News Column

VCA Inc. Reports Second Quarter 2014 Results

July 24, 2014

  • Revenue increased 5.2% to a second quarter record of $489.5 million
  • Gross profit increased 5.4% to $120.4 million
  • Operating income increased 5.6% to $79.9 million
  • Diluted earnings per common share increased 10.9% to $0.51
  • Adjusted EPS Excluding Amortization increased 10.0% to $0.55

    LOS ANGELES--(BUSINESS WIRE)-- VCA Inc. (NASDAQ: WOOF), a leading animal healthcare company in the United States and Canada, today reported financial results for the second quarter ended June 30, 2014, as follows: revenue increased 5.2% to a second quarter record of $489.5 million; gross profit increased 5.4% to $120.4 million; operating income increased 5.6% to $79.9 million; net income increased 9.4% to $45.6 million and diluted earnings per common share increased 10.9% to $0.51. Non-GAAP earnings per diluted common share excluding acquisition-related amortization ("Adjusted EPS Excluding Amortization") increased 10.0% to $0.55 for the three months ended June 30, 2014. The increase in our earnings per share was aided by our share buyback program.

    For the six months ended June 30, 2014 and 2013, diluted earnings per share was $0.89 and $0.81, respectively. Adjusted EPS Excluding Amortization was $0.96 and $0.90 for the six months ended June 30, 2014 and 2013, respectively. The adjusted diluted earnings per share for the six months ended June 30, 2013, excludes $3.8 million of pre-tax charges related to vacated properties. The operations of two animal hospitals we vacated were consolidated into the newly constructed, VCA West Los Angeles Animal Hospital in the prior year.

    Bob Antin, Chairman and CEO, stated, "We are very pleased with the increase in our organic revenue growth rates and related margin improvement in both our core Animal Hospital and Laboratory business segments. Accordingly, we remain optimistic with respect to our results for the second half of the year.

    "Animal Hospital revenue in the current quarter increased 5.9%, to $386.8 million, driven by acquisitions made during the past 12 months and same-store revenue growth of 2.2%. Our same-store gross profit margin increased to 16.8% from 16.6%, while our total gross margin decreased slightly to 16.4%, from 16.5% in the prior-year quarter. The following margins are adjusted excluding amortization: adjusted same-store gross profit margin increased to 17.7%, from 17.4% in the prior-year quarter; adjusted total gross margin increased to 17.4%, from 17.3% in the prior-year quarter; adjusted operating margin decreased to 14.8%, from 14.9% in the prior-year quarter. During the quarter, we acquired six independent animal hospitals which had historical combined annual revenue of $12.1 million.

    "Laboratory internal revenue in the second quarter increased 5.0%, to $95.8 million. Our Laboratory gross profit margin increased to 51.2% from 49.6%, and our operating margin increased as well to 42.5%, from 40.8% in the prior-year quarter. Excluding amortization expense, our adjusted Laboratory gross profit margin increased to 51.4%, from 49.8% in the prior-year quarter, and our adjusted operating margin likewise increased to 42.8%, from 41.1% in the prior-year quarter.

    "Revenue from our other operations reported in our All Other segment decreased to $23.7 million, from $27.5 million in the prior-year quarter. Sound-Eklin, our medical technology business included in this segment, was negatively impacted by the May 2014 fire, which destroyed their offices and manufacturing facility. We are grateful for the support of our clients, VCA family and friends in the veterinary industry as we work to bring their operations back to normal."

    2014 Financial Guidance

    We reaffirm the annual guidance provided on February 13, 2014.

    Non-GAAP Financial Measures

    We believe investors’ understanding of our total performance is enhanced by disclosing adjusted net income, adjusted diluted earnings per common share and Adjusted EPS Excluding Amortization. We define these adjusted measures as the reported amounts, adjusted to exclude certain significant items and amortization of intangibles acquired in acquisitions.

    Management believes these adjusted measures are useful to management and investors in evaluating the Company's operational performance and their use provides an additional tool for evaluating the Company's operating results and trends. As a result, these non-GAAP financial measures help to provide meaningful comparisons of our overall performance from one reporting period to another and meaningful assessments of related trends.

    There is a material limitation associated with the use of these non-GAAP financial measures: our adjusted measures exclude the impact of these significant items, and as a result, our computation of adjusted diluted earnings per common share does not depict diluted earnings per common share in accordance with GAAP.

    To compensate for the limitations in the non-GAAP financial measures discussed above, our disclosures provide a complete understanding of all adjustments found in non-GAAP financial measures, and we reconcile the non-GAAP financial measures to the GAAP financial measures in the attached financial schedules titled "Supplemental Operating Data."

    Conference Call

    We will discuss our second quarter 2014 financial results during a conference call today, July 24th, at 4:30 p.m. Eastern Time. A live broadcast of the call may be accessed by visiting our website at investor.vcaantech.com. The call may also be accessed by dialing (877) 293-5492. Interested parties should call at least ten minutes prior to the start of the call to register. Replay of the webcast will be available for ninety days by visiting the company's website.

    Forward-Looking Statements

    This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Among the forward-looking statements in this press release are statements addressing our 2014 guidance and plans, expectations, future financial position and results of operation. These forward-looking statements are not historical facts and are inherently uncertain and out of our control. Any or all of our forward-looking statements in this press release may turn out to be wrong. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. Actual future results may vary materially. Among other factors that could cause our actual results to differ from this forward-looking information are: the continued effects of the economic uncertainty prevailing in regions in which we operate; our ability to execute on our growth strategy and to manage acquired operations; changes in demand for our products and services; fluctuations in our revenue adversely affecting our gross profit, operating income and margins; and the effects of the other factors discussed in our Annual Report on Form 10-K, Reports on Form 10-Q and our other filings with the SEC.

    About VCA Inc.

    We own, operate and manage the largest networks of freestanding veterinary hospitals and veterinary-exclusive clinical laboratories in the country, additionally we are the largest provider of online communication, professional education and marketing solutions to the veterinary community. We also supply diagnostic imaging equipment to the veterinary industry.

    VCA Inc.
    Condensed, Consolidated Income Statements
    (Unaudited)

    (In thousands, except per share amounts)

     
      Three Months Ended   Six Months Ended
    June 30,June 30,
      2014       2013     2014       2013  
    Revenue:
    Animal hospital $ 386,776 $ 365,205 $ 738,364 $ 705,820
    Laboratory 95,955 91,230 184,489 178,565
    All other 23,712 27,472 51,833 55,995
    Intercompany   (16,971 )   (18,652 )   (35,707 )   (36,519 )
      489,472     465,255     938,979     903,861  
     
    Direct costs 369,057 350,961 717,113 692,644
     
    Gross profit:
    Animal hospital 63,336 60,113 112,136 105,312
    Laboratory 49,092 45,226 92,123 87,691
    All other 7,648 9,423 17,617 19,057
    Intercompany   339     (468 )   (10 )   (843 )
      120,415     114,294     221,866     211,217  
     
    Selling, general and administrative expense:
    Animal hospital 9,864 8,720 18,992 17,045
    Laboratory 8,281 7,965 16,299 15,970
    All other 7,411 8,041 15,759 16,955
    Corporate   14,375     14,297     30,321     28,899  
      39,931     39,023     81,371     78,869  
     
    Net loss (gain) on sale or disposal of assets   578     (430 )   (643 )   1,296  
    Operating income 79,906 75,701 141,138 131,052
    Interest expense, net 4,030 5,658 8,197 9,965
    Other expense (income)   43     (18 )   (10 )   (27 )
    Income before provision for income taxes 75,833 70,061 132,951 121,114
    Provision for income taxes   28,925     26,601     51,128     45,831  
    Net income 46,908 43,460 81,823 75,283
    Net income attributable to noncontrolling interests   1,324     1,798     2,196     3,136  
    Net income attributable to VCA Inc. $ 45,584   $ 41,662   $ 79,627   $ 72,147  
     
    Diluted earnings per share $ 0.51   $ 0.46   $ 0.89   $ 0.81  
     
    Weighted-average shares outstanding for diluted earnings per share   89,191     89,653     89,312     89,531  
     
    VCA Inc.
    Condensed, Consolidated Balance Sheets
    (Unaudited)

    (In thousands)

     
      June 30,   December 31,
      2014     2013  
    Assets
    Current assets:
    Cash and cash equivalents $ 122,535 $ 125,029
    Trade accounts receivable, net 65,979 59,900
    Inventory 42,483 55,067
    Prepaid expenses and other 39,921 25,417
    Deferred income taxes 28,908 28,907
    Prepaid income taxes   9,369     15,434  
    Total current assets 309,195 309,754
    Property and equipment, net 445,199 448,366
    Other assets:
    Goodwill 1,355,396 1,330,917
    Other intangible assets, net 82,746 86,671
    Notes receivable 3,199 3,454
    Deferred financing costs, net 2,383 2,987
    Other   61,120     55,632  
    Total assets $ 2,259,238   $ 2,237,781  
    Liabilities and Equity
    Current liabilities:
    Current portion of long-term debt $ 50,808 $ 51,087
    Accounts payable 43,827 36,962
    Accrued payroll and related liabilities 61,192 57,337
    Other accrued liabilities   53,168     58,762  
    Total current liabilities 208,995 204,148
    Long-term debt, less current portion 542,978 568,558
    Deferred income taxes 100,219 100,099
    Other liabilities   36,505     36,758  
    Total liabilities 888,697 909,563
    Redeemable noncontrolling interests 10,984 10,678
    VCA Inc. stockholders’ equity:
    Common stock 87 89
    Additional paid-in capital 346,792 384,721
    Retained earnings 1,008,347 928,720
    Accumulated other comprehensive loss   (6,852 )   (6,190 )
    Total VCA Inc. stockholders’ equity 1,348,374 1,307,340
    Noncontrolling interests   11,183     10,200  
    Total equity   1,359,557     1,317,540  
    Total liabilities and equity $ 2,259,238   $ 2,237,781  
     
    VCA Inc.
    Condensed, Consolidated Statements of Cash Flows
    (Unaudited)

    (In thousands)

     
      Six Months Ended
    June 30,
      2014       2013  
    Cash flows from operating activities:
    Net income $ 81,823 $ 75,283
    Adjustments to reconcile net income to net cash provided by operating activities:
    Depreciation and amortization 39,797 37,739
    Amortization of debt issue costs 604 626
    Provision for uncollectible accounts 2,612 3,364
    Net (gain) loss on sale or disposal of assets (643 ) 1,296
    Share-based compensation 8,571 7,419
    Deferred income taxes 2,868
    Excess tax benefit from exercise of stock options (2,092 ) (771 )
    Other (53 ) (384 )
    Changes in operating assets and liabilities:
    Trade accounts receivable (8,945 ) (17,709 )
    Inventory, prepaid expense and other assets (6,610 ) (470 )
    Accounts payable and other accrued liabilities 1,171 4,329
    Accrued payroll and related liabilities 3,816 1,886
    Income taxes   8,062     12,595  
    Net cash provided by operating activities   128,113     128,071  
    Cash flows from investing activities:
    Business acquisitions, net of cash acquired (29,271 ) (21,835 )
    Real estate acquired in connection with business acquisitions (1,493 ) (510 )
    Property and equipment additions (27,979 ) (33,095 )
    Proceeds from sale of assets 4,456 595
    Other   55     (1,042 )
    Net cash used in investing activities   (54,232 )   (55,887 )
    Cash flows from financing activities:
    Repayment of debt (26,218 ) (17,442 )
    Distributions to non-controlling interest partners (2,259 ) (2,234 )
    Purchase of non-controlling interest (326 ) (5,030 )
    Proceeds from issuance of common stock under stock option plans 467 4,181
    Excess tax benefit from exercise of stock options 2,092 771
    Repurchase of common stock (49,091 ) (7,956 )
    Other   (838 )   (99 )
    Net cash used in financing activities   (76,173 )   (27,809 )
    Effect of currency exchange rate changes on cash and cash equivalents (202 ) (540 )
    (Decrease) increase in cash and cash equivalents (2,494 ) 43,835
    Cash and cash equivalents at beginning of period   125,029     68,435  
    Cash and cash equivalents at end of period $ 122,535   $ 112,270  
     
    VCA Inc.
    Supplemental Operating Data

    (Unaudited - In thousands, except per share amounts)

     
    Table #1        
    Reconciliation of net income attributable toThree Months Ended

    June 30,
    Six Months Ended

    June 30,
    VCA Inc., to adjusted net income attributable
    to VCA Inc., excluding amortization (1)201420132014   2013  
     
    Net income attributable to VCA Inc. $ 45,584 $ 41,662 $ 79,627 $ 72,147
    Vacant property adjustments (2) 3,804
    Tax benefit from vacant property adjustments (2)         (1,489 )
     
    Adjusted net income attributable to VCA Inc. $ 45,584 $ 41,662 $ 79,627 $ 74,462

    Impact of intangible asset amortization associated with acquisitions, net of tax (3)

      3,181   3,360   6,314   6,430  
    Adjusted net income attributable to VCA Inc., excluding amortization $ 48,765 $ 45,022 $ 85,941 $ 80,892  
     

    Table #2

    Three Months Ended

    June 30,
    Six Months Ended

    June 30,
    Reconciliation of diluted earnings per share to
    adjusted diluted earnings per share, excluding amortization (1)201420132014   2013  
     
    Diluted earnings per share $ 0.51 $ 0.46 $ 0.89 $ 0.81
    Impact of vacant property adjustments, net of tax (2) 0.03
           

    Adjusted Earnings per share (4)

    $ 0.51 $ 0.46 $ 0.89 $ 0.83

    Impact of intangible asset amortization associated with acquisitions, net of tax (3)

      0.04   0.04   0.07   0.07  
    Adjusted diluted earnings per share excluding amortization (3) $ 0.55 $ 0.50 $ 0.96 $ 0.90  
     
    Shares used for computing adjusted diluted earnings per share   89,191   89,653   89,312   89,531  
     
    VCA Inc.
    Supplemental Operating Data

    (Unaudited - In thousands, except per share amounts)

     
    Table #3   Three Months Ended

    June 30,
      Six Months Ended

    June 30,
    Reconciliation of gross profit to
    adjusted gross profit, excluding amortization (1)   2014       2013     2014       2013  
     
    Consolidated gross profit $ 120,415 $ 114,294 $ 221,866 211,217
    Impact of vacant property adjustments (2) 2,046

    Impact of rent expense adjustments (5)

          (1,396 )       (1,396 )
    Consolidated adjusted gross profit $ 120,415 $ 112,898 $ 221,866 $ 211,867
    Consolidated adjusted gross profit margin24.6%24.3%23.6%23.4%
    Intangible asset amortization associated with acquisitions (3)   5,160     5,452     10,240     10,515  
    Consolidated adjusted gross profit excluding amortization $ 125,575   $ 118,350   $ 232,106   $ 222,382  
    Consolidated adjusted gross profit margin excluding amortization25.7%25.4%24.7%24.6%
     
    Table #4Three Months Ended

    June 30,
    Six Months Ended

    June 30,
    Reconciliation of operating income to
    adjusted operating income, excluding amortization (1)   2014     2013     2014     2013  
     
    Consolidated operating income $ 79,906 $ 75,701 $ 141,138 $ 131,052
    Impact of vacant property adjustments (2) 3,804

    Impact of rent expense adjustments (5)

          (1,396 )       (1,396 )
    Consolidated adjusted operating income $ 79,906 $ 74,305 $ 141,138 $ 133,460
    Consolidated adjusted operating income margin16.3%16.0%15.0%14.8%
    Intangible asset amortization associated with acquisitions (3)   5,227     5,521     10,374     10,565  
    Consolidated adjusted operating income excluding amortization $ 85,133   $ 79,826   $ 151,512   $ 144,025  
    Consolidated adjusted operating income margin excluding amortization17.4%17.2%16.1%15.9%
    _________________________________________________

    (1)

      Management uses adjusted net income excluding acquisition-related amortization, adjusted EPS excluding amortization, adjusted gross profit excluding acquisition-related amortization and adjusted operating income excluding acquisition-related amortization and its components among other factors, to measure the performance of the overall Company. Further, we believe that investors' understanding of our performance is enhanced by disclosing these measures. Adjusted net income excluding acquisition-related amortization, adjusted EPS excluding amortization, consolidated adjusted gross profit excluding acquisition-related amortization, consolidated adjusted operating income excluding acquisition-related amortization measures are not, and should not be viewed as substitutes for U.S. generally accepted accounting principles (GAAP) net income and its components and diluted earnings per share.
     

    (2)

    During the first quarter of 2013, we recorded a write-down to net realizable value of $1.8 million related to a vacant property that is held for sale, and we accrued costs totaling $2.0 million related to a vacant leased property.
     

    (3)

    In the first quarter of 2013, we began to report Adjusted EPS Excluding Amortization to exclude acquisition-related amortization, and other infrequent charges and credits. We believe Adjusted EPS Excluding Amortization will provide our investors with better insight into the operating performance of the business.
     

    (4)

    Amounts may not add due to rounding.

     

    (5)

    In the second quarter of 2013, we recorded a reduction in rent expense as a result of a capital lease that was previously treated as an operating lease in our Animal Hospital segment.
     
    VCA Inc.
    Supplemental Operating Data (cont)

    (Unaudited - In thousands, except per share amounts)

     
        As of
      June 30,   December 31,
    Table #520142013
    Selected consolidated balance sheet data
    Debt:
    Senior term notes $ 533,242 $ 556,914
    Other debt and capital leases   60,544     62,731  
    Total debt $ 593,786   $ 619,645  
     
    Three Months Ended

    June 30,
    Six Months Ended

    June 30,
    Table #6
    Selected expense data   2014     2013     2014     2013  
     
    Rent expense $ 16,879   $ 15,162   $ 33,808   $ 33,787  
     

    Depreciation and amortization included in direct costs:

    Animal hospital $ 14,955 $ 14,462 $ 29,529 $ 27,641
    Laboratory 2,543 2,569 5,059 5,055
    All other 1,671 1,103 3,402 2,344
    Intercompany   (473 )   (446 )   (938 )   (885 )
    $ 18,696 $ 17,688 $ 37,052 $ 34,155

    Depreciation and amortization included in selling, general and administrative expense

      1,334     1,812     2,745     3,584  
    Total depreciation and amortization $ 20,030   $ 19,500   $ 39,797   $ 37,739  
     
    Share-based compensation included in direct costs:
    Laboratory $ 133 $ 109 $ 283 $ 218
     

    Share-based compensation included in selling, general and administrative expense:

    Animal hospital 424 402 941 1,043
    Laboratory 352 307 733 606
    All other 191 186 373 372
    Corporate   2,927     2,645     6,241     5,180  
      3,894     3,540     8,288     7,201  
    Total share-based compensation $ 4,027   $ 3,649   $ 8,571   $ 7,419  





    VCA Inc.

    Tomas Fuller

    Chief Financial Officer

    310-571-6505

    Source: VCA Inc.


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