e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2010
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or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission file number
001-16783
VCA Antech, Inc.
(Exact name of registrant as
specified in its charter)
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Delaware
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95-4097995
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. employer
identification no.)
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12401 West Olympic Boulevard,
Los Angeles, California
(Address of principal
executive offices)
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90064-1022
(Zip code)
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(310) 571-6500
Registrants telephone
number, including area code:
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, par value $0.001 per share
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Nasdaq Global Select Market
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o.
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ.
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o.
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files). Yes þ No o.
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the Exchange Act. (Check one):
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting
company o
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(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 þ.
The aggregate market value of the voting common equity held by
non-affiliates as of June 30, 2010, was approximately
$2.1 billion, computed by reference to the price of $24.76
per share, the price at which the common equity was last sold on
such date as reported on the NASDAQ Global Select Market. For
purposes of this computation, it is assumed that the shares
beneficially held by directors and officers of the registrant
would be deemed to be stock held by affiliates. Non-affiliated
common stock outstanding at June 30, 2010 was
84,066,864 shares.
Total common stock outstanding at February 18, 2011 was
86,227,954 shares.
DOCUMENTS
INCORPORATED BY REFERENCE
Parts of the definitive Proxy Statement to be delivered to
stockholders in connection with the 2010 Annual Meeting of
Stockholders are incorporated by reference into Items 10,
11, 12, 13 and 14 hereof.
VCA
ANTECH, INC. AND SUBSIDIARIES
TABLE OF
CONTENTS
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Page
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PART I
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Item 1.
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Business
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1
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Item 1A.
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Risk Factors
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10
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Item 1B.
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Unresolved Staff Comments
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16
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Item 2.
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Properties
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16
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Item 3.
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Legal Proceedings
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PART II
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Item 5.
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Market for Registrants Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
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16
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Item 6.
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Selected Financial Data
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18
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Item 7.
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Managements Discussion and Analysis of Financial Condition
and Results of Operations
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20
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Item 7A.
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Quantitative and Qualitative Disclosures about Market Risk
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42
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Item 8.
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Financial Statements and Supplementary Data
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43
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Item 9.
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Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
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85
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Item 9A.
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Controls and Procedures
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85
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Item 9B.
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Other Information
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85
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PART III
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Item 10.
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Directors, Executive Officers and Corporate Governance
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86
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Item 11.
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Executive Compensation
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86
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Item 12.
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Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
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86
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Item 13.
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Certain Relationships and Related Transactions, and Director
Independence
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86
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Item 14.
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Principal Accountant Fees and Services
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86
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PART IV
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Item 15.
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Exhibits and Financial Statement Schedules
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86
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Signatures
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90
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Forward-Looking
Statements
This annual report on
Form 10-K
contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 that involve
risks and uncertainties, as well as assumptions that, if they
materialize or prove incorrect, could cause our results and the
results of our consolidated subsidiaries to differ materially
from those expressed or implied by these forward-looking
statements. We generally identify forward-looking statements in
this report using words like believe,
intend, seek, 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
include those items discussed in Risk Factors in
Item 1A of this annual report.
PART I
Company
Overview
We are a leading national animal healthcare company operating in
the United States and Canada. We provide veterinary services and
diagnostic testing to support veterinary care and we sell
diagnostic imaging equipment and other medical technology
products and related services to the veterinary market.
Our animal hospitals offer a full range of general medical and
surgical services for companion animals, as well as specialized
treatments including advanced diagnostic services, internal
medicine, oncology, ophthalmology, dermatology and cardiology.
In addition, we provide pharmaceutical products and perform a
variety of pet wellness programs including health examinations,
diagnostic testing, routine vaccinations, spaying, neutering and
dental care. Our network of animal hospitals is supported by
more than 2,100 veterinarians and had approximately
6.8 million patient visits in 2010. Our network of
veterinary diagnostic laboratories 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.
Our network of veterinary diagnostic laboratories provides
diagnostic testing for over 16,000 clients, which includes
standard animal hospitals, large animal practices, universities
and other government organizations. Our Medical Technology
business sells digital radiography and ultrasound imaging
equipment, provides education and training on the use of that
equipment, and provides consulting and mobile imaging services.
Our principal executive offices are located at 12401 West
Olympic Boulevard, Los Angeles, California. We can be contacted
at
(310) 571-6500.
Company
History
Our company was formed in 1986 as a Delaware corporation and has
since established a position in the animal hospital and
veterinary diagnostic laboratory markets through both internal
growth and acquisitions. Our acquisitions include individual
animal hospitals and several large group acquisitions.
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On June 1, 2007, we acquired Healthy Pet Corp.
(Healthy Pet), which operated 44 animal hospitals
and a small laboratory, which primarily serviced its own animal
hospitals, as of the acquisition date. This acquisition allowed
us to expand our animal hospital operations, particularly in
Massachusetts, Connecticut, Virginia and Georgia.
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On July 1, 2010, we acquired a 70.4% interest in Pet DRx
Corporation (Pet DRx), which operated 23 animal
hospitals as of the acquisition date. On November 1, 2010,
we acquired the remaining 29.6% interest. This acquisition
allowed us to expand our animal hospital operations in
California.
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We also acquire and open additional laboratories that service
locations with a high level of demand (i.e., large metropolitan
areas). In addition, on October 1, 2004, we acquired Sound
Technologies, Inc. (STI), which is a supplier of
digital radiography and ultrasound imaging equipment and related
computer hardware, software and services to the veterinary
industry. The acquisition of STI provided us the opportunity to
sell digital imaging equipment, which we believe is an expanding
segment within the animal healthcare industry. On July 1,
2009, we acquired Eklin Medical Systems, Inc.
(Eklin), a leading seller of digital radiography,
ultrasound and practice management software systems in the
veterinary market. The combined company is the largest supplier
of diagnostic imaging equipment and other medical technology
products tailored specifically for the veterinary market.
Industry
Overview
According to American Pet Products Association, Incs.
(APPA)
2009-2010
APPA National Pet Owners Survey, the United States
population of companion animals is approximately
199 million, including about 171 million dogs and
cats. APPA estimates that over $28 billion was spent in the
United States on pets in 2009 for veterinary care, supplies,
medicine and boarding and grooming. The survey indicated that
the ownership of pets is widespread with over 71 million,
or 62%, of U.S. households owning at least one pet,
including companion and other animals. Specifically,
46 million households owned at least one dog and
38 million households owned at least one cat.
We believe that among pet owners there is a growing awareness of
pet health and wellness, including the benefits of preventive
care and specialized services. As technology continues to
migrate from the human healthcare sector into the practice of
veterinary medicine, more sophisticated treatments, diagnostic
tests and equipment are becoming available to treat companion
animals. These new and increasingly complex procedures,
diagnostic tests, including laboratory testing and advanced
imaging, and pharmaceuticals are gaining wider acceptance as pet
owners are exposed to these previously unconsidered treatment
programs through their exposure with this technology in human
healthcare, and through literature and marketing programs
sponsored by large pharmaceutical and pet nutrition companies.
Even as treatments available in veterinary medicine become more
complex, prices for veterinary services typically remain a low
percentage of a pet owners income, facilitating payment at
the time of service. Unlike the human healthcare industry,
providers of veterinary services are not dependent on
third-party payers in order to collect fees. As such, providers
of veterinary services typically do not have the problems of
extended payment collection cycles or pricing pressures from
third-party payers faced by human healthcare providers.
Outsourced laboratory testing and diagnostic equipment sales are
wholesale businesses that collect payments directly from animal
hospitals under standard industry payment terms. Fees for
services provided in our animal hospitals are due at the time of
service. In 2010 over 99% of our animal hospital services were
paid at the time of service. In addition, over the past three
fiscal years our bad debt expense has averaged less than 1% of
total revenue.
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 infestation of fleas, heartworms and ticks, and the number of
daylight hours.
Animal
Hospital Industry
Animal healthcare is provided predominately by the veterinarian
practicing as a sole practitioner, or as part of a larger group
practice or hospital. Veterinarians diagnose and treat animal
illnesses and injuries, perform surgeries, provide routine
medical exams and prescribe medication. Some veterinarians
specialize by type of medicine, such as orthopedics, dentistry,
ophthalmology or dermatology. Others focus on a particular
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type of animal. The principal factors in a pet owners
decision as to which veterinarian to use include convenient
location and hours, personal recommendations, reasonable fees
and quality of care.
According to the American Veterinary Medical Association, the
U.S. market for veterinary services is highly fragmented
with more than 51,000 veterinarians practicing at the end of
2009. We have estimated that there are over
22,000 companion animal hospitals operating at the end of
2009. Although most animal hospitals are single-site,
sole-practitioner facilities, we believe veterinarians are
gravitating toward larger, multi-doctor animal hospitals that
provide
state-of-the-art
facilities, treatments, methods and pharmaceuticals to enhance
the services they can provide their clients.
Well-capitalized animal hospital operators have the opportunity
to supplement their internal growth with selective acquisitions.
We believe the extremely fragmented animal hospital industry is
consolidating due to:
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the choice of some owners of animal hospitals to diversify their
investment portfolio by selling all or a portion of their
investment in the animal hospital;
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the purchasing, marketing and administrative cost advantages
that can be realized by a large, multiple location, multi-doctor
veterinary provider;
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the cost of financing equipment purchases and upgrading
technology necessary for a successful practice;
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the desire of veterinarians to focus on practicing veterinary
medicine, rather than spending large portions of their time
performing the administrative tasks necessary to operate an
animal hospital; and
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the appeal to many veterinarians of the benefits and flexible
work schedule that is not typically available to a sole
practitioner or single-site provider.
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Diagnostic
Laboratory Industry
Veterinarians use laboratory tests to diagnose and monitor
illnesses and conditions through the detection of substances in
urine, tissue, fecal and blood samples, and other specimens. As
is the case with the physician treating a human patient,
laboratory diagnostic testing is becoming a routine diagnostic
tool used by the veterinarian.
Veterinary laboratory tests are performed primarily at
veterinary diagnostic laboratories, universities or at animal
hospitals using
on-site
diagnostic equipment. For certain tests,
on-site
diagnostic equipment can provide more timely results than
outside laboratories, but this in-house testing requires the
animal hospital or veterinarian to purchase or lease the
equipment, maintain and calibrate the equipment periodically to
avoid testing errors, employ trained personnel to operate it and
purchase testing supplies. Conversely, veterinary diagnostic
laboratories can provide a wider range of tests than generally
are available
on-site at
most animal hospitals and do not require any up-front investment
on the part of the animal hospital or veterinarian. Leading
veterinary diagnostic laboratories also employ highly trained
individuals who specialize in the detection and diagnosis of
diseases and thus are a valuable resource for the veterinarian.
Our laboratories offer a broad spectrum of standard and
customized tests to the veterinary market, convenient sample
pick-up
times, rapid test reporting and access to professional
consulting services provided by trained specialists. Providing
the customer with this level of service at competitive prices
requires high throughput volumes due to the operating leverage
associated with the laboratory business. As a result, larger
laboratories are likely to have a competitive advantage relative
to smaller laboratories.
We believe that the outsourced laboratory testing market is an
integral segment of the animal healthcare industry as a result
of:
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the emphasis in veterinary education on diagnostic tests and the
trend toward specialization in veterinary medicine, which are
causing veterinarians to increasingly rely on tests for more
accurate diagnoses;
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the continued technological developments in veterinary medicine,
which are increasing the breadth of tests offered; and
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the continued focus on wellness, early detection and monitoring
programs in veterinary medicine.
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Medical
Technology Industry
Veterinarians use radiography and ultrasound imaging equipment
to capture and view anatomical images to aid in the diagnosis
and treatment of a broad range of diseases and injuries in
animals. Digital radiography imaging equipment utilizes
high-frequency electromagnetic waves to capture x-ray images
that are then digitized and stored in digital format. Ultrasound
imaging equipment utilizes high-frequency sound waves and echoes
to display a two-dimensional image of the tissue being examined.
Veterinarians can display images created by digital radiography
and ultrasound imaging equipment on computer monitors,
manipulate the images, store them electronically and transmit
them in digital format over the Internet with additional
computer hardware and software.
We believe that the use of digital radiography and ultrasound
imaging equipment provides advantages to veterinarians when
compared to other imaging equipment for the following reasons:
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the ability to see greater detail and manipulate images, which
assists in the diagnosis of illnesses and injuries and improves
the quality of care;
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the ability to transmit images over the Internet to facilitate
consultation with a specialist;
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improved efficiencies, including the ability to easily store and
retrieve images electronically; and
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the reduction of costs associated with the purchasing,
processing, storing, filing and retrieving of conventional film
used by traditional x-ray equipment.
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Business
Strategy
Our business strategy is to continue expanding our market
leadership in animal healthcare through our Animal Hospital,
Laboratory and Medical Technology segments. Key elements to our
strategy include:
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Capitalizing on our Leading Market Position to Generate
Revenue Growth. Our leading market position in
the animal hospital and veterinary laboratory markets positions
us to capitalize on favorable growth trends in the animal
healthcare industry. In our animal hospitals, we seek to
generate revenue growth by capitalizing on the growing emphasis
on pet health and wellness. In our laboratories, we seek to
generate revenue growth by taking advantage of the growing
number of outsourced diagnostic tests, the opportunities to
expand the testing that we provide and by increasing our market
share. We continually educate veterinarians on new and existing
technologies and tests available to diagnose medical conditions.
Further, we leverage the knowledge of our specialists by
providing veterinarians with extensive client support in
utilizing and understanding these diagnostic tests. Our Medical
Technology segment seeks to leverage our strengths in the
broader veterinary markets by introducing technologies, products
and services to the veterinary market. We seek to generate
revenue growth by increasing our market share and educating
veterinarians on new and existing technologies.
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Leveraging Established Infrastructure to Improve
Margins. We intend to leverage our established
Animal Hospital and Laboratory infrastructure to increase our
operating margins. Due to our established networks and the fixed
cost nature of our business model, we are able to realize high
margins on incremental revenue from Animal Hospital and
Laboratory customers. For example, given that our nationwide
transportation network servicing our Laboratory customers is a
relatively fixed cost, we are able to achieve significantly
higher margins on most incremental tests ordered by the same
customer when picked up by our couriers at the same time.
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Utilizing Enterprise-Wide Information Systems to Improve
Operating Efficiencies. Our Laboratory and the
majority of our Animal Hospital operations utilize
enterprise-wide management information systems. We believe that
these common systems enable us to more effectively manage the
key
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operating metrics that drive our business. With the aid of these
systems, we seek to standardize pricing, expand the services we
provide and increase volume through targeted marketing programs.
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Pursuing Selected Acquisitions. The
fragmentation of the animal hospital industry provides us with
significant expansion opportunities in our Animal Hospital
segment. Depending upon the attractiveness of the candidates and
the strategic fit with our existing operations, we intend to
acquire independent animal hospitals each year with aggregate
annual revenue of approximately $55 million to
$65 million. Our overall acquisition strategy involves the
identification of high-quality practices where we can create
additional value through the services and scale we can provide.
Our typical candidate mirrors the profile of our existing animal
hospital base. These acquisitions will be used to both expand
existing markets and to enter into new geographic areas. In
addition, we also evaluate the acquisition of animal hospital
chains, laboratories or related businesses if favorable
opportunities are presented. We intend primarily to use cash in
our acquisitions but, depending on the timing and amount of our
acquisitions, we may use stock or debt.
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Business
Segments
We report our results of operations through three segments:
Animal Hospital, Laboratory and Medical Technology.
Information regarding revenue and operating income, attributable
to each of our segments, is included in the Segment
Results section within Managements Discussion and
Analysis of Financial Condition and Results of Operations,
and within Note 13, Lines of Business, of our
Notes to Consolidated Financial Statements, which are
incorporated herein by reference.
Animal
Hospital
At December 31, 2010, we operated 528 animal hospitals
serving 41 states. Our Animal Hospital revenue accounted
for 76%, 76% and 75% of total consolidated revenue in 2010, 2009
and 2008, respectively.
Services
In addition to general medical and surgical services, we offer
specialized treatments for companion animals, including advanced
diagnostic services, internal medicine, oncology, ophthalmology,
dermatology and cardiology. We also provide pharmaceutical
products for use in the delivery of treatments by our
veterinarians and pet owners. Many of our animal hospitals offer
additional services, including grooming, bathing and boarding.
We also sell specialty pet products at our animal hospitals,
including pet food, vitamins, therapeutic shampoos and
conditioners, flea collars and sprays, and other accessory
products.
Animal
Hospital Network
We seek to provide quality care in clean, attractive facilities
that are generally open between 10 to 15 hours per day, six
to seven days per week. Our typical animal hospital:
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is located in a 4,000 to 6,000 square-foot, freestanding
facility in an attractive location;
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has annual revenue between $1.0 million and
$2.5 million;
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is supported by three to five veterinarians; and
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has an operating history of over 10 years.
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As of December 31, 2010, our nationwide network of
freestanding, full-service animal hospitals had facilities
located in the following states:
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California
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106
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Minnesota*
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6
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Texas*
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49
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New Mexico
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6
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Washington*
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33
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North Carolina*
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6
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Florida
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31
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Alaska
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5
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Massachusetts
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26
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Delaware
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4
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New York*
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24
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New Hampshire*
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4
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Pennsylvania
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23
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Wisconsin
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4
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Virginia
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18
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Hawaii
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3
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Colorado
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17
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Missouri
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3
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Illinois
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17
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Nebraska*
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3
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Connecticut
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16
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Rhode Island*
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3
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Georgia
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16
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Louisiana*
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2
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Arizona
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14
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South Carolina
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2
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Indiana
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13
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Vermont
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2
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Michigan*
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12
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Alabama*
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1
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Maryland
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11
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Kansas*
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1
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New Jersey*
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11
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Kentucky
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1
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Oregon*
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10
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Tennessee
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1
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Ohio
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8
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Utah
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1
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Nevada
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7
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West Virginia*
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1
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Oklahoma
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7
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States with laws that prohibit corporations from providing
veterinary medical care. In these states we provide
administrative and support services to veterinary medical groups
pursuant to management agreements. |
Marketing
We direct our marketing efforts toward increasing the number of
annual visits from existing clients through customer education
efforts and toward attracting new clients to our network of
hospitals through online and offline initiatives. We inform and
educate our clients about pet wellness and quality care through
mailings of HealthyPet Magazine, which focuses on pet
care and wellness. We also market through targeted demographic
mailings regarding specific pet health issues and collateral
health material made available at each animal hospital. With
these internal marketing programs, we seek to leverage our
existing customer base by increasing the number and intensity of
the services received during each visit. We send reminder
notices to increase awareness of the advantages of regular,
comprehensive veterinary medical care, including preventive care
such as early disease detection exams, vaccinations, dental
screening and geriatric care. We also have expanded our online
capabilities, offering increased convenience for our clients to
book appointments or find detailed health related materials on
our hospital websites. We also enter into referral arrangements
with local pet shops, humane societies and veterinarians to
increase our client base. We seek to obtain referrals from
veterinarians by promoting our specialized diagnostic and
treatment capabilities to veterinarians and veterinary practices
that cannot offer their clients these services.
Personnel
Our animal hospitals generally employ a staff of between 20 and
30 full-time-equivalent employees, depending upon the
facilitys size and customer base. The staff includes
administrative and technical support personnel, three to five
veterinarians, a hospital manager who supervises the
day-to-day
activities of the facility.
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We actively recruit qualified veterinarians and technicians and
are committed to supporting continuing education for our
professional staff. We operate post-graduate teaching programs
for veterinarians at 18 of our facilities, which train
approximately 130 veterinarians each year. We believe that these
programs enhance our reputation in the veterinary profession and
further our ability to continue to recruit the most talented
veterinarians.
We seek to establish an environment that supports the
veterinarian in the delivery of quality medicine and fosters
professional growth through increased patient flow and a diverse
case mix, continuing education,
state-of-the-art
equipment and access to specialists. We believe our animal
hospitals offer attractive employment opportunities to
veterinarians because of our professional environment,
competitive compensation, management opportunities, employee
benefits not generally available to a sole practitioner,
flexible work schedules that accommodate personal lifestyles and
the ability to relocate to different regions of the country.
We have established a medical advisory board to support our
operations. Our advisory board, under the direction of our Chief
Medical Officer, recommends medical standards for our network of
animal hospitals and is comprised of veterinarians recognized
for their outstanding knowledge and reputations in the
veterinary field. Our advisory board members represent both the
different geographic regions in which we operate and the medical
specialties practiced by our veterinarians; and three members
are faculty members at highly-ranked veterinary colleges.
Additionally, our regional medical directors, a group of highly
experienced veterinarians, are also closely involved in the
development and implementation of our medical programs.
Laboratory
We operate a full-service, veterinary diagnostic laboratory
network serving all 50 states and certain areas in Canada.
Our Laboratory revenue accounted for 20%, 21% and 21% of total
consolidated revenue in 2010, 2009 and 2008, respectively. We
service a diverse customer base of over 16,000 clients including
animal hospitals we operate, which accounted for 12%, 10% and
10% of total Laboratory revenue in 2010, 2009 and 2008,
respectively.
Services
Our diagnostic spectrum includes over 300 different tests in the
area of chemistry, pathology, endocrinology, serology,
hematology and microbiology, as well as tests specific to
particular diseases. We do not conduct experiments on animals.
Although modified to address the particular requirements of the
species tested, the tests performed in our veterinary
laboratories are similar to those performed in human clinical
laboratories and utilize similar laboratory equipment and
technologies. We believe that the growing concern for animal
health, combined with the movement of veterinary medicine toward
increasing specialization, may result in the migration of
additional areas of human testing into the veterinary field.
Given the recent advancements in veterinary medical technology
and the increased breadth and depth of knowledge required for
the practice of veterinary medicine, many veterinarians solicit
the knowledge and experience of our specialists to interpret
test results to aid in the diagnosis of illnesses and to suggest
possible treatment alternatives. Our diagnostic experts include
veterinarians, chemists and other scientists with expertise in
pathology, internal medicine, oncology, cardiology, dermatology,
neurology and endocrinology. Because of our specialists
involvement, we believe the quality of our service further
distinguishes our laboratory services as a premiere service
provider.
Laboratory
Network
At December 31, 2010, we operated 50 veterinary diagnostic
laboratories. Our laboratory network includes:
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primary hubs that are open 24 hours per day and offer a
full-testing menu;
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secondary laboratories that are open 24 hours per day and
offer a wide-testing menu servicing large metropolitan
areas; and
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short-term assessment and treatment (STAT)
laboratories that service other locations with demand sufficient
to warrant nearby laboratory facilities and are open primarily
during daytime hours.
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We connect our laboratories to our customers with what we
believe is the industrys largest transportation network,
picking up requisitions daily through an extensive network of
drivers and independent couriers. Customers outside our
transportation network use FedEx to send specimens to our
laboratory just outside of Memphis, Tennessee, which permits
rapid and cost-efficient testing because of the proximity to the
primary sorting facility of FedEx.
In 2010, we derived approximately 85% of our Laboratory revenue
from major metropolitan areas, where we offer
twice-a-day
pick-up
service and
same-day
results. In addition, in these areas we generally offer to
report results within three hours of
pick-up.
Outside of these areas, we typically provide test results to
veterinarians before 8:00 a.m. the day following
pick-up.
Sales,
Marketing and Client Service
Our full-time sales and field-service representatives market
laboratory services and maintain relationships with existing
customers. Our sales force is compensated via salary plus
commission and organized along geographic regions. We support
our sales efforts by strengthening our industry-leading team of
specialists, developing marketing literature, attending trade
shows, participating in trade associations and providing
educational services to veterinarians. Our client-service
representatives respond to customer inquiries, provide test
results and, when appropriate, introduce the customer to other
services offered by the laboratory.
Personnel
Each of our primary and secondary laboratory locations includes
a manager, supervisors for each department and personnel for
laboratory testing. In addition, we employ or contract with
specialists to interpret test results to assist veterinarians in
the diagnosis of illnesses and to suggest possible treatment
alternatives.
We actively recruit qualified personnel and are committed to
supporting continuing education for our professional staff. We
have internal training programs for routine testing procedures
to improve the skill level of our technicians and to improve the
overall capacity of our existing staff. We sponsor various
internship and certain other educational programs. These
programs serve to build awareness of our company with students,
who may seek employment with our company following graduation.
Medical
Technology
Our Medical Technology segment sells digital radiography and
ultrasound imaging equipment and related computer hardware,
software and services, including consulting services and
training, to the veterinary market. Our digital radiography and
ultrasound imaging equipment are used by veterinarians to
capture and view anatomical images to aid in the diagnosis and
treatment of a broad range of diseases and injuries in animals.
In addition, we have mobile imaging units that provide mobile
diagnostic ultrasound imaging services to veterinarians who do
not own their own ultrasound imaging equipment. Our Medical
Technology revenue accounted for 4%, 3% and 3% of consolidated
revenue in 2010, 2009 and 2008, respectively.
Products
and Services
We sell digital radiography imaging equipment, which is
comprised of a network of various components that we acquire
from third-party manufacturers and developers. A key component
is the amorphous silicon flat-panel x-ray detector, which we
acquire from Varian Medical Systems pursuant to a distribution
agreement entered into in February 2008, granting us worldwide
rights to incorporate these detectors into veterinary digital
imaging equipment for sale to the veterinary community. We also
acquire hardware from Canon, Inc. on a non-exclusive basis.
8
We sell General Electric ultrasound imaging equipment pursuant
to an agreement entered into with General Electric in July 2001
granting us exclusive rights to sell this equipment to members
and institutions in the North American veterinary community,
effective July 2011, we have exclusive rights to sell this
equipment only to members and institutions in the United States
veterinary community.
We license our proprietary software, TruDR. TruDR allows for the
capture of digital x-ray images and transmits those images to a
computer containing archiving and reviewing software. TruDR, or
similar software, is a required component for our digital
radiography imaging equipment to function. TruDR is not
applicable to ultrasound imaging equipment sales.
We also provide mobile imaging, consulting, education and
training services to our customers. In addition, we sell
extended service agreements to our customers that include
technical support, product updates for software and extended
warranty coverage for a period of up to five years. The products
included in our warranty programs are generally covered by the
original equipment manufacturer and we coordinate the warranty
support between our customer and the manufacturer.
Sales
and Marketing
Our sales agents market and sell our products and services to
veterinary hospitals and universities. Our sales agents receive
a base salary and commissions based on sales. We market our
products and services through direct mail, advertisements in
trade magazines, trade shows and direct sales calls to our
intended customers.
Systems
Animal
Hospital
We use an enterprise-wide management information system to
support our Animal Hospital operations. We decide whether or not
to place newly acquired animal hospitals on this network based
on a cost-benefit analysis. In addition, a majority of our
animal hospitals utilize consistent patient
accounting/point-of-sale software and we are able to track
performance of hospitals on a per-service, per-veterinarian and
per-client basis.
Laboratory
We use an enterprise-wide management information system to
support our veterinary laboratories. All of our financial data,
customer records and laboratory results are stored in computer
databases. Laboratory technicians and specialists are able to
electronically access test results from remote testing sites.
Our software gathers data in a data warehouse enabling us to
provide expedient results via fax or through our Internet online
resulting system.
Competition
The companion animal healthcare industry is highly competitive
and subject to continual change in the manner in which services
are delivered and providers are selected. We believe that the
primary factors influencing a customers selection of an
animal hospital are convenient location and hours, personal
recommendations, reasonable fees and quality of care. Our
primary competitors for our animal hospitals in most markets are
individual practitioners or small, regional multi-clinic
practices. In addition, some national companies in the pet care
industry, including the operators of super-stores, are
developing networks of animal hospitals in markets that include
our animal hospitals. We also compete with sellers of
pet-related products and diagnostic services delivered via the
internet.
Among veterinary diagnostic laboratories, we believe that
quality, price, specialist support and the time required to
deliver results are the major competitive factors. There are
many clinical laboratories that provide a broad range of
diagnostic testing services in the same markets serviced by us,
and we also face competition from several providers of
on-site
diagnostic equipment that allows veterinarians to perform
various testing. Our principal competitor in most geographic
locations in the United States is IDEXX Laboratories.
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The primary competitive factors in the medical imaging equipment
industry are quality, technical capability, breadth of product
line, distribution capabilities, price and the ability to
provide quality service and support. There are many companies
that manufacture and sell digital radiography and ultrasound
imaging equipment.
Government
Regulation
Certain states have laws that prohibit business corporations
from providing, or holding themselves out as providers of,
veterinary medical care. In these states we do not provide
veterinary services or own veterinary practices. We provide
management and other administrative services to veterinary
practices located in these states. At December 31, 2010, we
provided management services to 166 animal hospitals in
15 states under management agreements with the veterinary
practices. In one of these states, we operated a mobile imaging
service. Although we have structured our operations to comply
with our understanding of the veterinary medicine laws of each
state in which we operate, interpretive legal precedent and
regulatory guidance varies by state and is often times sparse
and not fully developed. A determination that we are in
violation of applicable restrictions on the practice of
veterinary medicine in any state in which we operate could have
a material adverse effect on our operations, particularly if we
were unable to restructure our operations to comply with the
requirements of that state.
In addition, all of the states in which we operate impose
various registration requirements. To fulfill these
requirements, we have registered each of our facilities with
appropriate governmental agencies and, where required, have
appointed a licensed veterinarian to act on behalf of each
facility. All veterinarians practicing in our animal hospitals
are required to maintain valid state licenses to practice.
Our acquisitions may be subject to pre-merger or post-merger
review by governmental authorities for anti-trust and other
legal compliance. Adverse regulatory action could negatively
affect our operations through the assessment of fines or
penalties against us or the possible requirement of divestiture
of one or more of our operations.
Employees
At December 31, 2010 we employed or managed on behalf of
the professional corporations to which we provide services
approximately 9,400 full-time-equivalent employees. At that
date, none of these employees were a party to a collective
bargaining agreement.
Availability
of Our Reports Filed with the Securities and Exchange Commission
(SEC)
We maintain a website with the address
http://investor.vcaantech.com.
We are not including the information contained on our website as
a part of, or incorporating it by reference into, this annual
report on
Form 10-K.
We make available free of charge through our website our annual
reports on
Form 10-K,
quarterly reports on
Form 10-Q
and current reports on
Form 8-K,
and amendments to these reports, as soon as reasonably
practicable after we electronically file that material with, or
furnish that material to, the SEC.
The SEC maintains an Internet site that contains reports, proxy
and information statements, and other information regarding
issuers that file electronically with the SEC. Copies of our
reports filed electronically with the SEC may be accessed on the
SECs website www.sec.gov. The public may also read
and copy any materials filed with the SEC at the SECs
Public Reference Room at 100 F Street NE, Washington,
DC 20549. Information on the operation of the Public Reference
Room may be obtained by calling the SEC at (800) SEC-0330.
Various sections of this annual report contain forward-looking
statements, all of which are based on current expectations and
could be affected by the uncertainties and risk factors
described below and throughout this annual report. Our actual
results may differ materially from these forward-looking
statements.
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The
current economic environment may continue to cause a decline in
our Animal Hospital same-store revenue growth and the rate of
our Laboratory internal revenue growth and have a material
adverse effect on our profitability.
The continued economic uncertainty has had, and may continue to
have, an adverse impact on our revenue and our profitability.
Consumer spending habits, including spending for pet healthcare,
are affected by, among other things, prevailing economic
conditions, levels of employment, salaries and wage rates,
consumer confidence and consumer perception of economic
conditions. Recently, these factors have caused consumer
spending to deteriorate significantly and may cause levels of
spending to remain depressed for the foreseeable future. These
factors may cause pet owners to elect to forgo expensive
treatment options or to defer treatment for their pets
altogether. We have experienced a decline in the frequency of
visits to our animal hospitals and the number of orders placed
in our animal hospitals. These factors have contributed to a
decline in our Animal Hospital same-store revenue growth and the
rate of our Laboratory internal revenue growth. While we
continue to employ cost control measures, our profit margins may
continue to decline until our businesses return to historical
growth rates.
In addition, the economic downturn may exacerbate the effect of
the risks discussed below, including the impact on our growth
strategy, changes in demand for our products and services, the
carrying value of our goodwill and other intangibles, our
ability to service our substantial indebtedness and sales of our
medical imaging equipment.
If we
are unable to effectively execute our growth strategy, we may
not achieve our desired economies of scale and our profitability
may decline.
Our success depends in part on our ability to increase our
revenue and operating income through a balanced program of
organic growth initiatives and selective acquisitions of
established animal hospitals, laboratories and related
businesses. If we cannot implement or effectively execute on
this strategy, our results of operations will be adversely
affected. Even if we effectively implement our growth strategy,
we may not achieve the economies of scale that we have
experienced in the past or that we anticipate occurring in the
future. We have not experienced same-store revenue growth in our
animal hospitals for the past eight quarters. Our Laboratory
growth has also been affected and became negative during certain
quarters of the three year period ending December 31, 2010.
Our Animal Hospital same-store revenue, adjusted for differences
in business days, has fluctuated between a decline of 3.2% and
growth of 5.8% for 2006 through 2010. Our Laboratory internal
revenue growth, adjusted for differences in billing days, has
fluctuated between 0% and 15.2% over the same years. Our
internal growth may continue to fluctuate and may be below our
historical rates. Any reduction in the rate of our internal
growth may cause our revenue and operating income to decrease.
Investors should not assume that our historical growth rates are
reliable indicators of results in future periods.
Changes
in the demand for our products and services could negatively
affect our operating results.
The frequency of visits to our animal hospitals has declined and
may continue to decline. We believe that the frequency of visits
is impacted by several trends in the industry, in addition to
the continuing financial crisis. Client visits may be negatively
impacted as a result of preventative care and better pet
nutrition. Demand for vaccinations will be impacted in the
future as protocols for vaccinations change. Our veterinarians
establish their own vaccine protocols. Some of our veterinarians
have changed their protocols and others may change their
protocols in light of recent
and/or
future literature. The demand for our products and services may
also decline as a result of the eradication or substantial
declines in the prevalence of certain diseases. Also, many
pet-related products traditionally sold at animal hospitals have
become more widely available in retail stores and other channels
of distribution, including the Internet, resulting in a decline
in demand for these products at our animal hospitals.
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Due to
the fixed cost nature of our business, fluctuations in our
revenue could adversely affect our gross profit, operating
income and margins.
A substantial portion of our expense, particularly rent and
personnel costs, are fixed and are based in part on expectations
of revenue. We may be unable to reduce spending in a timely
manner to compensate for any significant fluctuations in our
revenue. Accordingly, shortfalls in revenue may adversely affect
our gross profit, operating income and margins.
Any
failure in our information technology systems, disruption in our
transportation network or failure to receive supplies could
significantly increase testing turn-around time, reduce our
production capacity and otherwise disrupt our
operations.
Our Laboratory operations depend on the continued and
uninterrupted performance of our information technology systems
and transportation network, including overnight delivery
services provided by FedEx. Sustained system failures or
interruption in our transportation network could disrupt our
ability to process laboratory requisitions, perform testing,
provide test results in a timely manner
and/or bill
the appropriate party. We could lose customers and revenue as a
result of a system or transportation network failure. In
addition, any change in government regulation related to
transportation samples or specimens could also have an impact on
our business.
Our computer systems are vulnerable to damage or interruption
from a variety of sources, including telecommunications
failures, electricity brownouts or blackouts, malicious human
acts and natural disasters. Moreover, despite network security
measures, some of our servers are potentially vulnerable to
digital break-ins, computer viruses and similar disruptive
problems. Despite the precautions we have taken, unanticipated
problems affecting our systems could cause interruptions in our
information technology systems. Our insurance policies may not
adequately compensate us for any losses that may occur due to
any failures in our systems.
Our Laboratory operations depend on a limited number of
employees to upgrade and maintain its customized computer
systems. If we were to lose the services of some or all of these
employees, it may be time-consuming for new employees to become
familiar with our systems, and we may experience disruptions in
service during these periods.
Our operations depend, in some cases, on the ability of single
source suppliers or a limited number of suppliers, to deliver
products and supplies on a timely basis. Some of these suppliers
are smaller companies with limited capital resources and some of
the products that we purchase from these suppliers are
proprietary, and, therefore, cannot be readily or easily
replaced by alternative suppliers. We have in the past
experienced, and may in the future experience, shortages of or
difficulties in acquiring products
and/or
supplies in the quantities and of the quality needed. Shortages
in the availability of products
and/or
supplies for an extended period of time will disrupt our ability
to deliver products and provide services in a timely manner,
could result in the loss of customers, and could have a material
adverse impact on our results of operations.
Difficulties
integrating new acquisitions may impose increased costs, loss of
customers and a decline in operating margins and profitability
and other risks that we may not anticipate.
Our success depends in part on our ability to timely and
cost-effectively acquire, and integrate into our business,
additional animal hospitals, laboratories and related
businesses. In 2010, we acquired 50 animal hospitals, including
23 with the acquisition of Pet DRx. In 2009, we acquired 27
animal hospitals, two laboratories and Eklin. In 2008, we
acquired 51 animal hospitals and four laboratories. We expect to
continue our animal hospital acquisition program, and if
presented with favorable opportunities, we may acquire animal
hospital chains, laboratories or related businesses. Our
expansion into new territories and new business segments creates
the risk that we will be unsuccessful in the integration of the
acquired businesses that are new to our operations. Any
difficulties in the integration process could result in
increased expense, loss of customers and a decline in operating
margins and profitability. In some cases, we have experienced
delays and increased costs in integrating acquired businesses,
particularly where we acquire a large number of animal hospitals
in a single region at or about the same time. We also could
experience delays in converting the systems of acquired
businesses into our systems, which could result in increased
staff and payroll expense to
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collect our results as well as delays in reporting our results,
both for a particular region and on a consolidated basis.
Further, the legal and business environment prevalent in new
territories and with respect to new businesses may pose risks
that we do not anticipate and adversely impact our ability to
integrate newly acquired operations. In addition, our field
management may spend a greater amount of time integrating these
new businesses and less time managing our existing businesses.
During these periods, there may be less attention directed to
marketing efforts or staffing issues, which could affect our
revenue and expense. For all of these reasons, our historical
success in integrating acquired businesses is not a reliable
indicator of our ability to do so in the future.
The
significant competition in the companion animal healthcare
industry could result in a decrease in our prices, an increase
in our acquisition costs, a loss of market share and could
materially affect our revenue and profitability.
The companion animal healthcare industry is highly competitive
with few barriers to entry. To compete successfully, we may be
required to reduce prices, increase our acquisition and
operating costs or take other measures that could have an
adverse effect on our financial condition, results of
operations, margins and cash flow. In addition, if we are unable
to compete successfully, we may lose market share.
A significant component of our annual growth strategy includes
the acquisition of independent animal hospitals. The competition
for animal hospital acquisitions from small national and
regional multi-clinic companies may cause us to increase the
amount we pay to acquire additional animal hospitals and may
result in fewer acquisitions than anticipated by our growth
strategy. If we are unable to acquire a requisite number of
animal hospitals annually or if our acquisition costs increase,
we may be unable to effectively implement our growth strategy
and realize anticipated economies of scale.
Some national companies in the pet care industry, including the
operators of super-stores, are developing networks of animal
hospitals in markets that include our animal hospitals; this may
cause us to reduce prices to remain competitive. Reducing prices
may have an adverse effect on our Animal Hospital revenue,
alternatively not reducing prices may cause us to lose market
share.
We compete with clinical laboratory companies in the same
markets we service. These companies have acquired additional
laboratories in the markets in which we operate and may continue
their expansion, and aggressively bundle their
products and services to compete with us. Increased competition
may adversely affect our Laboratory revenue and margins. Several
other national companies develop and sell
on-site
diagnostic equipment that allows veterinarians to perform their
own laboratory tests. Growth of the
on-site
diagnostic testing market may have an adverse effect on our
Laboratory revenue.
Our Medical Technology division is a leader in the market for
medical imaging equipment in the animal healthcare industry. Our
primary competitors are companies that are much larger than us
and have substantially greater capital, manufacturing, marketing
and research and development resources than we do, including
companies such as Siemens Medical Systems, Philips Medical
Systems and Canon Medical Systems. The success of our Medical
Technology division, in part, is due to its focus on the
veterinary market, which allows it to differentiate its products
and services to meet the unique needs of this market. If this
market receives more focused attention from these larger
competitors, we may find it difficult to compete and as a result
our revenues and operating margins from this segment could
decline.
The
carrying value of our goodwill and other intangible assets could
be subject to an impairment
write-down.
At December 31, 2010, our consolidated balance sheet
reflected $1.1 billion of goodwill and $47.0 million
of other intangible assets, constituting a substantial portion
of our total assets of $1.8 billion at that date. We expect
that the aggregate amount of goodwill and other intangible
assets on our consolidated balance sheet will increase as a
result of future acquisitions. We continually evaluate whether
events or circumstances have occurred that suggest that the fair
value of our other intangible assets or each of our reporting
units are below their respective carrying values. The
determination that the fair value of our intangible assets or
one of our reporting units is less than its carrying value would
result in an impairment write-down. The impairment
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write-down would be reflected as expense and could have a
material adverse effect on our results of operations during the
period in which we recognize the expense.
Our estimated fair values are calculated in accordance with
generally accepted accounting principles related to fair value
and utilize valuation methods consisting primarily of discounted
cash flow techniques, and market comparables, where applicable.
These valuation methods involve the use of significant
assumptions and estimates such as forecasted growth rates,
valuation multiples, the weighted-average cost of capital, and
risk premiums, which are based upon the best available market
information and are consistent with our long-term strategic
plans. We provide no assurance that forecasted growth rates,
valuation multiples, and discount rates will not deteriorate. We
will continue to analyze changes to these assumptions in future
periods.
We
require a significant amount of cash to service our debt and
expand our business as planned.
We have, and will continue to have, a substantial amount of
debt. Our substantial amount of debt requires us to dedicate a
significant portion of our cash flow from operations to service
interest and principal payments on our debt, thereby reducing
the funds available for use for working capital, capital
expenditures, acquisitions and general corporate purposes.
Our
failure to satisfy covenants in our debt instruments will cause
a default under those instruments.
In addition to imposing restrictions on our business and
operations, our debt instruments include a number of covenants
relating to financial ratios and tests. Our ability to comply
with these covenants may be affected by events beyond our
control, including prevailing economic, financial and industry
conditions. The breach of any of these covenants would result in
a default under these instruments. An event of default would
permit our lenders and other debtholders to declare all amounts
borrowed from them to be due and payable, together with accrued
and unpaid interest. If we are unable to repay debt to our
senior lenders, these lenders and other debtholders could
proceed against our assets.
Our
debt instruments may adversely affect our ability to run our
business.
Our substantial amount of debt, as well as the guarantees of our
subsidiaries and the security interests in our assets and those
of our subsidiaries, could impair our ability to operate our
business effectively and may limit our ability to take advantage
of business opportunities. For example, our senior credit
facility may:
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limit our ability to borrow additional funds or to obtain other
financing in the future for working capital, capital
expenditures, acquisitions, investments and general corporate
purposes;
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limit our ability to dispose of our assets, create liens on our
assets or to extend credit;
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make us more vulnerable to economic downturns and reduce our
flexibility in responding to changing business and economic
conditions;
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limit our flexibility in planning for, or reacting to, changes
in our business or industry;
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place us at a competitive disadvantage to our competitors with
less debt; and
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restrict our ability to pay dividends, repurchase or redeem our
capital stock or debt, or merge or consolidate with another
entity.
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The terms of our senior credit facility allow us, under
specified conditions, to incur further indebtedness, which would
heighten the foregoing risks. If compliance with our debt
obligations materially hinders our ability to operate our
business and adapt to changing industry conditions, we may lose
market share, our revenue may decline and our operating results
may suffer.
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Any
failure by the manufacturers of our medical imaging equipment,
failure in our ability to develop functional and cost-effective
software for our products, or any product malfunctions could
result in a decline in customer purchases and a reduction in our
revenue and profitability.
We do not develop or manufacture the medical imaging equipment
that we distribute, except for the software component of our
digital radiography machines. Our business in this segment in
large part is dependent upon distribution agreements with the
manufacturers of the equipment, the ability of those
manufacturers to produce desirable equipment and to keep pace
with advances in technology, our ability to develop
cost-effective, functional, and user-friendly software for the
digital radiography machines, and the overall rate of new
development within the industry. If the distribution agreements
terminate or are not renewed, if the manufacturers breach their
covenants under these agreements, if the equipment manufactured
by these manufacturers or our software becomes less competitive
or if there is a general decrease in the rate of new development
within the industry, demand for our products and services would
decrease.
Manufacturing flaws, component failures, design defects, or
inadequate disclosure of product-related information could
result in an unsafe condition or injury. These problems could
result in product liability claims and lawsuits alleging that
our products have resulted or could result in an unsafe
condition or injury. In addition, an adverse event involving one
of our products could result in reduced market acceptance and
demand for all of our products, and could harm our reputation
and our ability to market our products in the future. Any of the
foregoing problems could disrupt our business and have a
material adverse effect on our business, results of operations,
financial condition and cash flows.
Our
use of self-insurance, self-insured retention and
high-deductible insurance programs to cover certain claims for
losses suffered and costs or expenses incurred could negatively
impact our business upon the occurrence of an uninsured and/or
significant event.
We self-insure and use high retention or high-deductible
insurance programs with regard to property risks, general,
professional and employment practice liabilities, health
benefits, and workers compensation. In the event that the
frequency of losses we experience increases unexpectedly, the
aggregate of those losses could materially increase our
liability and adversely affect our financial condition,
liquidity, cash flows and results of operations. In addition, we
have made certain judgments as to the limits on our existing
insurance coverage that we believe are in line with industry
standards, as well as in light of economic and availability
considerations. If we experience losses above these limits it
could materially adversely affect our financial and business
condition.
We may
experience difficulties hiring skilled veterinarians due to
shortages that could disrupt our business.
If we are unable to retain an adequate number of skilled
veterinarians, we may lose customers, our revenue may decline
and we may need to sell or close animal hospitals. At
December 31, 2010, there were 28 veterinary schools in the
country accredited by the American Veterinary Medical
Association. These schools graduate approximately 2,500
veterinarians per year. From time to time we experience
shortages of skilled veterinarians in some regional markets in
which we operate animal hospitals. During shortages in these
regions, we may be unable to hire enough qualified veterinarians
to adequately staff our animal hospitals, in which event we may
lose market share and our revenue and profitability may decline.
If we
fail to comply with governmental regulations applicable to our
business, various governmental agencies may impose fines,
institute litigation or preclude us from operating in certain
states.
The laws of many states prohibit business corporations from
providing, or holding themselves out as providers of, veterinary
medical care. At December 31, 2010, we operated 166 animal
hospitals in 15 states with these laws, including 49
practices in Texas, 33 in Washington and 24 in New York. In
addition, our mobile imaging service also operates in one state
with these laws. We may experience difficulty in expanding our
operations into other states with similar laws. Although we have
structured our operations to comply with our understanding of
the veterinary medicine laws of each state in which we operate,
interpretive legal
15
precedent and regulatory guidance varies by state and is often
times sparse and not fully developed. A determination that we
are in violation of applicable restrictions on the practice of
veterinary medicine in any state in which we operate could have
a material adverse effect on us, particularly if we are unable
to restructure our operations to comply with the requirements of
that state.
All of the states in which we operate impose various
registration requirements. To fulfill these requirements, we
have registered each of our facilities with appropriate
governmental agencies and, where required, have appointed a
licensed veterinarian to act on behalf of each facility. All
veterinarians practicing in our animal hospitals are required to
maintain valid state licenses to practice.
|
|
ITEM 1B.
|
UNRESOLVED
STAFF COMMENTS
|
None.
Our corporate headquarters and principal executive offices are
located in Los Angeles, California, in approximately
50,000 square feet of leased space. At February 28,
2011, we leased or owned facilities at 624 other locations that
house our animal hospitals, laboratories and medical technology
group. We own 137 facilities and the remainder are leased. We
believe that our real property facilities are adequate for our
current needs.
|
|
ITEM 3.
|
LEGAL
PROCEEDINGS
|
We are currently not subject to any legal proceedings other than
ordinarily routine litigation incidental to the conduct of our
business.
PART II
|
|
ITEM 5.
|
MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Our common stock trades on the NASDAQ Global Select Market under
the symbol WOOF. The following table sets forth the
range of high and low sales prices per share for our common
stock as quoted on the NASDAQ Global Select Market for the
periods indicated.
|
|
|
|
|
|
|
|
|
|
|
High
|
|
Low
|
|
Fiscal 2010 by Quarter
|
|
|
|
|
|
|
|
|
Fourth
|
|
$
|
24.04
|
|
|
$
|
19.88
|
|
Third
|
|
$
|
26.03
|
|
|
$
|
19.12
|
|
Second
|
|
$
|
29.28
|
|
|
$
|
24.63
|
|
First
|
|
$
|
28.09
|
|
|
$
|
23.52
|
|
Fiscal 2009 by Quarter
|
|
|
|
|
|
|
|
|
Fourth
|
|
$
|
27.99
|
|
|
$
|
22.41
|
|
Third
|
|
$
|
27.07
|
|
|
$
|
24.01
|
|
Second
|
|
$
|
27.25
|
|
|
$
|
21.79
|
|
First
|
|
$
|
23.03
|
|
|
$
|
17.42
|
|
At February 18, 2011, there were 231 holders of record of
our common stock.
16
The following graph sets forth the percentage change in
cumulative total stockholder return on our common stock from
December 31, 2005 to December 31, 2010. These periods
are compared with the cumulative returns of the NASDAQ Stock
Market (U.S. Companies) Index and the Russell 2000 Index.
The comparison assumes $100 was invested on December 31,
2005 in our common stock and in each of the foregoing indices.
The stock price performance on the following graph is not
necessarily indicative of future stock price performance.
COMPARISON
OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among VCA Antech, Inc., The NASDAQ Composite Index
And The Russell 2000 Index
*$100 invested on 12/31/05 in stock or index, including
reinvestment of dividends.
Fiscal year ending December 31.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/05
|
|
|
12/06
|
|
|
12/07
|
|
|
12/08
|
|
|
12/09
|
|
|
12/10
|
|
|
VCA Antech, Inc.
|
|
|
100.00
|
|
|
|
114.15
|
|
|
|
156.84
|
|
|
|
70.50
|
|
|
|
88.37
|
|
|
|
82.59
|
|
NASDAQ Composite
|
|
|
100.00
|
|
|
|
111.74
|
|
|
|
124.67
|
|
|
|
73.77
|
|
|
|
107.12
|
|
|
|
125.93
|
|
Russell 2000
|
|
|
100.00
|
|
|
|
118.37
|
|
|
|
116.51
|
|
|
|
77.15
|
|
|
|
98.11
|
|
|
|
124.46
|
|
Dividends
We have not paid cash dividends on our common stock, and we do
not anticipate paying cash dividends in the foreseeable future.
In addition, our senior credit facility places limitations on
our ability to pay cash dividends in respect of our common
stock. Specifically, our senior credit facility dated
August 19, 2010 prohibits us from declaring, ordering,
paying or setting apart any sum for any dividends or other
distributions on account of any shares of any class of stock,
other than dividends payable solely in shares of stock to
holders of such class of stock. Any future determination as to
the payment of dividends on our common stock will be restricted
by these limitations, will be at the discretion of our Board of
Directors and will depend on our results of operations,
financial condition, capital requirements and other factors
deemed relevant by the Board of Directors, including the General
Corporation Law of the State of Delaware, which provides that
dividends are only payable out of surplus or current net profits.
Transactions
in Our Equity Securities
For the period covered by this report, we have not engaged in
any sales of our unregistered equity securities that were not
disclosed in a quarterly report on
Form 10-Q
or a current report on
Form 8-K,
and we have not repurchased any of our equity securities in the
fourth quarter.
17
|
|
ITEM 6.
|
SELECTED
FINANCIAL DATA
|
The following table provides our selected consolidated financial
data as of and for each of the years in the five- year period
ended December 31, 2010. The income statement and cash flow
data and the other data for each of the three years ended
December 31, 2010, and the balance sheet data as of
December 31, 2010 and 2009 has been derived from our
audited financial statements included elsewhere in this
Form 10-K.
The other periods presented were derived from our audited
financial statements that are not included in this
Form 10-K.
The selected financial data presented below is not necessarily
indicative of results of future operations and should be read in
conjunction with the Managements Discussion and
Analysis of Financial Condition and Results of Operations
section and our consolidated financial statements and
related notes included elsewhere in this
10-K.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009(8)
|
|
|
2008(8)
|
|
|
2007(8)
|
|
|
2006(8)
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Income Statement Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Animal Hospital revenue(1)(6)
|
|
$
|
1,052,462
|
|
|
$
|
994,215
|
|
|
$
|
959,395
|
|
|
$
|
844,344
|
|
|
$
|
711,997
|
|
Laboratory revenue
|
|
|
310,654
|
|
|
|
310,057
|
|
|
|
306,891
|
|
|
|
297,690
|
|
|
|
259,321
|
|
Medical Technology revenue(4)
|
|
|
64,013
|
|
|
|
48,557
|
|
|
|
49,238
|
|
|
|
44,828
|
|
|
|
38,329
|
|
Intercompany revenue
|
|
|
(45,661
|
)
|
|
|
(38,322
|
)
|
|
|
(38,054
|
)
|
|
|
(30,717
|
)
|
|
|
(26,334
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
1,381,468
|
|
|
|
1,314,507
|
|
|
|
1,277,470
|
|
|
|
1,156,145
|
|
|
|
983,313
|
|
Direct costs
|
|
|
1,050,304
|
|
|
|
973,275
|
|
|
|
934,996
|
|
|
|
835,462
|
|
|
|
713,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
331,164
|
|
|
|
341,232
|
|
|
|
342,474
|
|
|
|
320,683
|
|
|
|
269,871
|
|
Selling, general and administrative expense(2)
|
|
|
123,541
|
|
|
|
95,669
|
|
|
|
90,564
|
|
|
|
86,139
|
|
|
|
77,325
|
|
Net loss on sale of assets(5)
|
|
|
374
|
|
|
|
4,035
|
|
|
|
234
|
|
|
|
1,323
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income(2)(5)
|
|
|
207,249
|
|
|
|
241,528
|
|
|
|
251,676
|
|
|
|
233,221
|
|
|
|
192,527
|
|
Interest expense, net
|
|
|
13,630
|
|
|
|
21,466
|
|
|
|
28,559
|
|
|
|
29,503
|
|
|
|
24,240
|
|
Debt retirement costs
|
|
|
2,131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (income) expense
|
|
|
(772
|
)
|
|
|
(104
|
)
|
|
|
(212
|
)
|
|
|
220
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
192,260
|
|
|
|
220,166
|
|
|
|
223,329
|
|
|
|
203,498
|
|
|
|
168,279
|
|
Provision for income taxes(3)(7)
|
|
|
78,102
|
|
|
|
84,580
|
|
|
|
86,219
|
|
|
|
78,636
|
|
|
|
59,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
114,158
|
|
|
|
135,586
|
|
|
|
137,110
|
|
|
|
124,862
|
|
|
|
108,629
|
|
Net income attributable to noncontrolling interests
|
|
|
3,915
|
|
|
|
4,158
|
|
|
|
4,126
|
|
|
|
3,850
|
|
|
|
3,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to VCA Antech, Inc.
|
|
$
|
110,243
|
|
|
$
|
131,428
|
|
|
$
|
132,984
|
|
|
$
|
121,012
|
|
|
$
|
105,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
1.28
|
|
|
$
|
1.54
|
|
|
$
|
1.57
|
|
|
$
|
1.44
|
|
|
$
|
1.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
1.27
|
|
|
$
|
1.53
|
|
|
$
|
1.55
|
|
|
$
|
1.41
|
|
|
$
|
1.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding for basic earnings per share
|
|
|
86,049
|
|
|
|
85,077
|
|
|
|
84,455
|
|
|
|
83,893
|
|
|
|
83,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding for diluted earnings per
share
|
|
|
87,051
|
|
|
|
86,097
|
|
|
|
85,700
|
|
|
|
85,716
|
|
|
|
84,882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2010
|
|
2009(8)
|
|
2008(8)
|
|
2007(8)
|
|
2006(8)
|
|
|
(In thousands, except percentages)
|
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated gross margin
|
|
|
24.0
|
%
|
|
|
26.0
|
%
|
|
|
26.8
|
%
|
|
|
27.7
|
%
|
|
|
27.4
|
%
|
Animal Hospital gross margin(1)(6)
|
|
|
16.4
|
%
|
|
|
18.5
|
%
|
|
|
19.2
|
%
|
|
|
19.3
|
%
|
|
|
19.4
|
%
|
Laboratory gross margin
|
|
|
45.8
|
%
|
|
|
46.3
|
%
|
|
|
46.6
|
%
|
|
|
48.1
|
%
|
|
|
46.0
|
%
|
Medical Technology gross margin(4)
|
|
|
30.1
|
%
|
|
|
32.6
|
%
|
|
|
35.6
|
%
|
|
|
33.6
|
%
|
|
|
35.6
|
%
|
Consolidated operating margin(2)(5)
|
|
|
15.1
|
%
|
|
|
18.4
|
%
|
|
|
19.7
|
%
|
|
|
20.2
|
%
|
|
|
19.6
|
%
|
Animal Hospital operating margin(1)(6)
|
|
|
14.1
|
%
|
|
|
16.3
|
%
|
|
|
16.9
|
%
|
|
|
16.6
|
%
|
|
|
16.6
|
%
|
Laboratory operating margin
|
|
|
37.3
|
%
|
|
|
38.9
|
%
|
|
|
39.9
|
%
|
|
|
41.5
|
%
|
|
|
39.3
|
%
|
Medical Technology operating margin(4)
|
|
|
7.3
|
%
|
|
|
6.1
|
%
|
|
|
10.8
|
%
|
|
|
9.3
|
%
|
|
|
9.3
|
%
|
Cash Flow Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
168,073
|
|
|
$
|
183,471
|
|
|
$
|
197,308
|
|
|
$
|
173,764
|
|
|
$
|
130,404
|
|
Net cash used in investing activities
|
|
$
|
(151,006
|
)
|
|
$
|
(130,770
|
)
|
|
$
|
(212,711
|
)
|
|
$
|
(271,305
|
)
|
|
$
|
(87,732
|
)
|
Net cash (used in) provided by financing activities
|
|
$
|
(65,310
|
)
|
|
$
|
3,477
|
|
|
$
|
(6,402
|
)
|
|
$
|
163,303
|
|
|
$
|
(56,056
|
)
|
Capital expenditures
|
|
$
|
(61,951
|
)
|
|
$
|
(50,801
|
)
|
|
$
|
(55,045
|
)
|
|
$
|
(48,714
|
)
|
|
$
|
(35,316
|
)
|
Balance Sheet Data (at period end):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
97,126
|
|
|
$
|
145,181
|
|
|
$
|
88,959
|
|
|
$
|
110,866
|
|
|
$
|
45,104
|
|
Goodwill
|
|
$
|
1,092,480
|
|
|
$
|
985,674
|
|
|
$
|
922,057
|
|
|
$
|
821,967
|
|
|
$
|
625,748
|
|
Total assets
|
|
$
|
1,776,422
|
|
|
$
|
1,627,404
|
|
|
$
|
1,449,038
|
|
|
$
|
1,286,711
|
|
|
$
|
971,957
|
|
Long-term debt
|
|
$
|
527,036
|
|
|
$
|
545,055
|
|
|
$
|
552,631
|
|
|
$
|
560,180
|
|
|
$
|
390,715
|
|
Total stockholders equity
|
|
$
|
998,924
|
|
|
$
|
875,047
|
|
|
$
|
710,989
|
|
|
$
|
568,384
|
|
|
$
|
430,305
|
|
|
|
|
(1) |
|
On July 1, 2010, we acquired a 70.4% interest in Pet DRx
Corporation which operated 23 animal hospitals as of the
acquisition date. On November 1, 2010, we acquired the
remaining 29.6% interest. |
|
(2) |
|
In 2010, our SG&A, operating income and operating margin
were unfavorably impacted by $14.5 million in consulting
and SERP expenses to be paid in accordance with consulting and
SERP agreements entered into on June 30, 2010. |
|
(3) |
|
The 2010 provision for income taxes includes the recognition of
$5.4 million, or $3.5 million net of tax, related to
additional state tax payments required as a result of a tax
settlement reached. |
|
(4) |
|
On July 1, 2009, we acquired Eklin, a supplier of digital
radiography equipment to the veterinary industry. |
|
(5) |
|
In 2009, our operating margin was unfavorably impacted by a
$3.3 million non-cash charge related to the write-off of an
internal-use software project. The $3.3 million is net of
$1.9 million in cash recovered for certain costs incurred
on this project. The write-off impacted our 2009 operating
margin by 0.3%. |
|
(6) |
|
On June 1, 2007, we acquired Healthy Pet, which operated 44
animal hospitals as of the acquisition date. |
|
(7) |
|
The 2006 provision for income taxes includes recognition of a
$6.8 million tax benefit due to the outcome of an income
tax audit that resulted in a reduction in our estimated tax
liabilities. |
|
(8) |
|
Certain prior year amounts have been reclassified to reflect the
transfer of certain business operations to the Laboratory
segment from the Medical Technology segment. The
reclassifications did not have a material impact on either of
our segments. |
19
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
The following discussion should be read in conjunction with
our consolidated financial statements provided under
Part II, Item 8 of this annual report on
Form 10-K.
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, seek,
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 result in these
forward-looking statements in being different than reflected in
this report are described throughout this annual report and
particularly in Risk Factors Part I,
Item 1A of this annual report on
Form 10-K.
The forward-looking information set forth in this annual
report on
Form 10-K
is as of February 28, 2011, and we undertake no duty to
update this information. Shareholders and prospective investors
can find information filed with the SEC after February 28,
2011, at our website at
http://investor.vcaantech.com
or at the SECs website at www.sec.gov.
Overview
We are a leading national animal healthcare company. We provide
veterinary services and diagnostic testing services to support
veterinary care and we sell diagnostic imaging equipment and
other medical technology products and related services to
veterinarians. 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 December 31, 2010, 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 December 31, 2010,
our laboratory network consisted of 50 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, heartworms and ticks, and the number of
daylight hours.
Our revenue has been adversely impacted by the current economic
recession. 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.
20
Executive
Overview
The continued economic uncertainty has had, and may continue to
have, an adverse impact on our revenue and our profitability.
Consumer spending habits, including spending for pet healthcare,
are affected by, among other things, prevailing economic
conditions, levels of employment, salaries and wage rates,
consumer confidence and consumer perception of economic
conditions. Beginning in 2007, these factors have caused
consumer spending to deteriorate significantly and may continue
to cause levels of spending to remain depressed for the
foreseeable future. These factors may cause pet owners to elect
to defer expensive treatment options or to forgo treatment for
their pets altogether. During the latter part of 2008 and
continuing through 2010, we experienced a decline in the number
of visits to our animal hospitals and the number of orders
placed. In addition, we experienced a decline during the current
year in the number of our Laboratory requisitions. Competition
in our markets has put downward pressure on the prices we charge
for our services. These factors have contributed to a decline in
our Animal Hospital same-store revenue growth and a slowing of
the rate of our Laboratory internal revenue growth.
During 2010, the decline in our Animal Hospital same-store
revenue growth and the slowing of the rate of our Laboratory
internal revenue growth contributed to declining profit margins
and net income.
We believe that our ability to maintain or increase margins in
2011 will be dependent on organic revenue growth rates. We plan
to continue our growth strategy of acquiring individual animal
hospitals and maintain our strong emphasis on expense
management. However, our ability to return to our historical
margins will be dependent on increases in same-store revenue
growth in our animal hospitals and internal revenue growth in
our laboratories.
Refinancing
Transactions
On August 19, 2010 we refinanced our senior credit
facility. The new senior credit facility provides for
$500 million of senior term notes and a $100 million
revolving credit facility. Both the senior term notes and the
revolving credit facility are priced at LIBOR plus
225 basis points, a 75 basis point increase from our
previous credit facility, see Note 5, Long-Term
Obligations, in our consolidated financial statements of
this annual report on
Form 10-K
for a more detailed discussion of applicable interest rates on
our new debt. In conjunction with these refinancing
transactions, we incurred $9.4 million of costs of which
approximately $2.1 million, or $1.3 million after tax
were recognized as part of income from continuing operations for
the year ended December 31, 2010 and the remaining
$7.3 million were capitalized as deferred financing costs
which will be amortized over the term of the credit facility.
Included in the $2.1 million of costs included in income
from continuing operations was approximately $192,000 of
previously deferred financing costs that were written off as
part of the transaction.
Acquisitions
Our annual growth strategy includes the acquisition of
independent animal hospitals. In addition, we also evaluate the
acquisition of animal hospital chains, laboratories or related
businesses if favorable opportunities are presented. In 2010 we
acquired 27 independent animal hospitals with annual revenue of
$72.0 million and
21
a chain of 23 animal hospitals with annual revenue of
$58.4 million. The following table summarizes the changes
in the number of facilities operated by our Animal Hospital and
Laboratory segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Animal hospitals:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
|
489
|
|
|
|
471
|
|
|
|
438
|
|
Acquisitions, excluding Pet DRx in 2010
|
|
|
27
|
|
|
|
27
|
|
|
|
51
|
|
Pet DRx
|
|
|
23
|
|
|
|
|
|
|
|
|
|
Acquisitions relocated into our existing animal hospitals
|
|
|
(2
|
)
|
|
|
(5
|
)
|
|
|
(13
|
)
|
New facilities
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Sold, closed or merged
|
|
|
(9
|
)
|
|
|
(4
|
)
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period
|
|
|
528
|
|
|
|
489
|
|
|
|
471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Laboratories:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
|
47
|
|
|
|
44
|
|
|
|
36
|
|
Acquisitions
|
|
|
|
|
|
|
2
|
|
|
|
4
|
|
Acquisitions relocated into our existing laboratories
|
|
|
|
|
|
|
(2
|
)
|
|
|
(1
|
)
|
New facilities
|
|
|
4
|
|
|
|
3
|
|
|
|
5
|
|
Closed or merged
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period
|
|
|
50
|
|
|
|
47
|
|
|
|
44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Animal
Hospital and Laboratory Acquisitions, excluding Pet
DRx
The following table summarizes the aggregate consideration,
including acquisition costs, paid by us for our acquired animal
hospitals and laboratories, excluding Pet DRx, and the
allocation of the purchase price (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Consideration:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash(1)
|
|
$
|
69,456
|
|
|
$
|
56,806
|
|
|
$
|
123,129
|
|
Non-cash note conversion to equity interest in subsidiary
|
|
|
|
|
|
|
5,700
|
|
|
|
|
|
Contingent consideration
|
|
|
2,857
|
|
|
|
712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of total consideration transferred
|
|
$
|
72,313
|
|
|
$
|
63,218
|
|
|
$
|
123,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocation of the Purchase Price:
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible assets
|
|
$
|
3,592
|
|
|
$
|
8,625
|
|
|
$
|
4,954
|
|
Identifiable intangible assets
|
|
|
9,510
|
|
|
|
9,408
|
|
|
|
20,447
|
|
Goodwill(2)
|
|
|
60,839
|
|
|
|
51,171
|
|
|
|
104,411
|
|
Notes payable and other liabilities assumed
|
|
|
(1,628
|
)
|
|
|
(5,986
|
)
|
|
|
(6,683
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
72,313
|
|
|
$
|
63,218
|
|
|
$
|
123,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
See the Cash Flows from Investing Activities section in
the Liquidity and Capital Resources discussion for
reconciliation of cash paid for acquisitions per this schedule
to the consolidated statements of cash flows. |
|
(2) |
|
We expect that $58.2 million, $33.6 million and
$81.2 million of the goodwill recognized in 2010, 2009 and
2008, respectively, will be fully deductible for income tax
purposes. |
22
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 $9.3 million, $4.9 million
and $17.6 million in 2010, 2009 and 2008, respectively.
Pet
DRx Acquisition
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
on November 1, 2010. The aggregate purchase price in both
steps was $41.3 million. Our consolidated financial
statements reflect the operating results of Pet DRx since
July 1, 2010.
The following table summarizes the purchase price and the
allocation of the purchase 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
|
|
$
|
17,766
|
|
Identifiable intangible assets
|
|
|
3,074
|
|
Goodwill(1)
|
|
|
44,962
|
|
Other liabilities assumed
|
|
|
(27,850
|
)
|
|
|
|
|
|
Total
|
|
$
|
37,952
|
|
|
|
|
|
|
Acquisition-related costs (included in corporate selling,
general and administrative expense in our income statement for
the year ended December 31, 2010)
|
|
$
|
3,567
|
|
|
|
|
|
|
|
|
|
(1) |
|
We expect that $6.4 million of goodwill will be fully
deductible for income tax purposes, of which $6.3 million
remains as of December 31, 2010. |
The pro forma impacts on revenue and earnings have not been
disclosed for the current or comparable prior periods, as the
amounts were immaterial to the financial statements as a whole.
Eklin
Medical Systems, Inc. Acquisition
On July 1, 2009, we acquired Eklin, a leading seller of
digital radiography and ultrasound systems in the veterinary
market. We acquired Eklin for a purchase price of
$12.5 million, net of cash acquired of $1.0 million.
The following table summarizes the purchase price and allocation
of the purchase price (in thousands):
|
|
|
|
|
Consideration:
|
|
|
|
|
Cash(1)
|
|
$
|
12,504
|
|
|
|
|
|
|
Fair value of total consideration transferred
|
|
$
|
12,504
|
|
|
|
|
|
|
Allocation of the Purchase Price:
|
|
|
|
|
Tangible assets
|
|
$
|
6,830
|
|
Identifiable intangible assets
|
|
|
7,351
|
|
Goodwill(2)
|
|
|
10,875
|
|
Other liabilities assumed
|
|
|
(12,552
|
)
|
|
|
|
|
|
Total
|
|
$
|
12,504
|
|
|
|
|
|
|
23
|
|
|
(1) |
|
See the Cash Flows from Investing Activities section in
the Liquidity and Capital Resources discussion for a
reconciliation of cash paid for acquisitions per this schedule
to the consolidated statements of cash flows. |
|
(2) |
|
We expect that $3.4 million of the goodwill recorded for
this acquisition as of December 31, 2010 will be fully
deductible for income tax purposes, of which $2.6 million
remains as of December 31, 2010. |
In addition we incurred $537,000 in transaction costs, which
were expensed in 2009 in accordance with the FASBs revised
accounting guidance on business combinations, effective
January 1, 2009.
Eklin has been combined with STI and is reported within our
Medical Technology segment.
The pro forma impacts on revenue and earnings have not been
disclosed for the current or comparable prior periods, as the
amounts were immaterial to the financial statements as a whole.
Critical
Accounting Policies and Estimates
We believe that the application of the following accounting
policies, which are important to our financial position and
results of operations, require significant judgments and
estimates on the part of management. For a summary of all our
accounting policies, including the accounting policies discussed
below, see Note 2, Summary of Significant Accounting
Policies, in our consolidated financial statements of this
annual report on
Form 10-K.
Revenue
Animal
Hospital and Laboratory Revenue
We recognize revenue when persuasive evidence of a sales
arrangement exists, delivery of goods has occurred or services
have been rendered, the sales price or fee is fixed or
determinable and collectability is reasonably assured.
Medical
Technology Revenue
Our Medical Technology segment generates a majority of its
revenue from the sale of digital radiography and ultrasound
imaging equipment. We also generate revenue from:
(i) licensing software; (ii) providing technical
support and product updates on a
when-and-if
available basis related to our software, otherwise known as
maintenance; (iii) providing professional services related
to our equipment and software, including installations,
on-site
training, education services and extended warranty programs; and
(iv) providing mobile imaging services. We frequently sell
equipment and license our software in multiple element
arrangements in which the customer may choose a combination of
our products and services.
The accounting for the sale of equipment and the sale of
software licenses and related items is substantially governed by
the requirements of the FASBs general revenue recognition
rules. The determination of the amount of software license,
maintenance and professional service revenue to be recognized in
each accounting period requires us to exercise judgment and use
estimates. In determining whether or not to recognize revenue,
we evaluate each of these criteria:
|
|
|
|
|
Evidence of an arrangement: We consider
a non-cancelable agreement signed by the customer and us to be
evidence of an arrangement.
|
|
|
|
Delivery: We consider delivery to have
occurred when the ultrasound imaging equipment is delivered. We
consider delivery to have occurred when the digital radiography
imaging equipment, including software, is delivered or accepted
by the customer if installation is required. We consider
delivery to have occurred with respect to professional services
when those services are provided or on a straight-line basis
over the service contract term, based on the nature of the
service or the terms of the contract.
|
|
|
|
Fixed or determinable fee: We assess
whether fees are fixed or determinable at the time of sale and
recognize revenue if all other revenue recognition requirements
are met. We generally consider
|
24
|
|
|
|
|
payments that are due within six months to be fixed or
determinable based upon our successful collection history. We
only consider fees to be fixed or determinable if they are not
subject to refund or adjustment.
|
|
|
|
|
|
Collection is deemed reasonably
assured: We conduct a credit review for all
significant transactions at the time of the arrangement to
determine the credit worthiness of the customer. Collection is
deemed probable if we expect that the customer will be able to
pay amounts under the arrangement as payments become due. If we
determine that collection is not probable, we defer the revenue
and recognize the revenue upon cash collection.
|
Digital
Radiography Imaging Equipment
We sell our digital radiography imaging equipment with multiple
elements, including hardware, software licenses
and/or
services. Under new accounting guidance, tangible products
containing software components and nonsoftware components that
function together to deliver the tangible products
essential functionality are now accounted for under the
FASBs new guidance pertaining to multiple-deliverable
revenue arrangements. These types of arrangements were
previously accounted for under the software accounting guidance.
The following discussion reflects the method of application of
the new guidance and the impact of the adoption on the current
year financial statements.
Under the new guidance sales arrangement consideration is
allocated at the inception of the arrangement to all
deliverables using the relative selling price method, whereby
any discount in the arrangement is allocated proportionally to
each deliverable on the basis of each deliverables selling
price. The selling price for each deliverable is based on
vendor-specific objective evidence (VSOE) if
available, third-party evidence (TPE) if VSOE is not
available, or estimated selling price (ESP) if
neither VSOE nor TPE is available. For elements where VSOE is
available, VSOE of fair value is based on the price for those
products and services when sold separately by us or the price
established by management with the relevant authority. TPE of
selling price is the price of our, or any of our
competitors, largely interchangeable products or services
in stand-alone sales to similarly situated customers. We do not
currently have VSOE for our DR imaging equipment as units are
not sold on a
stand-alone
basis without the related support packages. As this is also true
for our competitors, TPE of selling price is also unavailable.
We therefore use the ESP to allocate the arrangement
consideration related to our DR imaging equipment.
We recognize revenue for services sold with our digital
radiography imaging equipment when the services are provided or
at the time of delivery or installation and customer acceptance.
Generally, at the time of delivery and installation of equipment
the only undelivered item is the
post-contract
customer support (PCS). This obligation is
contractually defined in both terms of scope and period. For the
PCS, we recognize the revenue for these services on a
straight-line basis over the period of support and we expense
the costs of these services as they are incurred.
The new guidance resulted in a different allocation of revenue
to the deliverables in the current fiscal year, which changed
the pattern and timing of revenue recognition for these elements
but did not change the total revenue to be recognized for the
arrangement. Revenue and gross profit increased by approximately
$3.4 million and $1.0 million, respectively, for the
year ended December 31, 2010 primarily as a result of the
acceleration of revenue related to the delivery of the equipment
in international markets.
We are not able to reasonably estimate the effect of adopting
these standards on future financial periods as the impact will
vary based on the nature and volume of new or materially
modified arrangements in any given period.
Ultrasound
Imaging Equipment
We sell our ultrasound imaging equipment on a stand-alone basis
and with multiple elements, including hardware, software,
licenses
and/or
services. When we sell the ultrasound imaging equipment on a
stand-alone basis, we account for the sale under the
requirements of the FASBs general revenue recognition
rules and recognize revenue upon delivery. We account for the
sale of ultrasound imaging equipment with related
25
computer hardware and software by separating the transaction
into individual elements under the requirements of the
FASBs Revenue Recognition Multiple-Element
Arrangements guidance. We recognize revenue for each element in
accordance with the FASBs general revenue recognition
rules.
Digital
Radiography and Ultrasound Imaging Equipment Sold
Together
In certain transactions we sell our ultrasound imaging equipment
and related services together with our digital radiography
imaging equipment and related services. In these transactions,
each element is separated pursuant to the FASBs Revenue
Recognition Multiple-Element Arrangements guidance
and accounted for in accordance with the FASBs general
revenue recognition rules.
Other
Services
We recognize revenue on mobile imaging, consulting and education
services at the time the services have been rendered. We also
generate revenue from extended service agreements related to our
digital radiography imaging and ultrasound imaging equipment.
These extended service agreements include technical support,
product updates for software and extended warranty coverage. The
revenue for these extended service agreements is recognized on a
straight-line basis over the term of the agreement.
Valuation
of Goodwill and Other Intangible Assets
Goodwill
We allocate a significant portion of the purchase price for our
acquired businesses to goodwill. Our goodwill represents the
excess of the cost of an acquired entity over the net of the
amounts assigned to identifiable assets acquired and liabilities
assumed. The total amount of our goodwill at December 31,
2010 was $1.1 billion, consisting of $966.0 million
for our Animal Hospital segment, $96.8 million for our
Laboratory segment and $29.7 million for our Medical
Technology segment.
We test our goodwill for impairment annually, or sooner if
circumstances indicate an impairment may exist, in accordance
with goodwill guidance. We adopted the end of October as our
annual impairment testing date, which allows us time to
accurately complete our impairment testing process in order to
incorporate the results in our annual financial statements and
timely file those statements with the Securities and Exchange
Commission (SEC) in accordance with our accelerated
filing requirements. There were no impairment charges resulting
from the October 31, 2010, 2009 or 2008 impairment tests.
In addition, no events have occurred subsequent to the 2010
testing date which would indicate any impairment may have
occurred.
The recognition and measurement of a goodwill impairment loss
involves a two-step process:
First we identify potential impairment by comparing the
estimated fair value of our reporting units with the carrying
value of our reporting units per our accounting books, with
carrying value defined as the reporting units net assets,
including goodwill. If the estimated fair value of our reporting
units is greater than our carrying value, there is no impairment
and the second step is not needed.
If we identify a potential impairment in the first step, we are
then required to measure the amount of impairment. The amount of
the impairment is determined by allocating the estimated fair
value of the reporting unit as determined in step one to the
reporting units net assets based on fair value as would be
done in an acquisition. In this hypothetical acquisition, the
residual estimated fair value after allocation to the reporting
units identifiable net assets is the estimated fair value
of goodwill. If the estimated fair value of goodwill is less
than the carrying amount of goodwill, goodwill is considered
impaired and written down to the estimated fair value with a
corresponding charge to earnings. However, if the estimated fair
value of goodwill is greater than the carrying amount of
goodwill, goodwill is not considered impaired and is not
adjusted to the estimated fair value. Determining the fair value
of the net assets of our reporting units under this step would
require significant estimates.
Our estimated fair values are calculated in accordance with
generally accepted accounting principles related to fair value
and utilize generally accepted valuation techniques consisting
primarily of discounted cash
26
flow techniques and market comparables, where applicable. These
valuation methods involve the use of significant assumptions and
estimates such as forecasted growth rates, valuation multiples,
the weighted-average cost of capital, and risk premiums, which
are based upon the best available market information and are
consistent with our long-term strategic plans. In 2010, 2009 and
2008, we determined that the estimated fair value of each of our
reporting units exceeded their respective net book value,
resulting in a conclusion that none of the goodwill of our
reporting units was impaired. However, changes in our estimates,
such as forecasted cash flows, would affect the estimated fair
value of our reporting units and could have resulted in a
goodwill impairment charge particularly for our Animal Hospital
and Medical Technology reporting units. The fair value of our
Laboratory reporting unit significantly exceeded its respective
book value. However, the calculated fair value of our Animal
Hospital and Medical Technology reporting units exceeded their
respective carrying values by a much narrower margin. There is
approximately $966.0 million and $29.7 million of
goodwill associated with the Animal Hospital and Medical
Technology reporting units respectively. While management does
not believe that impairment is probable, the performance of
these business units requires continued improvement in future
periods to sustain their carrying value. The amount of any
future impairment is dependent on the performance of the
business which is dependent upon a number of variables,
especially revenue growth, which cannot be predicted with
certainty.
We will continue to analyze changes to these assumptions in
future periods. We will continue to evaluate goodwill during
future periods and further declines in revenue growth rates
could result in a goodwill impairment.
Other
Intangible Assets
In addition to goodwill, we acquire other identifiable
intangible assets in our acquisitions, including but not limited
to covenants-not-to-compete, client lists, lease related assets
and customer relationships. We value these identifiable
intangible assets at estimated fair value. Our estimated fair
values are based on generally accepted valuation techniques such
as market comparables, discounted cash flow techniques or costs
to replace. These valuation methods involve the use of
significant assumptions such as the timing and amount of future
cash flows, risks, appropriate discount rates, and the useful
lives of intangible assets.
Subsequent to acquisition, we test our identifiable intangible
assets for impairment as part of a broader test for impairment
of long-lived assets under the FASBs accounting guidance
for property, plant and equipment, whenever events or changes in
circumstances indicate that the carrying value may not be
recoverable. The recognition and measurement of an impairment
loss under the FASBs accounting guidance also involves a
two-step process:
First we identify potential impairment by estimating the
aggregate projected undiscounted future cash flows associated
with an asset or asset pool and compare that amount with the
carrying value of those assets. If the aggregate projected cash
flow is greater than our carrying amount, there is no impairment
and the second step is not needed.
If we identify a potential impairment in the first step, we are
then required to write the assets down to fair value with a
corresponding charge to earnings. If the fair value is greater
than carrying value, there is no adjustment. We may be required
to make significant estimates in determining the fair value of
some of our assets.
Income
Taxes
We account for income taxes under the FASBs accounting
guidance for income taxes. In accordance with the FASBs
accounting guidance, we record deferred tax liabilities and
deferred tax assets, which represent taxes to be settled or
recovered in the future. We adjust our deferred tax assets and
deferred tax liabilities to reflect changes in tax rates or
other statutory tax provisions. Changes in tax rates or other
statutory provisions are recognized in the period the change
occurs.
We make judgments in assessing our ability to realize future
benefits from our deferred tax assets, which include operating
and capital loss carryforwards. We believe that our earnings
during the periods when the temporary differences become
deductible will be sufficient to realize the related future tax
benefits. Should we
27
determine that we would not be able to realize all or a portion
of our deferred tax assets, an adjustment would be made to the
carrying amount through a valuation allowance.
Also, our net deductible temporary differences and tax
carryforwards are recorded using the enacted tax rates expected
to apply to taxable income in the periods in which the deferred
tax liability or asset is expected to be settled or realized. At
December 31, 2010, we have a net deferred tax liability of
$63.1 million. Should the expected applicable tax rates
change in the future, an adjustment to the net deferred tax
liability would be credited or charged, as appropriate, to
income in the period such determination was made. For example,
an increase of 1.0% in our anticipated income tax rate would
cause us to increase our net deferred tax liability balance by
$1.5 million with a corresponding charge to earnings.
We also assess differences between our tax bases, which are more
likely than not to be realized, and the as-filed tax bases of
certain assets and liabilities. We account for unrecognized tax
benefits in accordance with the FASBs accounting guidance
on income taxes which prescribes a minimum probability threshold
that a tax position must meet before a financial statement
benefit is recognized. The minimum threshold is defined as a tax
position that is more likely than not to be sustained upon
examination by the applicable taxing authority, including
resolution of any related appeals or litigation, based solely on
the technical merits of the position. The tax benefit to be
recognized is measured as the largest amount of benefit that is
greater than 50% likely of being realized upon ultimate
settlement. We did not have any unrecognized tax benefits on
December 31, 2010.
Self-Insured
Liabilities
We self-insure and use high retention or high-deductible
insurance programs for certain losses related to workers
compensation and employee health claims. Our self-insured
liabilities contain uncertainties because we are required to
make assumptions and to apply judgment to estimate the ultimate
cost to settle reported claims and claims incurred but not
reported as of the balance sheet date. We have not made any
material changes in the reserving methodology used to establish
our self-insured liabilities during the past three years.
Workers
Compensation Insurance
A portion of our workers compensation insurance policies
are self-insured retention annual policies that begin on
October 1st. The policies cover specific annual periods and
are normally open for no longer than seven years after the
period allowing claims for incidents occurring during the
covered period to be submitted after the end of the policy year.
Under our workers compensation insurance policies, we are
responsible for the first $250,000 in claim liability per
individual occurrence and we are also subject to an aggregate
limit. We use an internal review process to estimate claim
liability based on actual and expected claims incurred and the
estimated ultimate cost to settle the claims. Periodically, we
review our assumptions and valuations to determine the adequacy
of our self-insured liabilities. During the fourth quarter of
2010, 2009 and 2008, based upon our internal review, we revised
our estimate of our claims liability resulting in a $514,000,
$1.2 million and $2.0 million favorable impact to our
net earnings, respectively.
Beginning with the 2008 policy year we changed our coverage from
a self-insured retention policy to a guaranteed policy.
Health
Insurance
With the exception of California employees enrolled in HMO
plans, we are effectively self-insuring our employee health care
benefit by retaining claims liability risk up to $200,000 per
incident and an aggregate claim limit based on the number of
employees enrolled in the plan per month. We estimate our
liability for the uninsured portion of employee health care
obligations that have been incurred but not reported based on
our claims experience, the number of employees enrolled in the
program and the average time from when a claim is incurred to
the time it is paid. In addition, we perform an analysis of our
potential liability for open claims.
28
Consolidated
Results of Operations
The following table sets forth components of our income
statements expressed as a percentage of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Years Ended December 31,
|
|
|
|
2010
|
|
|
2009(1)
|
|
|
2008 (1)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Animal Hospital
|
|
|
76.2
|
%
|
|
|
75.6
|
%
|
|
|
75.1
|
%
|
Laboratory
|
|
|
22.5
|
|
|
|
23.6
|
|
|
|
24.0
|
|
Medical Technology
|
|
|
4.6
|
|
|
|
3.7
|
|
|
|
3.9
|
|
Intercompany
|
|
|
(3.3
|
)
|
|
|
(2.9
|
)
|
|
|
(3.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
Direct costs
|
|
|
76.0
|
|
|
|
74.0
|
|
|
|
73.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
24.0
|
|
|
|
26.0
|
|
|
|
26.8
|
|
Selling, general and administrative expense
|
|
|
8.9
|
|
|
|
7.3
|
|
|
|
7.1
|
|
Net loss on sale of assets
|
|
|
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
15.1
|
|
|
|
18.4
|
|
|
|
19.7
|
|
Interest expense, net
|
|
|
1.0
|
|
|
|
1.7
|
|
|
|
2.3
|
|
Debt retirement costs
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
14.0
|
|
|
|
16.7
|
|
|
|
17.4
|
|
Provision for income taxes
|
|
|
5.7
|
|
|
|
6.4
|
|
|
|
6.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
8.3
|
|
|
|
10.3
|
|
|
|
10.7
|
|
Net income attributable to noncontrolling interests
|
|
|
0.3
|
|
|
|
0.3
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to VCA Antech, Inc.
|
|
|
8.0
|
%
|
|
|
10.0
|
%
|
|
|
10.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Prior year percentages have been adjusted to reflect the
reclassification of certain business operations from our Medical
Technology segment to our Laboratory segment. The
reclassifications did not have a material impact on either
segment. |
Revenue
The following table summarizes our revenue (in thousands, except
percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009(1)
|
|
|
2008(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
% Change
|
|
|
|
$
|
|
|
Total
|
|
|
$
|
|
|
Total
|
|
|
$
|
|
|
Total
|
|
|
2010
|
|
|
2009
|
|
|
Animal Hospital
|
|
$
|
1,052,462
|
|
|
|
76.2
|
%
|
|
$
|
994,215
|
|
|
|
75.6
|
%
|
|
$
|
959,395
|
|
|
|
75.1
|
%
|
|
|
5.9
|
%
|
|
|
3.6
|
%
|
Laboratory
|
|
|
310,654
|
|
|
|
22.5
|
%
|
|
|
310,057
|
|
|
|
23.6
|
%
|
|
|
306,891
|
|
|
|
24.0
|
%
|
|
|
0.2
|
%
|
|
|
1.0
|
%
|
Medical Technology
|
|
|
64,013
|
|
|
|
4.6
|
%
|
|
|
48,557
|
|
|
|
3.7
|
%
|
|
|
49,238
|
|
|
|
3.9
|
%
|
|
|
31.8
|
%
|
|
|
(1.4
|
)%
|
Intercompany
|
|
|
(45,661
|
)
|
|
|
(3.3
|
)%
|
|
|
(38,322
|
)
|
|
|
(2.9
|
)%
|
|
|
(38,054
|
)
|
|
|
(3.0
|
)%
|
|
|
19.2
|
%
|
|
|
0.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
1,381,468
|
|
|
|
100.0
|
%
|
|
$
|
1,314,507
|
|
|
|
100.0
|
%
|
|
$
|
1,277,470
|
|
|
|
100.0
|
%
|
|
|
5.1
|
%
|
|
|
2.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Prior year amounts have been adjusted to reflect the
reclassification of certain business operations from our Medical
Technology segment to our Laboratory segment. The
reclassifications did not have a material impact on either
segment. |
Consolidated revenue increased $67.0 million in 2010 as
compared to 2009. The increase in revenue was primarily
attributable to the combination of revenue from acquired animal
hospitals, including Pet DRx acquired on July 1, 2010, and
increased revenue from our Medical Technology business segment.
The increase was partially offset by a decline in Animal
Hospital same-store revenue. Our Animal Hospital same-store
29
revenue growth, adjusted for differences in business days
declined 2.5% in 2010. Our Laboratory internal revenue growth
was flat in 2010.
Consolidated revenue increased $37.0 million in 2009 as
compared to 2008. The increase in revenue was primarily
attributable to revenue from acquired animal hospitals and to a
lesser extent revenue from the acquisition of Eklin and
Laboratory internal growth. The increase was partially offset by
declines in our Animal Hospital and Medical Technology
same-store revenue. Our Animal Hospital same-store revenue,
adjusted for differences in business days, declined 3.2% in
2009. Our Laboratory internal revenue growth, adjusted for
differences in billing days, was 0.8% in 2009.
We believe that the decline in our revenue growth rates is due
primarily to the aforementioned changes in our economic
environment and the overall competitive environment.
Gross
Profit
The following table summarizes our gross profit and our gross
profit as a percentage of applicable revenue, or gross margin
(in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009(1)
|
|
|
2008(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
% Change
|
|
|
|
$
|
|
|
Margin
|
|
|
$
|
|
|
Margin
|
|
|
$
|
|
|
Margin
|
|
|
2010
|
|
|
2009
|
|
|
Animal Hospital
|
|
$
|
172,390
|
|
|
|
16.4
|
%
|
|
$
|
183,698
|
|
|
|
18.5
|
%
|
|
$
|
184,185
|
|
|
|
19.2
|
%
|
|
|
(6.2
|
)%
|
|
|
(0.3
|
)%
|
Laboratory
|
|
|
142,196
|
|
|
|
45.8
|
%
|
|
|
143,492
|
|
|
|
46.3
|
%
|
|
|
143,138
|
|
|
|
46.6
|
%
|
|
|
(0.9
|
)%
|
|
|
0.2
|
%
|
Medical Technology
|
|
|
19,277
|
|
|
|
30.1
|
%
|
|
|
15,836
|
|
|
|
32.6
|
%
|
|
|
17,510
|
|
|
|
35.6
|
%
|
|
|
21.7
|
%
|
|
|
(9.6
|
)%
|
Intercompany
|
|
|
(2,699
|
)
|
|
|
|
|
|
|
(1,794
|
)
|
|
|
|
|
|
|
(2,359
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit
|
|
$
|
331,164
|
|
|
|
24.0
|
%
|
|
$
|
341,232
|
|
|
|
26.0
|
%
|
|
$
|
342,474
|
|
|
|
26.8
|
%
|
|
|
(3.0
|
)%
|
|
|
(0.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Prior year amounts have been adjusted to reflect the
reclassification of certain business operations from our Medical
Technology segment to our Laboratory segment. The
reclassifications did not have a material impact on either
segment. |
Consolidated gross profit decreased $10.1 million in 2010
as compared to 2009. The decrease was primarily due to the
decline in Animal Hospital gross profit. Animal Hospital gross
profit in 2010 was impacted by a decrease in gross margins as
compared to 2009. This decrease was primarily attributable to a
decline in same-store Animal Hospital gross margins due to the
decline in Animal Hospital same-store revenue and to a lesser
extent lower margins of acquired animal hospitals. Consolidated
gross profit was also impacted to a lesser extent by a decline
in Laboratory gross margins.
Consolidated gross profit decreased in 2009 as compared to 2008.
To conform to the current year presentation we reclassified
certain accounts from SG&A to direct costs in our Medical
Technology segment which had a greater impact in 2009 as
compared to 2008. Additionally, consolidated gross profit was
impacted by a decrease in consolidated gross margins as compared
to 2008. This decrease was primarily attributable to a decline
in the Medical Technology gross margin due to the reclasses
mentioned above and a decline in the Animal Hospital gross
margin. Consolidated gross margins in 2009 and 2008 benefited
from a decrease in workers compensation insurance expense
of $1.8 million and $2.9 million, respectively, or
0.1% and 0.2% of revenue, respectively, due to a reduction in
our estimated workers compensation insurance liability for
prior year policy periods.
30
Segment
Results
Animal
Hospital Segment
The following table summarizes revenue and gross profit for the
Animal Hospital segment (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Years Ended December 31,
|
|
|
% Change
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2010
|
|
|
2009
|
|
|
Revenue
|
|
$
|
1,052,462
|
|
|
$
|
994,215
|
|
|
$
|
959,395
|
|
|
|
5.9
|
%
|
|
|
3.6
|
%
|
Gross profit
|
|
$
|
172,390
|
|
|
$
|
183,698
|
|
|
$
|
184,185
|
|
|
|
(6.2
|
)%
|
|
|
(0.3
|
)%
|
Gross margin
|
|
|
16.4
|
%
|
|
|
18.5
|
%
|
|
|
19.2
|
%
|
|
|
|
|
|
|
|
|
Animal Hospital revenue increased $58.2 million in 2010 as
compared to 2009, and $34.8 million in 2009 as compared to
2008. The components of the increases are summarized in the
following table (in thousands, except percentages and average
price per order):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 Comparative Analysis
|
|
|
2009 Comparative Analysis
|
|
|
|
For The Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
%
|
|
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
Animal Hospital Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-store facility:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Orders(1)(2)
|
|
|
6,040
|
|
|
|
6,317
|
|
|
|
(4.4
|
)%
|
|
|
5,703
|
|
|
|
6,042
|
|
|
|
(5.6
|
)%
|
Average revenue per order(3)
|
|
$
|
154.56
|
|
|
$
|
151.58
|
|
|
|
2.0
|
%
|
|
$
|
150.39
|
|
|
$
|
146.71
|
|
|
|
2.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-store revenue(1)
|
|
$
|
933,555
|
|
|
$
|
957,524
|
|
|
|
(2.5
|
)%
|
|
$
|
857,685
|
|
|
$
|
886,375
|
|
|
|
(3.2
|
)%
|
Business day adjustment(4)
|
|
|
2,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,761
|
|
|
|
|
|
Net acquired revenue(5)
|
|
|
116,783
|
|
|
|
36,691
|
|
|
|
|
|
|
|
136,530
|
|
|
|
70,259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,052,462
|
|
|
$
|
994,215
|
|
|
|
5.9
|
%
|
|
$
|
994,215
|
|
|
$
|
959,395
|
|
|
|
3.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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
and adjusted for the impact resulting from any differences in
the number of business days in the comparable periods.
Same-store revenue also includes revenue generated by customers
referred from our relocated or combined animal hospitals,
including those merged upon acquisition. |
|
(2) |
|
The change in orders may not calculate exactly due to rounding. |
|
(3) |
|
Computed by dividing same-store revenue by same-store orders.
The average revenue per order may not calculate exactly due to
rounding. |
|
(4) |
|
The 2010 business day adjustment reflects the impact of one
additional business day in 2010 as compared to 2009 and the 2008
business day adjustment reflects the impact of one fewer
business day in 2009 as compared to 2008. |
|
(5) |
|
Net acquired revenue represents the revenue from those animal
hospitals acquired, net of revenue from those animal hospitals
sold or closed, on or after the beginning of the comparable
period, which was January 1, 2009 for the 2010 Comparative
Analysis and January 1, 2008 for the 2009 Comparative
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. |
Contributing to the decline in our volume of same-store orders
is 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.
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
31
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 for the year ended December 31, 2010
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 hospitals are reviewed
regularly and adjustments are made based on market
considerations, demographics and our costs. These adjustments
historically have approximated 3% to 6% on most services at the
majority of our animal hospitals and are typically implemented
in February of each year; however, price increases in 2010 have
generally ranged between 2% and 3%.
Animal Hospital gross profit is calculated as Animal Hospital
revenue less Animal Hospital direct costs. Animal Hospital
direct costs are comprised of all costs of services and products
at the animal hospitals, including, but not limited to, salaries
of veterinarians, technicians and all other animal
hospital-based personnel, facilities rent, occupancy costs,
supply costs, depreciation and amortization, certain marketing
and promotional expenses and costs of goods sold associated with
the retail sales of pet food and pet supplies.
Our Animal Hospital gross margin in 2010, 2009 and 2008 was
16.4%, 18.5% and 19.2%, respectively. In 2010 and 2009 the gross
margin declined as a result of a decline in our same-store
revenue and to a lesser extent lower gross margins from our
acquired hospitals.
Our Animal Hospital same-store gross margin in 2010, 2009 and
2008 was 17.1%, 19.4% and 20.2%, respectively. The 2010 and 2009
decrease was primarily attributable to deleveraging as a result
of the aforementioned decline in same-store revenue. The 2009
same-store gross margin was also impacted by increases in
medical supplies, marketing expenses and depreciation and
amortization. In 2010, 2009 and 2008, our same-store animal
hospitals benefited from a decrease in our estimated
workers compensation insurance liability of $715,000,
$1.6 million and $2.5 million, respectively, or 0.1%,
0.2% and 0.3% of same-store revenue.
Over the last several years we have acquired a significant
number of animal hospitals. Many of these newly acquired animal
hospitals had lower gross margins at the time of acquisition
than those previously operated by us. We have improved these
lower gross margins, in the aggregate, subsequent to the
acquisition by improving animal hospital revenue, reducing costs
and/or
increasing operating leverage.
Laboratory
Segment
The following table summarizes revenue and gross profit for our
Laboratory segment (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Years Ended December 31,
|
|
|
% Change
|
|
|
|
2010
|
|
|
2009(1)
|
|
|
2008(1)
|
|
|
2010
|
|
|
2009
|
|
|
Revenue
|
|
$
|
310,654
|
|
|
$
|
310,057
|
|
|
$
|
306,891
|
|
|
|
0.2
|
%
|
|
|
1.0
|
%
|
Gross profit
|
|
$
|
142,196
|
|
|
$
|
143,492
|
|
|
$
|
143,138
|
|
|
|
(0.9
|
)%
|
|
|
0.2
|
%
|
Gross margin
|
|
|
45.8
|
%
|
|
|
46.3
|
%
|
|
|
46.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Prior year amounts have been adjusted to reflect the
reclassification of certain business operations from our Medical
Technology segment to our Laboratory segment. The
reclassifications did not have a material impact on either
segment. |
32
Laboratory revenue increased $597,000 in 2010 as compared to
2009, and $3.2 million in 2009 as compared to 2008. The
components of the increase in Laboratory revenue are detailed
below (in thousands, except percentages and average price per
requisition):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 Comparative Analysis
|
|
|
2009 Comparative Analysis
|
|
|
|
For The Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
%
|
|
|
|
2010
|
|
|
2009(5)
|
|
|
Change
|
|
|
2009(5)
|
|
|
2008(5)
|
|
|
Change
|
|
|
Laboratory Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internal growth:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of requisitions(1)
|
|
|
12,932
|
|
|
|
13,224
|
|
|
|
(2.2
|
)%
|
|
|
13,136
|
|
|
|
13,091
|
|
|
|
0.3
|
%
|
Average revenue per requisition(2)
|
|
$
|
23.98
|
|
|
$
|
23.45
|
|
|
|
2.3
|
%
|
|
$
|
23.46
|
|
|
$
|
23.37
|
|
|
|
0.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total internal revenue(1)
|
|
$
|
310,118
|
|
|
$
|
310,057
|
|
|
|
0.0
|
%
|
|
$
|
308,235
|
|
|
$
|
305,894
|
|
|
|
0.8
|
%
|
Billing day adjustment(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
997
|
|
|
|
|
|
Acquired revenue(4)
|
|
|
536
|
|
|
|
|
|
|
|
|
|
|
|
1,822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
310,654
|
|
|
$
|
310,057
|
|
|
|
0.2
|
%
|
|
$
|
310,057
|
|
|
$
|
306,891
|
|
|
|
1.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Internal revenue and requisitions were calculated using
Laboratory operating results, adjusted to exclude the operating
results of acquired laboratories for the comparable periods that
we did not own them in the prior year and adjusted for the
impact resulting from any differences in the number of billing
days in comparable periods. |
|
(2) |
|
Computed by dividing internal revenue by the number of
requisitions. |
|
(3) |
|
The 2008 billing day adjustment in the 2009 Comparative Analysis
reflects the impact of differences in the number of billing days
in 2009 as compared to 2008. |
|
(4) |
|
Acquired revenue in both the 2010 and 2009 Comparative Analyses
represents the revenue of the laboratories acquired in each of
those respective years. |
|
(5) |
|
Prior year amounts have been adjusted to reflect the
reclassification of certain business operations from our Medical
Technology segment to our Laboratory segment. The
reclassifications did not have a material impact on either
segment. |
Laboratory revenue in 2010 increased slightly as compared to
2009 primarily due to acquired revenue. Internal revenue
remained relatively flat as a decline in the volume of
requisitions mostly offset the increase in average revenue per
requisition.
Historically, requisitions have been driven by an ongoing trend
in veterinary medicine to focus on the importance of laboratory
diagnostic testing in the diagnosis, early detection and
treatment of diseases, and the migration of certain tests to
outside laboratories that have historically been performed in
animal hospitals. While these factors have resulted in
significant increases in requisitions in the past, the economic
downturn, slow economic recovery, and the effects of increased
competition continue to impact requisitions in the current year.
We derive our laboratory revenue from services provided to over
16,000 independently owned animal hospitals and shifts in the
purchasing habits of any individual animal hospital or small
group of animal hospitals is not material to our laboratory
revenues. Other companies are developing networks of animal
hospitals, however, and shifts in the purchasing habits of these
networks have the potential of a greater impact on our
laboratory revenues.
The average revenue per requisition increased slightly in 2010
due to price increases which ranged from 3% to 4% in both
February 2010 and February 2009. The effects of the price
increases in 2010 were partially offset by other 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.
33
Laboratory gross profit is calculated as Laboratory revenue less
Laboratory direct costs. Laboratory direct costs are comprised
of all costs of laboratory services, including but not limited
to, salaries of veterinarians, specialists, technicians and
other laboratory-based personnel, transportation and delivery
costs, facilities rent, occupancy costs, depreciation and
amortization and supply costs.
The decrease in Laboratory gross margin in 2010 compared to 2009
was primarily due to the combination of the decline in the rate
of our revenue growth, relative to increasing costs including
transportation and repairs and maintenance. Our Laboratory gross
margin decreased slightly in 2009 as compared to 2008 due to a
decline in our revenue growth relative to an increase in certain
costs, including depreciation and amortization expense for new
equipment and leasehold improvements related to our continued
investment in technology.
Medical
Technology Segment
The following table summarizes revenue and gross profit for the
Medical Technology segment (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Years Ended December 31,
|
|
|
% Change
|
|
|
|
2010
|
|
|
2009(1)
|
|
|
2008(1)
|
|
|
2010
|
|
|
2009
|
|
|
Revenue
|
|
$
|
64,013
|
|
|
$
|
48,557
|
|
|
$
|
49,238
|
|
|
|
31.8
|
%
|
|
|
(1.4
|
)%
|
Gross profit
|
|
$
|
19,277
|
|
|
$
|
15,836
|
|
|
$
|
17,510
|
|
|
|
21.7
|
%
|
|
|
(9.6
|
)%
|
Gross margin
|
|
|
30.1
|
%
|
|
|
32.6
|
%
|
|
|
35.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Prior year amounts have been adjusted to reflect the
reclassification of certain business operations from our Medical
Technology segment to our Laboratory segment. The
reclassifications did not have a material impact on either
segment. |
Medical Technology revenue increased $15.5 million in 2010
as compared to 2009, which was primarily attributable to
increases in the unit sales of each of our digital radiography
equipment product lines and ultrasound imaging equipment and
increased customer service and equipment sales. Increases in our
digital radiography equipment sales was partially attributable
to the July 1, 2009 Eklin acquisition. Medical Technology
2010 revenue also benefited from a change in our revenue
recognition policy due to the implementation of new accounting
guidance, which resulted in less deferred revenue. See
Note 2c, Summary of Significant Accounting
Policies Revenue and Related Cost Recognition,
of this annual report on
Form 10-K.
Medical Technology revenue decreased $681,000 in 2009 as
compared to 2008, which was primarily attributable to declines
on sales of our ultrasound equipment. We believe the business
life cycle for ultrasound equipment is maturing and accordingly,
the demand for these types of products and related services may
decline in the near term. The revenue from our digital
radiography imaging equipment slightly declined due to the
structure of certain sales agreements that resulted in more
revenue being deferred in 2009 as compared to 2008. The
decreases were largely offset by increases in our customer
service revenue, including warranties, due to the acquisition of
Eklin.
Medical Technology gross profit is calculated as Medical
Technology revenue less Medical Technology direct costs. Medical
Technology direct costs are comprised of all product and service
costs, including, but not limited to, all costs of equipment,
related products and services, salaries of technicians, support
personnel, trainers, consultants and other non-administrative
personnel, depreciation and amortization and supply costs.
Medical Technology gross profit increased $3.4 million in
2010 as compared to 2009 due to the increase in revenue
mentioned above offset somewhat by a decrease in gross margin.
The decrease in gross margin was due to various factors
including a shift in the mix of products and services sold and
downward changes in pricing to mitigate the impact of
competition. Specifically, revenue from the sale of small animal
digital radiography imaging equipment, which has a higher gross
margin, decreased as a percentage of our total Medical
Technology revenue while revenue from the sale of equine digital
radiography imaging equipment, which has lower gross margins,
increased as a percentage of our total Medical Technology
revenue. With respect to our overall digital radiography sales,
as a result of the current economic environment customers are
34
purchasing more machines with less functionality or our standard
configuration. These economic as well as competitive pressures
have resulted in the decrease in margins, as the average cost
per unit has declined to a lesser degree than the average
revenue per unit. There was also an increase in revenue related
to warranties sold, which has a higher gross margin, due to an
overall increase in units installed year over year.
Medical Technology gross profit decreased in 2009 as compared to
2008 due to the decline in revenue mentioned above and a
decrease in gross margin, which was impacted by the
reclassification of certain accounts from SG&A to direct
costs to conform to the current years presentation. The
reclassification had a greater impact in 2009 as compared to
2008.
Intercompany
Revenue
Laboratory revenue in 2010, 2009 and 2008 included intercompany
revenue of $37.0 million, $32.5 million and
$32.0 million, respectively, that was generated by
providing laboratory services to our animal hospitals. Medical
Technology revenue in 2010, 2009 and 2008 included intercompany
revenue of $8.6 million, $5.8 million and
$6.0 million, respectively, that was generated by providing
products and services to our animal hospitals. For purposes of
reviewing the operating performance of our business segments,
all intercompany transactions are generally 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 (SG&A) expense and our expense
as a percentage of applicable revenue (in thousands, except
percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009(1)
|
|
|
2008(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
% Change
|
|
|
|
$
|
|
|
Revenue
|
|
|
$
|
|
|
Revenue
|
|
|
$
|
|
|
Revenue
|
|
|
2010
|
|
|
2009
|
|
|
Animal Hospital
|
|
$
|
23,539
|
|
|
|
2.2
|
%
|
|
$
|
21,174
|
|
|
|
2.1
|
%
|
|
$
|
22,142
|
|
|
|
2.3
|
%
|
|
|
11.2
|
%
|
|
|
(4.4
|
)%
|
Laboratory
|
|
|
26,243
|
|
|
|
8.4
|
%
|
|
|
22,895
|
|
|
|
7.4
|
%
|
|
|
20,816
|
|
|
|
6.8
|
%
|
|
|
14.6
|
%
|
|
|
10.0
|
%
|
Medical Technology
|
|
|
14,507
|
|
|
|
22.7
|
%
|
|
|
12,885
|
|
|
|
26.5
|
%
|
|
|
12,174
|
|
|
|
24.7
|
%
|
|
|
12.6
|
%
|
|
|
5.8
|
%
|
Corporate
|
|
|
59,252
|
|
|
|
4.3
|
%
|
|
|
38,715
|
|
|
|
2.9
|
%
|
|
|
35,432
|
|
|
|
2.8
|
%
|
|
|
53.0
|
%
|
|
|
9.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total SG&A
|
|
$
|
123,541
|
|
|
|
8.9
|
%
|
|
$
|
95,669
|
|
|
|
7.3
|
%
|
|
$
|
90,564
|
|
|
|
7.1
|
%
|
|
|
29.1
|
%
|
|
|
5.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
To conform to the current years presentation certain
accounts in our Medical Technology segment have been
reclassified to direct costs from SG&A. This did not have a
material impact on either expense category. |
Consolidated SG&A expense increased $27.9 million in
2010 as compared to 2009 and increased $5.1 million in 2009
as compared to 2008. Increased SG&A at Corporate included
$14.5 million in consulting and SERP expenses to be paid in
accordance with agreements entered into on June 30, 2010
and $3.6 million in transaction costs related to the Pet
DRx acquisition. Increased SG&A in our Animal Hospital
segment was primarily due to growth in the segment as a result
of acquisitions. Laboratory SG&A increased due to research
and development costs and costs incurred to support the efforts
of the sales team. Our SG&A expense as a percentage of
revenue increased in 2009 primarily due to acquisition
transaction costs that are now expensed in accordance with the
new business combination guidance that became effective
January 1, 2009. In addition to normal increases in
SG&A to support the growth of our company, we incurred
increased costs compared to 2008 related to our entry into
Canada and the development of new products in our Laboratory
segment in 2009.
35
Operating
Income
The following table summarizes our operating income (in
thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
% Change
|
|
|
|
$
|
|
|
Revenue
|
|
|
$
|
|
|
Revenue
|
|
|
$
|
|
|
Revenue
|
|
|
2010
|
|
|
2009
|
|
|
Animal Hospital
|
|
$
|
148,578
|
|
|
|
14.1
|
%
|
|
$
|
161,872
|
|
|
|
16.3
|
%
|
|
$
|
162,043
|
|
|
|
16.9
|
%
|
|
|
(8.2
|
)%
|
|
|
(0.1
|
)%
|
Laboratory
|
|
|
115,931
|
|
|
|
37.3
|
%
|
|
|
120,586
|
|
|
|
38.9
|
%
|
|
|
122,325
|
|
|
|
39.9
|
%
|
|
|
(3.9
|
)%
|
|
|
(1.4
|
)%
|
Medical Technology
|
|
|
4,699
|
|
|
|
7.3
|
%
|
|
|
2,940
|
|
|
|
6.1
|
%
|
|
|
5,307
|
|
|
|
10.8
|
%
|
|
|
59.8
|
%
|
|
|
(44.6
|
)%
|
Corporate
|
|
|
(59,260
|
)
|
|
|
|
|
|
|
(42,076
|
)
|
|
|
|
|
|
|
(35,640
|
)
|
|
|
|
|
|
|
40.8
|
%
|
|
|
18.1
|
%
|
Eliminations
|
|
|
(2,699
|
)
|
|
|
|
|
|
|
(1,794
|
)
|
|
|
|
|
|
|
(2,359
|
)
|
|
|
|
|
|
|
50.4
|
%
|
|
|
(24.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
$
|
207,249
|
|
|
|
15.1
|
%
|
|
$
|
241,528
|
|
|
|
18.4
|
%
|
|
$
|
251,676
|
|
|
|
19.7
|
%
|
|
|
(14.2
|
)%
|
|
|
(4.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated operating income decreased $34.3 million in
2010 as compared to 2009. The decrease was primarily due to the
decline in Animal Hospital margins and an increase in SG&A
as a percentage of revenue.
The decrease in our operating margin in 2009 as compared to 2008
was primarily due to the aforementioned decrease in gross
margin, and the impact of a net $3.3 million non-cash
charge related to the abandonment of an internally-developed
software project.
Write-down
and Loss on Sale of Assets
In 2010, 2009 and 2008, we sold assets, and wrote down certain
assets for net losses of $374,000, $4.0 million and
$234,000, respectively. The increase in loss in 2009 was related
to the abandonment of an internally-developed software project
(see above discussion under Operating Income).
Interest
Expense, Net
The following table summarizes our interest expense, net of
interest income (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior term notes
|
|
$
|
10,672
|
|
|
$
|
9,883
|
|
|
$
|
23,574
|
|
Revolving credit facility
|
|
|
|
|
|
|
|
|
|
|
205
|
|
Interest rate swap agreements
|
|
|
382
|
|
|
|
9,784
|
|
|
|
5,519
|
|
Capital leases and other
|
|
|
2,515
|
|
|
|
2,329
|
|
|
|
2,121
|
|
Amortization of debt costs
|
|
|
862
|
|
|
|
486
|
|
|
|
469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,431
|
|
|
|
22,482
|
|
|
|
31,888
|
|
Interest income
|
|
|
801
|
|
|
|
1,016
|
|
|
|
3,329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense, net of interest income
|
|
$
|
13,630
|
|
|
$
|
21,466
|
|
|
$
|
28,559
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The decrease in interest expense in 2010 as compared to 2009 was
primarily attributable to a decrease in the overall weighted
average effective interest rate primarily due to the gradual
expiration of all our higher cost fixed-rate swap agreements
during the last 12 months.
The decrease in net interest expense in 2009 as compared to 2008
was primarily attributable to a decrease in the effective
interest rate on our senior term notes and related interest rate
swap agreements from 5.5% to 3.8%, respectively.
36
Provision
for Income Taxes
The effective rate for 2010, 2009 and 2008 was 41.5%, 39.2% and
39.3%, respectively, which reflects a tax expense of
$5.4 million, or $3.5 million net of tax, recognized
during 2010 related to settlement of taxes on 2004 through 2007
taxable income.
Net
Income Attributable to Noncontrolling Interests
Net income attributable to noncontrolling interests represents
our partners proportionate share of income generated by
those subsidiaries that we do not wholly-own.
Inflation
Historically, our operations have not been materially affected
by inflation. We cannot assure that our operations will not be
affected by inflation in the future.
Related
Party Transactions
Transactions
with ThinkPets Inc. (formerly known as Zoasis
Corporation)
We incurred marketing expense for vaccine reminders and other
direct mail services provided by ThinkPets, a company that is
majority owned by Robert L. Antin, our Chief Executive Officer
and Chairman. Arthur J. Antin, our Chief Operating Officer, owns
an 8% interest in ThinkPets. We purchased services of
$2.8 million, $2.7 million and $2.1 million in
2010, 2009 and 2008, respectively. Although we receive certain
discounts on these services the aggregate amount of the
discounts is not material to the financial statements.
Related
Party Vendors
Frank Reddick joined our company as a director in February 2002
and is a partner in the law firm of Akin Gump Strauss
Hauer & Feld, LLP (Akin). Akin provided
legal services to us during 2010, 2009 and 2008. The amount paid
by our company to Akin for these legal services was
$2.3 million, $1.3 million and $600,000 in 2010, 2009
and 2008, respectively.
Liquidity
and Capital Resources
Introduction
We generate cash primarily from payments made by customers for
our veterinary services, payments from animal hospitals and
other clients for our laboratory services, and from proceeds
received from the sale of our imaging equipment and other
related services. Our business historically has experienced
strong liquidity, as fees for services provided in our animal
hospitals are due at the time of service and fees for laboratory
services are collected under standard industry terms. Our cash
disbursements are primarily for payments related to the
compensation of our employees, supplies and inventory purchases
for our operating segments, occupancy and other administrative
costs, interest expense, payments on long-term borrowings,
capital expenditures and 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 December 31, 2010, our consolidated cash and cash
equivalents totaled $97.1 million, representing a decrease
of $48.1 million as compared to the prior year. Cash flows
generated from operating activities totaled $168.1 million
in 2010, representing a decrease of $15.4 million as
compared to the prior year. We spent $151.0 million on
acquisitions, investments and capital expenditures during the
year.
37
We have historically funded our working capital requirements,
capital expenditures and investment in individual acquisitions
primarily from internally-generated cash flows and we expect to
do so in the future. During the year we retired our existing
senior term notes in the principal amount of $505.4 million
by entering into a new credit facility consisting of
$500 million in senior term notes and $100 million
revolving credit facility. The new credit facility bears
interest based on the interest rate offered to our
administrative agent on the London Interbank market or LIBOR
plus a margin of 2.25%. We have access to an unused
$100 million revolving credit facility mentioned above,
which was entered into during 2010 and expires August 2015.
Historically, we have accessed the capital markets to fund
acquisitions that could not be funded out of cash flow. 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. Consequently there is no
assurance that we will be able to obtain financing on favorable
terms in the future.
Future
Cash Flows
Short-term
Other than our acquisitions of animal hospital chains, we
historically have funded our working capital requirements,
capital expenditures and investments in animal hospital
acquisitions from internally-generated cash flow. We anticipate
that our cash on hand and net cash provided by operations and
available funds under our revolving credit agreement will be
sufficient to meet our anticipated cash requirements for the
next 12 months. If we consummate one or more significant
acquisitions of animal hospital chains during this period, we
may seek additional debt or equity financing.
In 2011, we expect to spend $55 million to $65 million
for the acquisition of independent animal hospitals. The
ultimate number of acquisitions is largely dependent upon the
attractiveness of the candidates and the strategic fit with our
existing operations. From January 1, 2011 through
February 28, 2011, we spent $3.2 million in connection
with the acquisition of one animal hospital. In addition, we
expect to spend approximately $75 million in 2011 for both
property and equipment additions and capital expenditures
necessary to maintain our existing facilities.
Long-term
Our long-term liquidity needs, other than those related to the
day-to-day
operations of our business, including commitments for operating
leases, generally are comprised of scheduled principal and
interest payments for our outstanding long-term indebtedness,
capital expenditures related to the expansion of our business
and acquisitions in accordance with our growth strategy. The
scheduled payments on our long-term obligations are included in
our contractual obligations table below.
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 on our company. Our management cannot make any
assurances that such refinancing or amendments, if necessary,
will be available on attractive terms, if at all.
Debt
Related Covenants
Our new senior credit facility contains certain financial
covenants pertaining to fixed charge coverage and leverage
ratios. In addition, our senior credit facility has restrictions
pertaining to capital expenditures, acquisitions and the payment
of cash dividends. As of December 31, 2010, we were in
compliance with these covenants, including the two covenant
ratios, the fixed charge coverage ratio and the leverage ratio.
At December 31, 2010, we had a fixed charge coverage ratio
of 1.61 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
38
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 December 31, 2010, we had a leverage ratio of 1.94 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.
Historical
Cash Flows
The following table summarizes our cash flows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
168,073
|
|
|
$
|
183,471
|
|
|
$
|
197,308
|
|
Investing activities
|
|
|
(151,006
|
)
|
|
|
(130,770
|
)
|
|
|
(212,711
|
)
|
Financing activities
|
|
|
(65,310
|
)
|
|
|
3,477
|
|
|
|
(6,402
|
)
|
Effect of currency exchange rate charges on cash and cash
equivalents
|
|
|
188
|
|
|
|
44
|
|
|
|
(102
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents
|
|
|
(48,055
|
)
|
|
|
56,222
|
|
|
|
(21,907
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
145,181
|
|
|
|
88,959
|
|
|
|
110,866
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
97,126
|
|
|
$
|
145,181
|
|
|
$
|
88,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Operating Activities
Net cash provided by operating activities decreased
$15.4 million in 2010 as compared to 2009. This decrease
was primarily due to lower operating income, and an increase in
cash paid for taxes of $18.1 million, partially offset by a
decrease in cash interest due to the expiration of our
interest-rate swap agreements and incremental changes in working
capital.
Net cash provided by operating activities decreased
$13.8 million in 2009 as compared to 2008. This decrease
was primarily due to decreases in working capital and a decrease
in operating performance, partially offset by a decrease of
$9.4 million in cash paid for interest.
39
Cash
Flows from Investing Activities
The table below presents the components of the changes in
investing cash flows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Years Ended December 31,
|
|
|
Variance
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2010
|
|
|
2009
|
|
|
Investing Cash Flows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of independent animal hospitals and laboratories
|
|
$
|
(69,456
|
)
|
|
$
|
(56,806
|
)
|
|
$
|
(123,129
|
)
|
|
$
|
(12,650
|
)
|
|
$
|
66,323
|
|
Acquisition of Pet DRx
|
|
|
(7,670
|
)
|
|
|
|
|
|
|
|
|
|
|
(7,670
|
)
|
|
|
|
|
Acquisition of Eklin
|
|
|
|
|
|
|
(12,504
|
)
|
|
|
|
|
|
|
12,504
|
|
|
|
(12,504
|
)
|
Other
|
|
|
(3,557
|
)
|
|
|
(5,267
|
)
|
|
|
(3,573
|
)
|
|
|
1,710
|
|
|
|
(1,694
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash used for acquisitions(1)
|
|
|
(80,683
|
)
|
|
|
(74,577
|
)
|
|
|
(126,702
|
)
|
|
|
(6,106
|
)
|
|
|
52,125
|
|
Property and equipment additions(2)
|
|
|
(61,951
|
)
|
|
|
(50,801
|
)
|
|
|
(55,045
|
)
|
|
|
(11,150
|
)
|
|
|
4,244
|
|
Real estate acquired with acquisitions(3)
|
|
|
(9,289
|
)
|
|
|
(4,894
|
)
|
|
|
(17,593
|
)
|
|
|
(4,395
|
)
|
|
|
12,699
|
|
Proceeds from sale of assets(4)
|
|
|
939
|
|
|
|
151
|
|
|
|
1,775
|
|
|
|
788
|
|
|
|
(1,624
|
)
|
Other(5)
|
|
|
(22
|
)
|
|
|
(649
|
)
|
|
|
(15,146
|
)
|
|
|
627
|
|
|
|
14,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
$
|
(151,006
|
)
|
|
$
|
(130,770
|
)
|
|
$
|
(212,711
|
)
|
|
$
|
(20,236
|
)
|
|
$
|
81,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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) |
|
The cash used to acquire property and equipment will vary from
year to year based on upgrade requirements and expansion of our
animal hospitals and laboratory facilities. |
|
(3) |
|
Due to the lower return on investment realized on acquired real
estate we are highly selective in our decision to acquire real
estate. The increase in cash used to acquire real estate is due
to real estate purchased in connection with the acquisition of
animal hospitals. |
|
(4) |
|
The increase in proceeds from sale of assets in 2010 was due to
the sale of one of our animal hospitals. The decrease in
proceeds from sale of assets in 2009 was primarily due to a
significant land sale in 2008. |
|
(5) |
|
The decrease in cash used for other investing activities in 2009
was primarily due to investments made in 2008 related to our
expansion into Canada and other markets. |
Cash
Flows from Financing Activities
The table below presents the components of the changes in
financing cash flows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Years Ended December 31,
|
|
|
Variance
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2010
|
|
|
2009
|
|
|
Financing Cash Flows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of long-term obligations(1)
|
|
$
|
(555,529
|
)
|
|
$
|
(7,936
|
)
|
|
$
|
(7,790
|
)
|
|
$
|
(547,593
|
)
|
|
$
|
(146
|
)
|
Proceeds from long-term obligations(1)
|
|
|
500,000
|
|
|
|
|
|
|
|
|
|
|
|
500,000
|
|
|
|
|
|
Borrowings on revolving credit facility
|
|
|
|
|
|
|
|
|
|
|
35,000
|
|
|
|
|
|
|
|
(35,000
|
)
|
Repayment on revolving credit facility
|
|
|
|
|
|
|
|
|
|
|
(35,000
|
)
|
|
|
|
|
|
|
35,000
|
|
Payment of financing costs(1)
|
|
|
(9,112
|
)
|
|
|
|
|
|
|
|
|
|
|
(9,112
|
)
|
|
|
|
|
Distributions to noncontrolling interest partners(2)
|
|
|
(4,247
|
)
|
|
|
(4,189
|
)
|
|
|
(3,987
|
)
|
|
|
(58
|
)
|
|
|
(202
|
)
|
Proceeds from stock options exercises(3)
|
|
|
5,510
|
|
|
|
15,297
|
|
|
|
3,606
|
|
|
|
(9,787
|
)
|
|
|
11,691
|
|
Excess tax benefits from stock options
|
|
|
378
|
|
|
|
866
|
|
|
|
1,769
|
|
|
|
(488
|
)
|
|
|
(903
|
)
|
Stock repurchases(4)
|
|
|
(2,310
|
)
|
|
|
(561
|
)
|
|
|
|
|
|
|
(1,749
|
)
|
|
|
(561
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
$
|
(65,310
|
)
|
|
$
|
3,477
|
|
|
$
|
(6,402
|
)
|
|
$
|
(68,787
|
)
|
|
$
|
9,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40
|
|
|
(1) |
|
The cash used for repayment of debt increased due to our
August 19, 2010 debt refinance and due to the payoff of
debt related to the Pet DRx acquisition. The proceeds from
issuance of long-term debt in 2010 is related to the debt
refinance mentioned above. The payment of financing costs in
2010 is also related to the debt refinance, see Note 5,
Long-Term Obligations, of this annual report on
Form 10-K. |
|
(2) |
|
The distributions to noncontrolling interest partners represent
cash payments to noncontrolling interest partners for their
portion of the partnerships excess cash. We adopted new
noncontrolling interest guidance effective January 1, 2009,
which resulted in a reclassification of these distributions from
operating activities to financing activities. |
|
(3) |
|
The number of stock option exercises decreased in 2010 and
increased in 2009 when compared to their respective prior years
due to the increase in the market price of our stock during 2009
and the nearing expiration of certain stock options. |
|
(4) |
|
The stock repurchases in fiscal 2010 and 2009 represent cash
paid for income taxes on behalf of employees who elected to
settle their tax obligations on vested stocks with a portion of
the stocks that vested. |
Future
Contractual Cash Requirements
The following table sets forth the scheduled principal, interest
and other contractual cash obligations due by us for each of the
years indicated as of December 31, 2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment due by period
|
|
|
|
|
|
|
Less than
|
|
|
1-3
|
|
|
3-5
|
|
|
More than
|
|
|
|
Total
|
|
|
1 year
|
|
|
years
|
|
|
years
|
|
|
5 years
|
|
|
Contractual Obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
494,618
|
|
|
$
|
25,752
|
|
|
$
|
65,741
|
|
|
$
|
403,125
|
|
|
$
|
|
|
Capital lease obligations
|
|
|
32,418
|
|
|
|
2,349
|
|
|
|
5,193
|
|
|
|
5,459
|
|
|
|
19,417
|
|
Operating leases
|
|
|
899,159
|
|
|
|
53,446
|
|
|
|
105,903
|
|
|
|
103,674
|
|
|
|
636,136
|
|
Fixed cash interest expense
|
|
|
14,888
|
|
|
|
2,341
|
|
|
|
4,218
|
|
|
|
3,395
|
|
|
|
4,934
|
|
Variable cash interest expense Term A(1)
|
|
|
50,006
|
|
|
|
12,206
|
|
|
|
22,325
|
|
|
|
15,475
|
|
|
|
|
|
Purchase obligations(2)
|
|
|
18,652
|
|
|
|
7,652
|
|
|
|
8,700
|
|
|
|
2,300
|
|
|
|
|
|
Other long-term liabilities(3)
|
|
|
24,182
|
|
|
|
2,940
|
|
|
|
4,630
|
|
|
|
3,769
|
|
|
|
12,843
|
|
Earn-out payments(4)
|
|
|
1,172
|
|
|
|
847
|
|
|
|
325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,535,095
|
|
|
$
|
107,533
|
|
|
$
|
217,035
|
|
|
$
|
537,197
|
|
|
$
|
673,330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The interest payments on our variable-rate senior term notes are
based on rates effective as of December 31, 2010. |
|
(2) |
|
Our purchase obligations consist primarily of supply purchase
agreements related to our Medical Technology business and
construction contracts primarily for our animal hospitals. |
|
(3) |
|
Includes future payments under our Supplemental Executive
Retirement Program and Consulting Agreements. |
|
(4) |
|
Represents contractual arrangements whereby additional cash may
be paid to former owners of acquired businesses upon attainment
of specified performance targets. |
Off-Balance
Sheet Financing Arrangements
Other than operating leases, which are included in the
Contractual Obligations table listed above as of
December 31, 2010, we do not have any off-balance sheet
financing arrangements.
41
Description
of Indebtedness
Senior
Credit Facility
At December 31, 2010, we had $493.8 million principal
amount outstanding under our senior term notes and no borrowings
outstanding under our revolving credit facility.
We pay interest on our senior term notes and revolving credit
facility based on the interest rate offered to our
administrative agent on LIBOR plus a margin of 2.25% per annum.
We pay a commitment fee of 0.50% on our revolving credit
facility.
The senior term notes and the revolving credit facility mature
in August 2015.
Other
Debt and Capital Lease Obligations
At December 31, 2010, we had seller notes secured by assets
of certain animal hospitals, unsecured debt and capital leases
that totaled $33.3 million.
|
|
ITEM 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
At December 31, 2010, we had borrowings of
$493.8 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. 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
December 31, 2010 we have no interest rate swap agreements.
In the future, we may enter into new interest rate strategies to
hedge against the risk of 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
will be or their possible impact.
If LIBOR increases 1% from December 31, 2010 the additional
annual interest expense will amount to $4.8 million. If
LIBOR decreases 1% from December 31, 2010 the annual
interest expense savings will amount to $4.8 million.
If LIBOR increases 1% from December 31, 2009 the additional
annual interest expense will amount to $5.0 million net of
the effect of the swap agreement mentioned below. If LIBOR
decreases 1% from December 31, 2009 the annual interest
expense savings will amount to $5.0 million net of the
effect of the swap agreement mentioned below. To reduce the risk
of increasing interest rates, we had entered into the following
interest rate swap agreement:
|
|
|
Fixed interest rate
|
|
2.64%
|
Notional amount
|
|
$100 million
|
Effective date
|
|
2/12/2008
|
Expiration date
|
|
2/26/2010
|
Counterparty
|
|
Wells Fargo
|
42
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
VCA
ANTECH, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page
|
|
Managements Annual Report on Internal Control Over
Financial Reporting
|
|
|
44
|
|
Reports of Independent Registered Public Accounting Firm
|
|
|
45
|
|
Consolidated Balance Sheets as of December 31, 2010 and 2009
|
|
|
47
|
|
Consolidated Income Statements for the Years Ended
December 31, 2010, 2009 and
2008
|
|
|
48
|
|
Consolidated Statements of Stockholders Equity for the
Years Ended December 31, 2010, 2009 and 2008
|
|
|
49
|
|
Consolidated Statements of Comprehensive Income for the Years
Ended December 31, 2010, 2009 and 2008
|
|
|
50
|
|
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2010, 2009 and 2008
|
|
|
51
|
|
Notes to Consolidated Financial Statements
|
|
|
53
|
|
Schedule I Condensed Financial Information of
Registrant
|
|
|
80
|
|
Schedule II Valuation and Qualifying Accounts
|
|
|
84
|
|
43
MANAGEMENTS
ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL
REPORTING
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting. Our internal
control over financial reporting is designed to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of our consolidated financial
statements for external reporting purposes in accordance with
generally accepted accounting principles.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Our management has carried out an evaluation, under the
supervision and with the participation of our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of our
internal control over financial reporting as of
December 31, 2010. In performing this evaluation,
management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control Integrated Framework. Based
on our assessment of internal control over financial reporting,
our management has concluded that, as of December 31, 2010,
our internal control over financial reporting was effective to
provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted
accounting principles.
KPMG LLP, the independent registered public accounting firm that
audited the consolidated financial statements included in this
annual report on
Form 10-K,
has issued an audit report on managements assessment of
our internal control over financial reporting.
February 28, 2011
Robert L. Antin
Chairman of the Board, President and
Chief Executive Officer
Tomas W. Fuller
Chief Financial Officer,
Vice President and Secretary
44
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of VCA Antech, Inc.:
We have audited the accompanying consolidated balance sheets of
VCA Antech, Inc. and subsidiaries as of December 31, 2010
and 2009, and the related consolidated statements of income,
stockholders equity, comprehensive income, and cash flows
for each of the years in the three-year period ended
December 31, 2010. In connection with our audits of the
consolidated financial statements, we also have audited the
financial statement schedules of condensed financial information
of registrant and valuation and qualifying accounts as listed in
the index under Item 8. These consolidated financial
statements and financial statement schedules are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated
financial statements and financial statement schedules based on
our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of VCA Antech, Inc. and subsidiaries as of
December 31, 2010 and 2009, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 2010, in conformity
with U.S. generally accepted accounting principles. Also in
our opinion, the related financial statement schedules, when
considered in relation to the basic consolidated financial
statements taken as a whole, present fairly, in all material
respects, the information set forth therein.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), VCA
Antech, Inc. and subsidiaries internal control over
financial reporting as of December 31, 2010, based on
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report
dated February 28, 2011, expressed an unqualified opinion
on the effectiveness of the Companys internal control over
financial reporting.
Los Angeles, California
February 28, 2011
45
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of VCA Antech, Inc.:
We have audited VCA Antech, Inc. and subsidiaries internal
control over financial reporting as of December 31, 2010,
based on criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The
Companys management is responsible for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over
financial reporting, included in the accompanying
Managements Annual Report on Internal Control Over
Financial Reporting. Our responsibility is to express an
opinion on the Companys internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our
opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, VCA Antech, Inc. and its subsidiaries
maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2010, based on
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of VCA Antech, Inc. and subsidiaries
as of December 31, 2010 and 2009, and the related
consolidated statements of income, stockholders equity,
comprehensive income, and cash flows for each of the years in
the three-year period ended December 31, 2010, and our
report dated February 28, 2011, expressed an unqualified
opinion on those consolidated financial statements.
Los Angeles, California
February 28, 2011
46
VCA
ANTECH, INC. AND SUBSIDIARIES
(In thousands, except par value)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
97,126
|
|
|
$
|
145,181
|
|
Trade accounts receivable, less allowance for uncollectible
accounts of $13,801 and $13,015 at December 31, 2010 and
2009, respectively
|
|
|
49,224
|
|
|
|
49,186
|
|
Inventory
|
|
|
40,760
|
|
|
|
32,031
|
|
Prepaid expenses and other
|
|
|
21,138
|
|
|
|
27,242
|
|
Deferred income taxes
|
|
|
19,019
|
|
|
|
18,318
|
|
Prepaid income taxes
|
|
|
19,047
|
|
|
|
6,252
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
246,314
|
|
|
|
278,210
|
|
Property and equipment, net
|
|
|
331,687
|
|
|
|
289,415
|
|
Goodwill
|
|
|
1,092,480
|
|
|
|
985,674
|
|
Other intangible assets, net
|
|
|
46,986
|
|
|
|
44,280
|
|
Notes receivable, net
|
|
|
6,429
|
|
|
|
5,153
|
|
Deferred financing costs, net
|
|
|
6,700
|
|
|
|
581
|
|
Other
|
|
|
35,826
|
|
|
|
24,091
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,766,422
|
|
|
$
|
1,627,404
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
28,101
|
|
|
$
|
17,195
|
|
Accounts payable
|
|
|
31,970
|
|
|
|
28,326
|
|
Accrued payroll and related liabilities
|
|
|
35,754
|
|
|
|
33,539
|
|
Other accrued liabilities
|
|
|
45,769
|
|
|
|
43,298
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
141,594
|
|
|
|
122,358
|
|
Long-term debt, less current portion
|
|
|
498,935
|
|
|
|
527,860
|
|
Deferred income taxes
|
|
|
82,131
|
|
|
|
75,197
|
|
Other liabilities
|
|
|
27,972
|
|
|
|
10,651
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
750,632
|
|
|
|
736,066
|
|
Commitments and contingencies:
|
|
|
|
|
|
|
|
|
Preferred stock, par value $0.001, 11,000 shares
authorized, none outstanding
|
|
|
|
|
|
|
|
|
VCA Antech, Inc. stockholders equity:
|
|
|
|
|
|
|
|
|
Common stock, par value $0.001, 175,000 shares authorized,
86,179 and 85,584
|
|
|
|
|
|
|
|
|
shares outstanding as of December 31, 2010 and 2009,
respectively
|
|
|
86
|
|
|
|
86
|
|
Additional paid-in capital
|
|
|
347,848
|
|
|
|
335,114
|
|
Accumulated earnings
|
|
|
650,253
|
|
|
|
540,010
|
|
Accumulated other comprehensive income (loss)
|
|
|
737
|
|
|
|
(163
|
)
|
|
|
|
|
|
|
|
|
|
Total VCA Antech, Inc. stockholders equity
|
|
|
998,924
|
|
|
|
875,047
|
|
Noncontrolling interest
|
|
|
16,866
|
|
|
|
16,291
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
1,015,790
|
|
|
|
891,338
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
1,766,422
|
|
|
$
|
1,627,404
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
47
VCA
ANTECH, INC. AND SUBSIDIARIES
(In thousands, except per share
amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Revenue
|
|
$
|
1,381,468
|
|
|
$
|
1,314,507
|
|
|
$
|
1,277,470
|
|
Direct costs
|
|
|
1,050,304
|
|
|
|
973,275
|
|
|
|
934,996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
331,164
|
|
|
|
341,232
|
|
|
|
342,474
|
|
Selling, general and administrative expense
|
|
|
123,541
|
|
|
|
95,669
|
|
|
|
90,564
|
|
Net loss on sale of assets
|
|
|
374
|
|
|
|
4,035
|
|
|
|
234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
207,249
|
|
|
|
241,528
|
|
|
|
251,676
|
|
Interest expense
|
|
|
14,431
|
|
|
|
22,482
|
|
|
|
31,888
|
|
Interest income
|
|
|
801
|
|
|
|
1,016
|
|
|
|
3,329
|
|
Debt retirement costs
|
|
|
2,131
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
(772
|
)
|
|
|
(104
|
)
|
|
|
(212
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
192,260
|
|
|
|
220,166
|
|
|
|
223,329
|
|
Provision for income taxes
|
|
|
78,102
|
|
|
|
84,580
|
|
|
|
86,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
114,158
|
|
|
|
135,586
|
|
|
|
137,110
|
|
Net income attributable to noncontrolling interests
|
|
|
3,915
|
|
|
|
4,158
|
|
|
|
4,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to VCA Antech, Inc.
|
|
$
|
110,243
|
|
|
$
|
131,428
|
|
|
$
|
132,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
1.28
|
|
|
$
|
1.54
|
|
|
$
|
1.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
1.27
|
|
|
$
|
1.53
|
|
|
$
|
1.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding for basic earnings per share
|
|
|
86,049
|
|
|
|
85,077
|
|
|
|
84,455
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding for diluted earnings per
share
|
|
|
87,051
|
|
|
|
86,097
|
|
|
|
85,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
48
VCA
ANTECH, INC. AND SUBSIDIARIES
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Noncontrolling
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Income (Loss)
|
|
|
Interests
|
|
|
Total
|
|
|
Balances, December 31, 2007
|
|
|
84,335
|
|
|
|
84
|
|
|
|
296,037
|
|
|
|
275,598
|
|
|
|
(3,335
|
)
|
|
|
10,207
|
|
|
|
578,591
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
132,984
|
|
|
|
|
|
|
|
4,126
|
|
|
|
137,110
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(730
|
)
|
|
|
|
|
|
|
(730
|
)
|
Unrealized loss on foreign currency, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(239
|
)
|
|
|
|
|
|
|
(239
|
)
|
Unrealized loss on hedging instruments, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,390
|
)
|
|
|
|
|
|
|
(5,390
|
)
|
Losses on hedging instruments reclassified to income, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,342
|
|
|
|
|
|
|
|
3,342
|
|
Formation of noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,241
|
|
|
|
3,241
|
|
Distribution to noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,987
|
)
|
|
|
(3,987
|
)
|
Purchase of noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(741
|
)
|
|
|
(741
|
)
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
7,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,176
|
|
Issuance of common stock under stock option plans
|
|
|
298
|
|
|
|
1
|
|
|
|
3,605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,606
|
|
Tax benefit from stock options and awards
|
|
|
|
|
|
|
|
|
|
|
1,856
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,856
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2008
|
|
|
84,633
|
|
|
|
85
|
|
|
|
308,674
|
|
|
|
408,582
|
|
|
|
(6,352
|
)
|
|
|
12,846
|
|
|
|
723,835
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
131,428
|
|
|
|
|
|
|
|
4,158
|
|
|
|
135,586
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
684
|
|
|
|
|
|
|
|
684
|
|
Unrealized gain on foreign currency, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
344
|
|
|
|
|
|
|
|
344
|
|
Unrealized loss on hedging instruments, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(815
|
)
|
|
|
|
|
|
|
(815
|
)
|
Losses on hedging instruments reclassified to income, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,976
|
|
|
|
|
|
|
|
5,976
|
|
Formation of noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,476
|
|
|
|
3,476
|
|
Distribution to noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,189
|
)
|
|
|
(4,189
|
)
|
Restricted stock unit grant
|
|
|
|
|
|
|
|
|
|
|
1,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,941
|
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
7,951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,951
|
|
Issuance of common stock under stock option plans
|
|
|
951
|
|
|
|
1
|
|
|
|
15,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,297
|
|
Stock repurchases
|
|
|
|
|
|
|
|
|
|
|
(561
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(561
|
)
|
Tax benefit from stock options and awards
|
|
|
|
|
|
|
|
|
|
|
1,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2009
|
|
|
85,584
|
|
|
|
86
|
|
|
|
335,114
|
|
|
|
540,010
|
|
|
|
(163
|
)
|
|
|
16,291
|
|
|
|
891,338
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
110,243
|
|
|
|
|
|
|
|
3,915
|
|
|
|
114,158
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
482
|
|
|
|
|
|
|
|
482
|
|
Unrealized gain on foreign currency, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
186
|
|
|
|
|
|
|
|
186
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,391
|
|
|
|
1,391
|
|
Distribution to noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,247
|
)
|
|
|
(4,247
|
)
|
Purchase of noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(484
|
)
|
|
|
(484
|
)
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
9,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,340
|
|
Issuance of common stock under stock option plans
|
|
|
595
|
|
|
|
|
|
|
|
5,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,510
|
|
Stock repurchases
|
|
|
|
|
|
|
|
|
|
|
(2,310
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,310
|
)
|
Tax benefit from stock options and awards
|
|
|
|
|
|
|
|
|
|
|
378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
378
|
|
Tax shortfall and other from stock options and awards
|
|
|
|
|
|
|
|
|
|
|
(184
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(184
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2010
|
|
|
86,179
|
|
|
$
|
86
|
|
|
$
|
347,848
|
|
|
$
|
650,253
|
|
|
$
|
737
|
|
|
$
|
16,866
|
|
|
$
|
1,015,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
49
VCA
ANTECH, INC. AND SUBSIDIARIES
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Net income
|
|
$
|
114,158
|
|
|
$
|
135,586
|
|
|
$
|
137,110
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
482
|
|
|
|
684
|
|
|
|
(730
|
)
|
Unrealized gain (loss) on foreign currency
|
|
|
304
|
|
|
|
563
|
|
|
|
(391
|
)
|
Tax (expense) benefit
|
|
|
(118
|
)
|
|
|
(219
|
)
|
|
|
152
|
|
Unrealized loss on hedging instruments
|
|
|
(2
|
)
|
|
|
(1,335
|
)
|
|
|
(8,825
|
)
|
Tax benefit
|
|
|
1
|
|
|
|
520
|
|
|
|
3,435
|
|
Losses on hedging instruments reclassified to income
|
|
|
382
|
|
|
|
9,784
|
|
|
|
5,472
|
|
Tax benefit
|
|
|
(149
|
)
|
|
|
(3,808
|
)
|
|
|
(2,130
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss):
|
|
|
900
|
|
|
|
6,189
|
|
|
|
(3,017
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
115,058
|
|
|
|
141,775
|
|
|
|
134,093
|
|
Comprehensive income attributable to noncontrolling interests
|
|
|
3,915
|
|
|
|
4,158
|
|
|
|
4,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to VCA Antech, Inc.
|
|
$
|
111,143
|
|
|
$
|
137,617
|
|
|
$
|
129,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
50
VCA
ANTECH, INC. AND SUBSIDIARIES
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
114,158
|
|
|
$
|
135,586
|
|
|
$
|
137,110
|
|
Adjustments to reconcile net income to net cash provided
|
|
|
|
|
|
|
|
|
|
|
|
|
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
46,069
|
|
|
|
39,571
|
|
|
|
31,911
|
|
Amortization of debt issue costs
|
|
|
862
|
|
|
|
486
|
|
|
|
470
|
|
Provision for uncollectible accounts
|
|
|
7,366
|
|
|
|
7,048
|
|
|
|
5,187
|
|
Debt retirement costs
|
|
|
2,131
|
|
|
|
|
|
|
|
|
|
Net loss on sale of assets
|
|
|
374
|
|
|
|
4,035
|
|
|
|
234
|
|
Share-based compensation
|
|
|
9,340
|
|
|
|
7,951
|
|
|
|
7,176
|
|
Deferred income taxes
|
|
|
13,493
|
|
|
|
24,600
|
|
|
|
22,581
|
|
Excess tax benefits from exercise of stock options
|
|
|
(378
|
)
|
|
|
(866
|
)
|
|
|
(1,769
|
)
|
Other
|
|
|
(901
|
)
|
|
|
(425
|
)
|
|
|
(14
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade accounts receivable
|
|
|
(7,048
|
)
|
|
|
(10,004
|
)
|
|
|
(5,674
|
)
|
Inventory, prepaid expenses and other assets
|
|
|
(11,868
|
)
|
|
|
(15,591
|
)
|
|
|
(6,981
|
)
|
Accounts payable and other accrued liabilities
|
|
|
7,463
|
|
|
|
(1,974
|
)
|
|
|
(2,515
|
)
|
Accrued payroll and related liabilities
|
|
|
(385
|
)
|
|
|
(7,794
|
)
|
|
|
4,863
|
|
Income taxes
|
|
|
(12,603
|
)
|
|
|
848
|
|
|
|
4,729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
168,073
|
|
|
|
183,471
|
|
|
|
197,308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Business acquisitions, net of cash acquired
|
|
|
(80,683
|
)
|
|
|
(74,577
|
)
|
|
|
(126,702
|
)
|
Real estate acquired in connection with business acquisitions
|
|
|
(9,289
|
)
|
|
|
(4,894
|
)
|
|
|
(17,593
|
)
|
Property and equipment additions
|
|
|
(61,951
|
)
|
|
|
(50,801
|
)
|
|
|
(55,045
|
)
|
Proceeds from sale of assets
|
|
|
939
|
|
|
|
151
|
|
|
|
1,775
|
|
Other
|
|
|
(22
|
)
|
|
|
(649
|
)
|
|
|
(15,146
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(151,006
|
)
|
|
|
(130,770
|
)
|
|
|
(212,711
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
51
VCA
ANTECH, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS (Continued)
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of debt
|
|
|
(555,529
|
)
|
|
|
(7,936
|
)
|
|
|
(7,790
|
)
|
Proceeds from the issuance of long-term debt
|
|
|
500,000
|
|
|
|
|
|
|
|
|
|
Payment of financing costs
|
|
|
(9,112
|
)
|
|
|
|
|
|
|
|
|
Borrowings on revolving credit facility
|
|
|
|
|
|
|
|
|
|
|
35,000
|
|
Repayment on revolving credit facility
|
|
|
|
|
|
|
|
|
|
|
(35,000
|
)
|
Distributions to noncontrolling interest partners
|
|
|
(4,247
|
)
|
|
|
(4,189
|
)
|
|
|
(3,987
|
)
|
Proceeds from issuance of common stock under stock option plans
|
|
|
5,510
|
|
|
|
15,297
|
|
|
|
3,606
|
|
Excess tax benefits from exercise of stock options
|
|
|
378
|
|
|
|
866
|
|
|
|
1,769
|
|
Stock repurchases
|
|
|
(2,310
|
)
|
|
|
(561
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(65,310
|
)
|
|
|
3,477
|
|
|
|
(6,402
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of currency exchange rate changes on cash and cash
equivalents
|
|
|
188
|
|
|
|
44
|
|
|
|
(102
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents
|
|
|
(48,055
|
)
|
|
|
56,222
|
|
|
|
(21,907
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
145,181
|
|
|
|
88,959
|
|
|
|
110,866
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
97,126
|
|
|
$
|
145,181
|
|
|
$
|
88,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
13,357
|
|
|
$
|
22,064
|
|
|
$
|
31,432
|
|
Income taxes paid
|
|
$
|
77,210
|
|
|
$
|
59,132
|
|
|
$
|
58,909
|
|
Supplemental schedule of non-cash investing and financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Detail of acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of assets acquired
|
|
$
|
139,917
|
|
|
$
|
94,528
|
|
|
$
|
128,346
|
|
Cash paid for acquisitions
|
|
|
(80,683
|
)
|
|
|
(74,577
|
)
|
|
|
(126,702
|
)
|
Cash paid to bondholders
|
|
|
(29,532
|
)
|
|
|
|
|
|
|
|
|
Non-cash note conversion to equity interest in subsidiary
|
|
|
|
|
|
|
(5,700
|
)
|
|
|
|
|
Contingent consideration
|
|
|
(259
|
)
|
|
|
(712
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities assumed
|
|
$
|
29,443
|
|
|
$
|
13,539
|
|
|
$
|
1,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
52
VCA
ANTECH, INC. AND SUBSIDIARIES
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 December 31, 2010, 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
December 31, 2010, we operated 50 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.
|
Summary
of Significant Accounting Policies
|
|
|
a.
|
Principles
of Consolidation
|
Our consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the
United States, and include the accounts of our parent company,
all majority-owned subsidiaries where we have control and
certain veterinary medical groups to which we provide services
as discussed below. We have eliminated all intercompany
transactions and balances.
We provide management services to certain veterinary medical
groups in states with laws that prohibit business corporations
from providing or holding themselves out as providers of
veterinary services. At December 31, 2010, we operated 166
animal hospitals in 15 of these states. In these states, we
provide administrative and support services to the veterinary
medical groups. Pursuant to the management agreements, the
veterinary medical groups are each solely responsible for all
aspects of the practice of veterinary medicine, as defined by
their respective state.
We have determined that the veterinary medical groups are
variable interest entities as defined by the Financial
Accounting Standards Board (FASB), and that we have
a variable interest in those entities through our management
agreements. We also determined that our variable interests in
these veterinary medical groups, in aggregate with the variable
interests held by our related parties, provide us with the power
to direct the activities of these groups that most significantly
impact their economic performance and obligate us to absorb
losses that could potentially be significant or the right to
receive benefits from the veterinary medical groups that could
potentially be significant. Based on these determinations, we
consolidated the veterinary medical groups in our consolidated
financial statements. In June 2009, the FASB issued new
accounting guidance on consolidations; see Note 2v,
Recent Accounting Pronouncements, for a discussion of the
January 1, 2010 adoption of this new guidance.
|
|
b.
|
Use of
Estimates in Preparation of Financial Statements
|
The preparation of our consolidated financial statements in
conformity with accounting principles generally accepted in the
United States requires us to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and contingent liabilities at
the date of our
53
VCA
ANTECH, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
2.
|
Summary
of Significant Accounting Policies, continued
|
consolidated financial statements and our reported amounts of
revenue and expense during the reporting period. Actual results
could differ from our estimates.
|
|
c.
|
Revenue
and Related Cost Recognition
|
We recognize revenue, barring other facts, when the following
revenue recognition criteria are met:
|
|
|
|
|
persuasive evidence of a sales arrangement exists;
|
|
|
|
delivery of goods has occurred or services have been rendered;
|
|
|
|
the sales price or fee is fixed or determinable; and
|
|
|
|
collectability is reasonably assured.
|
Revenue is reported net of sales discounts and excludes sales
taxes.
We generally recognize revenue and costs as follows:
|
|
|
|
|
For non-contractual services provided by our Animal Hospital,
Laboratory and Medical Technology business units, at the time
services are rendered.
|
|
|
|
For the sale of merchandise at our animal hospitals, when
delivery of the goods has occurred.
|
|
|
|
For services provided by our Medical Technology business unit
under defined support and maintenance contracts, on a
straight-line basis over the contract period, recognizing costs
as incurred; these services include, but are not limited to,
technical support,
when-and-if
available product updates for software and extended warranty
coverage.
|
|
|
|
For the sale of our digital radiography imaging equipment and
ultrasound imaging equipment sold on a standalone basis at the
time title and risk of loss transfers to the customer, which is
generally upon delivery or upon installation and customer
acceptance if required per the sale arrangement.
|
We account for revenue in our Medical Technology business as
follows, depending upon the item sold:
|
|
|
|
|
Digital radiography imaging equipment and all of its related
computer equipment, our proprietary software and services in
addition to any other computers sold with our proprietary
software are accounted for under the FASBs new accounting
guidance related to multiple-deliverable transactions. We early
adopted the new guidance on January 1, 2010. Previously we
accounted for these types of transactions under the FASBs
guidance for software revenue recognition.
|
|
|
|
|
|
Under the new accounting guidance, sales arrangement
consideration is allocated at the inception of the arrangement
to all deliverables using the relative selling price method,
whereby any discount in the arrangement is allocated
proportionally to each deliverable on the basis of each
deliverables selling price. The selling price for each
deliverable is based on vendor-specific objective evidence
(VSOE) if available, third-party evidence
(TPE) if VSOE is not available, or estimated selling
price (ESP) if neither VSOE nor TPE is available.
For elements where VSOE is available, VSOE of fair value is
based on the price for those products and services when sold
separately by us or the price established by management with the
relevant authority. TPE of selling price is the price of our, or
any of our competitors, largely interchangeable products
or services in stand-alone sales to similarly situated customers.
|
|
|
|
We do not currently have VSOE for our DR imaging equipment as
units are not sold on a stand-alone basis without the related
support packages. As this is also true for our competitors, TPE
of selling price is also unavailable. We therefore use ESP for
certain elements to allocate the arrangement consideration
related to our DR imaging equipment.
|
54
VCA
ANTECH, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
2.
|
Summary
of Significant Accounting Policies, continued
|
|
|
|
|
|
In domestic markets we have VSOE for our DR imaging equipment
post-contract
customer support (PCS) as the support package is
sold on a stand-alone basis. Our PCS agreements normally include
a warranty on the receptor plate and technical support on the
software elements. In foreign markets however, we do not have
VSOE on the receptor plate warranties, accordingly we use the
ESP.
|
|
|
|
The changes made under the new accounting guidance did not cause
any changes in the units of accounting related to our
arrangements.
|
|
|
|
The new guidance resulted in a different allocation of revenue
to the deliverables in the current fiscal year, which changed
the pattern and timing of revenue recognition for these elements
but did not change the total revenue to be recognized for the
arrangement. Revenue and gross profit increased by approximately
$3.4 million and $1.0 million, respectively, for the
year ended December 31, 2010 primarily as a result of the
acceleration of revenue related to the delivery of the equipment
in international markets.
|
|
|
|
We are not able to reasonably estimate the effect of adopting
these standards on future financial periods as the impact will
vary based on the nature and volume of new or materially
modified arrangements in any given period.
|
In certain transactions we sell our ultrasound imaging equipment
and related services together with our digital radiography
imaging equipment and related services. In these transactions,
we account for each item under its respective literature and
allocate revenue based upon the relative selling prices.
We defer revenue for certain transactions in our Medical
Technology business as follows:
|
|
|
|
|
We defer revenue for pre-paid services such as our consulting,
education services or PCS and recognize that revenue on a
straight-line basis over the contract period or as the services
are provided depending on the nature of the service.
|
|
|
|
We defer revenue for PCS provided as part of the purchase of
equipment and software and recognize that revenue on a
straight-line basis over the PCS period.
|
|
|
|
We defer revenue when we lack persuasive evidence of a sales
agreement and recognize that revenue only when that evidence
exists.
|
|
|
|
We defer revenue on transactions where we participated in the
buyers leasing and recognize that revenue over the lease term.
|
55
VCA
ANTECH, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
2.
|
Summary
of Significant Accounting Policies, continued
|
As a result of these policies, we have deferred revenue and
costs at December 31, 2010 and 2009 consisting of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Deferred equipment revenue(1)
|
|
$
|
6,499
|
|
|
$
|
10,053
|
|
Deferred fixed-priced support or maintance contract revenue
|
|
|
2,968
|
|
|
|
2,691
|
|
Other deferred revenue(2)
|
|
|
2,355
|
|
|
|
2,571
|
|
|
|
|
|
|
|
|
|
|
Total deferred revenue
|
|
|
11,822
|
|
|
|
15,315
|
|
Less current portion included in other accrued liabilities
|
|
|
8,617
|
|
|
|
12,497
|
|
|
|
|
|
|
|
|
|
|
Long-term portion of deferred revenue included in other
liabilities
|
|
$
|
3,205
|
|
|
$
|
2,818
|
|
|
|
|
|
|
|
|
|
|
Current portion of deferred costs included in prepaid expenses
and other
|
|
$
|
2,961
|
|
|
$
|
5,413
|
|
Long-term portion of deferred costs included in other assets
|
|
|
4,325
|
|
|
|
3,635
|
|
|
|
|
|
|
|
|
|
|
Total deferred costs(3)
|
|
$
|
7,286
|
|
|
$
|
9,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents amounts billed or received for sales arrangements
that include equipment, hardware, software and PCS. See above
discussion related to the new accounting guidance adopted
January 1, 2010 pertaining to revenue
recognition multiple-deliverable transactions. |
|
(2) |
|
Represents amounts billed or received in advance for services. |
|
(3) |
|
Represents costs related to equipment, hardware and software
included in deferred equipment revenue. |
Direct costs are comprised of all service and product costs,
including but not limited to, salaries of veterinarians,
technicians and other hospital-based and laboratory-based
personnel, transportation and delivery costs, facilities rent,
occupancy costs, supply costs, depreciation and amortization,
certain marketing and promotional expenses and costs of goods
sold.
|
|
e.
|
Cash and
Cash Equivalents
|
We consider only highly liquid investments with original
maturities of less than 90 days to be cash equivalents. We
maintain balances in our bank accounts that are in excess of
FDIC insured levels.
Our inventory consists primarily of finished goods and includes
imaging equipment, pet food and products and medical supplies.
It is valued at the lower of cost or market using the
first-in,
first-out method and is adjusted for estimated obsolescence and
written down to net realizable value based upon estimates of
future demand, technology developments and market conditions.
|
|
g.
|
Property
and Equipment
|
Property and equipment is recorded at cost. Equipment held under
capital leases is recorded at the lower of the present value of
the minimum lease payments or the fair value of the equipment at
the beginning of the lease term.
We develop and implement new software to be used internally, or
enhance our existing internal software. We develop the software
using our own employees
and/or
outside consultants. Costs associated with the
56
VCA
ANTECH, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
2.
|
Summary
of Significant Accounting Policies, continued
|
development of new software are expensed as incurred. Costs
related directly to the software design, coding, testing and
installation are capitalized and amortized over the expected
life of the software. Costs related to upgrades or enhancements
of existing systems are capitalized if the modifications result
in additional functionality.
Depreciation and amortization are recognized on the
straight-line method over the following estimated useful lives:
|
|
|
Buildings and improvements
|
|
5 to 40 years
|
Leasehold improvements
|
|
Lesser of lease term or 15 years
|
Furniture and equipment
|
|
5 to 7 years
|
Software
|
|
3 years
|
Equipment held under capital leases
|
|
5 to 10 years
|
Depreciation and amortization expense, including the
amortization of property under capital leases, in 2010, 2009 and
2008 was $36.7 million, $31.8 million and
$25.9 million, respectively.
Property and equipment at December 31, 2010 and 2009
consisted of (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Land
|
|
$
|
52,562
|
|
|
$
|
41,980
|
|
Building and improvements
|
|
|
110,557
|
|
|
|
95,968
|
|
Leasehold improvements
|
|
|
113,593
|
|
|
|
98,341
|
|
Furniture and equipment
|
|
|
193,086
|
|
|
|
170,672
|
|
Software
|
|
|
15,983
|
|
|
|
12,759
|
|
Buildings held under capital leases
|
|
|
20,864
|
|
|
|
19,954
|
|
Equipment held under capital leases
|
|
|
947
|
|
|
|
1,054
|
|
Construction in progress
|
|
|
22,252
|
|
|
|
16,193
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment
|
|
|
529,844
|
|
|
|
456,921
|
|
Less accumulated depreciation and amortization
|
|
|
(198,157
|
)
|
|
|
(167,506
|
)
|
|
|
|
|
|
|
|
|
|
Total property and equipment, net
|
|
$
|
331,687
|
|
|
$
|
289,415
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization on buildings and equipment held under
capital leases amounted to $4.6 million and
$3.7 million at December 31, 2010 and 2009,
respectively.
Most of our facilities are under operating leases. The minimum
lease payments, including predetermined fixed escalations of the
minimum rent, are recognized as rent expense on a straight-line
basis over the lease term as defined in the FASBs
accounting guidance pertaining to leases. The lease term
includes contractual renewal options that are reasonably assured
based on significant leasehold improvements acquired. Any
leasehold improvement incentives paid to us by a landlord are
recorded as a reduction of rent expense over the lease term.
Goodwill represents the excess of the cost of an acquired entity
over the net of the fair value of identifiable assets acquired
and liabilities assumed.
57
VCA
ANTECH, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
2.
|
Summary
of Significant Accounting Policies, continued
|
In accordance with the FASBs accounting guidance
pertaining to goodwill and other intangibles, we have
determined that we have three reporting units, Animal Hospital,
Laboratory and Medical Technology, and we estimate annually, or
sooner if circumstances indicate an impairment may exist, the
fair value of each of our reporting units and compare their
estimated fair value against the net book value of those
reporting units to determine if our goodwill is impaired.
Our estimated fair values are calculated in accordance with
generally accepted accounting principles related to fair value
and utilize valuation methods consisting primarily of discounted
cash flow techniques, and market comparables, where applicable.
These valuation methods involve the use of significant
assumptions and estimates such as forecasted growth rates,
valuation multiples, the weighted-average cost of capital, and
risk premiums. We provide no assurance that forecasted growth
rates, valuation multiples, and discount rates will not
deteriorate. We will continue to analyze changes to these
assumptions in future periods.
In 2010, 2009 and 2008, we determined that the estimated fair
value of each of our reporting units exceeded their respective
net book value, resulting in a conclusion that none of the
goodwill of our reporting units was impaired. However, changes
in our estimates, such as forecasted cash flows, would affect
the estimated fair value of our reporting units and could have
resulted in a goodwill impairment charge particularly for our
Animal Hospital and Medical Technology reporting units. The fair
value of our Laboratory reporting unit significantly exceeded
its respective book value. However, the calculated fair value of
our Animal Hospital and Medical Technology reporting units
exceeded their respective carrying values by a much narrower
margin. There is approximately $966.0 million and
$29.7 million of goodwill associated with the Animal
Hospital and Medical Technology reporting units respectively.
While management does not believe that impairment is probable,
the performance of these business units requires continued
improvement in future periods to sustain their carrying value.
The amount of any future impairment is dependent on the
performance of the business which is dependent upon a number of
variables, especially revenue growth, which cannot be predicted
with certainty.
We adopted the end of October as our annual impairment testing
date, which allows us time to complete our impairment testing
process in order to incorporate the results in our annual
financial statements and timely file those statements with the
Securities Exchange Commission in accordance with our
accelerated filing requirements. We have not had an impairment
charge since the adoption of current accounting guidance related
to goodwill impairment.
58
VCA
ANTECH, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
2.
|
Summary
of Significant Accounting Policies, continued
|
The following table presents the changes in the carrying amount
of our goodwill for 2010 and 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Animal Hospital
|
|
|
Laboratory
|
|
|
Medical Technology
|
|
|
Total
|
|
|
Balance as of January 1, 2009
|
|
$
|
807,203
|
|
|
$
|
95,694
|
|
|
$
|
19,160
|
|
|
$
|
922,057
|
|
Goodwill acquired
|
|
|
50,741
|
|
|
|
430
|
|
|
|
8,361
|
|
|
|
59,532
|
|
Goodwill related to noncontrolling interests
|
|
|
3,449
|
|
|
|
|
|
|
|
|
|
|
|
3,449
|
|
Other(1)
|
|
|
475
|
|
|
|
161
|
|
|
|
|
|
|
|
636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2009
|
|
|
861,868
|
|
|
|
96,285
|
|
|
|
27,521
|
|
|
|
985,674
|
|
Goodwill acquired
|
|
|
105,794
|
|
|
|
7
|
|
|
|
|
|
|
|
105,801
|
|
Other(1)
|
|
|
(1,663
|
)
|
|
|
526
|
|
|
|
2,142
|
|
|
|
1,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2010
|
|
$
|
965,999
|
|
|
$
|
96,818
|
|
|
$
|
29,663
|
|
|
$
|
1,092,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Other includes measurement period adjustments, earn-out payments
and foreign currency translation adjustments. The Medical
Technology measurement period adjustments consisted primarily of
an adjustment to the valuation of deferred tax assets. The
Animal Hospital 2010 other category includes the write-off of
goodwill related to the sale of one of the Pet DRx animal
hospitals that occurred during the fourth quarter. |
|
|
j.
|
Other
Intangible Assets
|
In addition to goodwill, we have amortizable intangible assets
at December 31, 2010 and 2009, as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Non-contractual customer relationships
|
|
$
|
48,686
|
|
|
$
|
(14,188
|
)
|
|
$
|
34,498
|
|
|
$
|
38,359
|
|
|
$
|
(8,077
|
)
|
|
$
|
30,282
|
|
Covenants
not-to-compete
|
|
|
14,459
|
|
|
|
(8,311
|
)
|
|
|
6,148
|
|
|
|
14,748
|
|
|
|
(7,785
|
)
|
|
|
6,963
|
|
Favorable lease asset
|
|
|
5,486
|
|
|
|
(2,672
|
)
|
|
|
2,814
|
|
|
|
5,406
|
|
|
|
(2,150
|
)
|
|
|
3,256
|
|
Technology
|
|
|
2,189
|
|
|
|
(1,447
|
)
|
|
|
742
|
|
|
|
2,209
|
|
|
|
(1,332
|
)
|
|
|
877
|
|
Trademarks
|
|
|
3,749
|
|
|
|
(986
|
)
|
|
|
2,763
|
|
|
|
3,362
|
|
|
|
(494
|
)
|
|
|
2,868
|
|
Client lists
|
|
|
35
|
|
|
|
(14
|
)
|
|
|
21
|
|
|
|
60
|
|
|
|
(26
|
)
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
74,604
|
|
|
$
|
(27,618
|
)
|
|
$
|
46,986
|
|
|
$
|
64,144
|
|
|
$
|
(19,864
|
)
|
|
$
|
44,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization is recognized on the straight-line method over the
following estimated useful lives:
|
|
|
Non-contractual customer relationships
|
|
4 to 25 years
|
Covenants
not-to-compete
|
|
3 to 10 years
|
Favorable lease asset
|
|
1 to 14 years
|
Technology
|
|
5 years
|
Trademarks
|
|
10 years
|
Client lists
|
|
3 years
|
59
VCA
ANTECH, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
2.
|
Summary
of Significant Accounting Policies, continued
|
The following table summarizes our aggregate amortization
expense related to other intangible assets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Aggregate amortization expense
|
|
$
|
9,380
|
|
|
$
|
7,790
|
|
|
$
|
6,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The estimated amortization expense related to intangible assets
for each of the five succeeding years and thereafter at
December 31, 2010 is as follows (in thousands):
|
|
|
|
|
2011
|
|
$
|
10,570
|
|
2012
|
|
|
9,472
|
|
2013
|
|
|
7,251
|
|
2014
|
|
|
5,007
|
|
2015
|
|
|
3,163
|
|
Thereafter
|
|
|
11,523
|
|
|
|
|
|
|
Total
|
|
$
|
46,986
|
|
|
|
|
|
|
We account for income taxes under the FASBs accounting
guidance on income taxes. In accordance with the guidance, we
record deferred tax liabilities and deferred tax assets, which
represent taxes to be recovered or settled in the future. We
adjust our deferred tax assets and deferred tax liabilities to
reflect changes in tax rates or other statutory tax provisions.
We make judgments in assessing our ability to realize future
benefits from our deferred tax assets, which include operating
and capital loss carryforwards. As such, we have a valuation
allowance to reduce our deferred tax assets for the portion we
believe will not be realized. Changes in tax rates or other
statutory provisions are recognized in the period the change
occurs. We also assess differences between our probable tax
bases and the as-filed tax bases of certain assets and
liabilities.
We account for unrecognized tax benefits also in accordance with
the FASBs accounting guidance on income taxes which
prescribes a minimum probability threshold that a tax position
must meet before a financial statement benefit is recognized.
The minimum threshold is defined as a tax position that is more
likely than not to be sustained upon examination by the
applicable taxing authority, including resolution of any related
appeals or litigation, based solely on the technical merits of
the position. The tax benefit to be recognized is measured as
the largest amount of benefit that is greater than 50% likely of
being realized upon ultimate settlement. We did not have any
unrecognized tax benefits on December 31, 2010.
Notes receivable are financial instruments issued in the normal
course of business and are not market traded. The amounts
recorded approximate fair value and are shown net of valuation
allowances. There were no valuation allowances recorded as of
December 31, 2010 and December 31, 2009. The notes
bear interest at rates varying from 3.9% to 8.0% per annum.
|
|
m.
|
Deferred
Financing Costs
|
Deferred financing costs are amortized using the effective
interest method over the life of the related debt. Accumulated
amortization of deferred financing costs was $574,000 and
$1.9 million at December 31, 2010 and 2009,
respectively.
60
VCA
ANTECH, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
2.
|
Summary
of Significant Accounting Policies, continued
|
|
|
n.
|
Fair
Value of Financial Instruments and Concentration of
Risk
|
The carrying amount reported in our consolidated balance sheets
for cash, cash equivalents, trade accounts receivable, accounts
payable and accrued liabilities approximates fair value because
of the immediate or short-term maturity of these financial
instruments. Our policy is to place our cash and cash
equivalents in highly-rated financial instruments and
institutions, which we believe mitigates our credit risk.
Concentration of credit risk with respect to accounts receivable
is limited due to the diversity of our customer base. We
routinely review the collection of our accounts receivable and
maintain an allowance for potential credit losses, but
historically have not experienced any significant losses related
to an individual customer or groups of customers in a geographic
area.
Our operations depend, in some cases, on the ability of single
source suppliers or a limited number of suppliers, to deliver
products and supplies on a timely basis. We have in the past
experienced, and may in the future experience, shortages of or
difficulties in acquiring products
and/or
supplies in the quantities and of the quality needed. Shortages
in the availability of products
and/or
supplies for an extended period of time will have a negative
impact on our operating results.
|
|
o.
|
Derivative
Instruments
|
In accordance with the FASBs accounting guidance
pertaining to derivatives and hedging, all investments in
derivatives are recorded at fair value. A derivative is
typically defined as an instrument whose value is
derived from an underlying instrument, index or
rate, has a notional amount, requires little or no initial
investment and can be net settled. Our derivatives are reported
as current assets and liabilities or other non-current assets or
liabilities as appropriate.
We use interest rate swap agreements to mitigate our exposure to
increasing interest rates as well as to maintain an appropriate
mix of fixed-rate and variable-rate debt. If we determine that
contracts are effective at meeting our risk reduction and
correlation criteria, we account for them using hedge
accounting. Under hedge accounting, we recognize the effective
portion of changes in the fair value of the contracts in other
comprehensive income and the ineffective portion in earnings. If
we determine that contracts do not, or no longer meet our risk
reduction and correlation criteria, we account for them under a
fair-value method recognizing changes in the fair value in
earnings in the period of change. If we determine that a
contract no longer meets our risk reduction and correlation
criteria or if the derivative expires, we recognize in earnings
any accumulated balance in other comprehensive income (loss)
related to this contract in the period of determination. For
interest rate swap agreements accounted for under hedge
accounting, we assess the effectiveness based on changes in
their intrinsic value with changes in the time value portion of
the contract reflected in earnings. All cash payments made or
received under the contracts are recognized in interest expense.
Credit exposure associated with non-performance by the
counterparties to derivative instruments is generally limited to
the uncollateralized fair value of the asset related to
instruments recognized in the consolidated balance sheets. We
attempt to mitigate the risk of non-performance by selecting
counterparties with high credit ratings and monitoring their
creditworthiness and by diversifying derivative amounts with
multiple counterparties.
The contractual or notional amounts for derivatives are used to
calculate the exchange of contractual payments under the
agreements and are not representative of the potential for gain
or loss on these instruments. Interest rates affect the fair
value of derivatives. The fair values generally represent the
estimated amounts that we would expect to receive or pay upon
termination of the contracts at the reporting date. The fair
values are based upon dealer quotes when available or an
estimate using values obtained from independent pricing
services, costs to settle or quoted market prices of comparable
instruments.
61
VCA
ANTECH, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
2.
|
Summary
of Significant Accounting Policies, continued
|
|
|
p.
|
Marketing
and Advertising
|
Marketing and advertising costs are expensed as incurred. Total
marketing and advertising expense included in direct costs
amounted to $21.7 million, $19.9 million and
$17.5 million for 2010, 2009 and 2008, respectively. Total
marketing and advertising expense included in selling, general
and administrative expense amounted to $2.8 million,
$2.0 million and $2.1 million for 2010, 2009 and 2008,
respectively.
|
|
q.
|
Insurance
and Self-Insurance
|
We use a combination of insurance and self-insurance with high
retention or high-deductible provisions for a number of risks,
including workers compensation, general liability,
property insurance and our group health insurance benefits.
Liabilities associated with these risks are estimated at fair
value on an undiscounted basis by considering historical claims
experience, demographic factors, severity factors and other
actuarial assumptions.
We accrue the cost of basic product warranties included with the
sale of our digital radiography imaging equipment and our
ultrasound imaging equipment at the time we sell these units to
our customers. Our warranty costs are primarily for our
assistance in helping our customers resolve issues with the
warranties they have with the original equipment manufacturers.
We estimate our warranty costs based on historical warranty
claim experience. Accrued warranty costs at December 31,
2010 and 2009 were $66,000 and $108,000, respectively.
|
|
s.
|
Calculation
of Earnings per Share
|
Basic earnings per share is calculated by dividing net income by
the weighted-average number of shares outstanding during the
period. Diluted earnings per share is calculated by dividing net
income by the weighted-average number of common shares
outstanding after giving effect to all potentially dilutive
common shares outstanding during the period. Basic and diluted
earnings per share were calculated as follows (in thousands,
except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Net income attributable to VCA Antech, Inc.
|
|
$
|
110,243
|
|
|
$
|
131,428
|
|
|
$
|
132,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
86,049
|
|
|
|
85,077
|
|
|
|
84,455
|
|
Effect of dilutive potential common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
753
|
|
|
|
785
|
|
|
|
1,131
|
|
Non-vested shares
|
|
|
249
|
|
|
|
235
|
|
|
|
114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
87,051
|
|
|
|
86,097
|
|
|
|
85,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share
|
|
$
|
1.28
|
|
|
$
|
1.54
|
|
|
$
|
1.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share
|
|
$
|
1.27
|
|
|
$
|
1.53
|
|
|
$
|
1.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2010, 2009 and 2008,
potential common shares of 11,763, 48,008 and 51,462,
respectively, were excluded from the computation of diluted
earnings per share because their inclusion would have had an
anti-dilutive effect.
62
VCA
ANTECH, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
2.
|
Summary
of Significant Accounting Policies, continued
|
|
|
t.
|
Share-Based
Compensation
|
We account for share-based compensation in accordance with
FASBs accounting guidance on stock compensation.
Accordingly, we measure the cost of share-based payments based
on the grant-date fair value of the equity instruments and
recognize the cost over the requisite service period, which is
typically the vesting period.
Our companys share-based employee compensation plans are
described further in Note 8, Share-Based
Compensation.
Effective January 1, 2009, we adopted the provisions of the
FASBs revised accounting guidance on business
combinations, which retained the underlying concepts in that all
business combinations continued to be accounted for at fair
value under the acquisition method of accounting, however
changed the application of the acquisition method in a number of
significant respects. Acquisition costs will generally be
expensed as incurred; non-controlling interests will be valued
at fair value at the acquisition date; restructuring costs
associated with a business combination will generally be
expensed subsequent to the acquisition date; and changes in
deferred tax asset valuation allowances and income tax
uncertainties after the acquisition date generally will affect
income tax expense. The revised business combination guidance
was effective on a prospective basis for all of our business
combinations for which the acquisition date is on or after
January 1, 2009, with the exception of the accounting for
valuation allowances on deferred taxes and acquired tax
contingencies. The revised business combination guidance amends
the FASBs accounting guidance pertaining to income taxes
such that adjustments made to valuation allowances on deferred
taxes and acquired tax contingencies associated with
acquisitions that closed prior to the effective date of the
revised business combination guidance would also apply the
provisions of the FASBs business combination guidance.
|
|
v.
|
Recent
Accounting Pronouncements
|
In January 2010, the FASB amended accounting guidance pertaining
to fair value measurements and disclosures to improve the
disclosure requirements and increase the transparency in
financial reporting. The amended guidance requires new
disclosures as follows: separate disclosure of significant
transfers in and out of Level 1 and 2 fair value
measurements along with a description of the reasons for the
transfers; and in the reconciliation for fair value measurements
using significant unobservable inputs
(Level 3) present separately information about
purchases, sales, issuances, and settlements. Additionally, this
new accounting guidance clarifies the level of disaggregation
required and the required disclosures about inputs and valuation
techniques. The new disclosures and clarifications of existing
disclosures were effective for interim and annual reporting
periods beginning after December 15, 2009, except for the
disclosures about purchases, sales, issuances, and settlements
in the roll forward of activity in Level 3 fair value
measurements. Those disclosures are effective for fiscal years
beginning after December 15, 2010, and for interim periods
within those fiscal years. The adoption of this new guidance did
not impact our consolidated financial statements.
Certain reclassifications have been made herein to prior year
balances to conform to the 2010 financial statement presentation.
63
VCA
ANTECH, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
3.
|
Related
Party Transactions
|
|
|
a.
|
Transactions
with ThinkPets Inc. (formerly known as Zoasis
Corporation)
|
We incurred marketing expense for vaccine reminders and other
direct mail services provided by ThinkPets, a company that is
majority owned by Robert L. Antin, our Chief Executive Officer
and Chairman. We purchased services of $2.8 million,
$2.7 million and $2.1 million for 2010, 2009 and 2008,
respectively. Arthur J. Antin, our Chief Operating Officer, owns
an 8% interest in ThinkPets.
In 2003, we entered into an agreement with ThinkPets pursuant to
which we acquired all of ThinkPets right, title, and
interest in and to certain software in exchange for all our
preferred stock of ThinkPets then held by us. Concurrent with
the purchase of the software, we granted to ThinkPets a limited
royalty-free, non-exclusive license to this software in exchange
for ThinkPets providing certain support for the software. Both
we and ThinkPets have a right to make modifications to the
software, but all modifications and derivative works are owned
by us. The software is hosted at our expense at a third-party
hosting facility for the benefit of both parties.
Frank Reddick joined our company as a director in February 2002
and is a partner in the law firm of Akin Gump Strauss
Hauer & Feld, LLP (Akin). Akin provided
legal services to us during 2010, 2009 and 2008. The amount paid
by our company to Akin for these legal services was
$2.3 million, $1.3 million and $600,000 in 2010, 2009
and 2008, respectively.
|
|
c.
|
Transactions
with VetSource
|
In 2006, we entered into a pharmacy distribution agreement with
Strategic Pharmaceutical Solutions, Inc. (VetSource)
a start-up
pharmacy distribution company. Pursuant to the terms of this
agreement we are entitled to one representative on the VetSource
Board of Directors. Under the agreement we promote the use of
VetSource as the preferred provider of pharmaceutical products
to VCA animal hospitals. The agreement has a five-year term and
will renew for one year terms unless either party provides
written notice of termination to the other party at least
120 days prior to expiration of the then current term. The
amount paid by our company to VetSource for pharmaceutical
products was $41.9 million, $38.3 million and
$22.7 million in 2010, 2009 and 2008, respectively.
On April 8, 2010, pursuant to our warrant agreement we
purchased 34% of the outstanding preferred stock of VetSource
for $1.0 million. We account for this investment using the
cost basis method. In addition, we entered into a consulting
agreement whereby VCA received a fee of $1.0 million for
advisory services provided to VetSource management in 2010.
64
VCA
ANTECH, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
4.
|
Other
Accrued Liabilities
|
Other accrued liabilities consisted of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Deferred revenue
|
|
$
|
8,617
|
|
|
$
|
12,497
|
|
Accrued health insurance
|
|
|
4,970
|
|
|
|
4,484
|
|
Deferred rent
|
|
|
3,456
|
|
|
|
2,989
|
|
Customer deposits
|
|
|
2,966
|
|
|
|
3,783
|
|
Accrued consulting fees
|
|
|
2,760
|
|
|
|
|
|
Accrued lab service rebates
|
|
|
2,535
|
|
|
|
1,238
|
|
Holdbacks and earn-outs
|
|
|
2,447
|
|
|
|
2,483
|
|
Accrued workers compensation insurance
|
|
|
786
|
|
|
|
2,217
|
|
Other
|
|
|
17,232
|
|
|
|
13,607
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
45,769
|
|
|
$
|
43,298
|
|
|
|
|
|
|
|
|
|
|
65
VCA
ANTECH, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Long-term obligations consisted of the following at
December 31, 2010 and 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Senior term notes
|
|
Notes payable, maturing in 2015, secured by assets, variable
interest rate (weighted-average interest rate of 2.6% in 2010)
|
|
$
|
493,750
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior term notes
|
|
Notes payable, maturing in 2011 and repaid in 2010, secured by
assets, variable interest rate (weighted-average interest rate
of 1.9% in 2009)
|
|
|
|
|
|
|
516,889
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving credit
|
|
Revolving line of credit, maturing in 2015, secured by assets,
variable interest rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured seller notes
|
|
Notes payable, various maturities through 2013, secured by
assets and stock of certain subsidiaries, various interest rates
ranging from 9.0% to 10.0%
|
|
|
868
|
|
|
|
1,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured debt
|
|
Note payable, maturing in 2010, interest rate of 7.25%
|
|
|
|
|
|
|
375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt obligations
|
|
|
494,618
|
|
|
|
518,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligations
|
|
|
32,418
|
|
|
|
26,768
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
527,036
|
|
|
|
545,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less current portion
|
|
|
(28,101
|
)
|
|
|
(17,195
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
498,935
|
|
|
$
|
527,860
|
|
|
|
|
|
|
|
|
|
|
|
|
The annual aggregate scheduled maturities of our long-term
obligations for the five years subsequent to December 31,
2010 are presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
|
|
|
Capital Lease
|
|
|
|
|
|
|
Obligations
|
|
|
Obligations
|
|
|
Total
|
|
|
2011
|
|
$
|
25,752
|
|
|
$
|
2,349
|
|
|
$
|
28,101
|
|
2012
|
|
|
28,205
|
|
|
|
2,529
|
|
|
|
30,734
|
|
2013
|
|
|
37,536
|
|
|
|
2,664
|
|
|
|
40,200
|
|
2014
|
|
|
40,625
|
|
|
|
2,674
|
|
|
|
43,299
|
|
2015
|
|
|
362,500
|
|
|
|
2,785
|
|
|
|
365,285
|
|
Thereafter
|
|
|
|
|
|
|
19,417
|
|
|
|
19,417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
494,618
|
|
|
$
|
32,418
|
|
|
$
|
527,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66
VCA
ANTECH, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
5.
|
Long-Term
Obligations, continued
|
Senior
Credit Facility
In May 2005, we entered into a senior credit facility with
various lenders for $550.0 million of senior secured credit
facilities with Goldman Sachs Credit Partners, L.P. as the
syndication agent and Wells Fargo Bank, N.A. as the
administrative agent. At the time of entering into the senior
credit facility, it included $475.0 million of senior term
notes and a $75.0 million revolving credit facility.
In June 2007, we amended our senior credit facility to allow for
additional senior term notes in the amount of
$160.0 million. The funds borrowed from the additional
senior term notes were primarily used to fund the acquisition of
Healthy Pet on June 1, 2007. The terms, including the
interest rate, of these additional senior term notes are the
same as the senior term notes existing prior to the amendment.
In connection with this amendment, we paid financing costs in
the amount of $926,000.
In August 2010, we entered into a new senior credit facility
with various lenders for $600 million of senior secured
credit facilities with Bank of America, N.A. as the syndication
agent and Wells Fargo Bank, N.A. as the administrative agent,
collateral agent, issuing bank and swing line lender. The new
credit facility provided $500 million of senior term notes
and a $100 million revolving credit facility, which may be
used to borrow, on a
same-day
notice under a swing line, the lesser of $10 million and
the aggregate unused amount of the revolving credit facility
then in effect. The terms of the new senior credit facility are
discussed below in this footnote. The funds borrowed under the
new senior term notes were used to retire our existing senior
term notes described above in the principal amount of
$505.4 million. In connection with the refinancing
transactions, we wrote off previously deferred financing costs
and paid financing costs. We incurred $9.4 million in debt
retirement costs, of which approximately $2.1 million, or
$1.3 million after tax were recognized as part of income
from continuing operations and approximately $7.3 million
were capitalized as deferred financing costs. Included in the
$2.1 million of debt retirement costs included in income
from continuing operations was approximately $192,000 in
previously deferred financing costs that were written off as
part of the transaction.
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
1.50% per annum for the senior term notes existing from May 2005
to August 2010 and for the senior term notes existing since
August 2010 a margin of 2.25% (Level III, see table below)
per annum until the date of delivery of the compliance
certificate and the financial statements for the period ending
March 31, 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Applicable Margin
|
|
|
Applicable Revolving
|
|
Level
|
|
Leverage Ratio
|
|
for Eurodollar Rate Loans
|
|
|
Commitment Fee %
|
|
|
I
|
|
³
2.75:1.00
|
|
|
2.75
|
%
|
|
|
0.50
|
%
|
II
|
|
< 2.75:1.00 and
³
2.25:1.00
|
|
|
2.50
|
%
|
|
|
0.50
|
%
|
III
|
|
< 2.25:1.00 and
³
1.75:1.00
|
|
|
2.25
|
%
|
|
|
0.50
|
%
|
IV
|
|
< 1.75:1.00 and
³
1.25:1.00
|
|
|
2.00
|
%
|
|
|
0.50
|
%
|
V
|
|
< 1.25:1.00
|
|
|
1.75
|
%
|
|
|
0.375
|
%
|
The base rate for the previous senior term notes existing from
May 2005 to August 2010 is the higher of (a) Wells
Fargos prime rate or (b) the Federal funds rate plus
0.5%. The base rate for the new senior term
67
VCA
ANTECH, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
5.
|
Long-Term
Obligations, continued
|
notes existing since August 2010 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.
Maturity and Principal Payments. The new
senior term notes mature on August 19, 2015. Principal
payments on the senior term notes are paid quarterly in the
amount of $6.3 million for the first two years beginning on
December 31, 2010, quarterly payments of $9.4 million
for the two years following, and quarterly payments of
$12.5 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For Years Ending December 31,
|
|
|
2011
|
|
2012
|
|
2013
|
|
2014
|
|
2015
|
|
Senior term notes
|
|
$
|
25,000
|
|
|
$
|
28,125
|
|
|
$
|
37,500
|
|
|
$
|
40,625
|
|
|
$
|
362,500
|
|
The revolving credit facility has a commitment fee equal to
0.50% per annum on the unused portion of the commitment. The
revolving credit facility matures on August 19, 2015.
Principal payments on the revolving credit facility are made at
our discretion with the entire unpaid amount due at maturity. At
December 31, 2010, we had no borrowings under our revolving
credit facility.
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. At December 31, 2010, we had a fixed charge coverage
ratio of 1.61 to 1.00, which was in compliance with the required
ratio of no less than 1.20 to 1.00, and a leverage ratio of 1.94
to 1.00, which was in compliance with the required ratio of no
more than 3.00 to 1.00.
Interest
Rate Swap Agreements
In the past we have entered into interest rate swap agreements
whereby we pay the counterparty amounts based on a fixed
interest rate and set notional principal amount in exchange for
the receipt of payments from the counterparty based on current
LIBOR and the same set notional principal amount. We use
interest rate swap agreements to mitigate our exposure to
increasing interest rates as well as to maintain an appropriate
mix of fixed-rate and variable-rate debt.
During 2010, all of our interest rate swap agreements had
expired and we have not entered into any new agreements.
68
VCA
ANTECH, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
5.
|
Long-Term
Obligations, continued
|
The following table summarizes cash received or cash paid and
unrealized gains or losses recognized as a result of our
interest rate swap agreements (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For Years Ended December 31,
|
|
|
2010
|
|
2009
|
|
2008
|
|
Cash paid(1)
|
|
$
|
382
|
|
|
$
|
9,784
|
|
|
$
|
5,472
|
|
Recognized gain from ineffectiveness(2)
|
|
$
|
|
|
|
$
|
(70
|
)
|
|
$
|
(97
|
)
|
|
|
|
(1) |
|
Our interest rate swap agreements effectively converted a
certain amount of our variable-rate debt under our senior credit
facility to fixed-rate debt for purposes of hedging against the
risk of increasing interest rates. The above table depicts cash
payments to the counterparties on our swap agreements. These
payments are offset by a corresponding decrease in interest paid
on our variable-rate debt under our senior credit facility.
These amounts are included in interest expense in our
consolidated income statements. |
|
(2) |
|
These recognized gains are included in other expense (income) in
our consolidated income statements. |
|
|
6.
|
Fair
Value of Financial Instruments
|
On January 1, 2008, we adopted the applicable provisions of
the new accounting guidance on fair value measurements which
defines fair value, establishes a framework for measuring fair
value and expands disclosures about fair value measurements
related to financial instruments. On January 1, 2009, we
adopted the new guidance for our non-financial assets and
non-financial liabilities measured on a non-recurring basis. As
of December 31, 2010, we do not have any applicable
non-recurring measurements of non-financial assets and
non-financial liabilities.
Current fair value accounting guidance includes a hierarchy that
is intended to increase consistency and comparability in fair
value measurements and related disclosures. The fair value
hierarchy is based on inputs to valuation techniques that are
used to measure fair value that are either observable or
unobservable. Observable inputs reflect assumptions market
participants would use in pricing an asset or liability based on
market data obtained from independent sources while unobservable
inputs reflect a reporting entitys pricing based upon
their own market assumptions. The current guidance establishes a
three-tiered fair value hierarchy which prioritizes the inputs
used in measuring fair value as follows:
|
|
|
|
|
Level 1. Observable inputs such as quoted
prices in active markets;
|
|
|
|
Level 2. Inputs, other than quoted
prices, that are observable for the asset or liability, either
directly or indirectly. These include quoted prices for similar
assets or liabilities in active markets and quoted prices for
identical or similar assets or liabilities in markets that are
not active; and
|
|
|
|
Level 3. Unobservable inputs in which
there is little or no market data, which require the reporting
entity to develop its own assumptions.
|
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 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.
69
VCA
ANTECH, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
6.
|
Fair
Value of Financial Instruments, continued
|
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
December 31, 2010 is based upon the ask price quoted from
an external source, which is considered a Level 2 input. At
December 31, 2009, due to changes in the credit markets, we
did not believe current pricing levels provided a reasonable
estimate of fair value. As such, we estimated the fair value of
our variable-rate debt using discounted cash flow techniques
utilizing current market rates, which incorporated our credit
risk.
The following table reflects the carrying value and fair value
of our variable-rate long-term debt (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2010
|
|
2009
|
|
|
Carrying
|
|
Fair
|
|
Carrying
|
|
Fair
|
|
|
Value
|
|
Value
|
|
Value
|
|
Value
|
|
Variable-rate long-term debt
|
|
$
|
493,750
|
|
|
$
|
496,219
|
|
|
$
|
516,889
|
|
|
$
|
513,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swap Agreements. We use the
market approach to measure fair value for our interest rate swap
agreements. The market approach uses prices and other relevant
information generated by market transactions involving
comparable assets or liabilities. As of December 31, 2010
all of our interest rate swap agreements had expired.
The following table reflects the fair value of our interest rate
swap agreements, which is measured on a recurring basis as
defined by the FASB accounting guidance (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basis of Fair Value Measurement
|
|
|
|
|
Quoted Prices
|
|
Significant Other
|
|
Significant
|
|
|
|
|
In Active Markets
|
|
Observable
|
|
Unobservable
|
|
|
|
|
for Identical Items
|
|
Inputs
|
|
Inputs
|
|
|
Balance
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
At December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other accrued liabilities
|
|
$
|
380
|
|
|
$
|
|
|
|
$
|
380
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We have not paid cash dividends on our common stock and we do
not anticipate paying cash dividends in the foreseeable future.
In addition, our senior credit facility places limitations on
our ability to pay cash dividends or make other distributions in
respect of our common stock. Specifically, our senior credit
facility dated August 19, 2010 prohibits us from declaring,
ordering, paying, or setting apart any sum for any dividends or
other distributions on account of any shares of any class of
stock, other than dividends payable solely in shares of stock to
holders of such class of stock. Any future determination as to
the payment of dividends will depend on our results of
operations, financial condition, capital requirements and other
factors deemed relevant by our Board of Directors, including the
General Corporation Law of the State of Delaware, which provides
that dividends are only payable out of surplus or current net
profits.
70
VCA
ANTECH, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
8.
|
Share-Based
Compensation
|
Stock
Incentive Plans
At December 31, 2010, there were stock options, non-vested
shares and restricted stock units outstanding under our existing
stock incentive plans. We maintain three plans: the 1996 Stock
Incentive Plan; the 2001 Stock Incentive Plan; and the 2006
Equity Incentive Plan (2006 Plan). New options and
other stock awards may only be granted under the 2006 Plan. At
December 31, 2010, the sum of the shares previously issued
pursuant to awards under the 2006 Plan and the shares of common
stock remaining available for future issuance under the 2006
Plan to our employees, directors, consultants and those of our
affiliates is 6,670,435 shares. The number of shares of
common stock remaining available for future issuance under the
2006 Plan may increase by any shares of common stock underlying
prior outstanding options that expire, are forfeited, cancelled
or terminate for any reason without having been exercised in
full. The number of shares available for issuance at
December 31, 2010 was 4,561,931. Outstanding options and
non-vested shares granted under our plans typically vest over
periods that range from two to five years, and outstanding
options typically expire between five and ten years from the
date of grant.
Stock
Option Activity
A summary of our stock option activity for 2010 is as follows
(in thousands, except weighted-average exercise price and
weighted-average remaining contractual term):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
Aggregate
|
|
|
|
Stock
|
|
|
Exercise
|
|
|
Term
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Price
|
|
|
(Years)
|
|
|
Value
|
|
|
Outstanding at December 31, 2009
|
|
|
4,300
|
|
|
$
|
16.72
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(945
|
)
|
|
|
17.63
|
|
|
|
|
|
|
|
|
|
Forfeited/Canceled
|
|
|
(48
|
)
|
|
|
19.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2010
|
|
|
3,307
|
|
|
$
|
16.41
|
|
|
|
2.2
|
|
|
$
|
22,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2010
|
|
|
2,557
|
|
|
$
|
16.23
|
|
|
|
2.0
|
|
|
$
|
18,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected to vest at December 31, 2010
|
|
|
716
|
|
|
$
|
17.04
|
|
|
|
2.8
|
|
|
$
|
4,475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average grant-date fair value of our stock options
granted during 2008 was $5.85. There were no stock options
granted during 2010 and 2009. The aggregate intrinsic value of
our stock options exercised during 2010, 2009 and 2008 was
$3.3 million, $7.3 million and $5.8 million,
respectively. The actual tax benefit realized on options
exercised during 2010, 2009 and 2008 was $1.3 million,
$2.8 million and $2.2 million, respectively. The total
fair value of options vested during 2010, 2009 and 2008 was
$2.1 million, $72,000 and $3.1 million, respectively.
71
VCA
ANTECH, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
8.
|
Share-Based
Compensation, continued
|
The following table summarizes information about the options
outstanding at December 31, 2010 (in thousands, except per
share amounts and the weighted-average remaining contractual
life):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Weighted-Avg.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
Contractual
|
|
|
Weighted-Avg.
|
|
|
Number
|
|
|
Weighted-Avg.
|
|
Exercise Price
|
|
Outstanding
|
|
|
Life
|
|
|
Exercise Price
|
|
|
Exercisable
|
|
|
Exercise Price
|
|
|
$6.26 - $7.97
|
|
|
1,000
|
|
|
|
1.9
|
|
|
$
|
7.01
|
|
|
|
1,000
|
|
|
$
|
7.01
|
|
$15.33 - $30.70
|
|
|
2,307
|
|
|
|
2.3
|
|
|
$
|
20.49
|
|
|
|
1,557
|
|
|
$
|
22.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,307
|
|
|
|
|
|
|
|
|
|
|
|
2,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2010, there was $1.6 million of total
unrecognized compensation cost related to our stock options.
This cost is expected to be recognized over a weighted-average
period of over one year.
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. There were no options granted during
2010 and 2009.
We use historical data to estimate pre-vesting option
forfeitures. We recognize share-based compensation only for
those awards that we expect to vest.
The compensation cost that has been charged against income for
stock options was $2.6 million, $1.9 million and
$1.7 million for 2010, 2009 and 2008, respectively. The
corresponding income tax benefit recognized in the income
statement was $1.0 million, $0.8 million and
$0.6 million for 2010, 2009 and 2008, respectively.
Non-Vested
Shares
Additionally, under our 2006 Plan, we have issued non-vested
stock awards in our common stock to certain employees and
members of our Board of Directors. The non-vested stock awards
to employees and executives generally vest as follows: 25% on
the second anniversary of the grant date; 50% on the third
anniversary of the grant date; and 25% on the fourth anniversary
of the grant date. The non-vested stock awards to members of our
Board of Directors generally vest in equal annual installments
over three years from the date of grant. Total compensation
expense related to non-vested stock awards was
$6.7 million, $6.0 million and $5.5 million in
2010, 2009 and 2008, respectively. The corresponding income tax
benefit recognized in the income statement was
$2.6 million, $2.3 million and $2.1 million for
2010, 2009 and 2008, respectively. As of December 31, 2010
there was $8.7 million of unrecognized compensation cost
related to these non-
72
VCA
ANTECH, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
8.
|
Share-Based
Compensation, continued
|
vested shares that will be recognized over a weighted-average
period of three years. A summary of our non-vested stock
activity for 2010 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grant Date
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average Fair
|
|
|
|
|
|
|
Value
|
|
|
|
Shares
|
|
|
Per Share
|
|
|
Outstanding at December 31, 2009
|
|
|
691,764
|
|
|
$
|
30.54
|
|
Granted
|
|
|
269,104
|
|
|
$
|
20.54
|
|
Vested
|
|
|
(263,752
|
)
|
|
$
|
31.74
|
|
Forfeited/Canceled
|
|
|
(10,605
|
)
|
|
$
|
30.40
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2010
|
|
|
686,511
|
|
|
$
|
26.16
|
|
|
|
|
|
|
|
|
|
|
During 2010, we granted 269,104 shares of non-vested common
stock. Of these awards 258,000 shares were granted to
employees and 11,104 shares were granted to our
non-employee directors. The awards to employees and to our
non-employee directors will vest in equal annual installments
over four years and three years, respectively, from the grant
date.
Restricted
Stock Unit Activity
Pursuant to the terms of the 2006 Equity Incentive Plan, on
April 17, 2009, we awarded 84,757 restricted stock units in
lieu of cash bonuses to our four senior executive officers for
services performed in fiscal year 2008. Restricted stock units
differ from the non-vested stock awards mentioned above in that
the restricted stock units were fully vested or earned by the
employee on the grant date however are restricted such that the
participant will not have any right, title, or interest in, or
otherwise be considered the owner of, any of the shares of
common stock covered by the restricted stock units until such
shares of common stock are settled. The restricted stock units
will be settled upon the first to occur of the following:
May 1, 2012, the date of the senior executives
separation from service, death or disability, or the date of a
change in control. The restricted stock units had a grant date
fair value of $22.90 per share resulting in a total value of
$1.9 million and the grant was considered a non-cash
financing activity in the prior year. There were no restricted
stock grants for the December 31, 2010 period.
|
|
9.
|
Commitments
and Contingencies
|
We operate many of our animal hospitals from premises that are
leased under operating leases with terms, including renewal
options, ranging from five to 35 years. Certain leases
include fair-value purchase options that can be exercised at our
discretion at various times within the lease terms.
73
VCA
ANTECH, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
9.
|
Commitments
and Contingencies, continued
|
The future minimum lease payments on operating leases at
December 31, 2010 are as follows (in thousands):
|
|
|
|
|
2011
|
|
$
|
53,446
|
|
2012
|
|
|
53,230
|
|
2013
|
|
|
52,673
|
|
2014
|
|
|
52,010
|
|
2015
|
|
|
51,664
|
|
Thereafter
|
|
|
636,136
|
|
|
|
|
|
|
Total
|
|
$
|
899,159
|
|
|
|
|
|
|
Rent expense totaled $51.9 million, $46.7 million and
$42.7 million in 2010, 2009 and 2008, respectively. Rental
income totaled $726,000, $564,000 and $490,000 in 2010, 2009 and
2008, respectively.
Under the terms of certain purchase agreements, we have
aggregate commitments to purchase approximately
$18.7 million of products and services through 2011.
We have contractual arrangements in connection with certain
acquisitions, whereby additional cash may be paid to former
owners of acquired companies upon attainment of specified
financial criteria as set forth in the respective agreements.
The amount to be paid cannot be determined until the earn-out
periods expire and the attainment of criteria is established. If
the specified financial criteria are attained, we will be
obligated to pay an additional $1.2 million.
We adopted new guidance regarding business combinations for
acquisitions with acquisition dates of January 1, 2009 or
later. Under the new guidance contingent consideration, such as
earn-out liabilities, is now 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.
In connection with certain acquisitions, we withheld a portion
of the purchase price, or the holdback, as security for
indemnification obligations of the sellers under the acquisition
agreement. The amounts withheld are typically payable within a
12-month
period. The total outstanding holdbacks at both
December 31, 2010 and 2009 were $1.8 million and are
included in other accrued liabilities.
We paid $3.3 million, $5.0 million and
$3.0 million in 2010, 2009 and 2008, respectively, to
sellers for the unused portion of holdbacks.
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.
74
VCA
ANTECH, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The provision for income taxes is comprised of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Federal:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
51,717
|
|
|
$
|
49,416
|
|
|
$
|
52,696
|
|
Deferred
|
|
|
11,536
|
|
|
|
20,910
|
|
|
|
19,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63,253
|
|
|
|
70,326
|
|
|
|
72,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
12,892
|
|
|
|
10,564
|
|
|
|
10,942
|
|
Deferred
|
|
|
1,957
|
|
|
|
3,690
|
|
|
|
2,845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,849
|
|
|
|
14,254
|
|
|
|
13,787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
78,102
|
|
|
$
|
84,580
|
|
|
$
|
86,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The net deferred income tax assets (liabilities) at
December 31, 2010 and 2009 is comprised of the following
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Current deferred income tax assets:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
4,996
|
|
|
$
|
5,145
|
|
State taxes
|
|
|
5,329
|
|
|
|
3,707
|
|
Other liabilities and reserves
|
|
|
6,528
|
|
|
|
6,831
|
|
Other assets
|
|
|
904
|
|
|
|
833
|
|
Inventory
|
|
|
1,262
|
|
|
|
1,802
|
|
|
|
|
|
|
|
|
|
|
Total current deferred income tax assets
|
|
$
|
19,019
|
|
|
$
|
18,318
|
|
|
|
|
|
|
|
|
|
|
Non-current deferred income tax (liabilities) assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
31,377
|
|
|
$
|
13,997
|
|
Write-down of assets
|
|
|
1,216
|
|
|
|
1,216
|
|
Start-up
costs
|
|
|
333
|
|
|
|
333
|
|
Other assets
|
|
|
25,826
|
|
|
|
21,549
|
|
Intangible assets
|
|
|
(113,685
|
)
|
|
|
(99,799
|
)
|
Property and equipment
|
|
|
(19,105
|
)
|
|
|
(16,004
|
)
|
Unrealized loss on investments
|
|
|
1,950
|
|
|
|
1,950
|
|
Share-based compensation
|
|
|
6,115
|
|
|
|
6,169
|
|
Valuation allowance
|
|
|
(16,158
|
)
|
|
|
(4,608
|
)
|
|
|
|
|
|
|
|
|
|
Total non-current deferred income tax liabilities, net
|
|
$
|
(82,131
|
)
|
|
$
|
(75,197
|
)
|
|
|
|
|
|
|
|
|
|
At December 31, 2010, we had Federal net operating loss
(NOL) carryforwards of approximately
$78.9 million, comprised mainly of acquired NOL
carryforwards. These NOLs expire at various dates through 2029.
The utilization of NOL carryforwards to reduce taxable income is
subject to certain statutory limitations. Events that cause such
a limitation include, but are not limited to, a cumulative
ownership change of more than 50% over a three-year period. We
believe that some of our acquisitions caused such a change of
ownership and, accordingly, utilization of the NOL carryforwards
may be limited in future years. Accordingly, the valuation
allowance is principally related to subsidiaries NOL
carryforwards as well as certain investment-
75
VCA
ANTECH, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
10.
|
Income
Taxes, continued
|
related expenditures where the realization of the benefits is
not more likely than not to occur. We believe that it is more
likely than not that the benefit from the remaining net deferred
tax assets will be realizable.
Our effective tax rate was 41.5%, 39.2% and 39.3% in 2010, 2009
and 2008, respectively.
A reconciliation of the provision for income taxes to the amount
computed at the Federal statutory rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Federal income tax at statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State taxes, net of Federal benefit
|
|
|
6.0
|
|
|
|
4.1
|
|
|
|
4.1
|
|
Miscellaneous
|
|
|
0.5
|
|
|
|
0.1
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41.5
|
%
|
|
|
39.2
|
%
|
|
|
39.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The provision for 2010 income taxes includes tax expense of
$5.4 million, or $3.5 million net of tax, related to
settlement of taxes on 2004 through 2007 taxable income.
We are regularly audited by federal and state tax authorities.
Our 2009, 2008 and 2007 taxable years are currently open for IRS
audit. The previous four years are generally open for state
audit.
|
|
11.
|
Noncontrolling
Interests
|
Effective January 1, 2009, we adopted the new accounting
guidance for noncontrolling interests on a retrospective basis.
The new guidance changes the accounting and reporting for
minority interests which have been recharacterized as
noncontrolling interests and are now classified as a component
of equity in our consolidated balance sheets. The adoption also
resulted in new presentation and disclosure requirements for
noncontrolling interests within our consolidated income
statements, statements of equity and statements of cash flows.
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. Noncontrolling
interest in income of subsidiaries was $3.9 million,
$4.2 million and $4.1 million in 2010, 2009 and 2008,
respectively. In addition, we reflect our noncontrolling
partners cumulative share in the equity of the respective
partnerships as noncontrolling interests in our consolidated
balance sheets. At December 31, 2010 and 2009,
noncontrolling interest was $16.9 million and
$16.3 million, respectively.
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. These obligations are
considered liabilities because of the certainty of the event. As
a result we valued these liabilities at fair value as of the
date of partnership formation. At December 31, 2010 and
2009, these liabilities were $1.2 million and
$1.4 million, respectively and are included in other
liabilities in our consolidated balance sheets. 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 and
accordingly are required to be presented in temporary equity
(mezzanine). The balance as of December 31, 2010 and 2009
in noncontrolling interests consists of these types of
arrangements.
76
VCA
ANTECH, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In 1992, we established a voluntary retirement plan under
Section 401(k) of the Internal Revenue Code. The plan
covers all employees with at least six months of employment with
our company and provides the annual matching contributions by us
at the discretion of our Board of Directors. Our expense for
matching contributions to our voluntary retirement plan
approximated $1.6 million, $1.8 million and
$1.2 million in 2010, 2009 and 2008, respectively.
Our reportable segments are Animal Hospital, Laboratory and
Medical Technology. These segments are strategic business units
that have different services, products,
and/or
functions. Our segments are managed separately because each is a
distinct and different business venture with unique challenges,
risks and rewards. Our Animal Hospital segment provides
veterinary services for companion animals and sells related
retail and pharmaceutical products. Our Laboratory segment
provides diagnostic laboratory testing services for
veterinarians, both associated with our animal hospitals and
those independent of us. Our Medical Technology segment sells
digital radiography and ultrasound imaging equipment, related
computer hardware, software and ancillary services to the
veterinary market. We also operate a corporate office that
provides general and administrative support services for our
other segments.
The accounting policies of our segments are the same as those
described in the summary of significant accounting policies
included in Note 2, Summary of Significant Accounting
Policies. 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.
77
VCA
ANTECH, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
13.
|
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(1)
|
|
|
Technology(1)
|
|
|
Corporate
|
|
|
Eliminations
|
|
|
Total(1)
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External revenue
|
|
$
|
1,052,462
|
|
|
$
|
273,616
|
|
|
$
|
55,390
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,381,468
|
|
Intercompany revenue
|
|
|
|
|
|
|
37,038
|
|
|
|
8,623
|
|
|
|
|
|
|
|
(45,661
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
1,052,462
|
|
|
|
310,654
|
|
|
|
64,013
|
|
|
|
|
|
|
|
(45,661
|
)
|
|
|
1,381,468
|
|
Direct costs
|
|
|
880,072
|
|
|
|
168,458
|
|
|
|
44,736
|
|
|
|
|
|
|
|
(42,962
|
)
|
|
|
1,050,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
172,390
|
|
|
|
142,196
|
|
|
|
19,277
|
|
|
|
|
|
|
|
(2,699
|
)
|
|
|
331,164
|
|
Selling, general and administrative expense
|
|
|
23,539
|
|
|
|
26,243
|
|
|
|
14,507
|
|
|
|
59,252
|
|
|
|
|
|
|
|
123,541
|
|
Net loss on sale of assets
|
|
|
273
|
|
|
|
22
|
|
|
|
71
|
|
|
|
8
|
|
|
|
|
|
|
|
374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$
|
148,578
|
|
|
$
|
115,931
|
|
|
$
|
4,699
|
|
|
$
|
(59,260
|
)
|
|
$
|
(2,699
|
)
|
|
$
|
207,249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
32,456
|
|
|
$
|
9,738
|
|
|
$
|
2,437
|
|
|
$
|
2,474
|
|
|
$
|
(1,036
|
)
|
|
$
|
46,069
|
|
Capital expenditures
|
|
$
|
52,243
|
|
|
$
|
5,176
|
|
|
$
|
857
|
|
|
$
|
5,516
|
|
|
$
|
(1,841
|
)
|
|
$
|
61,951
|
|
Total assets at December 31, 2010
|
|
$
|
1,320,619
|
|
|
$
|
215,483
|
|
|
$
|
69,082
|
|
|
$
|
175,297
|
|
|
$
|
(14,059
|
)
|
|
$
|
1,766,422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External revenue
|
|
$
|
994,215
|
|
|
$
|
277,528
|
|
|
$
|
42,764
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,314,507
|
|
Intercompany revenue
|
|
|
|
|
|
|
32,529
|
|
|
|
5,793
|
|
|
|
|
|
|
|
(38,322
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
994,215
|
|
|
|
310,057
|
|
|
|
48,557
|
|
|
|
|
|
|
|
(38,322
|
)
|
|
|
1,314,507
|
|
Direct costs
|
|
|
810,517
|
|
|
|
166,565
|
|
|
|
32,721
|
|
|
|
|
|
|
|
(36,528
|
)
|
|
|
973,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
183,698
|
|
|
|
143,492
|
|
|
|
15,836
|
|
|
|
|
|
|
|
(1,794
|
)
|
|
|
341,232
|
|
Selling, general and administrative expense
|
|
|
21,174
|
|
|
|
22,895
|
|
|
|
12,885
|
|
|
|
38,715
|
|
|
|
|
|
|
|
95,669
|
|
Net loss on sale of assets
|
|
|
652
|
|
|
|
11
|
|
|
|
11
|
|
|
|
3,361
|
|
|
|
|
|
|
|
4,035
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$
|
161,872
|
|
|
$
|
120,586
|
|
|
$
|
2,940
|
|
|
$
|
(42,076
|
)
|
|
$
|
(1,794
|
)
|
|
$
|
241,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
26,769
|
|
|
$
|
9,325
|
|
|
$
|
2,000
|
|
|
$
|
2,307
|
|
|
$
|
(830
|
)
|
|
$
|
39,571
|
|
Capital expenditures
|
|
$
|
40,137
|
|
|
$
|
7,518
|
|
|
$
|
919
|
|
|
$
|
3,994
|
|
|
$
|
(1,767
|
)
|
|
$
|
50,801
|
|
Total assets at December 31, 2009
|
|
$
|
1,158,891
|
|
|
$
|
207,043
|
|
|
$
|
71,019
|
|
|
$
|
201,024
|
|
|
$
|
(10,573
|
)
|
|
$
|
1,627,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External revenue
|
|
$
|
959,395
|
|
|
$
|
274,875
|
|
|
$
|
43,200
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,277,470
|
|
Intercompany revenue
|
|
|
|
|
|
|
32,016
|
|
|
|
6,038
|
|
|
|
|
|
|
|
(38,054
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
959,395
|
|
|
|
306,891
|
|
|
|
49,238
|
|
|
|
|
|
|
|
(38,054
|
)
|
|
|
1,277,470
|
|
Direct costs
|
|
|
775,210
|
|
|
|
163,753
|
|
|
|
31,728
|
|
|
|
|
|
|
|
(35,695
|
)
|
|
|
934,996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
184,185
|
|
|
|
143,138
|
|
|
|
17,510
|
|
|
|
|
|
|
|
(2,359
|
)
|
|
|
342,474
|
|
Selling, general and administrative expense
|
|
|
22,142
|
|
|
|
20,816
|
|
|
|
12,174
|
|
|
|
35,432
|
|
|
|
|
|
|
|
90,564
|
|
Net (gain) loss on sale of assets
|
|
|
|
|
|
|
(3
|
)
|
|
|
29
|
|
|
|
208
|
|
|
|
|
|
|
|
234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$
|
162,043
|
|
|
$
|
122,325
|
|
|
$
|
5,307
|
|
|
$
|
(35,640
|
)
|
|
$
|
(2,359
|
)
|
|
$
|
251,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
21,837
|
|
|
$
|
7,385
|
|
|
$
|
1,423
|
|
|
$
|
1,857
|
|
|
$
|
(591
|
)
|
|
$
|
31,911
|
|
Capital expenditures
|
|
$
|
40,489
|
|
|
$
|
12,995
|
|
|
$
|
620
|
|
|
$
|
2,620
|
|
|
$
|
(1,679
|
)
|
|
$
|
55,045
|
|
Total assets at December 31, 2008
|
|
$
|
1,069,963
|
|
|
$
|
194,892
|
|
|
$
|
42,111
|
|
|
$
|
150,891
|
|
|
$
|
(8,819
|
)
|
|
$
|
1,449,038
|
|
|
|
|
(1) |
|
Certain prior year amounts have been reclassified to reflect the
transfer of certain business operations to the Laboratory
segment from the Medical Technology segment. The
reclassifications did not have a material impact on either of
our segments. |
78
VCA
ANTECH, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
14.
|
Selected
Quarterly Financial Data (Unaudited)
|
Quarterly
Results
The following table sets forth selected unaudited quarterly
results for the eight quarters commencing January 1, 2009
and ending December 31, 2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 Quarter Ended
|
|
2009 Quarter Ended
|
|
|
Dec. 31
|
|
Sep. 30(1)
|
|
Jun. 30(2)
|
|
Mar. 31
|
|
Dec. 31(3)
|
|
Sep. 30
|
|
Jun. 30(3)
|
|
Mar. 31
|
|
Revenue
|
|
$
|
338,112
|
|
|
$
|
358,703
|
|
|
$
|
353,919
|
|
|
$
|
330,734
|
|
|
$
|
315,219
|
|
|
$
|
338,562
|
|
|
$
|
344,876
|
|
|
$
|
315,850
|
|
Gross profit
|
|
$
|
69,586
|
|
|
$
|
85,299
|
|
|
$
|
93,484
|
|
|
$
|
82,795
|
|
|
$
|
71,138
|
|
|
$
|
90,577
|
|
|
$
|
97,348
|
|
|
$
|
82,169
|
|
Operating income
|
|
$
|
40,124
|
|
|
$
|
58,042
|
|
|
$
|
52,453
|
|
|
$
|
56,630
|
|
|
$
|
47,591
|
|
|
$
|
65,473
|
|
|
$
|
68,964
|
|
|
$
|
59,500
|
|
Net income
|
|
$
|
22,122
|
|
|
$
|
28,587
|
|
|
$
|
30,517
|
|
|
$
|
32,932
|
|
|
$
|
26,251
|
|
|
$
|
37,486
|
|
|
$
|
38,968
|
|
|
$
|
32,881
|
|
Net income attributable to VCA Antech, Inc.
|
|
$
|
21,473
|
|
|
$
|
27,431
|
|
|
$
|
29,404
|
|
|
$
|
31,935
|
|
|
$
|
25,352
|
|
|
$
|
36,361
|
|
|
$
|
37,745
|
|
|
$
|
31,970
|
|
Basic earnings per common share
|
|
$
|
0.25
|
|
|
$
|
0.32
|
|
|
$
|
0.34
|
|
|
$
|
0.37
|
|
|
$
|
0.30
|
|
|
$
|
0.43
|
|
|
$
|
0.45
|
|
|
$
|
0.38
|
|
Diluted earnings per common share
|
|
$
|
0.25
|
|
|
$
|
0.32
|
|
|
$
|
0.34
|
|
|
$
|
0.37
|
|
|
$
|
0.29
|
|
|
$
|
0.42
|
|
|
$
|
0.44
|
|
|
$
|
0.37
|
|
|
|
|
(1) |
|
Included in third quarter net income is $1.6 million, net
of tax, or $0.02 per diluted share, related to costs incurred in
conjunction with the refinance of our senior credit facility,
see Note 5, Long-Term Obligations. The third quarter
net income also included tax expense of $3.5 million, net
of tax, or $0.04 per diluted share related to settlement of
taxes on 2004 through 2007 taxable income. |
|
(2) |
|
Included in second quarter operating income is
$14.5 million in consulting and SERP expenses to be paid in
accordance with consulting and SERP agreements entered into on
June 30, 2010. The consulting and SERP expense had an
$8.9 million impact on net income or $0.10 per diluted
share. |
|
(3) |
|
The abandonment and subsequent recovery of costs incurred on an
internally-developed software project impacted the second
quarter and fourth quarter operating income by a charge of
$5.3 million and a credit of $1.9 million,
respectively. The project mentioned above impacted the second
quarter and fourth quarter net income by a charge of
$3.2 million, or $0.04 per diluted share, and a gain of
$1.2 million, or $0.01 per diluted share, respectively. |
Although not readily detectable because of the impact of
acquisitions, our operations are subject to seasonal
fluctuation. In particular, our Animal Hospital and Laboratory
revenue historically has been greater in the second and third
quarters than in the first and fourth quarters.
The demand for our veterinary services is significantly higher
during 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 infestation of
fleas, heartworms and ticks, and the number of daylight hours. A
substantial portion of our costs for our veterinary services are
fixed and do not vary with the level of demand. Consequently,
our operating income and operating margins generally have been
higher for the second and third quarters than that experienced
in the first and fourth quarters.
79
Schedule
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
VCA
ANTECH, INC. AND SUBSIDIARIES
VCA
ANTECH, INC. (Parent Company)
CONDENSED
BALANCE SHEETS
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Investment in subsidiaries
|
|
$
|
936,540
|
|
|
$
|
825,397
|
|
Intercompany receivable
|
|
|
62,384
|
|
|
|
49,650
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
998,924
|
|
|
$
|
875,047
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
86
|
|
|
|
86
|
|
Additional paid-in capital
|
|
|
347,848
|
|
|
|
335,114
|
|
Accumulated earnings
|
|
|
650,253
|
|
|
|
540,010
|
|
Accumulated other comprehensive loss
|
|
|
737
|
|
|
|
(163
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
$
|
998,924
|
|
|
$
|
875,047
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed
financial statements.
See accompanying Report of Independent Registered Public
Accounting Firm.
80
VCA
ANTECH, INC. AND SUBSIDIARIES
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(Continued)
VCA
ANTECH, INC. (Parent Company)
CONDENSED STATEMENTS OF INCOME
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Revenue
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Direct costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on sale of assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity interest in income of subsidiaries
|
|
|
110,243
|
|
|
|
131,428
|
|
|
|
132,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
110,243
|
|
|
|
131,428
|
|
|
|
132,984
|
|
Provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
110,243
|
|
|
|
131,428
|
|
|
|
132,984
|
|
Net income attributable to noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to VCA Antech, Inc.
|
|
$
|
110,243
|
|
|
$
|
131,428
|
|
|
$
|
132,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed
financial statements.
See accompanying Report of Independent Registered Public
Accounting Firm.
81
VCA
ANTECH, INC. AND SUBSIDIARIES
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(Continued)
VCA
ANTECH, INC. (Parent Company)
CONDENSED
STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
110,243
|
|
|
$
|
131,428
|
|
|
$
|
132,984
|
|
Adjustments to reconcile net income to net cash used in
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity interest in earnings of subsidiaries
|
|
|
(110,243
|
)
|
|
|
(131,428
|
)
|
|
|
(132,984
|
)
|
Increase in intercompany receivable
|
|
|
(5,510
|
)
|
|
|
(15,297
|
)
|
|
|
(3,606
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(5,510
|
)
|
|
|
(15,297
|
)
|
|
|
(3,606
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock under stock option plans
|
|
|
5,510
|
|
|
|
15,297
|
|
|
|
3,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
5,510
|
|
|
|
15,297
|
|
|
|
3,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed
financial statements.
See accompanying Report of Independent Registered Public
Accounting Firm.
82
VCA
ANTECH, INC. AND SUBSIDIARIES
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(Continued)
VCA
ANTECH, INC. (Parent Company)
NOTES TO
CONDENSED FINANCIAL STATEMENTS
The borrowings under the senior credit facility are guaranteed
by VCA Antech, Inc. (VCA) and its wholly-owned
subsidiaries. Vicar Operating, Inc. (Vicar), a
wholly-owned subsidiary of VCA, may borrow up to
$100 million under a revolving line of credit under the
senior credit facility. VCAs guarantee under the senior
credit facility is secured by the assets of its wholly-owned
subsidiaries in addition to a pledge of capital stock or similar
equity interest of its wholly-owned subsidiaries.
See Note 5, Long-Term Obligations, in our
accompanying consolidated financial statements of this annual
report on
Form 10-K
for a five-year schedule of debt maturities.
|
|
Note 2.
|
Dividends
from Subsidiaries
|
The senior credit facility has restrictions on the ability of
Vicar and its consolidated subsidiaries to transfer assets in
the form of cash, dividends, loans or advances to VCA. In 2010,
2009 and 2008, VCA did not receive any cash dividends from its
consolidated subsidiaries.
See accompanying Report of Independent Registered Public
Accounting Firm.
83
VALUATION AND QUALIFYING ACCOUNTS
VCA
ANTECH, INC. AND SUBSIDIARIES
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Charged to
|
|
|
Charged to
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
Beginning of
|
|
|
Costs and
|
|
|
Other
|
|
|
|
|
|
|
|
|
at End
|
|
|
|
Period
|
|
|
Expenses
|
|
|
Accounts
|
|
|
Write-offs
|
|
|
Other(1)
|
|
|
of Period
|
|
|
Year ended December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for uncollectible accounts(2)
|
|
$
|
13,015
|
|
|
$
|
7,366
|
|
|
$
|
|
|
|
$
|
(7,237
|
)
|
|
$
|
657
|
|
|
$
|
13,801
|
|
Year ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for uncollectible accounts(2)
|
|
$
|
11,025
|
|
|
$
|
7,048
|
|
|
$
|
|
|
|
$
|
(5,505
|
)
|
|
$
|
447
|
|
|
$
|
13,015
|
|
Year ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for uncollectible accounts(2)
|
|
$
|
11,017
|
|
|
$
|
5,187
|
|
|
$
|
|
|
|
$
|
(5,889
|
)
|
|
$
|
710
|
|
|
$
|
11,025
|
|
|
|
|
(1) |
|
Other changes in the allowance for uncollectible
accounts include allowances acquired with animal hospitals and
laboratory acquisitions. |
|
(2) |
|
Balance includes allowance for trade accounts receivable and
notes receivable. |
See accompanying Report of Independent Registered Public
Accounting Firm.
84
|
|
ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
None.
|
|
ITEM 9A.
|
CONTROLS
AND PROCEDURES
|
Conclusion
Regarding the Effectiveness of Disclosure Controls and
Procedures
We carried out an evaluation required by the Securities Exchange
Act of 1934, as amended (the 1934 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 1934 Act, as of December 31, 2010. Based on
this evaluation, our principal executive officer and principal
financial officer concluded that, as of December 31, 2010,
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
1934 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
disclosures.
Managements
Annual Report on Internal Control Over Financial
Reporting
Our management does not expect that our internal control over
financial reporting will prevent all error and all fraud.
Internal controls over financial reporting, no matter how well
conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the internal control
over financial reporting are met. Further, the design of
internal controls over financial reporting must reflect the fact
that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Because of
the inherent limitations in all internal controls over financial
reporting, no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if
any, within the company have been detected. These inherent
limitations include the realities that judgments in
decision-making can be faulty and that breakdowns can occur
because of simple errors or mistakes. Additionally, controls can
be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of
the controls. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions,
or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a
cost-effective internal control over financial reporting,
misstatements due to error or fraud may occur and not be
detected.
Our managements report on internal control over financial
reporting, and the related report of our independent public
accounting firm, are included in Item 8 of this annual
report on
Form 10-K
under Managements Annual Report on Internal Control
Over Financial Reporting and Report of Independent
Registered Public Accounting Firm on Internal Control Over
Financial Reporting, respectively, and are incorporated by
reference.
Changes
in Internal Control Over Financial Reporting
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.
|
|
ITEM 9B.
|
OTHER
INFORMATION
|
None.
85
PART III
|
|
ITEM 10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
Information regarding our directors and executive officers will
appear in the proxy statement for the 2011 annual meeting of
stockholders and is incorporated herein by this reference.
|
|
ITEM 11.
|
EXECUTIVE
COMPENSATION
|
Information regarding executive compensation will appear in the
proxy statement for the 2011 annual meeting of stockholders and
is incorporated herein by this reference.
|
|
ITEM 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
|
Information regarding security ownership of certain beneficial
owners and management and related stockholder matters will
appear in the proxy statement for the 2011 annual meeting of
stockholders and is incorporated herein by this reference.
|
|
ITEM 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
Information regarding certain relationships and related
transactions will appear in the proxy statement for the 2011
annual meeting of stockholders and is incorporated herein by
this reference.
|
|
ITEM 14.
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|
Information regarding principal accountant fees and services
will appear in the proxy statement for the 2011 annual meeting
of stockholders and is incorporated herein by this reference.
PART IV
|
|
ITEM 15.
|
EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES
|
|
|
|
|
(1)
|
FINANCIAL STATEMENTS See Item 8 of this annual
report on
Form 10-K.
|
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM See Item 8 of this annual report on
Form 10-K.
|
|
|
|
(2)
|
SCHEDULE I CONDENSED FINANCIAL
INFORMATION See Item 8 of this annual report
on Form
10-K.
|
SCHEDULE II VALUATION AND QUALIFYING
ACCOUNTS See Item 8 of this annual report on
Form 10-K.
All other schedules have been omitted because they are not
applicable or not required, or the information is included in
the Consolidated Financial Statements or Notes thereto.
|
|
|
|
(3)
|
EXHIBITS See Exhibit Index attached to this
annual report on
Form 10-K.
|
86
List of
Exhibits
|
|
|
|
|
Number
|
|
Exhibit Description
|
|
|
3
|
.1
|
|
Amended and Restated Certificate of Incorporation of
Registrant. Incorporated by reference to Exhibit 3.1 to the
Registrants annual report on Form 10-K filed March 29,
2002.
|
|
3
|
.2
|
|
Certificate of Amendment to the Certificate of Incorporation of
Registrant. Incorporated by reference to Exhibit 3.1 to the
Registrants current report on Form 8-K filed July 16, 2004.
|
|
3
|
.3
|
|
Certificate of Correction to the Certificate of Amendment to the
Amended and Restated Certificate of Incorporation of
Registrant. Incorporated by reference to Exhibit 3.2 to the
Registrants current report on Form 8-K filed July 16, 2004.
|
|
3
|
.4
|
|
Second Amended and Restated Bylaws of Registrant. Incorporated
by reference to Exhibit 3.1 to the Registrants current
report on Form 8-K filed May 1, 2006.
|
|
4
|
.1
|
|
Specimen Certificate for shares of common stock of Registrant.
Incorporated by reference to Exhibit 4.9 to Amendment No. 3
to the Registrants registration statement on Form S-1
filed November 16, 2001.
|
|
10
|
.1
|
|
Credit and Guaranty Agreement, dated August 19, 2010, by and
among Vicar Operating, Inc., VCA Antech, Inc., certain
subsidiaries of Vicar Operating, Inc., as guarantors, various
lenders from time to time partly thereto, Wells Fargo Bank N.A.,
as administrative agent, collateral agent, issuing bank and
swing line lender, Bank of America, N.A., as syndication agent,
and JP Morgan Chase Bank, N.A., 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 quarterly report on Form 10-Q
filed November 8, 2010.
|
|
10
|
.2*
|
|
Employment Agreement, dated as of November 27, 2001, by and
between VCA Antech, Inc. and Robert L. Antin. Incorporated by
reference to Exhibit 10.5 to the registration statement of Vicar
Operating, Inc., on Form S-4 filed February 1, 2002.
|
|
10
|
.3*
|
|
Employment Agreement, dated as of November 27, 2001, by and
between VCA Antech, Inc. and Arthur J. Antin. Incorporated by
reference to Exhibit 10.6 to the registration statement of Vicar
Operating, Inc., on Form S-4 filed February 1, 2002.
|
|
10
|
.4*
|
|
Employment Agreement, dated as of November 27, 2001, by and
between VCA Antech, Inc. and Tomas W. Fuller. Incorporated by
reference to Exhibit 10.7 to the registration statement of Vicar
Operating, Inc., on Form S-4 filed February 1, 2002.
|
|
10
|
.5*
|
|
Letter Agreement, dated as of March 9, 2004, by and between VCA
Antech, Inc. and Robert L. Antin. Incorporated by reference to
Exhibit 10.20 to the Registrants annual report on Form
10-K filed March 12, 2004.
|
|
10
|
.6*
|
|
Letter Agreement, dated as of March 9, 2004, by and between VCA
Antech, Inc. and Arthur J. Antin. Incorporated by reference to
Exhibit 10.21 to the Registrants annual report on Form
10-K filed March 12, 2004.
|
|
10
|
.7*
|
|
Letter Agreement, dated as of March 9, 2004, by and between VCA
Antech, Inc. and Tomas W. Fuller. Incorporated by reference to
Exhibit 10.22 to the Registrants annual report on Form
10-K filed March 12, 2004.
|
|
10
|
.8*
|
|
Letter Agreement, dated as of April 15, 2008, by and between VCA
Antech, Inc. and Neil Tauber. Incorporated by reference to
Exhibit 10.1 to the Registrants current report on Form 8-K
filed April 28, 2008.
|
|
10
|
.9*
|
|
Post-Retirement Medical Benefits Coverage Agreement dated as of
December 27, 2007, by and between VCA Antech, Inc. and Robert L.
Antin. Incorporated by reference to Exhibit 10.15 to the
Registrants annual report on Form 10-K filed February 29,
2008.
|
|
10
|
.10*
|
|
Post-Retirement Medical Benefits Coverage Agreement dated as of
December 27, 2007, by and between VCA Antech, Inc. and Arthur J.
Antin. Incorporated by reference to Exhibit 10.16 to the
Registrants annual report on Form 10-K filed February 29,
2008.
|
|
10
|
.11*
|
|
Post-Retirement Medical Benefits Coverage Agreement dated as of
December 27, 2007, by and between VCA Antech, Inc. and Neil
Tauber. Incorporated by reference to Exhibit 10.17 to the
Registrants annual report on Form 10-K filed February 29,
2008.
|
87
|
|
|
|
|
Number
|
|
Exhibit Description
|
|
|
10
|
.12*
|
|
Post-Retirement Medical Benefits Coverage Agreement dated as of
December 27, 2007, by and between VCA Antech, Inc. and Tomas W.
Fuller. Incorporated by reference to Exhibit 10.18 to the
Registrants annual report on Form 10-K filed February 29,
2008.
|
|
10
|
.13*
|
|
Second Amendment to Amended and Restated Employment Agreement,
effective January 1, 2009, by and between VCA Antech, Inc. and
Robert L. Antin. Incorporated by reference to Exhibit 10.18 to
the Registrants annual report on Form 10-K filed February
26, 2010.
|
|
10
|
.14*
|
|
Second Amendment to Amended and Restated Employment Agreement,
effective January 1, 2009, by and between VCA Antech, Inc. and
Arthur J. Antin. Incorporated by reference to Exhibit 10.19 to
the Registrants annual report on Form 10-K filed February
26, 2010.
|
|
10
|
.15*
|
|
Second Amendment to Amended and Restated Employment Agreement,
effective January 1, 2009, by and between VCA Antech, Inc. and
Tomas W. Fuller. Incorporated by reference to Exhibit 10.20 to
the Registrants annual report on Form 10-K filed February
26, 2010.
|
|
10
|
.16*
|
|
VCA Antech, Inc. 2007 Annual Cash Incentive Plan. Incorporated
by reference to Annex A to the Registrants proxy statement
on Schedule 14A filed on April 27, 2007.
|
|
10
|
.17*
|
|
Supplemental Executive Retirement Program Agreement, effective
as of June 28, 2010, by and between VCA Antech, Inc. and Robert
L. Antin. Incorporated by reference to Exhibit 10.1 to the
Registrants current report on Form 8-K dated July 7, 2010.
|
|
10
|
.18*
|
|
Supplemental Executive Retirement Program Agreement, effective
as of June 28, 2010, by and between VCA Antech, Inc. and Arthur
J. Antin. Incorporated by reference to Exhibit 10.2 to the
Registrants current report on Form 8-K dated July 7, 2010.
|
|
10
|
.19*
|
|
Supplemental Executive Retirement Program Agreement, effective
as of June 28, 2010, by and between VCA Antech, Inc. and Neil
Tauber. Incorporated by reference to Exhibit 10.3 to the
Registrants current report on Form 8-K dated July 7, 2010.
|
|
10
|
.20*
|
|
Supplemental Executive Retirement Program Agreement, effective
as of June 28, 2010, by and between VCA Antech, Inc. and Tomas
W. Fuller. Incorporated by reference to Exhibit 10.4 to the
Registrants current report on Form 8-K dated July 7, 2010.
|
|
10
|
.21*
|
|
Consulting Agreement, effective as of June 28, 2010, by and
between VCA Antech, Inc. and Robert L. Antin. Incorporated by
reference to Exhibit 10.5 to the Registrants current
report on Form 8-K dated July 7, 2010.
|
|
10
|
.22*
|
|
Consulting Agreement, effective as of June 28, 2010, by and
between VCA Antech, Inc. and Arthur J. Antin. Incorporated
by reference to Exhibit 10.6 to the Registrants current
report on Form 8-K dated July 7, 2010.
|
|
10
|
.23*
|
|
Consulting Agreement, effective as of June 28, 2010, by and
between VCA Antech, Inc. and Neil Tauber. Incorporated by
reference to Exhibit 10.7 to the Registrants current
report on
Form 8-K
dated July 7, 2010.
|
|
10
|
.24*
|
|
Consulting Agreement, effective as of June 28, 2010, by and
between VCA Antech, Inc. and Tomas W. Fuller. Incorporated
by reference to Exhibit 10.8 to the Registrants current
report on Form 8-K dated July 7, 2010.
|
|
10
|
.25*
|
|
Amendment No. 1 to the Consulting Agreement, effective as of
September 30, 2010, by and between VCA Antech, Inc. and Neil
Tauber. Incorporated by reference to Exhibit 10.4 to the
Registrants quarterly report on Form 10-Q filed November
8, 2010.
|
|
10
|
.26*
|
|
Amendment No. 1 to the Consulting Agreement, effective as of
September 30, 2010, by and between VCA Antech, Inc. and Tomas W.
Fuller. Incorporated by reference to Exhibit 10.5 to the
Registrants quarterly report on Form 10-Q filed November
8, 2010.
|
|
10
|
.27*
|
|
Summary of Executive Officer Compensation.
|
|
10
|
.28*
|
|
Summary of Board of Directors Compensation. Incorporated by
reference to Exhibit 10.23 to the Registrants annual
report on Form 10-K filed February 26, 2010.
|
|
10
|
.29
|
|
Amended and Restated 1996 Stock Incentive Plan of VCA Antech,
Inc. Incorporated by reference to Exhibit 10.9 to Amendment No.
2 to the Registrants registration statement on Form S-1
filed October 31, 2001.
|
88
|
|
|
|
|
Number
|
|
Exhibit Description
|
|
|
10
|
.30
|
|
2001 Stock Incentive Plan of VCA Antech, Inc. Incorporated by
reference to Exhibit 10.10 to Amendment No. 2 to the
Registrants registration statement on Form S-1 filed
October 31, 2001.
|
|
10
|
.31
|
|
VCA Antech, Inc. 2006 Equity Incentive Plan, as amended on May
22, 2006. Incorporated by reference to Exhibit 4.5 to the
Registrants registration statement on Form S-8 filed on
December 15, 2006.
|
|
10
|
.32
|
|
Stock Option Agreement for VCA Antech, Inc. 2006 Equity
Incentive Plan. Incorporated by reference to Exhibit 4.6 to the
Registrants registration statement on Form S-8 filed on
December 15, 2006.
|
|
10
|
.33
|
|
Restricted Stock Award Agreement for VCA Antech, Inc. 2006
Equity Incentive Plan. Incorporated by reference to Exhibit 4.7
to the Registrants registration statement on Form S-8
filed on December 15, 2006.
|
|
10
|
.34
|
|
Restricted Stock Unit Agreement for VCA Antech, Inc. 2006 Equity
Incentive Plan. Incorporated by reference to Exhibit 10.29 to
the Registrants annual report on Form 10-K filed February
26, 2010.
|
|
10
|
.35
|
|
Corporate Headquarters Lease, dated as of January 1, 1999, by
and between VCA Antech, Inc. and Werner Wolfen, Michael Duritz,
Nancy Bruch, Dorothy A. Duritz, Harvey Rosenberg and Judy
Rosenberg (Landlords). Incorporated by reference to Exhibit
10.11 to Amendment No. 1 to the Registrants registration
statement on Form S-1 filed October 15, 2001.
|
|
10
|
.36
|
|
Corporate Headquarters Lease, dated as of June 9, 2004, by and
between VCA Antech, Inc. and Martin Shephard, Trustee of the
Shephard Family Trust of 1998 (Lessor). Incorporated by
reference to Exhibit 10.21 to the Registrants annual
report on Form 10-K filed March 14, 2006.
|
|
10
|
.37
|
|
Form of Indemnification Agreement. Incorporated by reference to
Exhibit 10.13 to the Registrants registration statement on
Form S-1 filed August 9, 2001.
|
|
14
|
.1
|
|
Code of Conduct and Business Ethics of the Registrant.
Incorporated by reference to Exhibit 14.1 to the
Registrants annual report on Form 10-K filed March 12,
2004.
|
|
21
|
.1
|
|
Subsidiaries of Registrant.
|
|
23
|
.1
|
|
Consent of Independent Registered Public Accounting Firm.
|
|
24
|
.1
|
|
Power of Attorney (included in signature page).
|
|
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**
|
|
|
|
* |
|
Management contract or compensatory plan or arrangement. |
|
** |
|
Furnished, not filed. |
89
SIGNATURES
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 February 28, 2011.
VCA Antech, Inc.
Tomas W. Fuller
Chief Financial Officer, Principal Financial Officer,
Vice President and Secretary
KNOWN BY ALL PERSONS THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Robert L. Antin
and Tomas W. Fuller, or any one of them, their attorneys-in-fact
and agents with full power of substitution and re-substitution,
for him and his name, place and stead, in any and all
capacities, to sign any or all amendments to this annual report
on
Form 10-K
and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and
perform each and every act and thing requisite and necessary to
be done in and about the foregoing, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or either
of them, or their substitutes, may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant in the capacities and on the dates
indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Robert
L. Antin
Robert
L. Antin
|
|
Chairman of the Board, President and Chief Executive Officer
|
|
February 28, 2011
|
|
|
|
|
|
/s/ Tomas
W. Fuller
Tomas
W. Fuller
|
|
Chief Financial Officer, Principal Financial Officer, Vice
President and Secretary
|
|
February 28, 2011
|
|
|
|
|
|
/s/ Dawn
R. Olsen
Dawn
R. Olsen
|
|
Principal Accounting Officer, Vice President and Controller
|
|
February 28, 2011
|
|
|
|
|
|
/s/ John
M. Baumer
John
M. Baumer
|
|
Director
|
|
February 28, 2011
|
|
|
|
|
|
/s/ John
Heil
John
Heil
|
|
Director
|
|
February 28, 2011
|
|
|
|
|
|
/s/ Frank
Reddick
Frank
Reddick
|
|
Director
|
|
February 28, 2011
|
|
|
|
|
|
/s/ John
B. Chickering, Jr.
John
B. Chickering, Jr.
|
|
Director
|
|
February 28, 2011
|
|
|
|
|
|
|
|
* By:
|
|
Attorney-in-Fact
|
|
Director
|
|
|
90