WOOF Petco Health and Wellness Company Inc

• Revenue increased 10.2% to a fourth quarter record of $479.9 million
• Gross profit increased 13.2% to $99.0 million
• Operating income increased 14.7% to $52.7 million
• Diluted earnings per common share increased 17.9% to $0.33
• Non-GAAP diluted earnings per common share increased 19.4% to $0.37
• Acquired a quarterly record 24 independent animal hospitals

VCA Inc. (NASDAQ: WOOF), a leading animal healthcare company in the United States and Canada, today reported financial results for the fourth quarter ended December 31, 2014, as follows: revenue increased 10.2% to a fourth quarter record of $479.9 million, gross profit increased 13.2% to $99.0 million, operating income increased 14.7% to $52.7 million, net income increased 16.3% to $29.9 million, and diluted earnings per common share increased 17.9% to $0.33. Non-GAAP diluted earnings per common share, which excludes acquisition-related amortization, increased 19.4% to $0.37.

We also reported our financial results for the twelve months ended December 31, 2014, as follows: revenue increased 6.4% to $1.9 billion, gross profit increased 8.6% to $444.6 million, operating income decreased 0.7% to $247.3 million, net income decreased 1.6% to $140.7 million, and diluted earnings per common share increased 0.7% to $1.54. Our financial results for the twelve months ended December 31, 2014, on a Non-GAAP basis, are as follows: gross profit increased 8.7% to $465.4 million, operating income increased 9.6% to $295.3 million, net income increased 10.3% to $166.3 million, and Non-GAAP diluted earnings per common share increased 12.5% to $1.89.

Our financial results for the twelve months ended December 31, 2014, included a non-cash impairment charge of $27.0 million, $17.0 million net of tax, or $0.19 per diluted common share, related to the write-down of goodwill and other long-lived assets in our Vetstreet business, included in our All Other segments category. Our results also included debt retirement costs of $1.7 million, $1.0 million net of tax, or $0.01 per common share, related to the refinancing of our senior credit facility. Our results for the twelve months ended December 31, 2013, included charges of $3.8 million, $2.3 million net of tax, or $0.03 per diluted common share, related to vacated properties that were consolidated into the then newly constructed VCA West Los Angeles Animal Hospital, as well as a non-cash inventory credit adjustment of $2.8 million, $1.7 million net of tax, or $0.02 per diluted common share.

Bob Antin, Chairman and CEO, stated, “We had another terrific quarter. We experienced solid internal revenue growth of 4.4% and 5.1% in our core Animal Hospital and Laboratory business segments, respectively. Our same-store Animal Hospital gross profit margins increased 80 basis points and our Laboratory gross profit margins increased an impressive 170 basis points. The positive momentum in our business has continued from the third quarter to the end of the year and we are optimistic about our overall growth prospects in 2015.

“Animal Hospital revenue in the fourth quarter of 2014 increased 10.9% to $380.7 million, driven by acquisitions made in the past twelve months and same-store revenue growth of 4.4%. Our same-store gross profit margin increased to 13.5% from 12.7% and our total gross margin increased to 13.2% from 12.5% in the prior-year quarter. During the quarter, we acquired a record 24 independent animal hospitals which had historical combined annual revenue of $68.5 million, bringing our year to date total to $122.5 million.

“Laboratory internal revenue in the fourth quarter of 2014 increased 5.1% to $83.9 million, driven by an increase in the average revenue per requisition of 5.2%. Our Laboratory gross profit margin increased to 46.0% from 44.3% and our operating margin increased to 35.8% from 34.4%.

“During the fourth quarter, we purchased 2.6 million shares of our common stock for $112.8 million. Since the Board authorized our share repurchase program, we have acquired 7.4 million shares of our common stock for $278.5 million from April 2013 through December 31, 2014."

2015 Financial Guidance

We provide the following financial guidance for the full year 2015:

• Revenue from $2.08 billion to $2.09 billion;
• Net income from $166 million to $175 million;
• Diluted earnings per common share from $2.00 to $2.10; and
• Non-GAAP diluted earnings per common share from $2.17 to $2.27.

Non-GAAP Financial Measures

We believe investors’ understanding of our total performance is enhanced by disclosing Non-GAAP financial measures including Non-GAAP net income, Non-GAAP gross profit, Non-GAAP operating income and Non-GAAP diluted earnings per common share. 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 fourth quarter 2014 financial results during a conference call today, February 11th, at 9:00 a.m. Eastern Time. A live broadcast of the call may be accessed by visiting our website at investor.vca.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 2015 Financial Guidance and other statements addressing our 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: 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 for the year ended December 31, 2013, reports on Form 10-Q and our other filings with the SEC.

About VCA Inc.

We own, operate and manage the largest network 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 EndedDecember 31, Twelve Months EndedDecember 31, 2014       2013 2014       2013 Revenue: Animal hospital $ 380,694 $ 343,220 $ 1,514,878 $ 1,417,908 Laboratory 84,004 79,806 360,396 344,831 All other 33,871 29,283 115,785 112,740 Intercompany (18,642 ) (16,856 ) (72,576 ) (72,110 ) 479,927   435,453   1,918,483   1,803,369     Direct costs 380,909 347,967 1,473,842 1,393,989   Gross profit: Animal hospital 50,128 42,976 230,801 209,127 Laboratory 38,661 35,378 175,808 163,879 All other 10,871 9,538 38,624 38,601 Intercompany (642 ) (406 ) (592 ) (2,227 ) 99,018   87,486   444,641   409,380     Selling, general and administrative expense: Animal hospital 10,761 8,410 39,022 34,133 Laboratory 8,641 8,024 33,550 31,915 All other 9,674 8,368 33,456 32,941 Corporate 18,267   15,493   65,478   58,922   47,343 40,295 171,506 157,911 Impairment of goodwill and other long-lived assets — — 27,019 — Net (gain) loss on sale of assets (979 ) 1,268   (1,152 ) 2,455   Operating income 52,654 45,923 247,268 249,014 Interest expense, net 5,215 4,110 17,779 18,549 Debt retirement costs — — 1,709 — Other expense 41   203   219   90   Income before provision for income taxes 47,398 41,610 227,561 230,375 Provision for income taxes 17,489   15,882   86,878   87,453   Net income 29,909 25,728 140,683 142,922 Net income attributable to noncontrolling interests 1,550   1,011   5,245   5,411   Net income attributable to VCA Inc. $ 28,359   $ 24,717   $ 135,438   $ 137,511     Diluted earnings per share $ 0.33   $ 0.28   $ 1.54   $ 1.53     Weighted-average shares outstanding for diluted earnings per share 85,121   89,650   87,825   89,663                            

VCA Inc.

Condensed, Consolidated Balance Sheets

(Unaudited)

(In thousands)

  December 31, 2014 December 31, 2013 Assets Current assets: Cash and cash equivalents $ 81,383 $ 125,029 Trade accounts receivable, net 60,482 59,900 Inventory 56,050 55,067 Prepaid expenses and other 36,924 25,417 Deferred income taxes 30,331 29,018 Prepaid income taxes 18,277   15,434   Total current assets 283,447 309,865 Property and equipment, net 468,041 448,366 Other assets: Goodwill 1,415,861 1,321,234 Other intangible assets, net 88,175 86,671 Notes receivable, net 2,807 3,454 Deferred financing costs, net 7,874 2,987 Other 65,815   55,632   Total assets $ 2,332,020   $ 2,228,209     Liabilities and Equity Current liabilities: Current portion of long-term debt $ 19,356 $ 51,087 Accounts payable 46,284 36,962 Accrued payroll and related liabilities 64,359 57,337 Other accrued liabilities 67,219   58,762   Total current liabilities 197,218 204,148 Long-term debt, less current portion 775,412 568,558 Deferred income taxes 103,502 93,082 Other liabilities 33,190   34,127   Total liabilities 1,109,322 899,915 Redeemable noncontrolling interests 11,077 10,678 VCA Inc. stockholders’ equity: Common stock 83 89 Additional paid-in capital 155,802 384,797 Retained earnings 1,064,158 928,720 Accumulated other comprehensive loss (19,397 ) (6,190 ) Total VCA Inc. stockholders’ equity 1,200,646 1,307,416 Noncontrolling interests 10,975   10,200   Total equity 1,211,621   1,317,616   Total liabilities and equity $ 2,332,020   $ 2,228,209            

VCA Inc.

Condensed, Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

  Twelve Months EndedDecember 31, 2014                 2013 Cash flows from operating activities: Net income $ 140,683 $ 142,922 Adjustments to reconcile net income to net cash provided by operating activities: Impairment of goodwill and other long-lived assets 27,019 — Depreciation and amortization 79,427 77,409 Amortization of debt issue costs 1,391 1,245 Provision for uncollectible accounts 6,248 7,360 Debt retirement costs 1,709 — Net (gain) loss on sale of assets (1,152 ) 2,455 Share-based compensation 17,200 14,104 Deferred income taxes 8,853 18,064 Excess tax benefit from stock based compensation (6,241 ) (3,446 ) Other 531 (377 ) Changes in operating assets and liabilities: Trade accounts receivable (3,900 ) (11,048 ) Inventory, prepaid expense and other assets (22,897 ) (7,134 ) Accounts payable and other accrued liabilities 11,597 557 Accrued payroll and related liabilities 6,782 6,502 Income taxes 2,960   7,759   Net cash provided by operating activities 270,210   256,372   Cash flows from investing activities: Business acquisitions, net of cash acquired (138,490 ) (52,688 ) Real estate acquired in connection with business acquisitions (9,017 ) (5,328 ) Property and equipment additions (72,948 ) (73,270 ) Proceeds from sale of assets 3,904 7,096 Other (2,691 ) (2,541 ) Net cash used in investing activities (219,242 ) (126,731 ) Cash flows from financing activities: Repayment of debt (568,011 ) (41,129 ) Proceeds from issuance of long-term debt 600,000 — Proceeds from revolving credit facility 135,000 — Payment of financing costs (7,987 ) — Distributions to noncontrolling interest partners (5,009 ) (4,866 ) Purchase of noncontrolling interest (326 ) (6,581 ) Proceeds from issuance of common stock under stock option plans 2,859 17,233 Excess tax benefit from stock based compensation 6,241 3,446 Repurchase of common stock (255,108 ) (39,367 ) Other (1,424 ) (749 ) Net cash used in financing activities (93,765 ) (72,013 ) Effect of currency exchange rate changes on cash and cash equivalents (849 ) (1,034 ) (Decrease) increase in cash and cash equivalents (43,646 ) 56,594 Cash and cash equivalents at beginning of period 125,029   68,435   Cash and cash equivalents at end of period $ 81,383   $ 125,029                              

VCA Inc.

Supplemental Operating Data

(Unaudited - In thousands, except per share amounts)

  Table #1

Reconciliation of net income attributable to VCA Inc., to Non-GAAP net income attributable to VCA Inc.(1)

Three Months EndedDecember 31,

Twelve Months EndedDecember 31,

 

2014 2013 2014 2013   Net income attributable to VCA Inc. $ 28,359 $ 24,717 $ 135,438 $ 137,511

Vacant property adjustments(2)

— — — 3,804

Tax benefit from vacant property adjustments(2), (7)

— — — (1,489 )

Inventory adjustment(3)

— — — (2,808 )

Tax expense from inventory adjustment(3), (7)

— — — 1,099

Impairment of goodwill and other long-lived assets(4)

— — 27,019 —

Tax benefit on impairment charge(4), (7)

— — (9,978 ) —

Debt Retirement costs(5)

— — 1,709 —

Tax benefit from debt retirement costs(5), (7)

— — (669 ) —

Acquisitions related amortization(1)

5,434 4,781 21,039 20,934

Tax benefit from acquisitions related amortization(1), (7)

(2,127 ) (1,871 ) (8,235 ) (8,194 )                 Non-GAAP net income attributable to VCA Inc. $ 31,666   $ 27,627   $ 166,323   $ 150,857       Table #2 Three Months EndedDecember 31, Twelve Months EndedDecember 31,

Reconciliation of diluted earnings per share to Non-GAAP diluted earnings per share(1)

 

2014 2013 2014 2013   Diluted earnings per share $ 0.33 $ 0.28 $ 1.54 $ 1.53

Impact of vacant property adjustments, net of tax(2)

— — — 0.03

Impact of inventory adjustment, net of tax(3)

— — — (0.02 )

Impact of goodwill and other long-lived assets impairment, net of tax(4)

— — 0.19 —

Impact of debt retirement costs, net of tax(5)

— — 0.01 —

Impact of acquisitions related amortization, net of tax(1)

0.04 0.03 0.15 0.14                 Non-GAAP diluted earnings per share $ 0.37   $ 0.31   $ 1.89   $ 1.68  

Shares used for computing diluted earnings per share

85,121   89,650   87,825   89,663                  

VCA Inc.

Supplemental Operating Data (continued)

(Unaudited - In thousands, except per share amounts)

 

Table #3

Reconciliation of consolidated gross profit to Non-GAAP consolidated gross profit(1)

December 31,

December 31,

 

2014       2013 2014       2013   Consolidated gross profit $ 99,018 $ 87,486 $ 444,641 $ 409,380

Impact of vacant property adjustments(2)

— — — 2,046

Impact of inventory adjustment(3)

— — — (2,808 )

Impact of rent expense adjustments(6)

— — — (1,396 )

Impact of acquisitions related amortization(1)

5,374 4,718 20,780 20,753                 Non-GAAP consolidated gross profit $ 104,392   $ 92,204   $ 465,421   $ 427,975   Non-GAAP consolidated gross profit margin 21.8 % 21.2 % 24.3 % 23.7 %     Table #4 Three Months EndedDecember 31, Twelve Months EndedDecember 31,

Reconciliation of consolidated operating income to Non-GAAP consolidated operating income(1)

 

2014 2013 2014 2013   Consolidated operating income $ 52,654 $ 45,923 $ 247,268 $ 249,014

Impact of vacant property adjustments(2)

— — — 3,804

Impact of inventory adjustment(3)

— — — (2,808 )

Impact of goodwill and other long-lived assets impairment(4)

— — 27,019 —

Impact of rent expense adjustments(6)

— — — (1,396 )

Impact of acquisitions related amortization(1)

5,434 4,781 21,039 20,934                 Non-GAAP consolidated operating income $ 58,088   $ 50,704   $ 295,326   $ 269,548   Non-GAAP consolidated operating margin 12.1 % 11.6 % 15.4 % 14.9 %

_________________________________________________

(1)    

Management believes that investors' understanding of our performance is enhanced by disclosing adjusted measures as the reported amounts, adjusted to exclude certain significant items and acquisition-related amortization. Non-GAAP net income, Non-GAAP diluted earnings per common share, Non-GAAP consolidated gross profit and Non-GAAP consolidated operating income measures are not, and should not be viewed as substitutes for U.S. generally accepted accounting principles (GAAP) net income, 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 was held for sale, and we accrued costs totaling $2.0 million related to a vacant leased property.

  (3)

In the third quarter of 2013, we recorded a non-cash physical inventory adjustment in our Animal Hospital business segment which resulted in a $2.8 million credit adjustment to direct costs.

  (4) In the third quarter, we recognized a non-cash impairment charge of $27.0 million related to the write-down of goodwill and other long-lived assets in our Vetstreet business.   (5) Also in the third quarter, we incurred debt retirement costs of $1.7 million related to the refinancing of our senior credit facility.   (6) 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.   (7) The rate used to calculate the tax benefit is the statutory rate of the applicable year.                      

VCA Inc.

Supplemental Operating Data (continued)

(Unaudited - In thousands, except per share amounts)

  As of Table #5 December 31, 2014       December 31, 2013 Selected consolidated balance sheet data Debt: Senior term notes $ 600,000 $ 556,914 Revolving credit 135,000 — Other debt and capital leases 59,768   62,731   Total debt $ 794,768   $ 619,645       Three Months EndedDecember 31, Twelve Months EndedDecember 31, Table #6 Selected expense data 2014 2013 2014 2013   Rent expense $ 18,463   $ 16,940   $ 69,747   $ 67,615    

Depreciation and amortization included in direct costs:

Animal hospital $ 15,822 $ 14,530 $ 60,395 $ 57,011 Laboratory 2,649 2,571 10,358 10,157 All other 824 1,519 5,731 5,122 Intercompany (514 ) (448 ) (1,931 ) (1,783 ) $ 18,781 $ 18,172 $ 74,553 $ 70,507

Depreciation and amortization included in selling, general and administrative expense

987   1,454   4,874   6,902   Total depreciation and amortization $ 19,768   $ 19,626   $ 79,427   $ 77,409     Share-based compensation included in direct costs: Laboratory $ 216 $ 120 $ 653 $ 448  

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

Animal hospital 721 306 2,132 1,723 Laboratory 440 319 1,513 1,198 All other 237 236 842 794 Corporate 3,352   2,783   12,060   9,941   4,750   3,644   16,547   13,656   Total share-based compensation $ 4,966   $ 3,764   $ 17,200   $ 14,104    

VCA Inc.Tomas FullerChief Financial Officer(310) 571-6505