,531 | | |||||||||||
Variable cash interest expense Term A (1) |
48,733 | 11,350 | 20,857 | 16,526 | | |||||||||||||||
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$ | 629,983 | $ | 40,413 | $ | 93,513 | $ | 496,057 | | ||||||||||||
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(1) | The interest payments on our variable-rate senior term notes are based on rates effective as of September 30, 2011. |
Off-Balance-Sheet Financing Arrangements
Other than operating leases, as of September 30, 2011, we do not have any off-balance-sheet financing arrangements.
Interest Rate Swap Agreements
As of March 31, 2010, all of our interest rate swap agreements had expired and we have not entered into any new agreements. 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.
Description of Indebtedness
Senior Credit Facility
At September 30, 2011, we had $581.3 million principal amount outstanding under our senior term notes and no borrowings outstanding under our $125 million 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 current margin of 1.75% per annum. See Note 6, Long-Term Obligations, in our condensed, consolidated financial statements of this quarterly report on Form 10-Q for a more detailed discussion of applicable interest rates on our amended debt. The senior term notes and the revolving credit facility mature in August 2016.
Other Debt and Capital Lease Obligations
At September 30, 2011, we had seller notes secured by assets of certain animal hospitals and capital leases that totaled $46.1 million, which are included in long-term debt in our condensed, consolidated balance sheet of this quarterly report on Form 10-Q. Our seller notes have various maturities through 2013 and various interest rates ranging from 9.0% to 10.0%. Our capital leases have various maturities through 2030 and various interest rates ranging from 1.4% to 9.9%.
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ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
At September 30, 2011, we had borrowings of $581.3 million under our senior credit facility with fluctuating interest rates based on market benchmarks such as LIBOR. Changes in interest rates could adversely affect the market value of our variable-rate debt. For every 1.0% increase in LIBOR we will pay an additional $5.7 million in pre-tax interest expense on an annualized basis on our senior term notes. Conversely for every 1.0% decrease in LIBOR we will save $5.7 million in pre-tax interest expense on an annualized basis. This represents an increase of approximately $900,000 in both additional interest payments and interest savings, in comparison to our estimate included in Item 7A of our 2010 Annual Report on Form 10-K, due to the August 2011 amendment of our senior credit facility which provided for $100 million in additional senior term notes. To mitigate our exposure to increasing interest rates we have historically entered into interest rate swap agreements that effectively convert a certain amount of our variable-rate debt to fixed-rate debt. As of September 30, 2011 we have no interest rate swap agreements.
In the future, we may enter into interest rate strategies to mitigate our exposure to increasing interest rates as well as to maintain an appropriate mix of fixed-rate and variable-rate debt. 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 SECs 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.
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 Part I, Item 1A, of our 2010 Annual Report on Form 10-K and Part II, Item 1A, of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2011.
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ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
None
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
None
ITEM 5. | OTHER INFORMATION |
None
ITEM 6. | EXHIBITS |
The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure, other than with respect to the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by us in these agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs as of the date they were made or at any other time.
2.1 | Securities Purchase Agreement, dated as of July 10, 2011, among Vicar Operating, Inc., MediMedia Animal Health, LLC, and MediMedia USA, Inc. | |||
10.1 | Amended and Restated Credit and Guaranty Agreement, dated as of August 16, 2011, among Vicar Operating, Inc., VCA Antech, Inc., certain subsidiaries of Vicar Operating, Inc., as guarantors, various lenders from time to time party thereto, Wells Fargo Bank, National Association, as administrative agent, collateral agent, issuing bank and swing line lender, Bank of America, N.A. and JP Morgan Chase Bank, N.A., as co-syndication agents, and U.S. Bank National Association, and Union Bank, N.A., as co-documentation agents. Portions of the schedules have been omitted pursuant to a request for confidential treatment. Incorporated by reference to Exhibit 10.1 to the Registrants current report on Form 8-K filed August 22, 2011. | |||
10.2 | Employment Agreement, dated as of August 18, 2011, by and between VCA Antech, Inc. and Josh Drake. Incorporated by reference to Exhibit 10.1 to the Registrants current report on Form 8-K filed August 22, 2011. | |||
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. | |||
101.INS | XBRL Instance Document* | |||
101.SCH | XBRL Taxonomy Extension Schema Document* | |||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase* | |||
101.DEF | XBRL Taxonomy Definition Linkbase* | |||
101.LAB | XBRL Taxonomy Extension Label Linkbase* | |||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase* |
* | Furnished, not filed. |
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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 November 9, 2011.
Date: November 9, 2011 | By: | /s/ Tomas W. Fuller | ||||
Tomas W. Fuller | ||||||
Chief Financial Officer |
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Exhibit No. |
Description | |
2.1 |
Securities Purchase Agreement, dated as of July 10, 2011, among Vicar Operating, Inc., MediMedia Animal Health, LLC, and MediMedia USA, Inc. | |
10.1 |
Amended and Restated Credit and Guaranty Agreement, dated as of August 16, 2011, among Vicar Operating, Inc., VCA Antech, Inc., certain subsidiaries of Vicar Operating, Inc., as guarantors, various lenders from time to time party thereto, Wells Fargo Bank, National Association, as administrative agent, collateral agent, issuing bank and swing line lender, Bank of America, N.A. and JP Morgan Chase Bank, N.A., as co-syndication agents, and U.S. Bank National Association, and Union Bank, N.A., as co-documentation agents. Portions of the schedules have been omitted pursuant to a request for confidential treatment. Incorporated by reference to Exhibit 10.1 to the Registrants current report on Form 8-K filed August 22, 2011. | |
10.2 |
Employment Agreement, dated as of August 18, 2011, by and between VCA Antech, Inc. and Josh Drake. Incorporated by reference to Exhibit 10.1 to the Registrants current report on Form 8-K filed August 22, 2011. | |
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. | |
Exhibit 101.INS |
XBRL Instance Document* | |
Exhibit 101.SCH |
XBRL Extension Schema Document* | |
Exhibit 101.CAL |
XBRL Extension Calculation Linkbase Document* | |
Exhibit 101.LAB |
XBRL Extension Label Linkbase Document* | |
Exhibit 101.PRE |
XBRL Extension Presentation Linkbase Document* | |
Exhibit 101.DEF |
XBRL Extension Definition Linkbase Document* |
*Pursuant to Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed to be filed for purposes of Section 18 of the Exchange Act of 1934, as amended (Exchange Act), or otherwise subject to the liability of that section, and shall not be deemed part of a registration statement, prospectus or other document filed under the Securities Act of 1933, as amended, or the Exchange Act, except as may be expressly set forth by specific reference in such filings.
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