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 March 31, 2009

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

VCA Antech, Inc.

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

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

(310) 571-6500
(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. (Check one):

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, 84,711,360 shares as of May 4, 2009.

 

 

VCA Antech, Inc.
Form 10-Q
March 31, 2009

Table of Contents

				Page
				Number
Part I.		Financial Information
Item 1.		Financial Statements (Unaudited)
		Condensed, Consolidated Balance Sheets as of March 31, 2009 and December 31, 2008			1
		Condensed, Consolidated Income Statements for the Three Months Ended March 31, 2009 and 2008			2
		Condensed, Consolidated Statements of Equity for the Three Months Ended March 31, 2009 and 2008			3
		Condensed, Consolidated Statements of Cash Flows for the Three Months Ended March 31, 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			31
Item 4.		Controls and Procedures			31
Part II.		Other Information
Item 1.		Legal Proceedings			32
Item 1A.		Risk Factors			32
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			32
Item 3.		Defaults Upon Senior Securities			32
Item 4.		Submission of Matters to a Vote of Security Holders			32
Item 5.		Other Information			32
Item 6.		Exhibits			32
		Signature			33
		Exhibit Index			34
EX-31.1
EX-31.2
EX-32.1

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

VCA Antech, Inc. and Subsidiaries

		March 31,				December 31,
		2009				2008
Assets
Current assets:
Cash and cash equivalents		$	109,084			$	88,959
Trade accounts receivable, less allowance for uncollectible accounts of $11,540 and $11,025 at March 31, 2009 and December 31, 2008, respectively			47,929				43,453
Inventory			26,366				26,631
Prepaid expenses and other			18,112				18,800
Deferred income taxes			16,566				15,938
Prepaid income taxes			—				5,287
Total current assets			218,057				199,068
Property and equipment, less accumulated depreciation and amortization of $144,722 and $138,431 at March 31, 2009 and December 31, 2008, respectively			273,230				263,443
Goodwill			940,124				922,057
Other intangible assets, net			36,600				35,645
Notes receivable, net			4,719				12,893
Deferred financing costs, net			947				1,067
Other			20,849				14,865
Total assets		$	1,494,526			$	1,449,038
Liabilities and Equity
Current liabilities:
Current portion of long-term obligations		$	8,117			$	7,771
Accounts payable			23,704				26,087
Accrued payroll and related liabilities			39,795				42,840
Income taxes payable			9,370				—
Other accrued liabilities			43,699				46,424
Total current liabilities			124,685				123,122
Long-term obligations, less current portion			542,670				544,860
Deferred income taxes			54,255				47,331
Other liabilities			10,174				9,890
Total liabilities			731,784				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, 84,704 and 84,633 shares outstanding as of March 31, 2009 and December 31, 2008, respectively			85				85
Additional paid-in capital			310,782				308,674
Accumulated earnings			440,552				408,582
Accumulated other comprehensive loss			(4,986	)			(6,352	)
Total VCA Antech, Inc. stockholders’ equity			746,433				710,989
Noncontrolling interest			16,309				12,846
Total equity			762,742				723,835
Total liabilities and equity		$	1,494,526			$	1,449,038

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

VCA Antech, Inc. and Subsidiaries

		Three Months Ended
		March 31,
		2009				2008
Revenue		$	315,850			$	307,832
Direct costs			233,409				224,801
Gross profit			82,441				83,031
Selling, general and administrative expense			23,189				23,178
Gain on sale of assets			(248	)			(184	)
Operating income			59,500				60,037
Interest expense, net			6,118				7,615
Other (income) expense			(110	)			177
Income before provision for income taxes			53,492				52,245
Provision for income taxes			20,611				20,086
Net income			32,881				32,159
Net income attributable to noncontrolling interests			911				957
Net income attributable to VCA Antech, Inc.		$	31,970			$	31,202
Basic earnings per share		$	0.38			$	0.37
Diluted earnings per share		$	0.37			$	0.36
Weighted-average shares outstanding for basic earnings per share			84,680				84,348
Weighted-average shares outstanding for diluted earnings per share			85,386				85,865

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

VCA Antech, Inc. and Subsidiaries

																		Accumulated
										Additional								Other
		Common Stock								Paid-In				Accumulated				Comprehensive				Noncontrolling
		Shares				Amount				Capital				Earnings				Income (Loss)				Interest				Total
Balances, December 31, 2007			84,335			$	84			$	296,037			$	275,598			$	(3,335	)		$	10,207			$	578,591
Net income			—				—				—				31,202				—				957				32,159
Unrealized loss on hedging instruments, net of tax			—				—				—				—				(3,323	)			—				(3,323	)
Losses on hedging instruments reclassified to income, net of tax			—				—				—				—				420				—				420
Formation of noncontrolling interest			—				—				—				—				—				1,769				1,769
Distribution to noncontrolling interest			—				—				—				—				—				(760	)			(760	)
Purchase of noncontrolling interest			—				—				—				—				—				(158	)			(158	)
Share-based compensation			—				—				1,309				—				—				—				1,309
Exercise of stock options			15				—				214				—				—				—				214
Tax benefit from stock options exercised			—				—				113				—				—				—				113
Balances, March 31, 2008			84,350			$	84			$	297,673			$	306,800			$	(6,238	)		$	12,015			$	610,334
Balances, December 31, 2008			84,633			$	85			$	308,674			$	408,582			$	(6,352	)		$	12,846			$	723,835
Net income			—				—				—				31,970				—				911				32,881
Foreign currency translation adjustment			—				—				—				—				(178	)			—				(178	)
Unrealized loss on foreign currency, net of tax			—				—				—				—				(58	)			—				(58	)
Unrealized loss on hedging instruments, net of tax			—				—				—				—				(374	)			—				(374	)
Losses on hedging instruments reclassified to income, net of tax			—				—				—				—				1,976				—				1,976
Formation of noncontrolling interest			—				—				—				—				—				3,440				3,440
Distribution to noncontrolling interest			—				—				—				—				—				(888	)			(888	)
Share-based compensation			—				—				1,976				—				—				—				1,976
Exercise of stock options			71				—				557				—				—				—				557
Stock repurchases			—				—				(180	)			—				—				—				(180	)
Tax shortfall from stock options exercised			—				—				(245	)			—				—				—				(245	)
Balances, March 31, 2009			84,704			$	85			$	310,782			$	440,552			$	(4,986	)		$	16,309			$	762,742

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

VCA Antech, Inc. and Subsidiaries

		Three Months Ended
		March 31,
		2009				2008
Cash flows from operating activities:
Net income		$	32,881			$	32,159
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			9,152				7,263
Amortization of debt issue costs			120				116
Provision for uncollectible accounts			1,559				820
Gain on sale of assets			(248	)			(184	)
Share-based compensation			1,976				1,309
Deferred income taxes			5,304				2,329
Excess tax benefit from exercise of stock options			—				(133	)
Other			(148	)			86
Changes in operating assets and liabilities:
Accounts receivable			(5,455	)			(6,463	)
Inventory, prepaid expenses and other assets			(2,790	)			(2,351	)
Accounts payable and other accrued liabilities			(2,362	)			2,767
Accrued payroll and related liabilities			(3,204	)			(5,629	)
Income taxes			14,413				16,946
Net cash provided by operating activities			51,198				49,035
Cash flows from investing activities:
Business acquisitions, net of cash acquired			(14,467	)			(47,826	)
Real estate acquired in connection with business acquisitions			(963	)			(3,612	)
Property and equipment additions			(12,886	)			(9,463	)
Proceeds from sale of assets			74				1,747
Other			(373	)			(12,124	)
Net cash used in investing activities			(28,615	)			(71,278	)
Cash flows from financing activities:
Repayment of long-term obligations			(1,946	)			(1,966	)
Distributions to noncontrolling interest partners			(888	)			(760	)
Proceeds from issuance of common stock under stock option plans			557				214
Excess tax benefit from exercise of stock options			—				133
Stock repurchases			(180	)			—
Net cash used in financing activities			(2,457	)			(2,379	)
Effect of currency exchange rate changes on cash and cash equivalents			(1	)			—
Increase (decrease) in cash and cash equivalents			20,125				(24,622	)
Cash and cash equivalents at beginning of period			88,959				110,866
Cash and cash equivalents at end of period		$	109,084			$	86,244
Supplemental disclosures of cash flow information:
Interest paid		$	6,430			$	8,422
Income taxes paid		$	894			$	811
Supplemental schedule of non-cash investing and financing activites:
Detail of acquisitions:
Fair value of assets acquired		$	23,333			$	48,183
Cash paid for acquisitions			(13,095	)			(45,789	)
Non-cash note conversion to equity interest in subsidiary			(5,700	)			—
Liabilities assumed		$	4,538			$	2,394

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

VCA Antech, Inc. and Subsidiaries

1. Nature of Operations

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

     Our animal hospitals offer a full range of general medical and surgical services for companion animals. Our animal hospitals treat diseases and injuries, provide pharmaceutical products and perform a variety of pet-wellness programs, including health examinations, diagnostic testing, vaccinations, spaying, neutering and dental care. At March 31, 2009, we operated 478 animal hospitals throughout 39 states.

     We operate a full-service veterinary diagnostic laboratory network serving all 50 states and certain areas in Canada. Our laboratory network provides sophisticated testing and consulting services used by veterinarians in the detection, diagnosis, evaluation, monitoring, treatment and prevention of diseases and other conditions affecting animals. At March 31, 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, and provides consulting and mobile imaging services.

2. Basis of Presentation

     Our accompanying unaudited, condensed, consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States for interim financial information and in accordance with the rules and regulations of the United States Securities and Exchange Commission. Accordingly, they do not include all of the information and notes required by GAAP in the United States 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 Statement of Financial Accounting Standards (“SFAS”) No. 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment of Accounting Research Bulletins (ARB) No. 51 (“SFAS No. 160”). The results of operations for the three months ended March 31, 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.

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

3. Acquisitions

     Effective January 1, 2009, we adopted the provisions of SFAS 141(R), Business Combinations (revised 2007) (“SFAS 141(R)”). SFAS 141(R) retains the underlying concepts of SFAS 141, Business Combinations (“SFAS 141”) in that all business combinations continue to be accounted for at fair value under the acquisition method of accounting. SFAS 141(R) changes the application of the acquisition method in a number of significant respects. Acquisition costs will generally be expensed as incurred; non-controlling interests will be valued at fair value at the acquisition date; restructuring costs associated with a business combination will generally be expensed subsequent to the acquisition date; and changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense. SFAS 141(R) 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. SFAS 141(R) amends SFAS No. 109, Accounting for Income Taxes (“SFAS 109”) 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 SFAS 141(R) would also apply the provisions of SFAS 141(R).

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

3. Acquisitions, continued

     We acquired the following animal hospitals during the three months ended March 31, 2009:

Animal Hospitals:
Acquisitions			9
Acquisitions relocated into our existing animal hospitals			(2	)
Total			7

     During the three months ended March 31, 2009 we acquired one pathology office. Pathology offices are not included in our laboratory count.

Animal Hospital and Laboratory Acquisitions

     The following table summarizes the preliminary purchase price paid by us for the nine animal hospitals and one pathology office we acquired during the three months ended March 31, 2009, and the preliminary allocation of the purchase price (in thousands):

Preliminary Purchase Price:
Cash		$	13,095
Non-cash note conversion to equity interest in subsidiary			5,700
Other liabilities assumed			4,538
Total		$	23,333
Preliminary Allocation of the Purchase Price:
Tangible assets		$	6,134
Identifiable intangible assets			3,063
Goodwill (1)			14,136
Total		$	23,333

     In addition to the purchase price listed above we made cash payments for real estate acquired in connection with our purchase of animal hospitals totaling $963,000 for the three months ended March 31, 2009. We did not recognize any material assets or liabilities arising from contingencies at the acquisition date in connection with any of our acquisitions.

Other Acquisition Payments

     In connection with substantially all of our acquisitions, we withheld a portion of the purchase price (“holdback”) as security for indemnification obligations of the sellers under the acquisition agreement. We paid $1.4 million to sellers for the unused portion of holdbacks during the three months ended March 31, 2009. The total outstanding holdbacks at March 31, 2009 and December 31, 2008 were $3.9 million and $4.9 million, respectively.

     We made no earn-out payments during the three months ended March 31, 2009.

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

4. Goodwill and Other Intangible Assets

     In April 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) Financial Accounting Standards (“FAS”) 142-3, Determination of the Useful Life of Intangible Assets (“FSP FAS 142-3”). FSP FAS 142-3 amends SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS No. 142”), to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141(R), and other U.S. GAAP. We adopted FSP FAS 142-3 on January 1, 2009. The adoption of FSP FAS 142-3 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 non-controlling 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 three months ended March 31, 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			14,044				92				—				14,136
Goodwill related to noncontrolling interests			3,440				—				—				3,440
Other (1)			507				(16	)			—				491
Balance as of March 31, 2009		$	825,194			$	95,770			$	19,160			$	940,124

Other Intangible Assets

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

		As of March 31, 2009												As of December 31, 2008
		Gross								Net				Gross								Net
		Carrying				Accumulated				Carrying				Carrying				Accumulated				Carrying
		Amount				Amortization				Amount				Amount				Amortization				Amount
Non-contractual customer relationships		$	28,674			$	(4,611	)		$	24,063			$	26,412			$	(3,689	)		$	22,723
Covenants not-to-compete			16,033				(8,087	)			7,946				16,195				(8,001	)			8,194
Favorable lease asset			4,119				(153	)			3,966				4,689				(629	)			4,060
Technology			1,270				(1,139	)			131				1,270				(1,076	)			194
Trademarks			748				(273	)			475				699				(251	)			448
Client lists			76				(57	)			19				84				(58	)			26
Total		$	50,920			$	(14,320	)		$	36,600			$	49,349			$	(13,704	)		$	35,645

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

4. Goodwill and Other Intangible Assets, continued

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

		Three Months Ended
		March 31,
		2009				2008
Aggregate amortization expense		$	1,807			$	1,204

     The estimated amortization expense related to intangible assets for the remainder of fiscal 2009 and each of the succeeding years thereafter as of March 31, 2009 is as follows (in thousands):

Remainder of 2009		$	5,524
2010			6,713
2011			5,895
2012			5,011
2013			2,963
Thereafter			10,494
Total		$	36,600

5. Noncontrolling Interests

     Effective January 1, 2009, we adopted the provisions of SFAS No. 160 on a retrospective basis. SFAS No. 160 changes the accounting and reporting for minority interests which have been re-characterized as noncontrolling interests and are now classified as a component of equity in our Condensed, Consolidated Balance Sheets. The adoption of SFAS No. 160 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.

6. Other Accrued Liabilities

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

		March 31,				December 31,
		2009				2008
Accrued workers’ compensation insurance		$	4,302			$	4,436
Deferred revenue			6,937				7,303
Interest rate swap liability			6,218				8,899
Other			26,242				25,786
		$	43,699			$	46,424

7. Interest Rate Swap Agreements

     In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133 (“SFAS No. 161”). SFAS No. 161 changed the disclosure requirements for derivative instruments and hedging activities to enhance the current disclosure framework in SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. 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 SFAS No. 161 on January 1, 2009 and have included the applicable disclosures below and in Note 8.

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

7. Interest Rate Swap Agreements, continued

     In accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, all investments in derivatives are recorded at fair value. A derivative is typically defined as an instrument whose value is “derived” from an underlying instrument, index or rate, has a notional amount, requires little or no initial investment and can be net settled. Our derivatives are reported as current assets and liabilities or other non-current assets or liabilities as appropriate.

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

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

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

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

     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		5.51%		4.95%		5.34%		2.64%
Notional amount (in millions)		$50.0		$75.0		$100.0		$100.0
Effective date		6/20/2006		4/30/2007		6/11/2007		2/12/2008
Expiration date		6/30/2009		4/30/2009		12/31/2009		2/26/2010
Counterparty		Goldman Sachs		Wells Fargo		Goldman Sachs		Wells Fargo
Qualifies for hedge accounting		Yes		Yes		Yes		Yes

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

7. Interest Rate Swap Agreements, continued

     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
		March 31,
		2009				2008
Cash paid (1)		$	3,245			$	688
Recognized (gain) loss from ineffectiveness (2)		$	(49	)		$	177

8. Fair Value Measurements

     On January 1, 2008, we adopted the applicable provisions of SFAS No. 157, Fair Value Measurements (“SFAS No. 157”), 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 SFAS No. 157 for our non-financial assets and non-financial liabilities measured on a non-recurring basis. As of March 31, 2009, we do not have any applicable non-recurring measurements of non-financial assets and non-financial liabilities.

     SFAS No. 157 includes a fair value 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. SFAS No. 157 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.

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

8. Fair Value Measurements, continued

Fair Value of Financial Instruments

     In April 2009, the FASB issued FSP 107-1, which amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This FSP also amends Accounting Principles Board Opinions (“APB”) No. 28, Interim Financial Reporting, to require those disclosures in summarized financial information at interim reporting periods. The FSP is effective for interim periods ending after June 15, 2009. We early adopted the provisions of this FSP and all other related guidance for the quarter ended March 31, 2009.

     SFAS No. 107 requires disclosure of fair value information about financial instruments, whether or not recognized in the accompanying consolidated balance sheets. Fair value as defined by SFAS No. 157 is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value estimates of financial instruments are not necessarily indicative of the amounts we might pay or receive in actual market transactions. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

     Cash and Cash Equivalents. These balances include cash and cash equivalents with maturities of less than three months. The carrying amount approximates fair value due to the short-term maturities of these instruments.

     Receivables, Less Allowance for Doubtful Accounts and Accounts Payable. 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 March 31, 2009 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.

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

		As of March 31, 2009								As of December 31, 2008
		Carrying				Fair				Carrying				Fair
		Value				Value				Value				Value
Variable-rate long-term debt		$	520,934			$	474,085			$	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 as defined by SFAS No. 157, of our interest rate swap agreements which are measured on a recurring basis (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 March 31, 2009
Other accrued liabilities		$	(6,218	)		$	—			$	(6,218	)		$	—
At December 31, 2008
Other accrued liabilities		$	(8,899	)		$	—			$	(8,899	)		$	—

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

9. Share-Based Compensation

Stock Option Activity

     There were no stock options granted during the three months ended March 31, 2009. The aggregate intrinsic value of our stock options exercised during the three months ended March 31, 2009 was $126,000 and the actual tax benefit realized on options exercised during the period was $49,000.

     At March 31, 2009 there was $5.5 million of total unrecognized compensation cost related to our stock options. This cost is expected to be recognized over a weighted-average period of 3.1 years.

     The compensation cost that has been charged against income for stock options for the three months ended March 31, 2009 and 2008 was $507,000 and $437,000, respectively. The corresponding income tax benefit recognized was $198,000 and $170,000 for the three months ended March 31, 2009 and 2008, respectively.

Non-vested Stock Activity

     There were no shares of non-vested common stock issued during the three months ended March 31, 2009.

     Total compensation cost charged against income related to non-vested stock awards was $1.5 million and $872,000 for the three months ended March 31, 2009 and 2008, respectively. The corresponding income tax benefit recognized in the income statement was $574,000 and $339,000 for the three months ended March 31, 2009 and 2008, respectively.

     At March 31, 2009, there was $13.0 million of unrecognized compensation cost related to these non-vested shares, which will be recognized over a weighted-average period of 2.5 years, assuming the performance conditions are met. A summary of our non-vested stock activity for the three months ended March 31, 2009 is as follows:

						Weighted-
						Average Fair
						Value
		Shares				Per Share
Outstanding at December 31, 2008			724,235			$	31.52
Granted			—			$	—
Vested			(44,873	)		$	32.77
Forfeited/Canceled			(5,625	)		$	35.78
Outstanding at March 31, 2009			673,737			$	31.40

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

10. 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
		March 31,
		2009				2008
Net income attributable to VCA Antech, Inc.		$	31,970			$	31,202
Weighted-average common shares outstanding:
Basic			84,680				84,348
Effect of dilutive potential common shares:
Stock options			568				1,414
Non-vested shares			138				103
Diluted			85,386				85,865
Basic earnings per share		$	0.38			$	0.37
Diluted earnings per share		$	0.37			$	0.36

     For the three months ended March 31, 2009 and 2008, potential common shares of 2,417,761 and 39,997, respectively, were excluded from the computation of diluted earnings per share because their inclusion would have had an anti-dilutive effect.

11. Comprehensive Income

     Total comprehensive income consists of net income and the other comprehensive gain (loss) during the three months ended March 31, 2009 and 2008. The following table provides a summary of comprehensive income (in thousands):

		Three Months Ended
		March 31,
		2009				2008
Net income		$	32,881			$	32,159
Other comprehensive (loss) income:
Foreign currency translation adjustments			(178	)			—
Unrealized loss on foreign currency			(95	)			—
Tax benefit			37				—
Unrealized loss on hedging instruments			(614	)			(5,440	)
Tax benefit			240				2,117
Losses on hedging instruments reclassified to income			3,245				688
Tax benefit			(1,269	)			(268	)
Other comprehensive income (loss)			1,366				(2,903	)
Total comprehensive income			34,247				29,256
Comprehensive income attributable to noncontrolling interests			(911	)			(957	)
Comprehensive income attributable to VCA Antech, Inc.		$	33,336			$	28,299

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

12. 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 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 March 31, 2009
External revenue		$	238,358			$	69,492			$	8,000			$	—			$	—			$	315,850
Intercompany revenue			—				7,997				1,158				—				(9,155	)			—
Total revenue			238,358				77,489				9,158				—				(9,155	)			315,850
Direct costs			195,194				41,483				5,633				—				(8,901	)			233,409
Gross profit			43,164				36,006				3,525				—				(254	)			82,441
Selling, general and administrative expense			5,384				5,567				3,084				9,154				—				23,189
(Gain) loss on sale of assets			(259	)			2				1				8				—				(248	)
Operating income (loss)		$	38,039			$	30,437			$	440			$	(9,162	)		$	(254	)		$	59,500
Depreciation and amortization		$	6,299			$	2,183			$	369			$	488			$	(187	)		$	9,152
Capital expenditures		$	9,123			$	2,129			$	1,121			$	885			$	(372	)		$	12,886
Three Months Ended March 31, 2008
External revenue		$	226,100			$	69,058			$	12,674			$	—			$	—			$	307,832
Intercompany revenue			—				7,671				1,175				—				(8,846	)			—
Total revenue			226,100				76,729				13,849				—				(8,846	)			307,832
Direct costs			184,963				39,387				8,936				—				(8,485	)			224,801
Gross profit			41,137				37,342				4,913				—				(361	)			83,031
Selling, general and administrative expense			5,478				4,951				3,434				9,315				—				23,178
(Gain) loss on sale of assets			(193	)			(11	)			20				—				—				(184	)
Operating income (loss)		$	35,852			$	32,402			$	1,459			$	(9,315	)		$	(361	)		$	60,037
Depreciation and amortization		$	4,883			$	1,647			$	397			$	459			$	(123	)		$	7,263
Capital expenditures		$	7,055			$	1,778			$	82			$	825			$	(277	)		$	9,463
At March 31, 2009
Total assets		$	1,096,347			$	202,582			$	42,245			$	163,034			$	(9,682	)		$	1,494,526
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)

13. 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, 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 March 31, 2009, we will be obligated to pay an additional $1.7 million.

b. Officers’ Compensation

     Each of our Chief Executive Officer (“CEO”), Chief Operating Officer (“COO”) and Chief Financial Officer (“CFO”) has entered into an employment agreement with our company. The agreements provide for a base salary and annual bonuses set by our Compensation Committee of the Board of Directors. As of any given date, under their contracts, each officer has the following remaining term: five years for the CEO, three years for the COO and two years for the CFO. Our Senior Vice President (“SVP”) has entered into a letter agreement with the Company pursuant to which certain payments will be made to our SVP in the event his employment is terminated.

     In the event any of these officers’ employment is terminated due to death or disability, each officer, or each officer’s estate, is entitled to receive the remaining base salary during the remaining scheduled term of his employment agreement (and in the case of our SVP, for two years), the continued vesting of his non-vested stock, the acceleration of the vesting of his options that would have vested during the 24 months following the date of termination, which options shall remain exercisable for the full term, and the right to continue receiving specified benefits and perquisites.

     In the event any of these officers terminate their employment agreements for cause (or, in the case of our SVP, he terminates his employment for good reason), we terminate any of their employment agreements (or, in the case of our SVP, we terminate his employment) without cause or a change of control occurs (in which case such employment agreements, and our SVP’s employment with us, terminate automatically), each officer is entitled to receive the remaining base salary during the remaining scheduled term of his employment agreement (and in the case of our SVP, for two years), a bonus based on past bonuses, the continued vesting of his non-vested stock, the acceleration of the vesting of his options, which options shall remain exercisable for the full term, and the right to continue receiving specified benefits and perquisites. Notwithstanding the foregoing, if the CFO’s employment agreement or our SVP’s employment is terminated by us without cause, accelerated vesting of their respective options will be limited to those options that would have vested during the 24 months following the date of termination.

     In the event of a change of control, the cash value of all benefits due under their employment contracts (or, in the case of our SVP, his letter agreement) as a result of the termination would be immediately payable to the officers. In addition, if any of the amounts payable to these officers under these provisions constitute “excess parachute payments” under the Internal Revenue Code, each officer is entitled to an additional payment to cover the tax consequences associated with the excess parachute payment.

c. 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.

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

14. Recent Accounting Pronouncements

     In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments (“FSP FAS 107-1 and APB 28-1”). FSP FAS 107-1 and APB 28-1 require disclosures about fair value of financial instruments in interim and annual financial statements. FSP FAS 107-1 and APB 28-1 is effective for periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. We elected to adopt FSP FAS 107-1 and APB 28-1 effective March 31, 2009 and we have included the required disclosures in Note 7.

     In April 2009, the FASB issued FSP FAS 141R-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies (“FSP FAS 141R-1”). FSP FAS 141R-1 amends SFAS No. 141R regarding the initial recognition and measurement of contingencies acquired or assumed in a business combination. FSP FAS 141R-1 requires recognition at fair value of such contingencies if the acquisition-date fair value can be determined during the measurement period. FSP FAS 141R-1 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 FSP FAS 141R-1 did not have a material impact on our consolidated financial statements.

15. Subsequent Events

     On April 17, 2009, we granted 84,757 restricted stock units under the 2006 Equity Incentive Plan to each of our four senior executive officers for services performed in fiscal year 2008. The restricted stock units were fully vested on the grant date. The fair value of the units is $22.90 per share resulting in a total value of $1.9 million.

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

		Page
		Number
Introduction			18
Executive Overview			18
Critical Accounting Policies			19
Consolidated Results of Operations			20
Segment Results			21
Liquidity and Capital Resources			26
Recent Accounting Prouncements			30

Introduction

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

     The forward-looking information set forth in this Quarterly report on Form 10-Q is as of May 8, 2009, and we undertake no duty to update this information. Shareholders and prospective investors can find information filed with the SEC after May 8, 2009 at our website at http://investor.vcaantech.com or at the SEC’s website at www.sec.gov.

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

	•		Our Animal Hospital segment operates the largest network of freestanding, full-service animal hospitals in the nation. Our animal hospitals offer a full range of general medical and surgical services for companion animals. We treat diseases and injuries, offer pharmaceutical and retail products and perform a variety of pet wellness programs, including health examinations, diagnostic testing, routine vaccinations, spaying, neutering and dental care. At March 31, 2009, our animal hospital network consisted of 478 animal hospitals in 39 states.
	•		Our Laboratory segment operates the largest network of veterinary diagnostic laboratories in the nation. Our laboratories provide sophisticated testing and consulting services used by veterinarians in the detection, diagnosis, evaluation, monitoring, treatment and prevention of diseases and other conditions affecting animals. At March 31, 2009, our Laboratory network consisted of 46 laboratories serving all 50 states and certain areas in Canada.
	•		Our Medical Technology segment sells digital radiography and ultrasound imaging equipment, related computer hardware, software and ancillary services.

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

Executive Overview

     During the three months ended March 31, 2009 our Laboratory internal revenue growth was 1.7% while our Animal Hospital same-store growth was negative 2.7%. Although our organic revenue growth rates have been impacted by the economic crisis, we have continued our long history of earnings growth as a result of our continued focus on our core business strategy and by maintaining a strong emphasis on expense management.

Acquisitions and Facilities

     Our growth strategy includes the acquisition of independent animal hospitals. We currently anticipate that we will acquire $60.0 million to $70.0 million of annualized Animal Hospital revenue by the end of 2009. In addition, we also evaluate the acquisition of animal hospital chains, laboratories or related businesses if favorable opportunities are presented. The following table summarizes the changes in the number of facilities operated by our Animal Hospital and Laboratory segments during the three months ended March 31, 2009:

Animal Hospitals:
Beginning of period			471
Acquisitions			9
Acquisitions relocated into our existing animal hospitals			(2	)
End of period			478
Laboratories:
Beginning of period			44
Acquisitions (1)			—
Created			2
End of period			46

Critical Accounting Policies

     Our consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States, which require management to make estimates and assumptions that affect reported amounts. The estimates and assumptions are based on historical experience and on other factors that management believes to be reasonable. Actual results may differ from those estimates. Critical accounting policies represent the areas where more significant judgments and estimates are used in the preparation of our consolidated financial statements. A discussion of such critical accounting policies, which include revenue recognition, valuation of goodwill and other intangible assets, income taxes, and self-insured liabilities can be found in our 2008 Annual Report on Form 10-K. There have been no material changes to those policies as of this Quarterly Report on Form 10-Q for the period ended March 31, 2009.

Valuation of Goodwill

     In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets (“SFAS No. 142”), we are required to test our goodwill for impairment annually, or sooner if circumstances indicate an impairment may exist. During the quarter ended March 31, 2009, as a result of a decline in the sales volume at our Medical Technology reporting unit we evaluated the related goodwill for impairment. We calculated an estimate of the fair value of the Medical Technology reporting unit which indicated that currently there was no impairment. However, the fair value did not significantly exceed its respective book value. It is considered at least reasonably possible that our determination that goodwill is not impaired could change in the near term should the current economic crisis continue or worsen. We will continue to monitor the results of all of our business segments and perform additional valuations as necessary. Otherwise we will perform our regularly scheduled annual impairment analysis of all our reporting units in October 2009 which will include both discounted cash flow techniques and market comparables.

Consolidated Results of Operations

     The following table sets forth components of our condensed, consolidated income statements expressed as a percentage of revenue:

		Three Months Ended
		March 31,
		2009				2008
Revenue:
Animal Hospital			75.5	%			73.4	%
Laboratory			24.5				24.9
Medical Technology			2.9				4.5
Intercompany			(2.9	)			(2.8	)
Total revenue			100.0				100.0
Direct costs			73.9				73.0
Gross profit			26.1				27.0
Selling, general and administrative expense			7.3				7.5
Gain on sale of assets			—				—
Operating income			18.8				19.5
Interest expense, net			1.9				2.5
Income before provision for income taxes			16.9				17.0
Provision for income taxes			6.5				6.6
Net income			10.4				10.4
Net income attributable to noncontrolling interests			0.3				0.3
Net income attributable to VCA Antech, Inc.			10.1	%			10.1	%

Revenue

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

		Three Months Ended March 31,
		2009								2008
						% of								% of				%
		$				Total				$				Total				Change
Animal Hospital		$	238,358				75.5	%		$	226,100				73.4	%			5.4	%
Laboratory			77,489				24.5	%			76,729				24.9	%			1.0	%
Medical Technology			9,158				2.9	%			13,849				4.5	%			(33.9	)%
Intercompany			(9,155	)			(2.9	)%			(8,846	)			(2.8	)%			3.5	%
Total revenue		$	315,850				100.0	%		$	307,832				100.0	%			2.6	%

     Consolidated revenue increased $8.0 million for the three months ended March 31, 2009 as compared to the same period in the prior year. The increase in consolidated revenue was attributable to revenue from acquired animal hospitals and, to a lesser extent, internal growth in our Laboratory segment. Our Animal Hospital same-store revenue growth, adjusted for one fewer business day in the current period, was negative 2.7% for the three months ended March 31, 2009. Our Laboratory internal revenue growth was 1.7% for the three months ended March 31, 2009. The decline in our revenue growth rates is due primarily to the aforementioned changes in our economic environment.

Gross Profit

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

		Three Months Ended March 31,
		2009								2008
						Gross								Gross				%
		$				Margin				$				Margin				Change
Animal Hospital		$	43,164				18.1	%		$	41,137				18.2	%			4.9	%
Laboratory			36,006				46.5	%			37,342				48.7	%			(3.6	)%
Medical Technology			3,525				38.5	%			4,913				35.5	%			(28.3	)%
Intercompany			(254	)							(361	)
Total gross profit		$	82,441				26.1	%		$	83,031				27.0	%			(0.7	)%

     Consolidated gross profit decreased $590,000 for the three months ended March 31, 2009. The decrease was primarily due to a decline in Medical Technology revenue and a decline in Laboratory gross margins. The decline was partially offset by an increase in Animal Hospital gross profit attributable to the acquisition of additional animal hospitals and, to a lesser extent, internal revenue growth in the Laboratory segment.

Segment Results

Animal Hospital Segment

     The following table summarizes revenue and gross profit for the Animal Hospital segment (in thousands, except percentages):

		Three Months Ended March 31,
		2009				2008				% Change
Revenue		$	238,358			$	226,100				5.4	%
Gross profit		$	43,164			$	41,137				4.9	%
Gross margin			18.1	%			18.2	%

     Animal Hospital revenue increased $12.3 million for the three months ended March 31, 2009 as compared to the same period in the prior year. The components of the increase are summarized in the following table (in thousands, except percentages and average price per order):

		Three Months Ended March 31,
		2009				2008				% Change
Same-store facilities:
Orders (1)(2)			1,391				1,491				(6.7	)%
Average revenue per order (3)		$	150.75			$	144.49				4.3	%
Same-store revenue (1)		$	209,652			$	215,370				(2.7	)%
Business day adjustment (4)			—				2,709
Net acquired revenue (5)			28,706				8,021
Total		$	238,358			$	226,100				5.4	%

     During the three months ended March 31, 2009, our volume of same-store orders declined primarily as a result of current economic conditions and changes in our overall business environment. Over the last few years, some pet-related products traditionally sold in our animal hospitals are now widely available in retail stores and other distribution channels such as the Internet. There has also been a decline in the number of vaccinations as some recent professional literature and research has suggested that vaccinations can be given to pets less frequently.

     Our average revenue per order increased however during the three months ended March 31, 2009. Our business strategy is to place a greater emphasis on comprehensive wellness visits and advanced medical procedures, which typically generate higher-priced orders. The migration of lower-priced orders from our animal hospitals to other distribution channels mentioned above and our emphasis on comprehensive wellness visits has resulted in a decrease in lower-priced orders and an increase in higher-priced orders.

     Price increases also contributed to the increase in the average revenue per order. Prices at each of our hospitals are reviewed regularly and adjustments are made based on market considerations, demographics and our costs. These adjustments historically have approximated 3% to 6% on most services at the majority of our hospitals and are typically implemented in February of each year.

     Animal Hospital gross profit is calculated as Animal Hospital revenue less Animal Hospital direct costs. Animal Hospital direct costs are comprised of all costs of services and products at the animal hospitals, including, but not limited to, salaries of veterinarians, technicians and all other animal hospital-based personnel, facilities rent, occupancy costs, supply costs, depreciation and amortization, certain marketing and promotional expenses incurred by each individual animal hospital and costs of goods sold associated with the retail sales of pet food and pet supplies.

     Our Animal Hospital gross margin remained essentially unchanged totaling 18.1% for the three months ended March 31, 2009 as compared to 18.2% in the prior year. Our Animal Hospital same-store gross margin increased to 18.8% for the three months ended March 31, 2009 as compared to 18.5% in the prior year. The increase in the same-store gross margin is primarily attributable to the implementation of cost controls. The increase in same-store gross margins has been largely offset by lower gross margins from our acquired hospitals.

     Over the last several years we have acquired a significant number of animal hospitals. Many of these newly acquired animal hospitals had lower gross margins at the time of acquisition than those previously operated by us. We have improved these lower gross margins, in the aggregate, subsequent to the acquisition by improving animal hospital revenue, reducing costs, and increasing operating leverage.

     Laboratory Segment

     The following table summarizes revenue and gross profit for our Laboratory segment (in thousands, except percentages):

		Three Months Ended March 31,
		2009				2008				% Change
Revenue		$	77,489			$	76,729				1.0	%
Gross profit		$	36,006			$	37,342				(3.6	)%
Gross margin			46.5	%			48.7	%

     Laboratory revenue increased $760,000 for the three months ended March 31, 2009 as compared to the same period in the prior year. The components of the increase in Laboratory revenue are detailed below (in thousands, except percentages and average price per requisition):

		Three Months Ended March 31,
		2009				2008				% Change
Internal growth:
Number of requisitions (1)			3,279				3,198				2.5	%
Average revenue per reqisition (2)		$	23.48			$	23.68				(0.8	)%
Total internal revenue (1)		$	77,001			$	75,732				1.7	%
Billing day adjustment (3)			—				997
Acquired revenue (4)			488				—
Total		$	77,489			$	76,729				1.0	%