UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

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

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

Commission File Number: 001-16783

VCA Antech, Inc.

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

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

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

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

Yes þ   No o.

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

(Not yet applicable to the registrant)
Yes o   No o.

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

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o   No þ.

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: common stock, $0.001 par value, 85,478,182 shares as of November 2, 2009.

 

 

VCA Antech, Inc.
Form 10-Q
September 30, 2009

Table of Contents

		Page
		Number
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed, Consolidated Balance Sheets as of September 30, 2009 and December 31, 2008		1
Condensed, Consolidated Income Statements for the Three and Nine Months Ended September 30, 2009 and 2008		2
Condensed, Consolidated Statements of Equity for the Nine Months Ended September 30, 2009 and 2008		3
Condensed, Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2009 and 2008		4
Notes to Condensed, Consolidated Financial Statements		5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		17
Item 3. Quantitative and Qualitative Disclosures About Market Risk		33
Item 4. Controls and Procedures		33
Part II. Other Information
Item 1. Legal Proceedings		34
Item 1A. Risk Factors		34
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		34
Item 3. Defaults Upon Senior Securities		34
Item 4. Submission of Matters to a Vote of Security Holders		34
Item 5. Other Information		34
Item 6. Exhibits		34
Signature		35
Exhibit Index		36
EX-31.1
EX-31.2
EX-32.1

PART I.    FINANCIAL INFORMATION

ITEM 1.		FINANCIAL STATEMENTS

VCA Antech, Inc. and Subsidiaries

Condensed, Consolidated Balance Sheets
(Unaudited)
(In thousands, except par value)

		September 30,				December 31,
		2009				2008
Assets
Current assets:
Cash and cash equivalents		$	155,001			$	88,959
Trade accounts receivable, less allowance for uncollectible accounts of $12,813 and $11,025 at September 30, 2009 and December 31, 2008, respectively			49,439				43,453
Inventory			31,100				26,631
Prepaid expenses and other			20,671				18,800
Deferred income taxes			17,364				15,938
Prepaid income taxes			1,152				5,287
Total current assets			274,727				199,068
Property and equipment, less accumulated depreciation and amortization of $159,141 and $138,431 at September 30, 2009 and December 31, 2008, respectively			283,457				263,443
Goodwill			970,274				922,057
Other intangible assets, net			44,211				35,645
Notes receivable, net			4,819				12,893
Deferred financing costs, net			704				1,067
Other			21,586				14,865
Total assets		$	1,599,778			$	1,449,038
Liabilities and Equity
Current liabilities:
Current portion of long-term obligations		$	8,418			$	7,771
Accounts payable			28,958				26,087
Accrued payroll and related liabilities			37,026				42,840
Other accrued liabilities			48,291				46,424
Total current liabilities			122,693				123,122
Long-term obligations, less current portion			538,663				544,860
Deferred income taxes			67,560				47,331
Other liabilities			10,525				9,890
Total liabilities			739,441				725,203
Commitments and contingencies:
Preferred stock, par value $0.001, 11,000 shares authorized, none outstanding			—				—
VCA Antech, Inc. stockholders’ equity:
Common stock, par value $0.001, 175,000 shares authorized, 85,441 and 84,633 shares outstanding as of September 30, 2009 and December 31, 2008, respectively			85				85
Additional paid-in capital			330,549				308,674
Accumulated earnings			514,658				408,582
Accumulated other comprehensive loss			(1,482	)			(6,352	)
Total VCA Antech, Inc. stockholders’ equity			843,810				710,989
Noncontrolling interest			16,527				12,846
Total equity			860,337				723,835
Total liabilities and equity		$	1,599,778			$	1,449,038

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

VCA Antech, Inc. and Subsidiaries

Condensed, Consolidated Income Statements
(Unaudited)
(In thousands, except per share amounts)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
Revenue		$	338,562			$	332,035			$	999,288			$	974,301
Direct costs			247,422				243,267				728,095				705,536
Gross profit			91,140				88,768				271,193				268,765
Selling, general and administrative expense			25,258				22,003				71,652				67,990
Write-off of internal-use software			—				—				5,271				—
Net loss on sale and disposal of assets			409				90				333				33
Operating income			65,473				66,675				193,937				200,742
Interest expense, net			4,808				6,709				16,652				21,369
Other (income) expense			(1	)			88				(131	)			(44	)
Income before provision for income taxes			60,666				59,878				177,416				179,417
Provision for income taxes			23,180				23,000				68,081				68,979
Net income			37,486				36,878				109,335				110,438
Net income attributable to noncontrolling interests			1,125				1,104				3,259				3,145
Net income attributable to VCA Antech, Inc.		$	36,361			$	35,774			$	106,076			$	107,293
Basic earnings per share		$	0.43			$	0.42			$	1.25			$	1.27
Diluted earnings per share		$	0.42			$	0.42			$	1.23			$	1.25
Weighted-average shares outstanding for basic earnings per share			85,217				84,463				84,909				84,394
Weighted-average shares outstanding for diluted earnings per share			86,431				85,789				85,893				85,789

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

VCA Antech, Inc. and Subsidiaries

Condensed, Consolidated Statements of Equity
(Unaudited)

(In thousands)

																		Accumulated
										Additional								Other
		Common Stock								Paid-In				Accumulated				Comprehensive				Noncontrolling
		Shares				Amount				Capital				Earnings				(Loss) Income				Interest				Total
Balances, December 31, 2007			84,335			$	84			$	296,037			$	275,598			$	(3,335	)		$	10,207			$	578,591
Net income			—				—				—				107,293				—				3,145				110,438
Foreign currency translation adjustment			—				—				—				—				(224	)			—				(224	)
Unrealized loss on foreign currency, net of tax			—				—				—				—				(92	)			—				(92	)
Unrealized loss on hedging instruments, net of tax			—				—				—				—				(1,175	)			—				(1,175	)
Losses on hedging instruments reclassified to income, net of tax			—				—				—				—				2,461				—				2,461
Formation of noncontrolling interest			—				—				—				—				—				3,241				3,241
Distribution to noncontrolling interest			—				—				—				—				—				(2,797	)			(2,797	)
Purchase of noncontrolling interest			—				—				—				—				—				(374	)			(374	)
Share-based compensation			—				—				5,309				—				—				—				5,309
Stock option activity and awards			296				1				3,574				—				—				—				3,575
Tax benefit from stock options and awards			—				—				1,846				—				—				—				1,846
Balances, September 30, 2008			84,631			$	85			$	306,766			$	382,891			$	(2,365	)		$	13,422			$	700,799
Balances, December 31, 2008			84,633			$	85			$	308,674			$	408,582			$	(6,352	)		$	12,846			$	723,835
Net income			—				—				—				106,076				—				3,259				109,335
Foreign currency translation adjustment			—				—				—				—				592				—				592
Unrealized gain on foreign currency, net of tax			—				—				—				—				288				—				288
Unrealized loss on hedging instruments, net of tax			—				—				—				—				(801	)			—				(801	)
Losses on hedging instruments reclassified to income, net of tax			—				—				—				—				4,791				—				4,791
Formation of noncontrolling interest			—				—				—				—				—				3,440				3,440
Distribution to noncontrolling interest			—				—				—				—				—				(3,018	)			(3,018	)
Restricted stock unit grant			—				—				1,941				—				—				—				1,941
Share-based compensation			—				—				5,940				—				—				—				5,940
Stock option activity and awards			808				—				13,110				—				—				—				13,110
Stock repurchases			—				—				(561	)			—				—				—				(561	)
Tax benefit from stock options and awards			—				—				1,445				—				—				—				1,445
Balances, September 30, 2009			85,441			$	85			$	330,549			$	514,658			$	(1,482	)		$	16,527			$	860,337

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

VCA Antech, Inc. and Subsidiaries

Condensed, Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)

		Nine Months Ended
		September 30,
		2009				2008
Cash flows from operating activities:
Net income		$	109,335			$	110,438
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			28,986				23,762
Amortization of debt issue costs			363				351
Provision for uncollectible accounts			5,075				3,671
Net loss on sale and disposal of assets			333				33
Share-based compensation			5,940				5,309
Deferred income taxes			16,057				9,894
Excess tax benefit from exercise of stock options			(591	)			(1,846	)
Write-off of internal-use software			5,271				—
Other			(299	)			192
Changes in operating assets and liabilities:
Accounts receivable			(8,312	)			(5,736	)
Inventory, prepaid expenses and other assets			(7,820	)			(5,972	)
Accounts payable and other accrued liabilities			742				(438	)
Accrued payroll and related liabilities			(4,339	)			(3,553	)
Income taxes			5,580				9,457
Net cash provided by operating activities			156,321				145,562
Cash flows from investing activities:
Business acquisitions, net of cash acquired			(51,853	)			(89,775	)
Real estate acquired in connection with business acquisitions			(3,828	)			(15,063	)
Property and equipment additions			(38,522	)			(39,764	)
Proceeds from sale of assets			123				1,774
Other			(440	)			(15,024	)
Net cash used in investing activities			(94,520	)			(157,852	)
Cash flows from financing activities:
Repayment of long-term obligations			(5,898	)			(5,852	)
Distributions to noncontrolling interest partners			(3,018	)			(2,797	)
Proceeds from issuance of common stock under stock option plans			13,110				3,574
Excess tax benefit from exercise of stock options			591				1,846
Stock repurchases			(561	)			—
Net cash provided by (used in) financing activities			4,224				(3,229	)
Effect of currency exchange rate changes on cash and cash equivalents			17				(44	)
Increase (decrease) in cash and cash equivalents			66,042				(15,563	)
Cash and cash equivalents at beginning of period			88,959				110,866
Cash and cash equivalents at end of period		$	155,001			$	95,303
Supplemental disclosures of cash flow information:
Interest paid		$	16,329			$	23,449
Income taxes paid		$	46,444			$	49,628
Supplemental schedule of non-cash investing and financing activities:
Detail of acquisitions:
Fair value of assets acquired		$	72,303			$	92,930
Cash paid for acquisitions			(48,042	)			(88,136	)
Non-cash note conversion to equity interest in subsidiary			(5,700	)			—
Contingent consideration			(712	)			—
Liabilities assumed		$	17,849			$	4,794

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

VCA Antech, Inc. and Subsidiaries

1. Nature of Operations

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

     Our animal hospitals offer a full range of general medical and surgical services for companion animals. Our animal hospitals treat diseases and injuries, provide pharmaceutical products and perform a variety of pet-wellness programs, including health examinations, diagnostic testing, vaccinations, spaying, neutering and dental care. At September 30, 2009, we operated 482 animal hospitals throughout 40 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 September 30, 2009, we operated 46 laboratories of various sizes located strategically throughout the United States and Canada.

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

2. Basis of Presentation

     Our accompanying unaudited, condensed, consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information and in accordance with the rules and regulations of the United States Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and notes required by GAAP for annual financial statements as permitted under applicable rules and regulations. In the opinion of management, all normal recurring adjustments considered necessary for a fair presentation have been included. Certain reclassifications have been made herein to 2008 amounts to conform to the current year presentation. These include the adoption of the Financial Accounting Standards Board’s (“FASB”) new accounting guidance on noncontrolling interests in consolidated financial statements. The results of operations for the three and nine months ended September 30, 2009 are not necessarily indicative of the results to be expected for the full year ending December 31, 2009. For further information, refer to our consolidated financial statements and notes thereto included in our 2008 Annual Report on Form 10-K.

     In June 2009, the FASB issued the FASB Accounting Standards Codification (“Codification”) as the single source of GAAP. The Codification was effective for our company beginning July 1, 2009. The Codification does not change GAAP and did not impact our consolidated financial statements.

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

     We evaluated the effects of all subsequent events through November 6, 2009, the date this report is filed with the SEC.

3. Goodwill and Other Intangible Assets

     In April 2008, the FASB issued new accounting guidance on the determination of the useful life of intangible assets. The guidance was designed to improve the consistency between the useful life of a recognized intangible asset under previous guidance related to goodwill and other intangible assets and the period of expected cash flows used to measure the fair value of the asset under business combinations guidance, and other GAAP. We adopted the

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

3. Goodwill and Other Intangible Assets, continued

new guidance on January 1, 2009. The adoption did not have a material impact on our consolidated financial statements.

   Goodwill

     Goodwill represents the excess of the aggregate of the consideration transferred, the fair value of any noncontrolling interest in the acquiree and for a business combination achieved in stages, the acquisition-date fair value of any previously held equity interest over the net of the fair value of identifiable assets acquired and liabilities assumed. The following table presents the changes in the carrying amount of our goodwill for the nine months ended September 30, 2009 (in thousands):

		Animal								Medical
		Hospital				Laboratory				Technology				Total
Balance as of December 31, 2008		$	807,203			$	95,694			$	19,160			$	922,057
Goodwill acquired			32,484				430				11,127				44,041
Goodwill related to noncontrolling interests			3,440				—				—				3,440
Other (1)			583				153				—				736
Balance as of September 30, 2009		$	843,710			$	96,277			$	30,287			$	970,274

   Other Intangible Assets

     In addition to goodwill, we have amortizable intangible assets at September 30, 2009 and December 31, 2008 as follows (in thousands):

		As of September 30, 2009												As of December 31, 2008
		Gross								Net				Gross								Net
		Carrying				Accumulated				Carrying				Carrying				Accumulated				Carrying
		Amount				Amortization				Amount				Amount				Amortization				Amount
Noncontractual customer relationships		$	36,268			$	(6,817	)		$	29,451			$	26,412			$	(3,689	)		$	22,723
Covenants not-to-compete			14,532				(7,335	)			7,197				16,195				(8,001	)			8,194
Favorable lease asset			4,119				(431	)			3,688				4,689				(629	)			4,060
Trademarks			3,316				(395	)			2,921				699				(251	)			448
Technology			2,209				(1,297	)			912				1,270				(1,076	)			194
Client lists			103				(61	)			42				84				(58	)			26
Total		$	60,547			$	(16,336	)		$	44,211			$	49,349			$	(13,704	)		$	35,645

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

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
Aggregate amortization expense		$	2,013			$	1,792			$	5,643			$	4,739

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

3. Goodwill and Other Intangible Assets, continued

     The estimated amortization expense related to intangible assets for the remainder of fiscal 2009 and each of the succeeding years thereafter as of September 30, 2009 is as follows (in thousands):

Remainder of 2009		$	2,155
2010			8,321
2011			7,477
2012			6,511
2013			5,354
Thereafter			13,942
Total (1)		$	43,760

4. 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 condensed, consolidated balance sheets. The adoption also resulted in new presentation and disclosure requirements for noncontrolling interests within our condensed, consolidated income statements, statements of equity and statements of cash flows. The adoption did not have a material impact on our consolidated financial statements.

5. Other Accrued Liabilities

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

		September 30,				December 31,
		2009				2008
Accrued workers’ compensation insurance		$	3,934			$	4,436
Deferred revenue			11,397				7,303
Interest rate swap liability			2,278				8,899
Other			30,682				25,786
		$	48,291			$	46,424

6. Interest Rate Swap Agreements

     In March 2008, the FASB issued new accounting guidance on disclosure requirements for derivative instruments and hedging activities to enhance the current disclosure framework. The additional disclosures require information about how our interest rate swap agreements and hedging activities affect our financial position, financial performance, and cash flows. We adopted the new guidance on January 1, 2009 and have included the applicable disclosures below and in Note 7. The adoption did not have a material impact on our consolidated financial statements.

     In accordance with current accounting guidance, 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.

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

6. Interest Rate Swap Agreements, continued

     We use interest rate swap agreements to mitigate our exposure to increasing interest rates as well as to maintain an appropriate mix of fixed-rate and variable-rate debt.

     If we determine that contracts are effective at meeting our risk reduction and correlation criteria we account for them using hedge accounting. Under hedge accounting, we recognize the effective portion of changes in the fair value of the contracts in other comprehensive income and the ineffective portion in earnings. If we determine that contracts do not, or no longer, meet our risk reduction and correlation criteria, we account for them under a fair-value method recognizing changes in the fair value in earnings in the period of change. If we determine that a contract no longer meets our risk reduction and correlation criteria, or if the derivative expires, we recognize in earnings any accumulated balance in other comprehensive income related to the contract in the period of determination. For interest rate swap agreements accounted for under hedge accounting, we assess the effectiveness based on changes in their intrinsic value with changes in the time value portion of the contract reflected in earnings. All cash payments made or received under the contracts are recognized in interest expense.

     Credit exposure associated with non-performance by the counterparties to derivative instruments is generally limited to the uncollateralized fair value of the asset related to instruments recognized in the consolidated balance sheets. We attempt to mitigate the risk of non-performance by selecting counterparties with high credit ratings and monitoring their creditworthiness and by diversifying derivative amounts with multiple counterparties.

     The contractual or notional amounts for derivatives are used to calculate the exchange of contractual payments under the agreements and are not representative of the potential for gain or loss on these instruments. Interest rates affect the fair value of derivatives. The fair values generally represent the estimated amounts that we would expect to receive or pay upon termination of the contracts at the reporting date. The fair values are based upon dealer quotes when available or an estimate using values obtained from independent pricing services, costs to settle or quoted market prices of comparable instruments.

     We have entered into interest rate swap agreements whereby we pay to the counterparties amounts based on fixed interest rates and set notional principal amounts in exchange for the receipt of payments from counterparties based on current London Interbank Offer Rates (“LIBOR”) and the same set notional principal amounts. The purpose of these hedges is to offset the variability of cash flows due to our outstanding variable-rate debt under our senior-term notes. A summary of these agreements is as follows:

		Interest Rate Swap Agreements
Fixed interest rate			5.34%				2.64%
Notional amount (in millions)			$ 100.0				$ 100.0
Effective date			6/11/2007				2/12/2008
Expiration date			12/31/2009				2/26/2010
Counterparty		Goldman Sachs				Wells Fargo
Qualifies for hedge accounting		Yes				Yes

     The following table summarizes cash received or cash paid and ineffectiveness reported in earnings as a result of our interest rate swap agreements (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
Cash paid (1)		$	1,895			$	1,639			$	7,867			$	4,030
Recognized loss (gain) from ineffectiveness (2)		$	1			$	12			$	(70	)		$	(24	)

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

6. Interest Rate Swap Agreements, continued

7. Fair Value Measurements

     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 September 30, 2009, 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 entity’s 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

     In April 2009, the FASB issued new accounting guidance for disclosures about fair value of financial instruments, which amends the previous guidance to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. The new guidance also amends the previous guidance related to interim financial reporting to require those disclosures in summarized financial information at interim reporting periods. The new guidance is effective for interim periods ending after June 15, 2009. We early adopted the provisions and all other related guidance for the quarter ended March 31, 2009.

     The Codification 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 Codification 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.

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

7. Fair Value Measurements, 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. We believe the carrying values of our variable-rate debt at September 30, 2009 and December 31, 2008 are not reasonable estimates of fair value due to changes in the credit markets during 2008 and 2009. We have estimated the fair value of our variable-rate debt using discounted cash flow techniques utilizing current market rates, which incorporate our credit risk.

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

		As of September 30, 2009								As of December 31, 2008
		Carrying				Fair				Carrying				Fair
		Value				Value				Value				Value
Variable-rate long-term debt		$	518,237			$	511,912			$	522,282			$	499,025

     Interest Rate Swap Agreements. We use the market approach to measure fair value for our interest rate swap agreements. The market approach uses prices and other relevant information generated by market transactions involving comparable assets or liabilities.

     The following table reflects the fair value of our interest rate swap agreements, which is measured on a recurring basis as defined by the Codification (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 September 30, 2009
Other accrued liabilities		$	2,278			$	—			$	2,278			$	—
At December 31, 2008
Other accrued liabilities		$	8,899			$	—			$	8,899			$	—

8. Share-Based Compensation

   Stock Option Activity

     There were no stock options granted during the nine months ended September 30, 2009. The aggregate intrinsic value of our stock options exercised during the three and nine months ended September 30, 2009 was $4.6 million and $5.9 million, respectively, and the actual tax benefit realized on options exercised during these periods was $1.8 million and $2.3 million, respectively.

     At September 30, 2009 there was $4.5 million of total unrecognized compensation cost related to our stock options. This cost is expected to be recognized over a weighted-average period of 2.4 years.

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

8. Share-Based Compensation, continued

     The compensation cost that has been charged against income for stock options for the three months ended September 30, 2009 and 2008 was $471,000 and $418,000, respectively. The corresponding income tax benefit recognized was $183,000 and $163,000 for the three months ended September 30, 2009 and 2008, respectively.

     The compensation cost that has been charged against income for stock options for the nine months ended September 30, 2009 and 2008 was $1.5 million and $1.3 million, respectively. The corresponding income tax benefit recognized was $574,000 and $503,000 for the nine months ended September 30, 2009 and 2008, respectively.

   Non-Vested Stock Activity

     There were no non-vested common stock awards granted during the three months ended September 30, 2009. During the nine months ended September 30, 2009 we granted 12,096 shares of non-vested common stock. These awards were granted to our non-employee directors and will vest in equal annual installments over three years from the grant date.

     Total compensation cost charged against income related to non-vested stock awards was $1.5 million and $1.6 million for the three months ended September 30, 2009 and 2008, respectively. The corresponding income tax benefit recognized in the income statement was $603,000 and $611,000 for the three months ended September 30, 2009 and 2008, respectively.

     Total compensation cost charged against income related to non-vested stock awards was $4.5 million and $4.0 million for the nine months ended September 30, 2009 and 2008, respectively. The corresponding income tax benefit recognized in the income statement was $1.7 million and $1.6 million for the nine months ended September 30, 2009 and 2008, respectively.

     At September 30, 2009, there was $10.1 million of unrecognized compensation cost related to these non-vested shares, which will be recognized over a weighted-average period of two years. A summary of our non-vested stock activity for the nine months ended September 30, 2009 is as follows:

						Weighted-
						Average Fair
						Value
		Shares				Per Share
Outstanding at December 31, 2008			724,235			$	31.52
Granted			12,096			$	24.80
Vested			(90,660	)		$	32.89
Forfeited/Canceled			(10,875	)		$	34.12
Outstanding at September 30, 2009			634,796			$	31.15

   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, they 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 executive’s 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 is considered a non-cash financing activity in the current period.

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

9. Calculation of Earnings per Share

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

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
Net income attributable to VCA Antech, Inc.		$	36,361			$	35,774			$	106,076			$	107,293
Weighted-average common shares outstanding:
Basic			85,217				84,463				84,909				84,394
Effect of dilutive potential common shares:
Stock options			951				1,184				779				1,271
Non-vested shares			263				142				205				124
Diluted			86,431				85,789				85,893				85,789
Basic earnings per share		$	0.43			$	0.42			$	1.25			$	1.27
Diluted earnings per share		$	0.42			$	0.42			$	1.23			$	1.25

     For the three months ended September 30, 2009 and 2008, potential common shares of 9,111 and 45,330, respectively, were excluded from the computation of diluted earnings per share because their inclusion would have had an anti-dilutive effect.

     For the nine months ended September 30, 2009 and 2008, potential common shares of 1,227,008 and 45,330, respectively, were excluded from the computation of diluted earnings per share because their inclusion would have had an anti-dilutive effect.

10. Comprehensive Income

     Total comprehensive income consists of net income and the other comprehensive income during the three and nine months ended September 30, 2009 and 2008. The following table provides a summary of comprehensive income (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
Net income		$	37,486			$	36,878			$	109,335			$	110,438
Other comprehensive income:
Foreign currency translation adjustments			415				(206	)			592				(224	)
Unrealized gain (loss) on foreign currency			316				(92	)			473				(92	)
Tax expense			(124	)			—				(185	)			—
Unrealized loss on hedging instruments			(245	)			(218	)			(1,315	)			(1,983	)
Tax benefit			96				129				514				808
Losses on hedging instruments reclassified to income			1,895				1,639				7,867				4,030
Tax benefit			(741	)			(639	)			(3,076	)			(1,569	)
Other comprehensive income			1,612				613				4,870				970
Total comprehensive income			39,098				37,491				114,205				111,408
Comprehensive income attributable to noncontrolling interests			1,125				1,104				3,259				3,145
Comprehensive income attributable to VCA Antech, Inc.		$	37,973			$	36,387			$	110,946			$	108,263

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

11. Lines of Business

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

     The accounting policies of our segments are the same as those described in the summary of significant accounting policies included in our 2008 Annual Report on Form 10-K. We evaluate the performance of our segments based on gross profit and operating income. For purposes of reviewing the operating performance of our segments all intercompany sales and purchases are generally accounted for as if they were transactions with independent third parties at current market prices.

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

		Animal								Medical								Intercompany
		Hospital				Laboratory				Technology				Corporate				Eliminations				Total
Three Months Ended September 30, 2009
External revenue		$	257,385			$	69,504			$	11,673			$	—			$	—			$	338,562
Intercompany revenue			—				7,958				2,059				—				(10,017	)			—
Total revenue			257,385				77,462				13,732				—				(10,017	)			338,562
Direct costs			206,172				41,636				9,024				—				(9,410	)			247,422
Gross profit			51,213				35,826				4,708				—				(607	)			91,140
Selling, general and administrative expense			5,162				5,621				4,316				10,159				—				25,258
Net loss on sale and disposal of assets			400				1				1				7				—				409
Operating income (loss)		$	45,651			$	30,204			$	391			$	(10,166	)		$	(607	)		$	65,473
Depreciation and amortization		$	6,777			$	2,364			$	616			$	603			$	(214	)		$	10,146
Capital expenditures		$	10,571			$	2,388			$	347			$	557			$	(549	)		$	13,314
Three Months Ended September 30, 2008
External revenue		$	253,251			$	69,035			$	9,749			$	—			$	—			$	332,035
Intercompany revenue			—				8,030				2,797				—				(10,827	)			—
Total revenue			253,251				77,065				12,546				—				(10,827	)			332,035
Direct costs			202,965				41,792				8,224				—				(9,714	)			243,267
Gross profit			50,286				35,273				4,322				—				(1,113	)			88,768
Selling, general and administrative expense			5,643				5,178				3,120				8,062				—				22,003
Net loss on sale and disposal of assets			25				3				2				60				—				90
Operating income (loss)		$	44,618			$	30,092			$	1,200			$	(8,122	)		$	(1,113	)		$	66,675
Depreciation and amortization		$	5,816			$	1,923			$	404			$	446			$	(152	)		$	8,437
Capital expenditures		$	11,327			$	2,777			$	46			$	756			$	(685	)		$	14,221

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

11. Lines of Business, continued

		Animal								Medical								Intercompany
		Hospital				Laboratory				Technology				Corporate				Eliminations				Total
Nine Months Ended September 30, 2009
External revenue		$	757,030			$	213,354			$	28,904			$	—			$	—			$	999,288
Intercompany revenue			—				24,408				4,614				—				(29,022	)			—
Total revenue			757,030				237,762				33,518				—				(29,022	)			999,288
Direct costs			609,520				124,900				21,452				—				(27,777	)			728,095
Gross profit			147,510				112,862				12,066				—				(1,245	)			271,193
Selling, general and administrative expense			15,924				16,832				10,058				28,838				—				71,652
Write-off of internal-use software			—				—				—				5,271				—				5,271
Net loss on sale and disposal of assets			270				28				7				28				—				333
Operating income (loss)		$	131,316			$	96,002			$	2,001			$	(34,137	)		$	(1,245	)		$	193,937
Depreciation and amortization		$	19,636			$	6,827			$	1,365			$	1,759			$	(601	)		$	28,986
Capital expenditures		$	29,447			$	6,506			$	665			$	3,235			$	(1,331	)		$	38,522
Nine Months Ended September 30, 2008
External revenue		$	730,352			$	211,684			$	32,265			$	—			$	—			$	974,301
Intercompany revenue			—				23,950				5,968				—				(29,918	)			—
Total revenue			730,352				235,634				38,233				—				(29,918	)			974,301
Direct costs			586,309				122,145				24,776				—				(27,694	)			705,536
Gross profit			144,043				113,489				13,457				—				(2,224	)			268,765
Selling, general and administrative expense			16,815				15,314				9,502				26,359				—				67,990
Net (gain) loss on sale and disposal of assets			(64	)			3				22				72				—				33
Operating income (loss)		$	127,292			$	98,172			$	3,933			$	(26,431	)		$	(2,224	)		$	200,742
Depreciation and amortization		$	16,234			$	5,378			$	1,205			$	1,359			$	(414	)		$	23,762
Capital expenditures		$	30,473			$	8,192			$	303			$	2,198			$	(1,402	)		$	39,764
At September 30, 2009
Total assets		$	1,129,515			$	206,937			$	73,394			$	200,018			$	(10,086	)		$	1,599,778
At December 31, 2008
Total assets		$	1,069,963			$	194,164			$	42,839			$	150,891			$	(8,819	)		$	1,449,038

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

12. Commitments and Contingencies

     We have certain commitments, including operating leases and purchase agreements. These items are discussed in detail in our consolidated financial statements and notes thereto included in our 2008 Annual Report on Form 10-K. We also have contingencies as follows:

  a. Earn-Out Payments

     We have contractual arrangements in connection with certain acquisitions that were accounted for under previous business combinations guidance, whereby additional cash may be paid to former owners of acquired companies upon attainment of specified financial criteria as set forth in the respective agreements. The amount to be paid cannot be determined until the earn-out periods expire and the attainment of criteria is established. If the specified financial criteria are attained, at September 30, 2009, we will be obligated to pay an additional $1.3 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.

  b. Other Contingencies

     We have certain contingent liabilities resulting from litigation and claims incident to the ordinary course of our business. We believe that the probable resolution of such contingencies will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.

13. Recent Accounting Pronouncements

     In December 2007, the FASB issued new accounting guidance related to business combinations. The new guidance retains the underlying concepts of previous GAAP in that all business combinations continue to be accounted for at fair value under the acquisition method of accounting. The new guidance changes the application of the acquisition method in a number of significant respects. Acquisition costs will generally be expensed as incurred; noncontrolling 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 new guidance is effective on a prospective basis for all of our business combinations for which the acquisition date is on or after January 1, 2009, with the exception of the accounting for valuation allowances on deferred taxes and acquired tax contingencies. The new guidance amends the Codification guidance related to accounting for 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 this guidance would also apply its provisions.

     In April 2009, the FASB issued new guidance regarding accounting for assets acquired and liabilities assumed in a business combination that arise from contingencies. This guidance requires recognition at fair value of such contingencies if the acquisition date fair value can be determined during the measurement period. This guidance became effective for us for contingent assets and liabilities arising from business combinations with acquisition dates on or after January 1, 2009. Our adoption of this guidance did not have a material impact on our consolidated financial statements.

     In May 2009, the FASB issued new accounting guidance related to subsequent events. The new guidance establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It requires disclosure of the date through which subsequent events have been evaluated and whether that date represents the date the financial statements were issued or were available to be issued. We adopted this guidance for the quarter ended June 30, 2009. The adoption did not have a material impact on our consolidated financial statements.

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

13. Recent Accounting Pronouncements, continued

     In June 2009, the FASB issued new guidance pertaining to variable interest entities. The new guidance amends previous guidance to replace a quantitative analysis with a qualitative analysis of interests in variable interest entities for the purpose of determining the primary beneficiary of a variable interest entity. It also requires companies to more frequently assess whether they must consolidate a variable interest entity. The new guidance will be effective for our company on January 1, 2010. We are currently evaluating the impact on our consolidated financial statements; however, we do not expect the adoption of this standard will have a material impact on our consolidated financial statements.

     In August 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-5, Measuring Liabilities at Fair Value. The ASU provides additional guidance in determining the fair value of liabilities particularly in circumstances where a quoted price in an active market for an identical liability is not readily available. It will be effective for us for the quarter ending December 31, 2009. We do not expect the adoption will have a material impact on our consolidated financial statements.

     In October 2009, the FASB issued ASU 2009-13, Multiple-Deliverable Revenue Arrangements. This ASU amends existing GAAP for separating consideration in multiple-deliverable arrangements and establishes a selling price hierarchy for determining the selling price of a deliverable. Additionally, it eliminates the residual method of allocation, requires consideration be allocated using the relative selling price method and expands required disclosures related to a vendors’ multiple-deliverable revenue arrangements. This ASU is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. The adoption of this ASU will have a material impact on our Medical Technology business segment. We expect that the implementation of the requirements of this standard will result in the more timely recognition of revenue. We expect to early adopt the new requirements no later than January 1, 2010.

     In October 2009, the FASB issued ASU 2009-14, Certain Revenue Arrangements that Include Software Elements. This ASU provides additional guidance on determining which software, if any, relating to a tangible product should be excluded from the scope of software revenue guidance. Additionally, it provides guidance on how to allocate consideration to deliverables in arrangements that include both tangible products and software. It is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. We expect that upon adoption of this new guidance we will no longer be governed by the previous accounting standard related to software accounting. Instead, as mentioned above, we will now be governed by ASU 2009-13. In conjunction with the early adoption of ASU 2009-13 as mentioned previously, we will also early adopt this ASU.

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

		Page
		Number
Introduction			18
Executive Overview			18
Critical Accounting Policies			20
Consolidated Results of Operations			21
Segment Results			22
Liquidity and Capital Resources			27
Recent Accounting Pronouncements			31