##### Table of Contents



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
 For the quarterly period ended September 30, 2008
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 Commission File Number: 001-16783
 
 VCA Antech, Inc.
 (Exact name of registrant as specified in its charter)
 Delaware
    
    95-4097995(State or other jurisdiction of 
incorporation or organization)
    
    (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)
 þ o
  Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o(Do not check if a smaller reporting company)
Smaller reporting company o o þ




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##### 



VCA Antech, Inc.
Form 10-Q
September 30, 2008
 Table of Contents
 PageNumberPart I.
    
    Financial InformationItem 1.
    
    Financial Statements (Unaudited)Condensed, Consolidated Balance Sheets as of September 30, 2008 and December 31, 2007
    
    
    1Condensed, Consolidated Income Statements for the Three and Nine Months Ended September 30, 2008 and 2007
    
    
    2Condensed, Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2008 and 2007
    
    
    3Notes to Condensed, Consolidated Financial Statements
    
    
    4Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    30Item 4.
    
    Controls and Procedures
    
    
    31Part II.
    
    Other InformationItem 1.
    
    Legal Proceedings
    
    
    31Item 1A.
    
    Risk Factors
    
    
    31Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    31Item 3.
    
    Defaults Upon Senior Securities
    
    
    32Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    32Item 5.
    
    Other Information
    
    
    32Item 6.
    
    Exhibits
    
    
    32Signature
    
    
    33Exhibit Index
    
    
    34EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1




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##### Table of Contents



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 31,2008
    
    
    2007AssetsCurrent assets:Cash and cash equivalents
    
    $
    95,303
    
    
    $
    110,866Trade accounts receivable, less allowance for uncollectible accounts of $11,474
and $10,940 at September 30, 2008 and December 31, 2007, respectively
    
    
    44,948
    
    
    
    42,650Inventory
    
    
    24,998
    
    
    
    25,517Prepaid expenses and other
    
    
    19,245
    
    
    
    15,307Deferred income taxes
    
    
    15,284
    
    
    
    14,402Prepaid income taxes
    
    
    549
    
    
    
    8,160Total current assets
    
    
    200,327
    
    
    
    216,902Property and equipment, less accumulated depreciation and amortization of $143,486
and $124,884 at September 30, 2008 and December 31, 2007, respectively
    
    
    251,242
    
    
    
    214,020Goodwill
    
    
    890,393
    
    
    
    821,967Other intangible assets, net
    
    
    33,914
    
    
    
    22,373Notes receivable, net
    
    
    12,766
    
    
    
    3,493Deferred financing costs, net
    
    
    1,186
    
    
    
    1,537Other
    
    
    15,738
    
    
    
    6,419Total assets
    
    $
    1,405,566
    
    
    $
    1,286,711Liabilities and Stockholders EquityCurrent liabilities:Current portion of long-term obligations
    
    $
    7,778
    
    
    $
    7,886Accounts payable
    
    
    23,685
    
    
    
    28,092Accrued payroll and related liabilities
    
    
    34,427
    
    
    
    38,341Other accrued liabilities
    
    
    47,405
    
    
    
    42,074Total current liabilities
    
    
    113,295
    
    
    
    116,393Long-term obligations, less current portion
    
    
    546,791
    
    
    
    552,294Deferred income taxes
    
    
    36,208
    
    
    
    28,197Other liabilities
    
    
    8,474
    
    
    
    11,236Minority interest
    
    
    13,422
    
    
    
    10,207Commitments and contingenciesPreferred stock, par value $0.001, 11,000 shares authorized, none outstanding
    
    
    
    
    
    
    Stockholders equity:Common stock, par value $0.001, 175,000 shares authorized, 84,631 and 84,335
shares outstanding as of September 30, 2008 and December 31, 2007, respectively
    
    
    85
    
    
    
    84Additional paid-in capital
    
    
    306,765
    
    
    
    296,037Accumulated earnings
    
    
    382,891
    
    
    
    275,598Accumulated other comprehensive loss
    
    
    (2,365
    )
    
    
    (3,335
    )Total stockholders equity
    
    
    687,376
    
    
    
    568,384Total liabilities and stockholders equity
    
    $
    1,405,566
    
    
    $
    1,286,711
  1




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##### Table of Contents



VCA Antech, Inc. and Subsidiaries
Condensed, Consolidated Income Statements
(Unaudited)
(In thousands, except per share amounts)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Revenue
    
    $
    332,035
    
    
    $
    306,537
    
    
    $
    974,301
    
    
    $
    871,987Direct costs
    
    
    243,267
    
    
    
    220,235
    
    
    
    705,536
    
    
    
    619,887Gross profit
    
    
    88,768
    
    
    
    86,302
    
    
    
    268,765
    
    
    
    252,100Selling, general and administrative expense
    
    
    22,003
    
    
    
    22,295
    
    
    
    67,990
    
    
    
    65,811Write-down and loss on sale of assets
    
    
    90
    
    
    
    333
    
    
    
    33
    
    
    
    875Operating income
    
    
    66,675
    
    
    
    63,674
    
    
    
    200,742
    
    
    
    185,414Interest expense, net
    
    
    6,709
    
    
    
    8,930
    
    
    
    21,369
    
    
    
    21,374Other expense (income)
    
    
    12
    
    
    
    (1
    )
    
    
    (24
    )
    
    
    226Income before minority interest and provision
for income taxes
    
    
    59,954
    
    
    
    54,745
    
    
    
    179,397
    
    
    
    163,814Minority interest in income of subsidiaries
    
    
    1,180
    
    
    
    1,187
    
    
    
    3,125
    
    
    
    3,061Income before provision for income taxes
    
    
    58,774
    
    
    
    53,558
    
    
    
    176,272
    
    
    
    160,753Provision for income taxes
    
    
    23,000
    
    
    
    21,329
    
    
    
    68,979
    
    
    
    64,364Net income
    
    $
    35,774
    
    
    $
    32,229
    
    
    $
    107,293
    
    
    $
    96,389Basic earnings per share
    
    $
    0.42
    
    
    $
    0.38
    
    
    $
    1.27
    
    
    $
    1.15Diluted earnings per share
    
    $
    0.42
    
    
    $
    0.38
    
    
    $
    1.25
    
    
    $
    1.13Weighted-average shares outstanding
for basic earnings per share
    
    
    84,463
    
    
    
    83,957
    
    
    
    84,394
    
    
    
    83,769Weighted-average shares outstanding
for diluted earnings per share
    
    
    85,789
    
    
    
    85,752
    
    
    
    85,789
    
    
    
    85,572
  2




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##### Table of Contents



VCA Antech, Inc. and Subsidiaries
Condensed, Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
 Nine Months EndedSeptember 30,2008
    
    
    2007Cash flows from operating activities:Net income
    
    $
    107,293
    
    
    $
    96,389Adjustments to reconcile net income to net cash provided by operating
activities:Depreciation and amortization
    
    
    23,762
    
    
    
    19,764Amortization of debt issue costs
    
    
    351
    
    
    
    253Provision for uncollectible accounts
    
    
    3,671
    
    
    
    3,561Write-down and loss on sale of assets
    
    
    33
    
    
    
    875Share-based compensation
    
    
    5,309
    
    
    
    3,429Minority interest in income of subsidiaries
    
    
    3,125
    
    
    
    3,061Distributions to minority interest partners
    
    
    (2,797
    )
    
    
    (2,262
    )Deferred income taxes
    
    
    9,894
    
    
    
    4,627Excess tax benefit from exercise of stock options
    
    
    (1,846
    )
    
    
    (6,576
    )Other
    
    
    212
    
    
    
    (115
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    (5,736
    )
    
    
    (4,823
    )Inventory, prepaid expenses and other assets
    
    
    (5,972
    )
    
    
    1,140Accounts payable and other accrued liabilities
    
    
    (438
    )
    
    
    (1,195
    )Accrued payroll and related liabilities
    
    
    (3,553
    )
    
    
    (3,958
    )Income taxes
    
    
    9,457
    
    
    
    20,983Net cash provided by operating activities
    
    
    142,765
    
    
    
    135,153Cash flows from investing activities:Business acquisitions, net of cash acquired
    
    
    (89,775
    )
    
    
    (214,758
    )Real estate acquired in connection with business acquisitions
    
    
    (15,063
    )
    
    
    (7,962
    )Property and equipment additions
    
    
    (39,764
    )
    
    
    (38,033
    )Proceeds from sale of assets
    
    
    1,774
    
    
    
    1,774Other
    
    
    (15,024
    )
    
    
    (188
    )Net cash used in investing activities
    
    
    (157,852
    )
    
    
    (259,167
    )Cash flows from financing activities:Repayment of long-term obligations
    
    
    (5,852
    )
    
    
    (6,282
    )Proceeds from issuance of long-term obligations
    
    
    
    
    
    
    160,000Payment of debt issue costs
    
    
    
    
    
    
    (897
    )Proceeds from issuance of common stock under stock option plans
    
    
    3,574
    
    
    
    6,668Excess tax benefit from exercise of stock options
    
    
    1,846
    
    
    
    6,576Net cash (used in) provided by financing activities
    
    
    (432
    )
    
    
    166,065Effect of currency exchange rate changes on cash and cash equivalents
    
    
    (44
    )
    
    
    (Decrease) increase in cash and cash equivalents
    
    
    (15,563
    )
    
    
    42,051Cash and cash equivalents at beginning of period
    
    
    110,866
    
    
    
    45,104Cash and cash equivalents at end of period
    
    $
    95,303
    
    
    $
    87,155
  3




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##### Table of Contents



VCA Antech, Inc. and Subsidiaries
 
 Notes To Condensed,
Consolidated Financial Statements
September 30, 2008
(Unaudited)
 1. Nature of Operations
     2. Basis of Presentation
   3. Acquisitions
  Animal Hospitals:Acquisitions
    
    
    43Acquisitions relocated into our existing
animal hospitals
    
    
    (9
    )Total
    
    
    34Laboratories:Acquisitions
    
    
    3Acquisitions relocated into our existing
laboratories
    
    
    Total
    
    
    3
 4




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##### Table of Contents



VCA Antech, Inc. and Subsidiaries
Notes To Condensed, Consolidated Financial Statements (Continued)
 3. Acquisitions, continued
 Animal Hospital and Laboratory Acquisitions
  Preliminary Purchase Price:Cash
    
    $
    88,136Liabilities assumed
    
    
    4,794Total
    
    $
    92,930Preliminary Allocation of the Purchase Price:Tangible assets
    
    $
    3,093Identifiable intangible assets
    
    
    16,828Goodwill (1)
    
    
    73,009Total
    
    $
    92,930
 
 (1)
    
    We expect that $59.5 million of the goodwill recorded for these acquisitions as of September
30, 2008 will be fully deductible for income tax purposes.  Other Acquisition Payments
   4. Goodwill and Other Intangible Assets
 Goodwill
  Animal
    
    
    MedicalLaboratory
    
    
    Hospital
    
    
    Technology
    
    
    TotalBalance as of December 31, 2007
    
    $
    95,344
    
    
    $
    707,463
    
    
    $
    19,160
    
    
    $
    821,967Goodwill acquired
    
    
    315
    
    
    
    73,198
    
    
    
    
    
    
    
    73,513Goodwill related to minority interests
    
    
    
    
    
    
    1,769
    
    
    
    
    
    
    
    1,769Other (1)
    
    
    62
    
    
    
    (6,918
    )
    
    
    
    
    
    
    (6,856
    )Balance as of September 30, 2008
    
    $
    95,721
    
    
    $
    775,512
    
    
    $
    19,160
    
    
    $
    890,393
 5




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##### Table of Contents



VCA Antech, Inc. and Subsidiaries
Notes To Condensed, Consolidated Financial Statements (Continued)
 4. Goodwill and Other Intangible Assets, continued
 
 (1)
    
    Other includes purchase price adjustments and earn-out payments. During the three months
ended September 30, 2008, we recorded adjustments to goodwill for a $2.3 million refund
received related to Healthy Pets working capital calculation and $2.5 million for the release
of a deferred tax valuation reserve related to the Pets Choice acquisition. Other Intangible Assets
  As of September 30, 2008
    
    
    As of December 31, 2007Gross
    
    
    
    
    
    
    Net
    
    
    Gross
    
    
    
    
    
    
    NetCarrying
    
    
    Accumulated
    
    
    Carrying
    
    
    Carrying
    
    
    Accumulated
    
    
    CarryingAmount
    
    
    Amortization
    
    
    Amount
    
    
    Amount
    
    
    Amortization
    
    
    AmountCovenants not-to-compete
    
    $
    16,626
    
    
    $
    (7,709
    )
    
    $
    8,917
    
    
    $
    13,487
    
    
    $
    (6,928
    )
    
    $
    6,559Non-contractual customer
relationships
    
    
    23,173
    
    
    
    (3,089
    )
    
    
    20,084
    
    
    
    12,992
    
    
    
    (2,755
    )
    
    
    10,237Favorable lease asset
    
    
    5,612
    
    
    
    (1,483
    )
    
    
    4,129
    
    
    
    5,594
    
    
    
    (1,019
    )
    
    
    4,575Technology
    
    
    1,259
    
    
    
    (1,003
    )
    
    
    256
    
    
    
    1,270
    
    
    
    (822
    )
    
    
    448Trademarks
    
    
    699
    
    
    
    (233
    )
    
    
    466
    
    
    
    582
    
    
    
    (185
    )
    
    
    397Contracts
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    380
    
    
    
    (309
    )
    
    
    71Client lists
    
    
    121
    
    
    
    (59
    )
    
    
    62
    
    
    
    137
    
    
    
    (51
    )
    
    
    86Total
    
    $
    47,490
    
    
    $
    (13,576
    )
    
    $
    33,914
    
    
    $
    34,442
    
    
    $
    (12,069
    )
    
    $
    22,373
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Aggregate amortization expense
    
    $
    1,792
    
    
    $
    967
    
    
    $
    4,739
    
    
    $
    2,997
  Remainder of 2008
    
    $
    1,8482009
    
    
    6,8352010
    
    
    6,0242011
    
    
    5,2132012
    
    
    2,751Thereafter
    
    
    11,243Total
    
    $
    33,914
 6




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##### Table of Contents



VCA Antech, Inc. and Subsidiaries
Notes To Condensed, Consolidated Financial Statements (Continued)
 5. Other Accrued Liabilities
  September 30,
    
    
    December 31,2008
    
    
    2007Accrued workers compensation insurance
    
    $
    9,078
    
    
    $
    6,051Deferred revenue
    
    
    8,005
    
    
    
    7,018Interest rate swap liability
    
    
    4,301
    
    
    
    5,827Accrued health insurance
    
    
    3,932
    
    
    
    3,273Holdbacks
    
    
    4,320
    
    
    
    2,215Accrued lease payments
    
    
    1,818
    
    
    
    2,329Accrued liability insurance
    
    
    2,209
    
    
    
    1,787Accrued post-retirement healthcare
    
    
    1,594
    
    
    
    1,281Accrued accounting fees
    
    
    1,320
    
    
    
    690Other
    
    
    10,828
    
    
    
    11,603$
    47,405
    
    
    $
    42,074
 6. Interest Rate Swap Agreements
  Interest Rate Swap AgreementsFixed interest rate
    
    
    5.51%
    
    
    
    4.95%
    
    
    
    5.34%
    
    
    
    2.64%Notional amount (in millions)
    
    
    $50.0
    
    
    
    $ 75.0
    
    
    
    $100.0
    
    
    
    $100.0Effective date
    
    
    6/20/2006
    
    
    
    4/30/2007
    
    
    
    6/11/2007
    
    
    
    2/12/2008Expiration date
    
    
    6/30/2009
    
    
    
    4/30/2009
    
    
    
    12/31/2009
    
    
    
    2/26/2010Counterparty
    
    Goldman Sachs
    
    Wells Fargo
    
    Goldman Sachs
    
    Wells FargoQualifies for hedge accounting
    
    Yes
    
    Yes
    
    Yes
    
    Yes
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2008
    
    2007
    
    2008
    
    2007Cash paid (received) (1)
    
    $
    1,639
    
    
    $
    (426
    )
    
    $
    4,030
    
    
    $
    (1,446
    )Recognized (gain) loss from ineffectiveness (2)
    
    $
    12
    
    
    $
    108
    
    
    $
    (24
    )
    
    $
    335
 
 (1)
    
    Our interest rate swap agreements effectively convert a certain amount of our variable-rate
debt under our senior credit facility to fixed-rate debt for purposes of controlling cash paid
for interest. The above table depicts both cash payments to and receipts from the
counterparties on our swap agreements. These payments and
receipts are offset by a corresponding decrease or increase in interest paid on our
variable-rate debt under our senior credit facility.(2)
    
    These recognized (gains) losses are included in other expense (income) in our consolidated income
statements. Fair Value Measurement
 7




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##### Table of Contents



VCA Antech, Inc. and Subsidiaries
Notes To Condensed, Consolidated Financial Statements (Continued)
 6. Interest Rate Swap Agreements, continued
    
    
    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.
  Basis of Fair Value MeasurementQuoted Prices
    
    
    Significant Other
    
    
    SignificantBalance at
    
    
    In Active Markets
    
    
    Observable
    
    
    UnobservableSeptember 30,
    
    
    for Identical Items
    
    
    Inputs
    
    
    Inputs2008
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Interest rate swap agreements:Prepaid expenses and other
    
    $
    730
    
    
    $
    
    
    
    $
    730
    
    
    $
    Other accrued liabilities
    
    $
    4,301
    
    
    $
    
    
    
    $
    4,301
    
    
    $
    
 7. Share-Based Compensation
 Stock Option Activity
   8




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##### Table of Contents



VCA Antech, Inc. and Subsidiaries
Notes To Condensed, Consolidated Financial Statements (Continued)
 7. Share-Based Compensation, continued
   Non-vested Stock Activity
     Weighted-Average FairValueShares
    
    
    Per ShareOutstanding at December 31, 2007
    
    
    352,832
    
    
    $
    32.90Granted
    
    
    420,445
    
    
    
    30.31Vested
    
    
    (2,667
    )
    
    
    40.59Forfeited/Canceled
    
    
    (1,500
    )
    
    
    32.34Outstanding at September 30, 2008
    
    
    769,110
    
    
    $
    31.46
 8. Calculation of Earnings per Share
  9




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VCA Antech, Inc. and Subsidiaries
Notes To Condensed, Consolidated Financial Statements (Continued)
 8. Calculation of Earnings per Share, continued
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net income
    
    $
    35,774
    
    
    $
    32,229
    
    
    $
    107,293
    
    
    $
    96,389Weighted-average common shares outstanding:Basic
    
    
    84,463
    
    
    
    83,957
    
    
    
    84,394
    
    
    
    83,769Effect of dilutive potential common shares:Stock options
    
    
    1,184
    
    
    
    1,718
    
    
    
    1,271
    
    
    
    1,750Non-vested shares
    
    
    142
    
    
    
    77
    
    
    
    124
    
    
    
    53Diluted
    
    
    85,789
    
    
    
    85,752
    
    
    
    85,789
    
    
    
    85,572Basic earnings per share
    
    $
    0.42
    
    
    $
    0.38
    
    
    $
    1.27
    
    
    $
    1.15Diluted earnings per share
    
    $
    0.42
    
    
    $
    0.38
    
    
    $
    1.25
    
    
    $
    1.13
   9. Comprehensive Income
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net income
    
    $
    35,774
    
    
    $
    32,229
    
    
    $
    107,293
    
    
    $
    96,389Other comprehensive gain (loss):Foreign currency translation adjustments
    
    
    (206
    )
    
    
    
    
    
    
    (224
    )
    
    
    Unrealized loss on foreign currency
    
    
    (92
    )
    
    
    
    
    
    
    (92
    )
    
    
    Unrealized loss on hedging instruments
    
    
    (218
    )
    
    
    (3,069
    )
    
    
    (1,983
    )
    
    
    (2,135
    )Tax benefit
    
    
    129
    
    
    
    1,219
    
    
    
    808
    
    
    
    848Loss (gain) on hedging instruments reclassified to income
    
    
    1,639
    
    
    
    (426
    )
    
    
    4,030
    
    
    
    (1,446
    )Tax (expense) benefit
    
    
    (639
    )
    
    
    170
    
    
    
    (1,569
    )
    
    
    575Other comprehensive gain (loss)
    
    
    613
    
    
    
    (2,106
    )
    
    
    970
    
    
    
    (2,158
    )Total comprehensive income
    
    $
    36,387
    
    
    $
    30,123
    
    
    $
    108,263
    
    
    $
    94,231
 10.
    
    Segment Reporting
  10




---



##### Table of Contents



VCA Antech, Inc. and Subsidiaries
Notes To Condensed, Consolidated Financial Statements (Continued)
 10. Segment Reporting, continued
    Animal
        
        
        Medical
        
        
        
        
        
        
        IntercompanyLaboratory
        
        
        Hospital
        
        
        Technology
        
        
        Corporate
        
        
        Eliminations
        
        
        TotalThree Months Ended September 30, 2008External revenue
        
        $
        69,035
        
        
        $
        253,251
        
        
        $
        9,749
        
        
        $
        
        
        
        $
        
        
        
        $
        332,035Intercompany revenue
        
        
        8,030
        
        
        
        
        
        
        
        2,797
        
        
        
        
        
        
        
        (10,827
        )
        
        
        Total revenue
        
        
        77,065
        
        
        
        253,251
        
        
        
        12,546
        
        
        
        
        
        
        
        (10,827
        )
        
        
        332,035Direct costs
        
        
        41,792
        
        
        
        202,965
        
        
        
        8,224
        
        
        
        
        
        
        
        (9,714
        )
        
        
        243,267Gross profit
        
        
        35,273
        
        
        
        50,286
        
        
        
        4,322
        
        
        
        
        
        
        
        (1,113
        )
        
        
        88,768Selling, general and
            administrative expense
        
        
        5,178
        
        
        
        5,643
        
        
        
        3,120
        
        
        
        8,062
        
        
        
        
        
        
        
        22,003Write-down and loss
            on sale of assets
        
        
        3
        
        
        
        25
        
        
        
        2
        
        
        
        60
        
        
        
        
        
        
        
        90Operating income (loss)
        
        $
        30,092
        
        
        $
        44,618
        
        
        $
        1,200
        
        
        $
        (8,122
        )
        
        $
        (1,113
        )
        
        $
        66,675Depreciation and amortization
        
        $
        1,923
        
        
        $
        5,816
        
        
        $
        404
        
        
        $
        446
        
        
        $
        (152
        )
        
        $
        8,437Capital expenditures
        
        $
        2,777
        
        
        $
        11,327
        
        
        $
        46
        
        
        $
        756
        
        
        $
        (685
        )
        
        $
        14,221Three Months Ended
            September 30, 2007External revenue
        
        $
        66,964
        
        
        $
        229,409
        
        
        $
        10,164
        
        
        $
        
        
        
        $
        
        
        
        $
        306,537Intercompany revenue
        
        
        7,302
        
        
        
        
        
        
        
        927
        
        
        
        
        
        
        
        (8,229
        )
        
        
        Total revenue
        
        
        74,266
        
        
        
        229,409
        
        
        
        11,091
        
        
        
        
        
        
        
        (8,229
        )
        
        
        306,537Direct costs
        
        
        38,628
        
        
        
        181,825
        
        
        
        7,830
        
        
        
        
        
        
        
        (8,048
        )
        
        
        220,235Gross profit
        
        
        35,638
        
        
        
        47,584
        
        
        
        3,261
        
        
        
        
        
        
        
        (181
        )
        
        
        86,302Selling, general and
            administrative expense
        
        
        4,859
        
        
        
        5,411
        
        
        
        2,761
        
        
        
        9,264
        
        
        
        
        
        
        
        22,295Write-down and loss
            on sale of assets
        
        
        14
        
        
        
        312
        
        
        
        6
        
        
        
        1
        
        
        
        
        
        
        
        333Operating income (loss)
        
        $
        30,765
        
        
        $
        41,861
        
        
        $
        494
        
        
        $
        (9,265
        )
        
        $
        (181
        )
        
        $
        63,674Depreciation and amortization
        
        $
        1,742
        
        
        $
        4,461
        
        
        $
        409
        
        
        $
        512
        
        
        $
        (100
        )
        
        $
        7,024Capital expenditures
        
        $
        2,084
        
        
        $
        7,383
        
        
        $
        142
        
        
        $
        1,468
        
        
        $
        (280
        )
        
        $
        10,797
 11




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##### Table of Contents



VCA Antech, Inc. and Subsidiaries
Notes To Condensed, Consolidated Financial Statements (Continued)
 10. Segment Reporting, continued
 Animal
        
        
        Medical
        
        
        
        
        
        
        IntercompanyLaboratory
        
        
        Hospital
        
        
        Technology
        
        
        Corporate
        
        
        Eliminations
        
        
        TotalNine
          Months Ended September 30, 2008External revenue
        
        $
        211,684
        
        
        $
        730,352
        
        
        $
        32,265
        
        
        $
        
        
        
        $
        
        
        
        $
        974,301Intercompany revenue
        
        
        23,950
        
        
        
        
        
        
        
        5,968
        
        
        
        
        
        
        
        (29,918
        )
        
        
        Total revenue
        
        
        235,634
        
        
        
        730,352
        
        
        
        38,233
        
        
        
        
        
        
        
        (29,918
        )
        
        
        974,301Direct costs
        
        
        122,145
        
        
        
        586,309
        
        
        
        24,776
        
        
        
        
        
        
        
        (27,694
        )
        
        
        705,536Gross profit
        
        
        113,489
        
        
        
        144,043
        
        
        
        13,457
        
        
        
        
        
        
        
        (2,224
        )
        
        
        268,765Selling, general and
            administrative expense
        
        
        15,314
        
        
        
        16,815
        
        
        
        9,502
        
        
        
        26,359
        
        
        
        
        
        
        
        67,990Write-down and loss
            (gain) on sale of assets
        
        
        3
        
        
        
        (64
        )
        
        
        22
        
        
        
        72
        
        
        
        
        
        
        
        33Operating income (loss)
        
        $
        98,172
        
        
        $
        127,292
        
        
        $
        3,933
        
        
        $
        (26,431
        )
        
        $
        (2,224
        )
        
        $
        200,742Depreciation and amortization
        
        $
        5,378
        
        
        $
        16,234
        
        
        $
        1,205
        
        
        $
        1,359
        
        
        $
        (414
        )
        
        $
        23,762Capital expenditures
        
        $
        8,192
        
        
        $
        30,473
        
        
        $
        303
        
        
        $
        2,198
        
        
        $
        (1,402
        )
        
        $
        39,764Nine Months Ended
            September 30, 2007External revenue
        
        $
        206,233
        
        
        $
        635,046
        
        
        $
        30,708
        
        
        $
        
        
        
        $
        
        
        
        $
        871,987Intercompany revenue
        
        
        20,840
        
        
        
        
        
        
        
        2,190
        
        
        
        
        
        
        
        (23,030
        )
        
        
        Total revenue
        
        
        227,073
        
        
        
        635,046
        
        
        
        32,898
        
        
        
        
        
        
        
        (23,030
        )
        
        
        871,987Direct costs
        
        
        115,467
        
        
        
        505,581
        
        
        
        21,541
        
        
        
        
        
        
        
        (22,702
        )
        
        
        619,887Gross profit
        
        
        111,606
        
        
        
        129,465
        
        
        
        11,357
        
        
        
        
        
        
        
        (328
        )
        
        
        252,100Selling, general and
            administrative expense
        
        
        14,872
        
        
        
        16,292
        
        
        
        8,389
        
        
        
        26,258
        
        
        
        
        
        
        
        65,811Write-down and loss
            on sale of assets
        
        
        72
        
        
        
        756
        
        
        
        46
        
        
        
        1
        
        
        
        
        
        
        
        875Operating income (loss)
        
        $
        96,662
        
        
        $
        112,417
        
        
        $
        2,922
        
        
        $
        (26,259
        )
        
        $
        (328
        )
        
        $
        185,414Depreciation and amortization
        
        $
        4,688
        
        
        $
        12,751
        
        
        $
        1,216
        
        
        $
        1,390
        
        
        $
        (281
        )
        
        $
        19,764Capital expenditures
        
        $
        9,808
        
        
        $
        23,663
        
        
        $
        566
        
        
        $
        4,604
        
        
        $
        (608
        )
        
        $
        38,033At September 30,
            2008Total assets
        
        $
        194,493
        
        
        $
        1,026,914
        
        
        $
        43,175
        
        
        $
        150,122
        
        
        $
        (9,138
        )
        
        $
        1,405,566At December 31,
            2007Total assets
        
        $
        178,846
        
        
        $
        934,366
        
        
        $
        54,954
        
        
        $
        125,173
        
        
        $
        (6,628
        )
        
        $
        1,286,711
 11. Commitments and Contingencies
  a. Earn-out Payments
  12




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##### Table of Contents



VCA Antech, Inc. and Subsidiaries
Notes To Condensed, Consolidated Financial Statements (Continued)
 11. Commitments and Contingencies, continued
 b. Officers Compensation
     c. Other Contingencies
  12. Recent Accounting Pronouncements
 The Hierarchy of Generally Accepted Accounting
Principles The Meaning of Present Fairly in Conformity With
Generally Accepted Accounting Principles.
 Determination of the Useful Life of Intangible Assets Goodwill and Other Intangible Assets,
 13




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##### Table of Contents



VCA Antech, Inc. and Subsidiaries
Notes To Condensed, Consolidated Financial Statements (Continued)
 12. Recent Accounting Pronouncements, continued
 Business Combinations
 Disclosures about Derivative Instruments and
Hedging Activities  an amendment of SFAS No. 133
 Business Combinations
 Noncontrolling Interests in Consolidated
Financial Statements  an amendment of ARB No. 51
 Fair Value Option for Financial Assets and
Financial Liabilities
  14




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##### Table of Contents



VCA Antech, Inc. and Subsidiaries
Notes To Condensed, Consolidated Financial Statements (Continued)
 13. Subsequent Events
 Revolving Credit Facility
   Share-Based Compensation
  15




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 PageNumberIntroduction
    
    
    17Executive Overview
    
    
    17Critical Accounting Policies
    
    
    18Consolidated Results of Operations
    
    
    19Segment Results
    
    
    20Liquidity and Capital Resources
    
    
    25Recent Accounting Prouncements
    
    
    29
 16




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##### Table of Contents



Introduction
 The following discussion should be read in conjunction with our condensed, consolidated
financial statements provided under Part I, Item I of this Quarterly report on Form 10-Q . We have
included herein statements that constitute forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. We generally identify forward-looking statements
in this report using words like believe, intend, expect, estimate, may, plan, should
plan, project, contemplate, anticipate, predict, potential, continue, or similar
expressions. You may find some of these statements below and elsewhere in this report. These
forward-looking statements are not historical facts and are inherently uncertain and outside of our
control. Any or all of our forward-looking statements in this report may turn out to be wrong.
They can be affected by inaccurate assumptions we might make or by known or unknown risks and
uncertainties. Many factors mentioned in our discussion in this report will be important in
determining future results. Consequently, no forward-looking statement can be guaranteed. Actual
future results may vary materially. Factors that may cause our plans, expectations, future
financial condition and results to change are described throughout this report and in our Annual
Report on Form 10-K , particularly in Risk Factors, Part I, Item 1A of that report.
 The forward-looking information set forth in this Quarterly report on Form 10-Q is as of
November 7, 2008, and we undertake no duty to update this information. Shareholders and
prospective investors can find information filed with the SEC after November 7, 2008 at our website
at http://investor.vcaantech.com or at the SECs website at www.sec.gov .
  
    
    Our Laboratory segment operates the largest network of veterinary diagnostic
laboratories in the nation. Our laboratories provide sophisticated testing and consulting
services used by veterinarians in the detection, diagnosis, evaluation, monitoring,
treatment and prevention of diseases and other conditions affecting animals. At September
30, 2008, our Laboratory network consisted of 42 laboratories serving all 50 states and
certain areas in Canada.
    
    Our Animal Hospital segment operates the largest network of freestanding, full-service
animal hospitals in the nation. Our animal hospitals offer a full range of general medical
and surgical services for companion animals. We treat diseases and injuries, offer
pharmaceutical and retail products and perform a variety of pet wellness programs,
including health examinations, diagnostic testing, routine vaccinations, spaying, neutering
and dental care. At September 30, 2008, our animal hospital network consisted of 467
animal hospitals in 39 states.
    
    Our Medical Technology segment sells digital radiography and ultrasound imaging
equipment, related computer hardware, software and ancillary services.
  
 Executive Overview
  17




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##### Table of Contents



Acquisitions and Facilities
  Animal Hospitals:Beginning of period
    
    
    438Acquisitions
    
    
    43Acquisitions relocated into our existing animal hospitals
    
    
    (10
    )Created
    
    
    1Sold/closed
    
    
    (5
    )End of period
    
    
    467Laboratories:Beginning of period
    
    
    36Acquisitions
    
    
    3Acquisitions relocated into our existing laboratories
    
    
    Created
    
    
    3End of period
    
    
    42
 
 Critical Accounting Policies
  Valuation of Goodwill
 Goodwill and Other
Intangible Assets,
 18




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##### Table of Contents



Consolidated Results of Operations
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2008
    
    2007
    
    2008
    
    2007Revenue:Laboratory
    
    
    23.2
    %
    
    
    24.2
    %
    
    
    24.2
    %
    
    
    26.0
    %Animal Hospital
    
    
    76.3
    
    
    
    74.8
    
    
    
    75.0
    
    
    
    72.8Medical Technology
    
    
    3.8
    
    
    
    3.6
    
    
    
    3.9
    
    
    
    3.8Intercompany
    
    
    (3.3
    )
    
    
    (2.6
    )
    
    
    (3.1
    )
    
    
    (2.6
    )Total revenue
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Direct costs
    
    
    73.3
    
    
    
    71.8
    
    
    
    72.4
    
    
    
    71.1Gross profit
    
    
    26.7
    
    
    
    28.2
    
    
    
    27.6
    
    
    
    28.9Selling, general and administrative expense
    
    
    6.6
    
    
    
    7.3
    
    
    
    7.0
    
    
    
    7.5Write-down and loss (gain) on sale of assets
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    0.1Operating income
    
    
    20.1
    
    
    
    20.8
    
    
    
    20.6
    
    
    
    21.3Interest expense, net
    
    
    2.0
    
    
    
    2.9
    
    
    
    2.2
    
    
    
    2.5Income before minority interest and provision
for income taxes
    
    
    18.1
    
    
    
    17.9
    
    
    
    18.4
    
    
    
    18.8Minority interest in income of subsidiairies
    
    
    0.4
    
    
    
    0.4
    
    
    
    0.3
    
    
    
    0.4Income before provision for income taxes
    
    
    17.7
    
    
    
    17.5
    
    
    
    18.1
    
    
    
    18.4Provision for income taxes
    
    
    6.9
    
    
    
    7.0
    
    
    
    7.1
    
    
    
    7.3Net income
    
    
    10.8
    %
    
    
    10.5
    %
    
    
    11.0
    %
    
    
    11.1
    %
 Revenue
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2008
    
    
    2007
    
    
    
    
    
    
    2008
    
    
    2007% of
    
    
    
    
    
    
    % of
    
    
    %
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % of
    
    
    %$
    
    
    Total
    
    
    $
    
    
    Total
    
    
    Change
    
    
    $
    
    
    Total
    
    
    $
    
    
    Total
    
    
    ChangeLaboratory
    
    $
    77,065
    
    
    
    23.2
    %
    
    $
    74,266
    
    
    
    24.2
    %
    
    
    3.8
    %
    
    $
    235,634
    
    
    
    24.2
    %
    
    $
    227,073
    
    
    
    26.0
    %
    
    
    3.8
    %Animal Hospital
    
    
    253,251
    
    
    
    76.3
    %
    
    
    229,409
    
    
    
    74.8
    %
    
    
    10.4
    %
    
    
    730,352
    
    
    
    75.0
    %
    
    
    635,046
    
    
    
    72.8
    %
    
    
    15.0
    %Medical Technology
    
    
    12,546
    
    
    
    3.8
    %
    
    
    11,091
    
    
    
    3.6
    %
    
    
    13.1
    %
    
    
    38,233
    
    
    
    3.9
    %
    
    
    32,898
    
    
    
    3.8
    %
    
    
    16.2
    %Intercompany
    
    
    (10,827
    )
    
    
    (3.3
    )%
    
    
    (8,229
    )
    
    
    (2.6
    )%
    
    
    31.6
    %
    
    
    (29,918
    )
    
    
    (3.1
    )%
    
    
    (23,030
    )
    
    
    (2.6
    )%
    
    
    29.9
    %Total revenue
    
    $
    332,035
    
    
    
    100.0
    %
    
    $
    306,537
    
    
    
    100.0
    %
    
    
    8.3
    %
    
    $
    974,301
    
    
    
    100.0
    %
    
    $
    871,987
    
    
    
    100.0
    %
    
    
    11.7
    %
  19




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##### Table of Contents



Gross Profit
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2008
    
    
    2007
    
    
    
    
    
    
    2008
    
    
    2007Gross
    
    
    
    
    
    
    Gross
    
    
    %
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    Gross
    
    
    %$
    
    
    Margin
    
    
    $
    
    
    Margin
    
    
    Change
    
    
    $
    
    
    Margin
    
    
    $
    
    
    Margin
    
    
    ChangeLaboratory
    
    $
    35,273
    
    
    
    45.8
    %
    
    $
    35,638
    
    
    
    48.0
    %
    
    
    (1.0
    )%
    
    $
    113,489
    
    
    
    48.2
    %
    
    $
    111,606
    
    
    
    49.1
    %
    
    
    1.7
    %Animal Hospital
    
    
    50,286
    
    
    
    19.9
    %
    
    
    47,584
    
    
    
    20.7
    %
    
    
    5.7
    %
    
    
    144,043
    
    
    
    19.7
    %
    
    
    129,465
    
    
    
    20.4
    %
    
    
    11.3
    %Medical Technology
    
    
    4,322
    
    
    
    34.4
    %
    
    
    3,261
    
    
    
    29.4
    %
    
    
    32.5
    %
    
    
    13,457
    
    
    
    35.2
    %
    
    
    11,357
    
    
    
    34.5
    %
    
    
    18.5
    %Intercompany
    
    
    (1,113
    )
    
    
    
    
    
    
    (181
    )
    
    
    
    
    
    
    
    
    
    
    (2,224
    )
    
    
    
    
    
    
    (328
    )Total gross profit
    
    $
    88,768
    
    
    
    26.7
    %
    
    $
    86,302
    
    
    
    28.2
    %
    
    
    2.9
    %
    
    $
    268,765
    
    
    
    27.6
    %
    
    $
    252,100
    
    
    
    28.9
    %
    
    
    6.6
    %
  
 Segment Results
 Laboratory Segment
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2008
    
    
    2007
    
    
    
    
    
    
    2008
    
    
    2007Gross
    
    
    
    
    
    
    Gross
    
    
    %
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    Gross
    
    
    %$
    
    
    Margin
    
    
    $
    
    
    Margin
    
    
    Change
    
    
    $
    
    
    Margin
    
    
    $
    
    
    Margin
    
    
    ChangeRevenue
    
    $
    77,065
    
    
    
    
    
    
    $
    74,266
    
    
    
    
    
    
    
    3.8
    %
    
    $
    235,634
    
    
    
    
    
    
    $
    227,073
    
    
    
    
    
    
    
    3.8
    %Gross profit
    
    $
    35,273
    
    
    
    45.8
    %
    
    $
    35,638
    
    
    
    48.0
    %
    
    
    (1.0
    )%
    
    $
    113,489
    
    
    
    48.2
    %
    
    $
    111,606
    
    
    
    49.1
    %
    
    
    1.7
    %
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2008
    
    
    2007
    
    
    % Change
    
    
    2008
    
    
    2007
    
    
    % ChangeLaboratory Revenue:Internal growth:Number of requisitions (1)
    
    
    3,286
    
    
    
    3,132
    
    
    
    4.9
    %
    
    
    10,062
    
    
    
    9,725
    
    
    
    3.5
    %Average revenue per reqisition (2)
    
    $
    23.30
    
    
    $
    23.71
    
    
    
    (1.7
    )%
    
    $
    23.29
    
    
    $
    23.35
    
    
    
    (0.3
    )%Total internal revenue (1)
    
    $
    76,565
    
    
    $
    74,266
    
    
    
    3.1
    %
    
    $
    234,306
    
    
    $
    227,073
    
    
    
    3.2
    %Acquired revenue (3)
    
    
    500
    
    
    
    
    
    
    
    
    
    
    
    1,328
    
    
    
    Total
    
    $
    77,065
    
    
    $
    74,266
    
    
    
    3.8
    %
    
    $
    235,634
    
    
    $
    227,073
    
    
    
    3.8
    %
 
 (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.(2)
    
    Computed by dividing internal revenue by the number of requisitions.(3)
    
    Acquired revenue represents revenue recognized from our acquired laboratories for the
comparable current year period that we did not own them in the prior year. 20




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##### Table of Contents



Animal Hospital Segment
  Three Months Ended September 30,
    
    Nine Months Ended September 30,2008
    
    2007
    
    
    
    
    
    2008
    
    2007Gross
    
    
    
    
    
    Gross
    
    %
    
    
    
    
    
    Gross
    
    
    
    
    
    Gross
    
    %$
    
    Margin
    
    $
    
    Margin
    
    Change
    
    $
    
    Margin
    
    $
    
    Margin
    
    ChangeRevenue
    
    $
    253,251
    
    
    
    
    
    
    $
    229,409
    
    
    
    
    
    
    
    10.4
    %
    
    $
    730,352
    
    
    
    
    
    
    $
    635,046
    
    
    
    
    
    
    
    15.0
    %Gross profit
    
    $
    50,286
    
    
    
    19.9
    %
    
    $
    47,584
    
    
    
    20.7
    %
    
    
    5.7
    %
    
    $
    144,043
    
    
    
    19.7
    %
    
    $
    129,465
    
    
    
    20.4
    %
    
    
    11.3
    %
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2008
    
    
    2007
    
    
    % Change
    
    
    2008
    
    
    2007
    
    
    % ChangeAnimal Hospital Revenue:Same-store facilities:Orders (1)(2)
    
    
    1,556
    
    
    
    1,640
    
    
    
    (5.1
    )%
    
    
    3,964
    
    
    
    4,137
    
    
    
    (4.2
    )%Average revenue per order (3)
    
    $
    148.16
    
    
    $
    138.64
    
    
    
    6.9
    %
    
    $
    146.75
    
    
    $
    139.17
    
    
    
    5.4
    %Same-store revenue (1)
    
    $
    230,533
    
    
    $
    227,312
    
    
    
    1.4
    %
    
    $
    581,660
    
    
    $
    575,668
    
    
    
    1.0
    %Business day adjustment (4)
    
    
    2,069
    
    
    
    
    
    
    
    
    
    
    
    1,757
    
    
    
    Net acquired revenue (5)
    
    
    20,649
    
    
    
    2,097
    
    
    
    
    
    
    
    146,935
    
    
    
    59,378Total
    
    $
    253,251
    
    
    $
    229,409
    
    
    
    10.4
    %
    
    $
    730,352
    
    
    $
    635,046
    
    
    
    15.0
    %
 21




---



##### Table of Contents



(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 period 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 2008 business day adjustment reflects the impact of one additional business day in 2008
as compared to 2007 for both 2007 periods presented.(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 July 1, 2007 for the three-month analysis, and January 1, 2007
for the nine-month analysis. Fluctuations in net acquired revenue occur due to the volume,
size, and timing of acquisitions and dispositions during the periods from this date through
the end of the applicable period.     22




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##### Table of Contents



Medical Technology Segment
  Three Months Ended September 30,
    
    Nine Months Ended September 30,2008
    
    2007
    
    
    
    
    
    2008
    
    2007Gross
    
    
    
    
    
    Gross
    
    %
    
    
    
    
    
    Gross
    
    
    
    
    
    Gross
    
    %$
    
    Margin
    
    $
    
    Margin
    
    Change
    
    $
    
    Margin
    
    $
    
    Margin
    
    ChangeRevenue
    
    $
    12,546
    
    
    
    
    
    
    $
    11,091
    
    
    
    
    
    
    
    13.1
    %
    
    $
    38,233
    
    
    
    
    
    
    $
    32,898
    
    
    
    
    
    
    
    16.2
    %Gross profit
    
    $
    4,322
    
    
    
    34.4
    %
    
    $
    3,261
    
    
    
    29.4
    %
    
    
    32.5
    %
    
    $
    13,457
    
    
    
    35.2
    %
    
    $
    11,357
    
    
    
    34.5
    %
    
    
    18.5
    %
    Intercompany Revenue
  23




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##### Table of Contents



Selling, General and Administrative Expense
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2008
    
    
    2007
    
    
    
    
    
    
    2008
    
    
    2007% of
    
    
    
    
    
    
    % of
    
    
    %
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % of
    
    
    %$
    
    
    Revenue
    
    
    $
    
    
    Revenue
    
    
    Change
    
    
    $
    
    
    Revenue
    
    
    $
    
    
    Revenue
    
    
    ChangeLaboratory
    
    $
    5,178
    
    
    
    6.7
    %
    
    $
    4,859
    
    
    
    6.5
    %
    
    
    6.6
    %
    
    $
    15,314
    
    
    
    6.5
    %
    
    $
    14,872
    
    
    
    6.5
    %
    
    
    3.0
    %Animal Hospital
    
    
    5,643
    
    
    
    2.2
    %
    
    
    5,411
    
    
    
    2.4
    %
    
    
    4.3
    %
    
    
    16,815
    
    
    
    2.3
    %
    
    
    16,292
    
    
    
    2.6
    %
    
    
    3.2
    %Medical Technology
    
    
    3,120
    
    
    
    24.9
    %
    
    
    2,761
    
    
    
    24.9
    %
    
    
    13.0
    %
    
    
    9,502
    
    
    
    24.9
    %
    
    
    8,389
    
    
    
    25.5
    %
    
    
    13.3
    %Corporate
    
    
    8,062
    
    
    
    2.4
    %
    
    
    9,264
    
    
    
    3.0
    %
    
    
    (13.0
    )%
    
    
    26,359
    
    
    
    2.7
    %
    
    
    26,258
    
    
    
    3.0
    %
    
    
    0.4
    %Total SG&A
    
    $
    22,003
    
    
    
    6.6
    %
    
    $
    22,295
    
    
    
    7.3
    %
    
    
    (1.3
    )%
    
    $
    67,990
    
    
    
    7.0
    %
    
    $
    65,811
    
    
    
    7.5
    %
    
    
    3.3
    %
    Operating Income
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2008
    
    
    2007
    
    
    
    
    
    
    2008
    
    
    2007% of
    
    
    
    
    
    
    % of
    
    
    %
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % of
    
    
    %$
    
    
    Revenue
    
    
    $
    
    
    Revenue
    
    
    Change
    
    
    $
    
    
    Revenue
    
    
    $
    
    
    Revenue
    
    
    ChangeLaboratory
    
    $
    30,092
    
    
    
    39.0
    %
    
    $
    30,765
    
    
    
    41.4
    %
    
    
    (2.2
    )%
    
    $
    98,172
    
    
    
    41.7
    %
    
    $
    96,662
    
    
    
    42.6
    %
    
    
    1.6
    %Animal Hospital
    
    
    44,618
    
    
    
    17.6
    %
    
    
    41,861
    
    
    
    18.2
    %
    
    
    6.6
    %
    
    
    127,292
    
    
    
    17.4
    %
    
    
    112,417
    
    
    
    17.7
    %
    
    
    13.2
    %Medical Technology
    
    
    1,200
    
    
    
    9.6
    %
    
    
    494
    
    
    
    4.5
    %
    
    
    142.9
    %
    
    
    3,933
    
    
    
    10.3
    %
    
    
    2,922
    
    
    
    8.9
    %
    
    
    34.6
    %Corporate
    
    
    (8,122
    )
    
    
    (2.4
    )%
    
    
    (9,265
    )
    
    
    (3.0
    )%
    
    
    (12.3
    )%
    
    
    (26,431
    )
    
    
    (2.7
    )%
    
    
    (26,259
    )
    
    
    (3.0
    )%
    
    
    0.7
    %Intercompany
    
    
    (1,113
    )
    
    
    10.3
    %
    
    
    (181
    )
    
    
    2.2
    %
    
    
    514.9
    %
    
    
    (2,224
    )
    
    
    7.4
    %
    
    
    (328
    )
    
    
    1.4
    %
    
    
    578.0
    %Total operating income
    
    $
    66,675
    
    
    
    20.1
    %
    
    $
    63,674
    
    
    
    20.8
    %
    
    
    4.7
    %
    
    $
    200,742
    
    
    
    20.6
    %
    
    $
    185,414
    
    
    
    21.3
    %
    
    
    8.3
    %
  24




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##### Table of Contents



Interest Expense, Net
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Interest expense (income):Senior term notes
    
    $
    5,385
    
    
    $
    9,432
    
    
    $
    17,961
    
    
    $
    23,205Interest rate hedging agreements
    
    
    1,639
    
    
    
    (433
    )
    
    
    4,077
    
    
    
    (1,450
    )Capital leases and other
    
    
    395
    
    
    
    811
    
    
    
    1,437
    
    
    
    1,510Amortization of debt costs
    
    
    118
    
    
    
    116
    
    
    
    351
    
    
    
    2537,537
    
    
    
    9,926
    
    
    
    23,826
    
    
    
    23,518Interest income
    
    
    (828
    )
    
    
    (996
    )
    
    
    (2,457
    )
    
    
    (2,144
    )Total interest expense, net of interest income
    
    $
    6,709
    
    
    $
    8,930
    
    
    $
    21,369
    
    
    $
    21,374
  Provision for Income Taxes
  
 Liquidity and Capital Resources
 Introduction
     25




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##### Table of Contents



Future Cash Flows
 Short-term
   Long-term
   Debt Related Covenants
    26




---



##### Table of Contents



Historical Cash Flows
  Nine Months EndedSeptember 30,2008
    
    
    2007Cash provided by (used in):Operating activities
    
    $
    142,765
    
    
    $
    135,153Investing activities
    
    
    (157,852
    )
    
    
    (259,167
    )Financing activities
    
    
    (432
    )
    
    
    166,065Effect of exchange rate changes on cash and cash equivalents
    
    
    (44
    )
    
    
    (Decrease) increase in cash and cash equivalents
    
    
    (15,563
    )
    
    
    42,051Cash and cash equivalents at beginning of period
    
    
    110,866
    
    
    
    45,104Cash and cash equivalents at end of period
    
    $
    95,303
    
    
    $
    87,155
 Cash Flows from Operating Activities
  Cash Flows from Investing Activities
  Nine Months EndedSeptember 30,2008
    
    
    2007
    
    
    VarianceInvesting Cash Flows:Acquisition of Healthy Pet
    
    $
    
    
    
    $
    (154,783
    )
    
    $
    154,783
    (1)Acquisition of independent animal
hospitals and laboratories
    
    
    (88,136
    )
    
    
    (57,990
    )
    
    
    (30,146)
    (2)Other
    
    
    (1,639
    )
    
    
    (1,985
    )
    
    
    346Total cash used for acquisitions
    
    
    (89,775
    )
    
    
    (214,758
    )
    
    
    124,983Property and equipment additions
    
    
    (39,764
    )
    
    
    (38,033
    )
    
    
    (1,731
    )Real estate acquired with acquisitions
    
    
    (15,063
    )
    
    
    (7,962
    )
    
    
    (7,101)
    (3)Proceeds from sale of assets
    
    
    1,774
    
    
    
    1,774
    
    
    
    Other
    
    
    (15,024
    )
    
    
    (188
    )
    
    
    (14,836)
    (4)Net cash used in investing activities
    
    $
    (157,852
    )
    
    $
    (259,167
    )
    
    $
    101,315
 
 (1)
    
    The decrease in cash used is primarily due to the acquisition of the Healthy Pet chain in
June of 2007.(2)
    
    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 the Executive
Overview.(3)
    
    The increase in cash used to acquire real estate was due primarily to a increase in the
number of favorable opportunities presented.(4)
    
    The increase in other investing cash flows was due primarily to certain investments in
related businesses. 27




---



##### Table of Contents



Cash Flows from Financing Activities
  Nine Months EndedSeptember 30,2008
    
    
    2007
    
    
    VarianceFinancing Cash Flows:Repayment of long-term obligations
    
    $
    (5,852
    )
    
    $
    (6,282
    )
    
    $
    430Proceeds from issuance of long-term obligations
    
    
    
    
    
    
    160,000
    
    
    
    (160,000
    )(1)Payment of debt issue costs
    
    
    
    
    
    
    (897
    )
    
    
    897Proceeds from stock options exercises
    
    
    3,574
    
    
    
    6,668
    
    
    
    (3,094
    )(2)Excess tax benefits from stock options
    
    
    1,846
    
    
    
    6,576
    
    
    
    (4,730
    )(2)Net cash (used in) provided by financing activities
    
    $
    (432
    )
    
    $
    166,065
    
    
    $
    (166,497
    )
 
 (1)
    
    The decrease in proceeds from the issuance of long-term obligations is due to funds borrowed
in 2007 related to the Healthy Pet acquisition.(2)
    
    The number of stock option exercises has declined in comparison to the prior year.
Accordingly, there has been a decline in the amount of excess tax benefits as well. Future Contractual Cash Requirements
  Payment due by periodTotal
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    ThereafterContractual ObligationsLong-term debt
    
    $
    560,648
    
    
    $
    1,701
    
    
    $
    5,890
    
    
    $
    40,922
    
    
    $
    512,019
    
    
    $
    80
    
    
    $
    36Capital lease obligations
    
    
    28,921
    
    
    
    463
    
    
    
    1,932
    
    
    
    2,095
    
    
    
    2,177
    
    
    
    2,359
    
    
    
    19,895Operating leases
    
    
    683,133
    
    
    
    10,463
    
    
    
    41,560
    
    
    
    40,525
    
    
    
    40,202
    
    
    
    40,022
    
    
    
    510,361Fixed cash interest expense
    
    
    12,152
    
    
    
    524
    
    
    
    1,980
    
    
    
    1,702
    
    
    
    1,448
    
    
    
    1,300
    
    
    
    5,198Variable cash interest expense term B (1)
    
    
    64,556
    
    
    
    6,218
    
    
    
    24,712
    
    
    
    24,456
    
    
    
    9,170
    
    
    
    
    
    
    
    Variable cash interest expense line of credit (1)
    
    
    2,849
    
    
    
    438
    
    
    
    1,750
    
    
    
    661
    
    
    
    
    
    
    
    
    
    
    
    Variable cash interest on swap agreements
    
    
    3,344
    
    
    
    972
    
    
    
    2,473
    
    
    
    (101
    )
    
    
    
    
    
    
    
    
    
    
    Purchase obligations (2)
    
    
    34,863
    
    
    
    8,809
    
    
    
    10,308
    
    
    
    9,744
    
    
    
    6,002
    
    
    
    
    
    
    
    Other long-term liabilities
    
    
    1,920
    
    
    
    
    
    
    
    65
    
    
    
    65
    
    
    
    
    
    
    
    
    
    
    
    1,790Earn-out payments (3)
    
    
    1,120
    
    
    
    
    
    
    
    545
    
    
    
    575
    
    
    
    
    
    
    
    
    
    
    
    $
    1,393,506
    
    
    $
    29,588
    
    
    $
    91,215
    
    
    $
    120,644
    
    
    $
    571,018
    
    
    $
    43,761
    
    
    $
    537,280
 
 (1)
    
    We have variable-rate debt. The interest payments on our variable-rate debt are based on
rates effective as of October 27, 2008.(2)
    
    Our purchase obligations consist primarily of supply purchase agreements related to our
Medical Technology business and construction contracts primarily for animal hospitals.(3)
    
    Represents contractual arrangements whereby additional cash may be paid to former owners of
acquired businesses upon attainment of specified performance targets. Off-Balance Sheet Arrangements
  28




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##### Table of Contents



Interest Rate Swap Agreements
  Fixed interest rate
    
    5.51%
    
    4.95%
    
    5.34%
    
    2.64%Notional amount (in millions)
    
    $50.0
    
    $75.0
    
    $100.0
    
    $100.0Effective date
    
    6/20/2006
    
    4/30/2007
    
    6/11/2007
    
    2/12/2008Expiration date
    
    6/30/2009
    
    4/30/2009
    
    12/31/2009
    
    2/26/2010Counterparty
    
    Goldman Sachs
    
    Wells Fargo
    
    Goldman Sachs
    
    Wells Fargo
  Description of Indebtedness
 Senior Credit Facility
    Other Debt and Capital Lease Obligations
  
 Recent Accounting Pronouncements
 The Hierarchy of Generally Accepted Accounting
Principles The Meaning of Present Fairly in Conformity With
Generally Accepted Accounting Principles.
 Determination of the
Useful Life of Intangible Assets Goodwill and Other Intangible Assets, Business Combinations
 29




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Disclosures about Derivative Instruments and
Hedging Activities  an amendment of SFAS No. 133
 Noncontrolling Interests in Consolidated
Financial Statements  an amendment of ARB No. 51
 Business Combinations
 Fair Value Option for Financial Assets and
Financial Liabilities
 Fair Value Measurements
 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  Fixed interest rate
    
    5.51%
    
    4.95%
    
    5.34%
    
    2.64%Notional amount (in millions)
    
    $50.0
    
    $75.0
    
    $100.0
    
    $100.0Effective date
    
    6/20/2006
    
    4/30/2007
    
    6/11/2007
    
    2/12/2008Expiration date
    
    6/30/2009
    
    4/30/2009
    
    12/31/2009
    
    2/26/2010Counterparty
    
    Goldman Sachs
    
    Wells Fargo
    
    Goldman Sachs
    
    Wells Fargo
  30




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ITEM 4. CONTROLS AND PROCEDURES
    
 PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
  General economic conditions may continue to cause a decline in business and have a material
adverse effect on our revenue and profitability.
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  31




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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 ITEM 5. OTHER INFORMATION
  
 ITEM 6. EXHIBITS
 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.
 32




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SIGNATURE
  Date:  November 7, 2008
    By:
    /s/ Tomas W. FullerTomas W. FullerChief Financial Officer 33




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EXHIBIT INDEX
 Exhibit No.
    
    Description31.1
    
    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.
 34