UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

ý		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-16783

VCA Antech, Inc.

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		95-4097995 (I.R.S. Employer Identification No.)

12401 West Olympic Boulevard
Los Angeles, California 90064-1022
(Address of principal executive offices)

(310) 571-6500
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ý No o.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ý No o.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.:

		Large accelerated filer ý		Accelerated filer o
		Non-accelerated filer o		Smaller reporting company o
(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 o No ý.

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: common stock, $0.001 par value, 86,422,044 shares as of May 3, 2011.

 

 

VCA Antech, Inc. and Subsidiaries
Form 10-Q
March 31, 2011

Table of Contents

				Page
				Number
Part I.		Financial Information
Item 1.		Financial Statements (Unaudited)
		Condensed, Consolidated Balance Sheets as of March 31, 2011 and December 31, 2010			1
		Condensed, Consolidated Income Statements for the Three Months Ended March 31, 2011 and 2010			2
		Condensed, Consolidated Statements of Equity for the Three Months Ended March 31, 2011 and 2010			3
		Condensed, Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2011 and 2010			4
		Notes to Condensed, Consolidated Financial Statements			5
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			13
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			26
Item 4.		Controls and Procedures			26
Part II.		Other Information
Item 1.		Legal Proceedings			26
Item 1A.		Risk Factors			26
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			26
Item 3.		Defaults Upon Senior Securities			27
Item 5.		Other Information			27
Item 6.		Exhibits			27
		Signature			28
		Exhibit Index			29
EX-31.1
EX-31.2
EX-32.1
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART I.		FINANCIAL INFORMATION

ITEM 1.		FINANCIAL STATEMENTS

VCA Antech, Inc. and Subsidiaries

		March 31,				December 31,
		2011				2010
Assets
Current assets:
Cash and cash equivalents		$	130,399			$	97,126
Trade accounts receivable, less allowance for uncollectible accounts of $13,404 and $13,801 at March 31, 2011 and December 31, 2010, respectively			54,888				49,224
Inventory			43,057				40,760
Prepaid expense and other			19,349				21,138
Deferred income taxes			18,875				19,019
Prepaid income taxes			8,727				19,047
Total current assets			275,295				246,314
Property and equipment, less accumulated depreciation and amortization of $208,693 and $198,157 at March 31, 2011 and December 31, 2010, respectively			334,343				331,687
Goodwill			1,094,704				1,092,480
Other intangible assets, net			44,940				46,986
Notes receivable, net			6,113				6,429
Deferred financing costs, net			6,312				6,700
Other			34,143				35,826
Total assets		$	1,795,850			$	1,766,422
Liabilities and Equity
Current liabilities:
Current portion of long-term debt		$	27,753			$	28,101
Accounts payable			30,710				31,970
Accrued payroll and related liabilities			46,465				35,754
Other accrued liabilities			41,533				45,769
Total current liabilities			146,461				141,594
Long-term debt, less current portion			492,046				498,935
Deferred income taxes			87,616				82,131
Other liabilities			25,906				28,478
Total liabilities			752,029				751,138
Commitments and contingencies:
Redeemable noncontrolling interests			6,218				5,799
Preferred stock, par value $0.001, 11,000 shares authorized, none outstanding			—				—
VCA Antech, Inc. stockholders’ equity:
Common stock, par value $0.001, 175,000 shares authorized, 86,418 and 86,179 shares outstanding as of March 31, 2011 and December 31, 2010, respectively			86				86
Additional paid-in capital			347,619				347,848
Retained earnings			679,092				650,253
Accumulated other comprehensive income			1,102				737
Total VCA Antech, Inc. stockholders’ equity			1,027,899				998,924
Noncontrolling interests			9,704				10,561
Total equity			1,037,603				1,009,485
Total liabilities and equity		$	1,795,850			$	1,766,422

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

VCA Antech, Inc. and Subsidiaries

		Three Months Ended
		March 31,
		2011				2010
Revenue		$	355,123			$	330,734
Direct costs			275,345				247,939
Gross profit			79,778				82,795
Selling, general and administrative expense			26,183				26,140
Net loss on sale of assets			89				25
Operating income			53,506				56,630
Interest expense, net			4,019				3,167
Other expense			58				25
Income before provision for income taxes			49,429				53,438
Provision for income taxes			18,933				20,506
Net income			30,496				32,932
Net income attributable to noncontrolling interests			1,657				997
Net income attributable to VCA Antech, Inc.		$	28,839			$	31,935
Basic earnings per share		$	0.33			$	0.37
Diluted earnings per share		$	0.33			$	0.37
Weighted-average shares outstanding for basic earnings per share			86,355				85,824
Weighted-average shares outstanding for diluted earnings per share			87,245				86,870

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

VCA Antech, Inc. and Subsidiaries

																		Accumulated
										Additional								Other
		Common Stock								Paid-In				Retained				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 $169 and $105 related to redeemable and mandatorily redeemable noncontrolling interests, respectively)			—				—				—				31,935				—				723				32,658
Foreign currency translation adjustment			—				—				—				—				167				—				167
Unrealized gain on foreign currency, net of tax			—				—				—				—				111				—				111
Unrealized loss on hedging instruments, net of tax			—				—				—				—				(1	)			—				(1	)
Losses on hedging instruments reclassified to income, net of tax			—				—				—				—				233				—				233
Distribution to noncontrolling interests			—				—				—				—				—				(798	)			(798	)
Purchase of noncontrolling interests			—				—				—				—				—				(233	)			(233	)
Share-based compensation			—				—				2,088				—				—				—				2,088
Issuance of common stock under stock incentive plans			334				—				2,858				—				—				—				2,858
Stock repurchases			—				—				(2,253	)			—				—				—				(2,253	)
Excess tax benefit from stock options			—				—				264				—				—				—				264
Tax shortfall and other from stock options and awards			—				—				(502	)			—				—				—				(502	)
Balances, March 31, 2010			85,918			$	86			$	337,569			$	571,945			$	347			$	11,121			$	921,068
Balances, December 31, 2010			86,179			$	86			$	347,848			$	650,253			$	737			$	10,561			$	1,009,485
Net income (excludes $595 and $629 related to redeemable and mandatorily redeemable noncontrolling interests, respectively)			—				—				—				28,839				—				433				29,272
Foreign currency translation adjustment			—				—				—				—				249				—				249
Unrealized gain on foreign currency, net of tax			—				—				—				—				116				—				116
Distribution to noncontrolling interests			—				—				—				—				—				(415	)			(415	)
Purchase of noncontrolling interests			—				—				263				—				—				(875	)			(612	)
Share-based compensation			—				—				1,068				—				—				—				1,068
Issuance of common stock under stock incentive plans			239				—				1,175				—				—				—				1,175
Stock repurchases			—				—				(2,337	)			—				—				—				(2,337	)
Excess tax benefit from stock options			—				—				185				—				—				—				185
Tax shortfall and other from stock options and awards			—				—				(583	)			—				—				—				(583	)
Balances, March 31, 2011			86,418			$	86			$	347,619			$	679,092			$	1,102			$	9,704			$	1,037,603

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

VCA Antech, Inc. and Subsidiaries

		Three Months Ended
		March 31,
		2011				2010
Cash flows from operating activities:
Net income		$	30,496			$	32,932
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			13,380				10,707
Amortization of debt issue costs			388				132
Provision for uncollectible accounts			1,297				1,492
Net loss on sale of assets			89				25
Share-based compensation			1,068				2,088
Deferred income taxes			8,035				7,232
Excess tax benefit from exercise of stock options			(185	)			(264	)
Other			(358	)			(114	)
Changes in operating assets and liabilities:
Trade accounts receivable			(6,933	)			(6,511	)
Inventory, prepaid expense and other assets			1,417				644
Accounts payable and other accrued liabilities			(8,120	)			(288	)
Accrued payroll and related liabilities			10,734				9,954
Income taxes			9,922				12,527
Net cash provided by operating activities			61,230				70,556
Cash flows from investing activities:
Business acquisitions, net of cash acquired			(5,812	)			(9,247	)
Real estate acquired in connection with business acquisitions			(1,200	)			(1,300	)
Property and equipment additions			(12,034	)			(16,049	)
Proceeds from sale of assets			22				6
Other			(131	)			(61	)
Net cash used in investing activities			(19,155	)			(26,651	)
Cash flows from financing activities:
Repayment of debt			(7,301	)			(10,822	)
Distributions to noncontrolling interest partners			(652	)			(989	)
Proceeds from issuance of common stock under stock option plans			1,175				2,858
Excess tax benefit from exercise of stock options			185				264
Stock repurchases			(2,337	)			(2,253	)
Net cash used in financing activities			(8,930	)			(10,942	)
Effect of currency exchange rate changes on cash and cash equivalents			128				53
Increase in cash and cash equivalents			33,273				33,016
Cash and cash equivalents at beginning of period			97,126				145,181
Cash and cash equivalents at end of period		$	130,399			$	178,197
Supplemental disclosures of cash flow information:
Interest paid		$	3,778			$	3,196
Income taxes paid		$	976			$	747
Supplemental schedule of noncash investing and financing activities:
Detail of acquisitions:
Fair value of assets acquired		$	5,350			$	8,868
Cash paid for acquisitions			(5,150	)			(8,528	)
Holdbacks			(200	)			—
Contingent consideration			—				(7	)
Liabilities assumed		$	—			$	333

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

VCA Antech, Inc. and Subsidiaries

1.   Nature of Operations

     Our company, VCA Antech, Inc. (“VCA”) is a Delaware corporation formed in 1986 and is based in Los Angeles, California. We are an animal healthcare company with three strategic segments: animal hospitals (“Animal Hospital”), veterinary diagnostic laboratories (“Laboratory”) and veterinary medical technology (“Medical Technology”).

     Our animal hospitals offer a full range of general medical and surgical services for companion animals. Our animal hospitals treat diseases and injuries, provide pharmaceutical products and perform a variety of pet-wellness programs, including health examinations, diagnostic testing, vaccinations, spaying, neutering and dental care. At March 31, 2011, we operated 528 animal hospitals throughout 41 states.

     We operate a full-service veterinary diagnostic laboratory network serving all 50 states and certain areas in Canada. Our laboratory network provides sophisticated testing and consulting services used by veterinarians in the detection, diagnosis, evaluation, monitoring, treatment and prevention of diseases and other conditions affecting animals. At March 31, 2011, we operated 52 laboratories of various sizes located strategically throughout the United States and Canada.

     Our Medical Technology segment sells digital radiography and ultrasound imaging equipment, provides education and training on the use of that equipment, provides consulting and mobile imaging services, and sells software and ancillary services to the veterinary market.

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 months ended March 31, 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 for the year ended 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 three months ended March, 31, 2010, accordingly certain amounts related to redeemable noncontrolling interests were reclassified from the noncontrolling interests column in the statement, see Note 11, 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 in our Medical Technology segment.

     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.

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

3.   Goodwill and Other Intangible Assets

   Goodwill

     The following table presents the changes in the carrying amount of our goodwill for the three months ended March 31, 2011 (in thousands):

		Animal								Medical
		Hospital				Laboratory				Technology				Total
Balance as of December 31, 2010		$	965,999			$	96,818			$	29,663			$	1,092,480
Goodwill acquired			4,439				6				—				4,445
Other (1)			(2,239	)			18				—				(2,221	)
Balance as of March 31, 2011		$	968,199			$	96,842			$	29,663			$	1,094,704

     We had no accumulated impairment losses as of March 31, 2011.

   Other Intangible Assets

     Our amortizable intangible assets at March 31, 2011 and December 31, 2010 are as follows (in thousands):

		As of March 31, 2011												As of December 31, 2010
		Gross								Net				Gross								Net
		Carrying				Accumulated				Carrying				Carrying				Accumulated				Carrying
		Amount				Amortization				Amount				Amount				Amortization				Amount
Noncontractual customer relationships		$	49,282			$	(16,027	)		$	33,255			$	48,686			$	(14,188	)		$	34,498
Covenants not-to-compete			13,824				(8,166	)			5,658				14,459				(8,311	)			6,148
Favorable lease asset			5,486				(2,806	)			2,680				5,486				(2,672	)			2,814
Trademarks			3,716				(1,095	)			2,621				3,749				(986	)			2,763
Technology			2,189				(1,480	)			709				2,189				(1,447	)			742
Client lists			35				(18	)			17				35				(14	)			21
Total		$	74,532			$	(29,592	)		$	44,940			$	74,604			$	(27,618	)		$	46,986

     The following table summarizes our aggregate amortization expense related to other intangible assets (in thousands):

		Three Months Ended
		March 31,
		2011				2010
Aggregate amortization expense		$	2,655			$	2,154

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

3.   Goodwill and Other Intangible Assets, continued

     The estimated amortization expense related to intangible assets for the remainder of 2011 and each of the succeeding years thereafter as of March 31, 2011 is as follows (in thousands):

Remainder of 2011		$	7,896
2012			9,609
2013			7,381
2014			5,136
2015			3,292
Thereafter			11,626
Total		$	44,940

4.   Other Accrued Liabilities

     Other accrued liabilities consisted of the following (in thousands):

		March 31,				December 31,
		2011				2010
Deferred revenue		$	7,464			$	8,617
Accrued health insurance			5,382				4,970
Deferred rent			3,627				3,456
Accrued consulting fees			2,760				2,760
Holdbacks and earnouts			2,319				2,447
Customer deposits			2,128				2,966
Accrued lab service rebates			40				2,535
Other			17,813				18,018
		$	41,533			$	45,769

5.   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 March 31, 2011 and December 31, 2010 is based upon the ask price quoted from an external source, which is considered a Level 2 input.

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

5. Fair Value Measurements, continued

     The following table reflects the carrying value and fair value of our long-term debt (in thousands):

		As of March 31, 2011								As of December 31, 2010
		Carrying				Fair				Carrying				Fair
		Value				Value				Value				Value
Variable-rate long-term debt		$	487,500			$	487,500			$	493,750			$	496,219

     At March 31, 2011 and December 31, 2010, we did not have any applicable nonrecurring measurements of nonfinancial assets and nonfinancial liabilities.

6.   Share-Based Compensation

Stock Option Activity

     A summary of our stock option activity for the three months ended March 31, 2011 is as follows (in thousands):

						Weighted-
						Average
		Stock				Exercise
		Options				Price
Outstanding at December 31, 2010			3,323			$	16.45
Exercised			(75	)			15.60
Outstanding at March 31, 2011			3,248			$	16.47
Exercisable at March 31, 2011			2,908			$	16.40
Expected to vest at March 31, 2011			324			$	17.04

     There were no stock options granted during the three months ended March 31, 2011. The aggregate intrinsic value of our stock options exercised during the three months ended March 31, 2011 was $694,000, and the actual tax benefit realized on options exercised during the period was $271,000.

     At March 31, 2011 there was $1.3 million of total unrecognized compensation cost related to our stock options. This cost is expected to be recognized over a weighted-average period of one year.

     The compensation cost that has been charged against income for stock options for the three months ended March 31, 2011 and 2010 was $347,000 and $471,000, respectively. The corresponding income tax benefit recognized was $136,000 and $183,000 for the three months ended March 31, 2011 and 2010, respectively.

   Nonvested Stock Activity

     During the three months ended March 31, 2011 we granted 4,470 shares of nonvested common stock. This award was granted to one of our nonexecutive employees and will vest in four equal annual installments from the grant date.

     Total compensation cost charged against income related to nonvested stock awards was $721,000 and $1.6 million for the three months ended March 31, 2011 and 2010, respectively. The corresponding income tax benefit recognized in the income statement was $281,000 and $629,000 for the three months ended March 31, 2011 and 2010, respectively.

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

6.   Share-Based Compensation, continued

     At March 31, 2011, there was $7.4 million of unrecognized compensation cost related to these nonvested shares, which will be recognized over a weighted-average period of 2.9 years. A summary of our nonvested stock activity for the three months ended March 31, 2011 is as follows:

						Grant Date
						Weighted-
						Average Fair
						Value
		Shares				Per Share
Outstanding at December 31, 2010			686,511			$	26.16
Granted			4,470			$	25.17
Vested			(257,816	)		$	30.98
Forfeited/Canceled			(1,896	)		$	30.35
Outstanding at March 31, 2011			431,269			$	23.25

7.   Calculation of Earnings per Share

     Basic earnings per share is calculated by dividing net income by the weighted-average number of shares outstanding during the period. Diluted earnings per share is calculated by dividing net income attributable to VCA Antech, Inc. by the weighted-average number of common shares outstanding, after giving effect to all dilutive potential common shares outstanding during the period. Basic and diluted earnings per share were calculated as follows (in thousands, except per share amounts):

		Three Months Ended
		March 31,
		2011				2010
Net income attributable to VCA Antech, Inc.		$	28,839			$	31,935
Weighted-average common shares outstanding:
Basic			86,355				85,824
Effect of dilutive potential common shares:
Stock options			690				870
Nonvested shares			200				176
Diluted			87,245				86,870
Basic earnings per share		$	0.33			$	0.37
Diluted earnings per share		$	0.33			$	0.37

     For the three months ended March 31, 2011 and 2010, potential common shares of 46,270 and 79,918, respectively, were excluded from the computation of diluted earnings per share because their inclusion would have had an antidilutive effect.

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

8.   Comprehensive Income

     Total comprehensive income consists of net income and the other comprehensive income during the three months ended March 31, 2011 and 2010. The following table provides a summary of comprehensive income (in thousands):

		Three Months Ended
		March 31,
		2011				2010
Net income(1)		$	30,496			$	32,932
Other comprehensive income:
Foreign currency translation adjustments			249				167
Unrealized gain on foreign currency			189				182
Tax expense			(73	)			(71	)
Unrealized loss on hedging instruments			—				(2	)
Tax benefit			—				1
Losses on hedging instruments reclassified to income			—				382
Tax benefit			—				(149	)
Other comprehensive income			365				510
Total comprehensive income			30,861				33,442
Comprehensive income attributable to noncontrolling interests(1)			(1,657	)			(997	)
Comprehensive income attributable to VCA Antech, Inc.		$	29,204			$	32,445

9.   Lines of Business

     Our reportable segments are Animal Hospital, Laboratory and Medical Technology. These segments are strategic business units that have different services, products and/or functions. The segments are managed separately because each is a distinct and different business venture with unique challenges, risks and rewards. Our Animal Hospital segment provides veterinary services for companion animals and sells related retail and pharmaceutical products. Our Laboratory segment provides diagnostic laboratory testing services for veterinarians, both associated with our animal hospitals and those independent of us. Our Medical Technology segment sells digital radiography and ultrasound imaging equipment, related computer hardware, software and ancillary services to the veterinary market. We also operate a corporate office that provides general and administrative support services for our other segments.

     The accounting policies of our segments are 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.

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

9.   Lines of Business, continued

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

		Animal								Medical								Intercompany
		Hospital				Laboratory				Technology				Corporate				Eliminations				Total
Three Months Ended March 31, 2011
External revenue		$	269,941			$	69,096			$	16,086			$	—			$	—			$	355,123
Intercompany revenue			—				10,453				3,010				—				(13,463	)			—
Total revenue			269,941				79,549				19,096				—				(13,463	)			355,123
Direct costs			230,388				42,819				14,638				—				(12,500	)			275,345
Gross profit			39,553				36,730				4,458				—				(963	)			79,778
Selling, general and administrative expense			6,083				6,636				3,556				9,908				—				26,183
Net loss on sale and disposal of assets			78				11				—				—				—				89
Operating income (loss)		$	33,392			$	30,083			$	902			$	(9,908	)		$	(963	)		$	53,506
Depreciation and amortization		$	9,873			$	2,471			$	657			$	680			$	(301	)		$	13,380
Capital expenditures		$	9,535			$	1,236			$	759			$	958			$	(454	)		$	12,034
Three Months Ended March 31, 2010
External revenue		$	246,668			$	69,400			$	14,666			$	—			$	—			$	330,734
Intercompany revenue			—				8,780				1,131				—				(9,911	)			—
Total revenue			246,668				78,180				15,797				—				(9,911	)			330,734
Direct costs			204,991				41,652				10,966				—				(9,670	)			247,939
Gross profit			41,677				36,528				4,831				—				(241	)			82,795
Selling, general and administrative expense			5,587				6,154				3,515				10,884				—				26,140
Net loss on sale and disposal of assets			(16	)			1				40				—				—				25
Operating income (loss)		$	36,106			$	30,373			$	1,276			$	(10,884	)		$	(241	)		$	56,630
Depreciation and amortization		$	7,352			$	2,413			$	601			$	581			$	(240	)		$	10,707
Capital expenditures		$	13,128			$	832			$	82			$	2,327			$	(320	)		$	16,049
At March 31, 2011
Total assets		$	1,327,137			$	223,407			$	68,286			$	193,016			$	(15,996	)		$	1,795,850
At December 31, 2010
Total assets		$	1,320,619			$	215,483			$	69,082			$	175,297			$	(14,059	)		$	1,766,422

10.   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 $1.2 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.

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

10.   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.

11.   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 mandatorily redeemable and redeemable noncontrolling interests in net income attributable to noncontrolling interests in our condensed, consolidated statements of income. 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 partner’s equity in the partnership in the event of the partner’s death. We report these redeemable noncontrolling interests at their estimated redemption value and classify them as liabilities due to the certainty of the related event. We recognize changes in the obligation in net income attributable to noncontrolling interests. At March 31, 2011 and December 31, 2010, these liabilities were $2.3 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. At March 31, 2011 and December 31, 2010, balances in temporary equity related to these types of arrangements were $6.2 million and $5.8 million, respectively.

     The following table provides a summary of redeemable noncontrolling interests (in thousands):

		Income				Redeemable
		Statement				Noncontrolling
		Impact				Interests
Balance as of December 31, 2009						$	4,369
Noncontrolling interest		$	169
Redemption value change			—				169
Formation of noncontrolling interests							450
Distribution to noncontrolling interests							(87	)
Balance as of March 31, 2010						$	4,901
Balance as of December 31, 2010						$	5,799
Noncontrolling interest		$	193
Redemption value change			402				595
Distribution to noncontrolling interests							(176	)
Balance as of March 31, 2011						$	6,218

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

		Page
Introduction			14
Executive Overview			14
Critical Accounting Policies			16
Consolidated Results of Operations			17
Segment Results			18
Liquidity and Capital Resources			22

Introduction

     The following discussion should be read in conjunction with our condensed, consolidated financial statements provided under Part I, Item I of this Quarterly report on Form 10-Q. We have included herein statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We generally identify forward-looking statements in this report using words like “believe,” “intend,” “expect,” “estimate,” “may,” “plan,” “should plan,” “project,” “contemplate,” “anticipate,” “predict,” “potential,” “continue,” or similar expressions. You may find some of these statements below and elsewhere in this report. These forward-looking statements are not historical facts and are inherently uncertain and outside of our control. Any or all of our forward-looking statements in this report may turn out to be wrong. They can be affected by inaccurate assumptions we might make, or by known or unknown risks and uncertainties. Many factors mentioned in our discussion in this report will be important in determining future results. Consequently, no forward-looking statement can be guaranteed. Actual future results may vary materially. Factors that may cause our plans, expectations, future financial condition and results to change are described throughout this report and in our Annual Report on Form 10-K, particularly in “Risk Factors,” Part I, Item 1A of that report.

     The forward-looking information set forth in this Quarterly Report on Form 10-Q is as of May 10, 2011, and we undertake no duty to update this information. Shareholders and prospective investors can find information filed with the SEC after May 10, 2011 at our website at http://investor.vcaantech.com or at the SEC’s website at www.sec.gov.

     We are a leading national animal healthcare company. We provide veterinary services and diagnostic testing to support veterinary care and we sell diagnostic imaging equipment, other medical technology products and related services to veterinarians. Our reportable segments are as follows:

•

Our Animal Hospital segment operates the largest network of freestanding, full-service animal hospitals in the nation. Our animal hospitals offer a full range of general medical and surgical services for companion animals. We treat diseases and injuries, offer pharmaceutical and retail products and perform a variety of pet wellness programs, including health examinations, diagnostic testing, routine vaccinations, spaying, neutering and dental care. At March 31, 2011, our animal hospital network consisted of 528 animal hospitals in 41 states.

•

Our Laboratory segment operates the largest network of veterinary diagnostic laboratories in the nation. Our laboratories provide sophisticated testing and consulting services used by veterinarians in the detection, diagnosis, evaluation, monitoring, treatment and prevention of diseases and other conditions affecting animals. At March 31, 2011, our laboratory network consisted of 52 laboratories serving all 50 states and certain areas in Canada.

•

Our Medical Technology segment sells digital radiography and ultrasound imaging equipment, related computer hardware, software and ancillary services.

     The practice of veterinary medicine is subject to seasonal fluctuation. In particular, demand for veterinary services is significantly higher during the warmer months because pets spend a greater amount of time outdoors where they are more likely to be injured and are more susceptible to disease and parasites. In addition, use of veterinary services may be affected by levels of flea infestation, heartworm and ticks, and the number of daylight hours.

     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.

Executive Overview

     During the three months ended March 31, 2011, we experienced improvement in our overall revenue growth in comparison to previous quarters, despite continued economic pressures. We achieved an increase in consolidated revenue through acquired animal hospitals and internal revenue growth in our Laboratory business segment. Our Animal Hospital same-store revenue declined 2.2% for the three months ended March 31, 2011. Our Laboratory internal revenue increased 1.7% for the three months ended March 31, 2011. The overall economic environment and lower margins at our acquired animal hospitals resulted in a decline in operating income.

   Acquisitions

     Our growth strategy includes the acquisition of independent animal hospitals. We currently anticipate that we will acquire $55 million to $65 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 three months ended March 31, 2011:

Animal Hospitals:
Beginning of period			528
Acquisitions			2
Sold, closed or merged			(2	)
End of period			528
Laboratories:
Beginning of period			50
Acquisitions			1
Created			1
End of period			52

     The following table summarizes the aggregate consideration for the two independent animal hospitals and one laboratory acquired during the three months ended March 31, 2011, and the allocation of the acquisition price (in thousands):

Consideration:
Cash (1)		$	5,150
Holdback			200
Fair value of total consideration transferred		$	5,350
Allocation of the Purchase Price:
Tangible assets		$	173
Identifiable intangible assets			732
Goodwill (2)			4,445
Total		$	5,350

     In addition to the acquisition price listed above, are cash payments for real estate acquired in connection with our acquisition of animal hospitals totaling $1.2 million for the three months ended March 31, 2011. The price paid was determined to be fair market value.

   Acquisition of Pet DRx Corporation

     On July 1, 2010, we acquired a 70.4% interest in Pet DRx Corporation (“Pet DRx”), a provider of veterinary primary care and specialized services to companion animals. Pet DRx operated 23 animal hospitals in California at the time of its acquisition. The acquisition expands our presence in the California market. We acquired the remaining portion of Pet DRx in November 2010. The aggregate acquisition price was $41.3 million.

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

Consideration:
Cash paid to bondholders		$	29,532
Cash paid to shareholders			7,670
Cash paid for holdbacks			750
Fair value of total consideration transferred		$	37,952
Allocation of the Purchase Price:
Tangible assets		$	20,211
Identifiable intangible assets			3,074
Goodwill (1)			42,547
Other liabilities assumed			(27,880	)
Total		$	37,952

     The pro forma impacts on revenue and earnings have not been disclosed as the amounts were immaterial to the financial statements as a whole.

Critical Accounting Policies

     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 March 31, 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
		March 31,
		2011				2010
Revenue:
Animal Hospital			76.0	%			74.6	%
Laboratory			22.4				23.6
Medical Technology			5.4				4.8
Intercompany			(3.8	)			(3.0	)
Total revenue			100.0				100.0
Direct costs			77.5				75.0
Gross profit			22.5				25.0
Selling, general and administrative expense			7.4				7.9
Operating income			15.1				17.1
Interest expense, net			1.2				0.9
Income before provision for income taxes			13.9				16.2
Provision for income taxes			5.3				6.2
Net income			8.6				10.0
Net income attributable to noncontrolling interests			0.5				0.3
Net income attributable to VCA Antech, Inc.			8.1	%			9.7	%

   Revenue

     The following table summarizes our revenue (in thousands, except percentages):

		Three Months Ended March 31,
		2011								2010
						% of								% of				%
		$				Total				$				Total				Change
Animal Hospital		$	269,941				76.0	%		$	246,668				74.6	%			9.4	%
Laboratory			79,549				22.4	%			78,180				23.6	%			1.8	%
Medical Technology			19,096				5.4	%			15,797				4.8	%			20.9	%
Intercompany			(13,463	)			(3.8	)%			(9,911	)			(3.0	)%			35.8	%
Total revenue		$	355,123				100.0	%		$	330,734				100.0	%			7.4	%

     Consolidated revenue increased $24.4 million for the three months ended March 31, 2011 as compared to the same period in the prior year. The increase was attributable to revenue from acquired animal hospitals and increased revenue from our Medical Technology and Laboratory business segments. The increase in Medical Technology revenue was due to a one-time cumulative adjustment related to certain products. The overall increase was partially offset by a decline in Animal Hospital same-store revenue. Our Animal Hospital same-store revenue declined 2.2% for the three months ended March 31, 2011.

   Gross Profit

     The following table summarizes our gross profit in both dollars and as a percentage of applicable revenue, or gross margin (in thousands, except percentages):

		Three Months Ended March 31,
		2011								2010
						Gross								Gross				%
		$				Margin				$				Margin				Change
Animal Hospital		$	39,553				14.7	%		$	41,677				16.9	%			(5.1	)%
Laboratory			36,730				46.2	%			36,528				46.7	%			0.6	%
Medical Technology			4,458				23.3	%			4,831				30.6	%			(7.7	)%
Intercompany			(963	)							(241	)
Total gross profit		$	79,778				22.5	%		$	82,795				25.0	%			(3.6	)%

     Consolidated gross profit decreased $3.0 million for the three months ended March 31, 2011 as compared to the same period in the prior year. The decrease was primarily due to a decline in Animal Hospital same-store revenue which impacted the same-store Animal Hospital gross margin.

Segment Results

   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 March 31,
		2011				2010				% Change
Revenue		$	269,941			$	246,668				9.4	%
Gross profit		$	39,553			$	41,677				(5.1	)%
Gross margin			14.7	%			16.9	%