VCA Antech, Inc. Reports Fourth Quarter 2007 Results and Affirms its Financial Guidance for 2008

VCA Antech, Inc. (NASDAQ:WOOF), a leading animal healthcare company in the United States, today reported financial results for the quarter ended December 31, 2007, as follows: revenue increased 17.3% to a fourth quarter record of $284.2 million; gross profit increased 12.5% to $69.3 million; operating income increased 17.5% to $47.8 million; net income was $24.6 million; and diluted earnings per common share was $0.29. The fourth quarter of 2007 included a benefit of $3.5 million, or $2.2 million after tax, related to a decrease in our estimated workers’ compensation insurance liability for policy periods prior to 2007. Excluding this benefit from 2007, adjusted diluted earnings per common share increased 13.0% to $0.26. We also reported our financial results for the year ended December 31, 2007, as follows: revenue increased 17.6% to a twelve-month record of $1.16 billion; gross profit increased 18.8% to $321.4 million; operating income increased 21.1% to $233.2 million; net income was $121.0 million; and diluted earnings per share was $1.41. The fourth quarter of 2007 included a benefit of $3.5 million, or $2.2 million after tax, related to a decrease in our estimated workers’ compensation insurance liability for policy periods prior to 2007. The first quarter of 2006 included a tax benefit of $6.8 million due to a favorable outcome of an income tax audit that resulted in a change to our estimated tax liabilities. Excluding these benefits from 2007 and 2006, adjusted diluted earnings per common share increased 19.8% to $1.39. Bob Antin, Chairman and CEO, stated, "VCA Antech had a very strong year highlighted by organic growth in each of its business segments and the execution of a very successful acquisition program. In 2007, laboratory internal revenue growth, adjusted for differences in billing days, was 13.5% and animal hospital same-store revenue growth was 5.2%. In the fourth quarter of 2007, laboratory internal revenue growth, adjusted for differences in billing days, and animal hospital same-store revenue growth, adjusted for differences in business days, was 9.1% and 2.5%, respectively. "Laboratory revenue in the fourth quarter increased 8.4% to $68.6 million driven primarily by internal revenue growth. Gross profit and operating margins in the fourth quarter of 2007 were 45.9% and 38.9%, respectively. Laboratory results for the fourth quarter of 2007 included a benefit of $597,000 related to a decrease in our workers’ compensation insurance liability for policy periods prior to 2007. Excluding this benefit, laboratory adjusted gross profit and operating margins were 45.1% and 38.0%, respectively. "Animal hospital revenue in the fourth quarter increased 21.8% to $209.3 million driven by acquisitions, including Healthy Pet Corp. acquired on June 1, 2007, and same-store revenue growth. Gross profit and operating margins in the fourth quarter of 2007 were 16.0% and 13.3%, respectively. Animal hospital results for the fourth quarter of 2007 included a benefit of $2.8 million related to a decrease in our workers’ compensation insurance liability as previously discussed. Excluding this benefit, animal hospital adjusted gross profit and operating margins were 14.8% and 12.0%, respectively. Animal hospital same-store gross profit margin in the fourth quarter of 2007 was 16.7%. Excluding the impact for the decrease in our workers’ compensation insurance liability, same-store adjusted gross profit margin declined to 15.2% compared to 16.9% in the comparable prior year quarter.” 2008 Financial Guidance We affirm our 2008 financial guidance previously provided on February 4, 2008. Our 2008 financial guidance is as follows: Revenue from $1.30 billion to $1.33 billion; Laboratory internal revenue growth to a range from 8% to 10%; Animal hospital same-store revenue growth to a range from 3% to 5%; Animal hospital acquired revenue from $50.0 million to $60.0 million; Net income from $135.0 million to $139.0 million; and Diluted earnings per common share from $1.55 to $1.60. Non-GAAP Financial Measures We believe investors’ understanding of our total performance is enhanced by disclosing adjusted gross profit, adjusted gross margin, adjusted operating income, adjusted operating margin, adjusted net income and adjusted diluted earnings per common share. We define these adjusted measures as the reported amounts, 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 measures 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 year and quarter ended December 31, 2007, we adjusted our reported amounts for a benefit in the amount of $3.5 million, or $2.2 million after tax, related to a decrease in our estimated workers’ compensation insurance liability recorded during the fourth quarter of 2007. For the year ended December 31, 2006, we adjusted our reported amounts for a $6.8 million tax benefit recorded during the first quarter of 2006. 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 company’s fourth quarter and annual 2007 financial results and our 2008 financial guidance during a conference call today, February 21, 2008, 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 (877) 675-4753. 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, including our financial guidance for fiscal year 2008. Actual results may and likely will differ materially from the guidance provided in this release. Among the important factors that could cause actual results to differ are: a material adverse change in our financial condition or operations; the impact of adverse trends in the general economy on 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 (including Healthy Pet Corp.) 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 and other intangible assets; 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 September 30, 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 (In thousands, except per share amounts)         Three Months Ended Year Ended December 31, December 31, 2007 2006 2007 2006 Revenue: Laboratory $ 68,622 $ 63,281 $ 295,695 $ 258,345 Animal hospital 209,298 171,880 844,344 711,997 Medical technology 13,925 13,957 46,823 39,305 Intercompany   (7,687 )   (6,767 )   (30,717 )   (26,334 )   284,158     242,351     1,156,145     983,313     Direct costs 214,837 180,735 834,724 712,749   Gross profit: Laboratory 31,466 28,362 143,072 119,449 Animal hospital 33,588 28,650 163,053 138,358 Medical technology 4,522 5,141 15,879 14,213 Intercompany   (255 )   (537 )   (583 )   (1,456 )   69,321     61,616     321,421     270,564     Selling, general and administrative expense: Laboratory 4,776 4,667 19,648 17,460 Animal hospital 5,270 5,125 21,562 20,232 Medical technology 3,139 3,028 11,528 10,762 Corporate   7,881     7,885     34,139     29,566     21,066     20,705     86,877     78,020     Write-down and loss on sale of assets   448     217     1,323     17     Operating income 47,807 40,694 233,221 192,527   Interest expense, net 8,129 5,917 29,503 24,240 Other expense 89 32 315 8 Minority interest   694     580     3,755     3,100   Income before provision for income taxes 38,895 34,165 199,648 165,179 Provision for income taxes   14,272     14,825     78,636     59,650   Net income $ 24,623   $ 19,340   $ 121,012   $ 105,529   Diluted earnings per share $ 0.29   $ 0.23   $ 1.41   $ 1.24   Shares used for computing diluted earnings per share   86,080     85,165     85,716     84,882   VCA Antech, Inc. Consolidated Balance Sheets (In thousands)         December 31, 2007 2006 Assets   Current assets: Cash and cash equivalents $ 110,866 $ 45,104 Trade accounts receivable, net 42,650 44,491 Inventory 25,517 21,420 Prepaid expenses and other 15,307 13,492 Deferred income taxes 14,402 14,935 Prepaid income taxes   8,160     13,523 Total current assets 216,902 152,965 Property and equipment, net 214,020 166,033 Other assets: Goodwill 821,967 625,748 Other intangible assets, net 22,373 18,337 Deferred financing costs, net 1,537 979 Other   9,912     7,895 Total assets $ 1,286,711   $ 971,957   Liabilities and Stockholders' Equity   Current liabilities: Current portion of long-term obligations $ 7,886 $ 6,648 Accounts payable 28,092 23,328 Accrued payroll and related liabilities 38,341 33,864 Other accrued liabilities   42,074     30,961 Total current liabilities 116,393 94,801 Long-term obligations, less current portion 552,294 384,067 Deferred income taxes 28,197 39,804 Other liabilities 11,236 13,294 Minority interest 10,207 9,686 Stockholders' equity: Common stock 84 84 Additional paid-in capital 296,037 275,013 Retained earnings 275,598 154,586 Accumulated other comprehensive income (loss)   (3,335 )   622 Total stockholders' equity   568,384     430,305 Total liabilities and stockholders' equity $ 1,286,711   $ 971,957 VCA Antech, Inc. Consolidated Statements of Cash Flows For the Year Ended December 31, 2007 and 2006 (In thousands)         Year Ended December 31, 2007 2006 Cash flows from operating activities: Net income $ 121,012 $ 105,529 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 27,049 22,242 Amortization of debt costs 368 361 Provision for uncollectible accounts 5,053 5,923 Write-down and loss on sale of assets 1,323 17 Share-based compensation 4,584 3,071 Minority interest in income of subsidiaries 3,755 3,100 Distributions to minority interest partners (3,388 ) (3,514 ) Deferred income taxes 10,940 7,688 Excess tax benefit from exercise of stock options (7,866 ) (6,645 ) Other (113 ) (949 ) Changes in operating assets and liabilities: Accounts receivable (2,687 ) (12,308 ) Inventory, prepaid expenses and other assets (4,712 ) (8,594 ) Accounts payable and other accrued liabilities 7 2,989 Accrued payroll and related liabilities 1,154 3,733 Prepaid income taxes   13,897     4,247   Net cash provided by operating activities   170,376     126,890   Cash flows from investing activities: Business acquisitions, net of cash acquired (215,523 ) (50,484 ) Real estate acquired in connection with business acquisitions (7,962 ) (2,872 ) Property and equipment additions (48,714 ) (35,316 ) Proceeds from sale of assets 1,674 598 Other   (780 )   342   Net cash used in investing activities   (271,305 )   (87,732 ) Cash flows from financing activities: Repayment of long-term obligations (8,238 ) (65,414 ) Proceeds from the issuance of long-term obligations 160,000 - Payment of financing costs (926 ) - Proceeds from issuance of common stock under stock option plans 7,989 6,227 Excess tax benefit from exercise of stock options   7,866     6,645   Net cash provided by (used in) financing activities   166,691     (52,542 ) Increase (decrease) in cash and cash equivalents 65,762 (13,384 ) Cash and cash equivalents at beginning of period   45,104     58,488   Cash and cash equivalents at end of period $ 110,866   $ 45,104   VCA Antech, Inc. Supplemental Operating Data (In thousands, except per share amounts)         Table #1 Three Months Ended Year Ended Reconciliation of net income to adjusted net income December 31, December 31,   2007 2006 2007 2006   Net income $ 24,623 $ 19,340 $ 121,012 $ 105,529 Certain significant items: Workers' compensation benefit (3,548 ) - (3,548 ) - Tax benefit   1,381     -     1,381     (6,806 ) Adjusted net income $ 22,456   $ 19,340   $ 118,845   $ 98,723     Table #2 Reconciliation of diluted earnings per share to adjusted diluted earnings per share   Diluted earnings per share $ 0.29 $ 0.23 $ 1.41 $ 1.24 Certain significant items as detailed in Table #1   (0.03 )   -     (0.02 )   (0.08 )   Adjusted diluted earnings per share $ 0.26   $ 0.23   $ 1.39   $ 1.16     Shares used for computing adjusted diluted earnings per share   86,080     85,165     85,716     84,882     Table #3 Reconciliation of gross profit to adjusted gross profit and gross margin to adjusted gross margin   Consolidated revenue $ 284,158   $ 242,351   $ 1,156,145   $ 983,313     Consolidated gross profit $ 69,321 $ 61,616 $ 321,421 $ 270,564 Consolidated gross margin 24.4 % 25.4 % 27.8 % 27.5 % Certain significant item: Workers' compensation benefit   (3,210 )   -     (3,210 )   -   Adjusted consolidated gross profit $ 66,111   $ 61,616   $ 318,211   $ 270,564   Adjusted consolidated gross margin 23.3 % 25.4 % 27.5 % 27.5 % VCA Antech, Inc. Supplemental Operating Data - Continued (In thousands, except per share amounts)         Three Months Ended Year Ended December 31, December 31, Table #3 - Continued 2007 2006 2007 2006   Laboratory revenue $ 68,622   $ 63,281   $ 295,695   $ 258,345     Laboratory gross profit $ 31,466 $ 28,362 $ 143,072 $ 119,449 Laboratory gross margin 45.9 % 44.8 % 48.4 % 46.2 % Certain significant item: Workers' compensation benefit   (493 )   -     (493 )   -   Laboratory adjusted gross profit $ 30,973   $ 28,362   $ 142,579   $ 119,449   Laboratory adjusted gross margin 45.1 % 44.8 % 48.2 % 46.2 %   Animal hospital revenue $ 209,298   $ 171,880   $ 844,344   $ 711,997     Animal hospital gross profit $ 33,588 $ 28,650 $ 163,053 $ 138,358 Animal hospital gross margin 16.0 % 16.7 % 19.3 % 19.4 % Certain significant item: Workers' compensation benefit   (2,655 )   -     (2,655 )   -   Animal hospital adjusted gross profit $ 30,933   $ 28,650   $ 160,398   $ 138,358   Animal hospital adjusted gross margin 14.8 % 16.7 % 19.0 % 19.4 %   Animal hospital same-store revenue $ 173,183   $ 169,041   $ 718,224   $ 683,012     Animal hospital same-store gross profit $ 28,856 $ 28,484 $ 142,288 $ 134,096 Animal hospital same-store gross margin 16.7 % 16.9 % 19.8 % 19.6 % Certain significant item: Workers' compensation benefit   (2,548 )   -     (2,548 )   -   Animal hospital same-store adjusted gross profit $ 26,308   $ 28,484   $ 139,740   $ 134,096   Animal hospital same-store adjusted gross margin 15.2 % 16.9 % 19.5 % 19.6 % VCA Antech, Inc. Supplemental Operating Data - Continued (In thousands, except per share amounts)         Table #4 Reconciliation of operating income to adjusted operating income and operating margin to adjusted operating margin   Three Months Ended Year Ended   December 31, December 31,   2007 2006 2007 2006   Consolidated revenue $ 284,158   $ 242,351   $ 1,156,145   $ 983,313     Consolidated operating income $ 47,807 $ 40,694 $ 233,221 $ 192,527 Consolidated operating margin 16.8 % 16.8 % 20.2 % 19.6 % Certain significant item: Workers' compensation benefit   (3,548 )   -     (3,548 )   -   Consolidated adjusted operating income $ 44,259   $ 40,694   $ 229,673   $ 192,527   Consolidated adjusted operating margin 15.6 % 16.8 % 19.9 % 19.6 %   Laboratory revenue $ 68,622   $ 63,281   $ 295,695   $ 258,345     Laboratory operating income $ 26,682 $ 23,701 $ 123,344 $ 101,981 Laboratory operating margin 38.9 % 37.5 % 41.7 % 39.5 % Certain significant item: Workers' compensation benefit   (597 )   -     (597 )   -   Laboratory adjusted operating income $ 26,085   $ 23,701   $ 122,747   $ 101,981   Laboratory adjusted operating margin 38.0 % 37.5 % 41.5 % 39.5 %   Animal hospital revenue $ 209,298   $ 171,880   $ 844,344   $ 711,997     Animal hospital operating income $ 27,927 $ 23,323 $ 140,344 $ 118,138 Animal hospital operating margin 13.3 % 13.6 % 16.6 % 16.6 % Certain significant item: Workers' compensation benefit   (2,776 )   -     (2,776 )   -   Animal hospital adjusted operating income $ 25,151   $ 23,323   $ 137,568   $ 118,138   Animal hospital adjusted operating margin 12.0 % 13.6 % 16.3 % 16.6 % VCA Antech, Inc. Supplemental Operating Data - Continued (In thousands, except per share amounts)           Table #5 December 31, Selected consolidated balance sheet data 2007 2006   Debt: Revolving credit facility $ - $ - Senior term notes 527,675 372,668 Other debt and capital leases   32,505     18,047   Total debt $ 560,180   $ 390,715     Three Months Ended Year Ended Table #6 December 31, December 31, Selected expense data 2007 2006 2007 2006   Rent expense $ 9,755   $ 8,359   $ 36,864   $ 32,058     Depreciation and amortization included in direct costs: Laboratory $ 1,713 $ 1,256 $ 6,356 $ 4,584 Animal hospital 4,825 3,875 17,353 14,455 Medical technology 304 283 1,201 1,174 Intercompany   (105 )   (93 )   (386 )   (202 ) 6,737 5,321 24,524 20,011 Depreciation and amortization included in selling, general and administrative expense   548     574     2,525     2,231   Total depreciation and amortization $ 7,285   $ 5,895   $ 27,049   $ 22,242     Share-based compensation included in direct costs: Laboratory $ 159 $ 164 $ 661 $ 656     Share-based compensation included in selling, general and administrative expense: Laboratory 179 127 731 509 Animal hospital 297 269 1,193 1,076 Medical technology 30 - 111 - Corporate   490     185     1,888     830     996     581     3,923     2,415   Total share-based compensation $ 1,155   $ 745   $ 4,584   $ 3,071