Summary of Significant Accounting Policies (Tables)

12 Months Ended

Dec. 31, 2012

less than 90 days

As a result of these policies, we have deferred revenue and costs at December 31, 2012 and 2011 consisting of the following (in thousands):



	2012		2011
Deferred equipment revenue⁽¹⁾	$	735	$	906
Deferred fixed-priced support or maintenance contract revenue	3,383		2,890
Other deferred revenue⁽²⁾	6,828		3,262
Total deferred revenue	10,946		7,058
Less current portion included in other accrued liabilities	10,811		7,025
Long-term portion of deferred revenue included in other liabilities	$	135	$	33
Current portion of deferred costs included in prepaid expenses and other	$	709	$	258
Long-term portion of deferred costs included in other assets	1,099		1,267
Total deferred costs⁽³⁾	$	1,808	$	1,525


⁽¹⁾	Represents amounts received for sales arrangements that include equipment, hardware, software and PCS. See above discussion for the accounting guidance pertaining to revenue recognition — multiple-deliverable transactions.


⁽²⁾	Represents amounts received in advance for services.


⁽³⁾	Represents costs related to warranties, equipment and hardware included in deferred equipment revenue.

Property and equipment estimated useful lives

Depreciation and amortization are recognized on the straight-line method over the following estimated useful lives:



Buildings and improvements	5 to 40 years
Leasehold improvements	Lesser of lease term or 15 years
Furniture and equipment	5 to 7 years
Software	3 years
Equipment held under capital leases	5 to 10 years

Property and Equipment

Property and equipment at December 31, 2012 and 2011 consisted of (in thousands):



	2012			2011
Land	$	56,162		$	53,425
Building and improvements	137,614			120,227
Leasehold improvements	140,944			127,790
Furniture and equipment	243,429			216,042
Software	32,676			22,932
Buildings held under capital leases	30,550			31,627
Equipment held under capital leases	849			1,034
Construction in progress	35,683			27,686
Total property and equipment	677,907			600,763
Less — accumulated depreciation and amortization	(274,463		)	(230,117		)
Total property and equipment, net	$	403,444		$	370,646

Goodwill



	Animal Hospital			Laboratory			All Other			Total
Balance as of December 31, 2010
Goodwill	$	965,999		$	96,818		$	29,663		$	1,092,480
Accumulated Impairment losses	—			—			—			—
Subtotal	965,999			96,818			29,663			1,092,480
Goodwill acquired	70,169			6			97,177			167,352
Goodwill impairment	—			—			(21,310		)	(21,310		)
Foreign translation adjustment	—			(14		)	—			(14		)
Other ⁽¹⁾	(767		)	—			(134		)	(901		)
Balance as of December 31, 2011
Goodwill	1,035,401			96,810			126,706			1,258,917
Accumulated Impairment losses	—			—			(21,310		)	(21,310		)
Subtotal	1,035,401			96,810			105,396			1,237,607
Goodwill acquired	143,926			34			12,155			156,115
Goodwill impairment	—			—			(99,501		)	(99,501		)
Foreign translation adjustment	1,281			17			—			1,298
Other ⁽¹⁾	(3,260		)	—			(1,028		)	(4,288		)
Balance as of December 31, 2012
Goodwill	1,177,348			96,861			137,833			1,412,042
Accumulated Impairment losses	—			—			(120,811		)	(120,811		)
Subtotal	$	1,177,348		$	96,861		$	17,022		$	1,291,231


⁽¹⁾	In 2012, "Other" includes acquisition-price adjustments, which consist primarily of an adjustment related to capital leases and buy outs. In 2011, "Other" primarily includes measurement period adjustments and earn-out payments.

Goodwill Impairment Charges

2012 Charge

Impairment testing for goodwill is performed at least annually. We perform our annual impairment test as of October 31st. Goodwill is also tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value.

We performed our annual test of goodwill as of October 31, 2012 for all of our reporting units. We determined that each of our reporting unit's fair value exceeded their respective carrying values with the exception of our Vetstreet reporting unit. Management ultimately determined that there was impairment to Vetstreet's goodwill primarily due to (i) less than anticipated financial performance for fiscal 2012, including with respect to revenue and operating cash flow, and (ii) new revenue and operating profit growth projections that are significantly lower than previous projections. Accordingly, we recorded a $99.5 million impairment charge during the fourth quarter of the current year.

Revenue and operating profit growth projections were lowered as a result of continued operational delays in part due to our upgrading and migration of Vetstreet's information technology systems from their former parent MediMedia, to their own Corporate data center. Additionally, we have changed Vetstreet's overall business strategy to better accommodate the needs of the veterinary community. The projected cash flows under our revised strategy however are significantly lower than under our

previous plan. Finally, our revised forecast reflects the impact of new well-capitalized entrants to this business which has resulted in increased competition.

The impairment test for goodwill uses a two-step approach, which is performed at the reporting unit level. Step 1 compares the fair value of the reporting unit to its carrying value including goodwill. If the carrying value exceeds the fair value, there is a potential impairment and Step 2 must be performed. Step 2 compares the carrying value of the reporting unit's

VCA Antech, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)



5.	Goodwill, continued

goodwill to its implied fair value (i.e., the fair value of the reporting unit less the fair value of the unit's assets and liabilities, including identifiable intangible assets). If the carrying value of goodwill exceeds its implied fair value, the excess is recorded as an impairment.

In performing Step 1 of the impairment test, we estimated the fair value of the reporting unit using a combination of the income and market approaches with greater emphasis placed on the income approach, for purposes of estimating the total enterprise value.

The income approach is based on a discounted cash flow analysis and calculates the fair value of the reporting unit by estimating the after-tax cash flows attributable to the reporting unit and then discounting the after-tax cash flows to a present value, using a weighted average cost of capital ("WACC"). The WACC utilized in our analysis using the income approach was 15.5%. The WACC is an estimate of the overall after-tax rate of return required for equity and debt holders of a business enterprise. The reporting unit's cost of equity and debt was developed based on data and factors relevant to the economy, the industry and the reporting unit. The cost of equity was estimated using the capital asset pricing model ("CAPM"). The CAPM uses a risk-free rate of return and an appropriate market risk premium for equity investments and the specific risks of the investment. The analysis also included comparisons to a group of guideline companies engaged in the same or similar businesses. The cost of debt was estimated using the current after-tax average borrowing cost that a market participant would expect to pay to obtain its debt financing assuming a target capital structure.

The market approach is based on the guideline publicly traded company method to determine the fair value of the reporting unit. Due to the significant lack of guideline public companies, little weight was given to this approach. Under this method, market multiples ratios were applied to the reporting unit's earnings with consideration given to our size, product offerings, growth, and other relevant factors compared to those of the guideline companies. The guideline companies selected were engaged in the same or a similar line of business as us. Market multiples were then selected based on consideration of risk, growth, and profitability differences between us and the guideline companies. The selected market multiples were then multiplied by our October 31, 2012 revenue to arrive at an estimate of fair value.

Based on the above analysis, it was determined that the carrying value of the Vetstreet reporting unit including goodwill exceeded the fair value of the reporting unit, requiring us to perform Step 2 of the goodwill impairment test to measure the amount of impairment loss, if any.

In performing Step 2 of the goodwill impairment test, we compared the implied fair value of the reporting unit's goodwill to its carrying value of goodwill. This test resulted in a non-cash, goodwill impairment charge of $99.5 million ($60.6 million

after-tax), which was recognized during the three months ended December 31, 2012. This charge had no impact on our cash flows or our compliance with debt covenants.

The fair value estimates used in the goodwill impairment analysis required significant judgment. The Company's fair value estimates for purposes of determining the goodwill impairment charge are considered Level 3 fair value measurements.

We based our fair value estimates on assumptions that we believe to be reasonable but that are inherently uncertain, including estimates of future revenues and operating margins and assumptions about the overall economic climate and the competitive environment for our business. Our estimates assume that revenues will decline into the foreseeable future. There can be no assurance that our estimates and assumptions will prove to be accurate predictions of the future. If our assumptions regarding business plans, competitive environments or anticipated operating results are not correct, we may be required to record goodwill impairment charges in future periods.

2011 Charge

On October 31, 2011 impairment test indicated that we have a $21.3 million goodwill impairment related to our Medical Technology reporting unit included under the "All Other" heading in the table above. Our determination in the prior period that the fair value of the reporting unit was now less than its carrying value was based upon changes in our estimate of forecast cash flows related to a shortfall in our 2011 period results.

Other Intangible Assets

In addition to goodwill, we have amortizable intangible assets at December 31, 2012 and 2011, as follows (in thousands):



	2012							2011
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Non-contractual customer relationships	$	110,404	$	(36,605	)	$	73,799	$	82,891	$	(21,147	)	$	61,744
Covenants not-to-compete	12,707		(7,357		)	5,350		13,035		(8,067		)	4,968
Favorable lease asset	7,228		(3,866		)	3,362		5,571		(3,210		)	2,361
Technology	6,588		(4,179		)	2,409		16,589		(2,342		)	14,247
Trademarks	12,494		(3,001		)	9,493		7,405		(1,686		)	5,719
Contracts	956		(570		)	386		3,500		(185		)	3,315
Client lists	50		(26		)	24		84		(35		)	49
Total	$	150,427	$	(55,604	)	$	94,823	$	129,075	$	(36,672	)	$	92,403

Amortization of intangible assets estimated useful lives

Amortization is recognized on the straight-line method over the following estimated useful lives:



Non-contractual hospital customer relationships		5 years
Non-contractual laboratory customer relationships		5 to 25 years
All other non-contractual customer relationships		3 to 10 years
Covenants not-to-compete		2 to 25 years
Favorable lease asset		1 to 18 years
Technology		5 to 7 years
Trademarks		2 to 10 years
Contracts		6 years
Client lists		3 years

Aggregate amortization expense

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



	For the Years Ended December 31,
	2012		2011		2010
Aggregate amortization expense	$	22,731	$	13,391	$	9,380

Estimated amortization expense related to intangible assets



	For the Years Ended December 31,
	2012		2011		2010
Aggregate amortization expense	$	22,731	$	13,391	$	9,380

The estimated amortization expense related to intangible assets for each of the five succeeding years and thereafter at December 31, 2012 is as follows (in thousands):



2013	$	20,778
2014	18,378
2015	16,338
2016	13,196
2017	6,442
Thereafter	19,691

Total	$	94,823

Calculation of Basic and Diluted Earnings per Share

Basic and diluted earnings per share were calculated as follows (in thousands, except per share amounts):



	For Years Ended December 31,
	2012		2011		2010
Net income attributable to VCA Antech, Inc	$	45,551	$	95,405	$	110,243
Weighted average common shares outstanding:
Basic	87,681		86,606		86,049
Effect of dilutive potential common stock:
Stock options	479		560		753
Non-vested shares and units	511		228		249
Diluted	88,671		87,394		87,051
Basic earnings per common share	$	0.52	$	1.10	$	1.28
Diluted earnings per common share	$	0.51	$	1.09	$	1.27