VCA Antech, Inc. Reports Second Quarter 2007 Results

VCA Antech, Inc. (NASDAQ:WOOF), a leading animal healthcare company in the United States, today reported financial results for the quarter ended June 30, 2007, as follows: revenue increased 17.7% to a second quarter record of $300.3 million; gross profit increased 19.9% to $89.9 million; operating income increased 21.3% to $67.4 million; net income increased 21.3% to $35.8 million; and diluted earnings per common share increased 20.0% to $0.42. We also reported our financial results for the six months ended June 30, 2007, as follows: revenue increased 15.6% to a first six-months record of $565.5 million; gross profit increased 19.7% to $165.8 million; operating income increased 21.4% to $121.7 million; net income was $64.2 million; and diluted earnings per common share was $0.75. The first quarter of 2006 included a tax benefit in the amount of $6.8 million, or $0.08 per diluted common share, due to a favorable outcome of an income tax audit that resulted in a change to our estimated tax liabilities. Excluding this item from 2006, adjusted net income increased 22.4% to $64.2 million and adjusted diluted earnings per common share increased 21.0% to $0.75. Bob Antin, Chairman and CEO, stated, "The second quarter was marked by the outstanding operating performance of our company and the acquisition of Healthy Pet Corp., which occurred on June 1, 2007. On a 17.7% increase in consolidated revenue, our gross profit and operating income increased 19.9% and 21.3%, respectively, net income increased 21.3% and diluted earnings per common share increased 20.0% to $0.42. "Our laboratory revenue increased 17.4% to $79.2 million. Our laboratory gross profit increased 22.9% and our laboratory gross margin increased to 50.5% compared to 48.2% in the comparable prior year quarter. Our laboratory operating income increased 23.7% and our laboratory operating margin increased to 44.0% compared to 41.8% in the comparable prior year quarter. Laboratory internal revenue growth was 15.9% for the second quarter of 2007. "Our animal hospital revenue increased 17.5% to $218.5 million. Our animal hospital same-store revenue growth was 6.6% for the second quarter of 2007 and our animal hospital same-store gross margin increased to 21.6% compared to 21.4% in the comparable prior year quarter. Our consolidated animal hospital gross margin declined to 21.2% compared to 21.3% in the comparable prior year quarter and our consolidated animal hospital operating margin remained unchanged at 18.6%. "Our medical technology revenue increased 26.6% to $10.6 million, our medical technology gross profit increased 20.4% to $3.8 million and our medical technology gross margin was 35.6% compared to 37.4% in the comparable prior year quarter. Our medical technology operating income was $1.1 million compared to $595,000 reported in the second quarter of 2006.” Non-GAAP Financial Measures We believe investors’ understanding of our total performance is enhanced by disclosing adjusted net income and adjusted diluted earnings per common share. We define adjusted net income and adjusted diluted earnings per common share as the reported items, adjusted to exclude certain significant items. Adjusted diluted earnings per common share is adjusted net income divided by diluted common shares outstanding. Management uses adjusted net income and adjusted diluted earnings per common share because they exclude the effect of significant items that we believe are not representative of our core operations for the periods presented. 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 our future performance and related trends. For the six months ended June 30, 2006, the only item excluded in computing adjusted net income and adjusted diluted earnings per common share was a $6.8 million tax benefit recorded during the first quarter of 2006. For the quarter and six months ended June 30, 2007, there were no adjustments. There is a material limitation associated with the use of these non-GAAP financial measures: our computation of adjusted net income for the six months ended June 30, 2006, excludes the impact of the $6.8 million tax benefit 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 company’s second quarter 2007 financial results during a conference call today, July 26, 2007 at 4:30 p.m. Eastern Time. You can access a live broadcast of the call by visiting our website at http://investor.vcaantech.com. You can also access the call via telephone by dialing (800) 500-3792. Interested parties should call at least 10 minutes prior to the start of the call to register. Forward-Looking Statements This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Among the important factors that could cause actual results to differ are: a material adverse change in our financial condition or operations; the ability to successfully integrate the acquisition of Healthy Pet Corp. and achieve expected operating synergies; the rate of our laboratory internal revenue growth and animal hospital same-store revenue growth; the level of direct costs and our ability to maintain revenue at a level necessary to maintain expected operating margins; the level of selling, general and administrative costs; the effects of our recent acquisitions and our ability to effectively manage our growth and achieve operating synergies; a decline in demand for some of our products and services; any disruption in our information technology systems or transportation networks; the effects of competition; any impairment in the carrying value of our goodwill; changes in prevailing interest rates; our ability to service our debt; and general economic conditions. These and other risk factors are discussed in our report on Form 10-K for the year ended December 31, 2006, and our Report on Form 10-Q for the quarter ended March 31, 2007, and the reader is directed to these statements for a further discussion of important factors that could cause actual results to differ materially from those in the forward-looking statements. We own, operate and manage the largest networks of freestanding veterinary hospitals and veterinary-exclusive clinical laboratories in the country, and we supply diagnostic imaging equipment to the veterinary industry. VCA ANTECH, INC. CONSOLIDATED INCOME STATEMENTS For the Three and Six Months Ended June 30, 2007 and 2006 (In thousands, except per share amounts)   Three Months Six Months Ended June 30, Ended June 30,   2007     2006     2007     2006   Revenue: Laboratory $ 79,210 $ 67,473 $ 152,807 $ 129,010 Animal hospital 218,466 186,002 405,637 356,525 Medical technology 10,635 8,400 21,807 16,392 Intercompany   (8,006 )   (6,725 )   (14,801 )   (12,597 )   300,305     255,150     565,450     489,330     Direct costs 210,427 180,188 399,652 350,847   Gross profit: Laboratory 39,966 32,524 75,968 61,074 Animal hospital 46,301 39,651 81,881 72,248 Medical technology 3,785 3,144 8,096 5,646 Intercompany   (174 )   (357 )   (147 )   (485 )   89,878     74,962     165,798     138,483   Selling, general and administrative: Laboratory 5,046 4,349 10,013 8,443 Animal hospital 5,321 5,123 10,881 9,946 Medical technology 2,693 2,549 5,628 5,200 Corporate   8,983     7,463     16,994     14,780     22,043     19,484     43,516     38,369     Write-down and loss (gain) on sale of assets   420     (85 )   542     (203 )   Operating income 67,415 55,563 121,740 100,317   Interest expense, net 6,671 5,927 12,444 12,239 Other (income) expense 172 (31 ) 227 (97 ) Minority interest expense   1,028     900     1,874     1,674   Income before provision for income taxes 59,544 48,767 107,195 86,501 Provision for income taxes   23,697     19,214     43,035     27,289   Net income $ 35,847   $ 29,553   $ 64,160   $ 59,212     Diluted earnings per common share $ 0.42   $ 0.35   $ 0.75   $ 0.70   Shares used for computing diluted earnings per common share   85,605     84,838     85,481     84,699   VCA ANTECH, INC. CONSOLIDATED BALANCE SHEETS As of June 30, 2007 and December 31, 2006 (In thousands)   June 30, December 31,   2007   2006 ASSETS Current assets: Cash and cash equivalents $ 62,107 $ 45,104 Trade accounts receivable, net 48,071 44,491 Inventory 20,832 21,420 Prepaid expenses and other 15,617 13,492 Deferred income taxes 16,988 14,935 Prepaid income taxes   579   13,523 Total current assets 164,194 152,965 Property and equipment, net 192,081 166,033 Other assets: Goodwill 833,336 625,748 Other intangible assets, net 17,756 16,293 Deferred financing costs, net 1,636 979 Other   12,003   9,939 Total assets $ 1,221,006 $ 971,957   LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term obligations $ 7,554 $ 6,648 Accounts payable 25,307 23,328 Accrued payroll and related liabilities 36,873 33,864 Other accrued liabilities   41,838   30,961 Total current liabilities 111,572 94,801 Long-term obligations, less current portion 540,658 384,067 Deferred income taxes 44,652 39,804 Other liabilities 11,855 13,294 Minority interest 10,348 9,686 Stockholders' equity: Common stock 84 84 Additional paid-in capital 282,521 275,013 Retained earnings 218,746 154,586 Accumulated other comprehensive income   570   622 Total stockholders' equity   501,921   430,305 Total liabilities and stockholders' equity $ 1,221,006 $ 971,957 VCA ANTECH, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS For the Six Months Ended June 30, 2007 and 2006 (In thousands)   Six Months Ended June 30,   2007     2006   Cash flows from operating activities: Net income $ 64,160 $ 59,212 Adjustments to reconcile net income to net cash provided by operating activities:   Depreciation and amortization 12,740 10,851 Amortization of debt costs 137 226 Provision for uncollectible accounts 2,110 2,976 Write-down and loss (gain) on sale of assets 542 (203 ) Share-based compensation 2,300 1,445 Excess tax benefit from exercise of stock options (2,680 ) (3,939 ) Minority interest in income of subsidiaries 1,874 1,674 Distributions to minority interest partners (1,364 ) (1,339 ) Deferred income taxes 3,025 4,701 Other (173 ) (561 ) Changes in operating assets and liabilities: Accounts receivable (5,244 ) (6,182 ) Inventory, prepaid expenses and other assets 45 (4,555 ) Accounts payable and other accrued liabilities (173 ) (6,480 ) Accrued payroll and related liabilities 1,105 (526 ) Income taxes   15,789     6,841   Net cash provided by operating activities   94,193     64,141   Cash flows from investing activities: Business acquisitions, net of cash acquired (203,322 ) (30,172 ) Real estate acquired in connection with business acquisitions (7,962 ) (1,781 ) Property and equipment additions (27,236 ) (15,067 ) Proceeds from sale of assets 1,564 297 Other   (256 )   161   Net cash used in investing activities   (237,212 )   (46,562 ) Cash flows from financing activities: Repayment of long-term obligations (4,224 ) (62,781 ) Proceeds from issuance of long-term obligations 160,000 - Payment of financing costs (794 ) - Proceeds from issuance of common stock under stock option plans 2,360 3,576 Excess tax benefit from exercise of stock options   2,680     3,939   Net cash provided by (used in) financing activities   160,022     (55,266 ) Increase (decrease) in cash and cash equivalents 17,003 (37,687 ) Cash and cash equivalents at beginning of period   45,104     58,488   Cash and cash equivalents at end of period $ 62,107   $ 20,801   VCA ANTECH, INC. SUPPLEMENTAL OPERATING DATA For the Three and Six Months Ended June 30, 2007 and 2006 (In thousands, except per share amounts)   Table #1 Three Months Ended Six Months Reconciliation of net income to adjusted net income June 30, Ended June 30,   2007     2006     2007     2006     Net income $ 35,847 $ 29,553 $ 64,160 $ 59,212 Certain significant item: Tax benefit   -     -     -     (6,806 ) Adjusted net income $ 35,847   $ 29,553   $ 64,160   $ 52,406     Table #2 Reconciliation of diluted earnings per common share to adjusted diluted earnings per common share       Diluted earnings per common share $ 0.42 $ 0.35 $ 0.75 $ 0.70 Certain significant item as detailed in Table #1   -     -     -     (0.08 ) Adjusted diluted earnings per common share $ 0.42   $ 0.35   $ 0.75   $ 0.62     Shares used for computing adjusted diluted earnings per common share   85,605     84,838     85,481     84,699     Table #3 Depreciation and amortization   Depreciation and amortization included in direct costs:   Laboratory $ 1,578 $ 1,065 $ 2,916 $ 2,122 Animal hospital 4,342 3,543 8,157 7,049 Medical technology 299 289 592 607 Intercompany   (92 )   (37 )   (181 )   (68 ) 6,127 4,860 11,484 9,710 Depreciation and amortization included in selling, general and administrative expense:     682     569     1,256     1,141   Total depreciation and amortization $ 6,809   $ 5,429   $ 12,740   $ 10,851   VCA ANTECH, INC. SUPPLEMENTAL OPERATING DATA - Continued As of June 30, 2007 and December 31, 2006 (In thousands)   Table #4 June 30, December 31, Selected consolidated balance sheet data   2007   2006   Debt: Revolving credit facility $ - $ - Senior term notes 530,372 372,668 Other debt and capital leases   17,840   18,047 Total debt $ 548,212 $ 390,715     For the Three and Six Months Ended June 30, 2007 and 2006 (In thousands)   Three Months Ended Six Months Ended Table #5 June 30, June 30, Selected expense data   2007   2006   2007   2006   Rent expense $ 9,106 $ 7,905 $ 17,531 $ 15,604   Share-based compensation included in direct costs: Laboratory $ 158 $ 160 $ 341 $ 320   Share-based compensation included in selling, general and administrative expense:   Laboratory 175 126 372 254 Animal hospital 283 216 607 431 Medical technology 26 - 54 - Corporate   441   167   926   440   925   509   1,959   1,125 Total share-based compensation $ 1,083 $ 669 $ 2,300 $ 1,445