WOOF-2014.3.31-10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________________
FORM 10-Q
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2014
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¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number: 001-16783
___________________________________________________
VCA Antech, Inc.
(Exact name of registrant as specified in its charter)
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| | |
Delaware | | 95-4097995 |
(State or other jurisdiction of | | (I.R.S. Employer |
incorporation or organization) | | Identification No.) |
12401 West Olympic Boulevard
Los Angeles, California 90064-1022
(Address of principal executive offices)
(310) 571-6500
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ].
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.:
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Large accelerated filer [X] | | Accelerated filer [ ] |
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Non-accelerated filer [ ] | | Smaller reporting company [ ] |
(Do not check if a smaller reporting company) | | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X].
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: common stock, $0.001 par value, 88,302,956 shares as of May 5, 2014.
VCA Antech, Inc. and Subsidiaries
Form 10-Q
March 31, 2014
Table of Contents
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| Condensed, Consolidated Statements of Income for the Three Months Ended March 31, 2014 and 2013 | |
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| Condensed, Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2014 and 2013 | |
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| Condensed, Consolidated Statements of Equity for the Three Months Ended March 31, 2014 and 2013 | |
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| Condensed, Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2014 and 2013 | |
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PART I. | FINANCIAL INFORMATION |
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ITEM 1. | FINANCIAL STATEMENTS |
VCA Antech, Inc. and Subsidiaries
Condensed, Consolidated Balance Sheets
(Unaudited)
(In thousands, except par value)
|
| | | | | | | |
| March 31, 2014 | | December 31, 2013 |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 137,288 |
| | $ | 125,029 |
|
Trade accounts receivable, less allowance for uncollectible accounts of $17,359 and $17,702 at March 31, 2014 and December 31, 2013, respectively | 64,520 |
| | 59,900 |
|
Inventory | 54,227 |
| | 55,067 |
|
Prepaid expenses and other | 23,713 |
| | 25,417 |
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Deferred income taxes | 29,075 |
| | 28,907 |
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Prepaid income taxes | 454 |
| | 15,434 |
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Total current assets | 309,277 |
| | 309,754 |
|
Property and equipment, net | 449,434 |
| | 448,366 |
|
Goodwill | 1,340,054 |
| | 1,330,917 |
|
Other intangible assets, net | 85,128 |
| | 86,671 |
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Notes receivable, net | 3,225 |
| | 3,454 |
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Deferred financing costs, net | 2,683 |
| | 2,987 |
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Other | 60,130 |
| | 55,632 |
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Total assets | $ | 2,249,931 |
| | $ | 2,237,781 |
|
Liabilities and Equity | | | |
Current liabilities: | | | |
Current portion of long-term debt | $ | 50,839 |
| | $ | 51,087 |
|
Accounts payable | 36,240 |
| | 36,962 |
|
Accrued payroll and related liabilities | 63,535 |
| | 57,337 |
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Other accrued liabilities | 54,830 |
| | 58,762 |
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Total current liabilities | 205,444 |
| | 204,148 |
|
Long-term debt, less current portion | 555,592 |
| | 568,558 |
|
Deferred income taxes | 100,033 |
| | 100,099 |
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Other liabilities | 35,953 |
| | 36,758 |
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Total liabilities | 897,022 |
| | 909,563 |
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Commitments and contingencies |
| |
|
Redeemable noncontrolling interests | 11,052 |
| | 10,678 |
|
Preferred stock, par value $0.001, 11,000 shares authorized, none outstanding | — |
| | — |
|
VCA Antech, Inc. stockholders’ equity: | | | |
Common stock, par value $0.001, 175,000 shares authorized, 88,288 and 88,508 shares outstanding as of March 31, 2014 and December 31, 2013, respectively | 88 |
| | 89 |
|
Additional paid-in capital | 380,267 |
| | 384,721 |
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Retained earnings | 962,763 |
| | 928,720 |
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Accumulated other comprehensive loss | (11,283 | ) | | (6,190 | ) |
Total VCA Antech, Inc. stockholders’ equity | 1,331,835 |
| | 1,307,340 |
|
Noncontrolling interests | 10,022 |
| | 10,200 |
|
Total equity | 1,341,857 |
| | 1,317,540 |
|
Total liabilities and equity | $ | 2,249,931 |
| | $ | 2,237,781 |
|
The accompanying notes are an integral part of these condensed, consolidated financial statements.
1
VCA Antech, Inc. and Subsidiaries
Condensed, Consolidated Income Statements
(Unaudited)
(In thousands, except per share amounts)
|
| | | | | | | |
| Three Months Ended March 31, |
| 2014 | | 2013 |
Revenue | $ | 449,507 |
| | $ | 438,606 |
|
Direct costs | 348,056 |
| | 341,683 |
|
Gross profit | 101,451 |
| | 96,923 |
|
Selling, general and administrative expense | 41,440 |
| | 39,846 |
|
Net (gain) loss on sale or disposal of assets | (1,221 | ) | | 1,726 |
|
Operating income | 61,232 |
| | 55,351 |
|
Interest expense, net | 4,167 |
| | 4,307 |
|
Other income | (53 | ) | | (9 | ) |
Income before provision for income taxes | 57,118 |
| | 51,053 |
|
Provision for income taxes | 22,203 |
| | 19,230 |
|
Net income | 34,915 |
| | 31,823 |
|
Net income attributable to noncontrolling interests | 872 |
| | 1,338 |
|
Net income attributable to VCA Antech, Inc. | $ | 34,043 |
| | $ | 30,485 |
|
Basic earnings per share | $ | 0.39 |
| | $ | 0.34 |
|
Diluted earnings per share | $ | 0.38 |
| | $ | 0.34 |
|
Weighted-average shares outstanding for basic earnings per share | 88,338 |
| | 88,400 |
|
Weighted-average shares outstanding for diluted earnings per share | 89,421 |
| | 89,379 |
|
The accompanying notes are an integral part of these condensed, consolidated financial statements.
2
VCA Antech, Inc. and Subsidiaries
Condensed, Consolidated Statements of Comprehensive Income
(Unaudited)
(In thousands)
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| | | | | | | |
| Three Months Ended March 31, |
| 2014 | | 2013 |
Net income(1) | $ | 34,915 |
| | $ | 31,823 |
|
Other comprehensive income: | | | |
Foreign currency translation adjustments | (5,521 | ) | | (2,744 | ) |
Other comprehensive loss | (5,521 | ) | | (2,744 | ) |
Total comprehensive income | 29,394 |
| | 29,079 |
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Comprehensive income attributable to noncontrolling interests(1) | 444 |
| | 1,338 |
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Comprehensive income attributable to VCA Antech, Inc. | $ | 28,950 |
| | $ | 27,741 |
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____________________________
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(1) | Includes approximately $0.5 million and $0.7 million of net income related to redeemable and mandatorily redeemable noncontrolling interests for the three months ended March 31, 2014 and 2013, respectively. |
The accompanying notes are an integral part of these condensed, consolidated financial statements.
3
VCA Antech, Inc. and Subsidiaries
Condensed, Consolidated Statements of Equity
(Unaudited)
(In thousands)
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| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income | | Noncontrolling Interests | | Total |
| Shares | | Amount | | | | | |
Balances, December 31, 2012 | 88,372 |
| | $ | 88 |
| | $ | 390,359 |
| | $ | 791,209 |
| | $ | 1,847 |
| | $ | 10,890 |
| | $ | 1,194,393 |
|
Net income (excludes $238 and $473 related to redeemable and mandatorily redeemable noncontrolling interests, respectively). | — |
| | — |
| | — |
| | 30,485 |
| | — |
| | 627 |
| | 31,112 |
|
Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | (2,744 | ) | | — |
| | (2,744 | ) |
Distribution to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | (452 | ) | | (452 | ) |
Purchase of noncontrolling interests | — |
| | — |
| | (470 | ) | | — |
| | — |
| | (4,082 | ) | | (4,552 | ) |
Share-based compensation | — |
| | — |
| | 3,770 |
| | — |
| | — |
| | — |
| | 3,770 |
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Issuance of common stock under stock incentive plans | 128 |
| | — |
| | 1,876 |
| | — |
| | — |
| | — |
| | 1,876 |
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Stock repurchases | (6 | ) | | — |
| | (59 | ) | | — |
| | — |
| | — |
| | (59 | ) |
Excess tax benefit from stock options | — |
| | — |
| | 62 |
| | — |
| | — |
| | — |
| | 62 |
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Tax benefit and other from stock options and awards | — |
| | — |
| | 26 |
| | — |
| | — |
| | — |
| | 26 |
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Balances, March 31, 2013 | 88,494 |
| | $ | 88 |
| | $ | 395,564 |
| | $ | 821,694 |
| | $ | (897 | ) | | $ | 6,983 |
| | $ | 1,223,432 |
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| | | | | | | | | | | | | |
Balances, December 31, 2013 | 88,508 |
| | $ | 89 |
| | $ | 384,721 |
| | $ | 928,720 |
| | $ | (6,190 | ) | | $ | 10,200 |
| | $ | 1,317,540 |
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Net income (excludes $151 and $368 related to redeemable and mandatorily redeemable noncontrolling interests, respectively). | — |
| | — |
| | — |
| | 34,043 |
| | — |
| | 353 |
| | 34,396 |
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Other comprehensive loss (excludes $318 related to mandatorily redeemable noncontrolling interests). | — |
| | — |
| | — |
| | — |
| | (5,093 | ) | | (110 | ) | | (5,203 | ) |
Dissolution of noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | 81 |
| | 81 |
|
Distribution to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | (502 | ) | | (502 | ) |
Purchase of noncontrolling interests | — |
| | — |
| | 30 |
| | — |
| | — |
| | — |
| | 30 |
|
Share-based compensation | — |
| | — |
| | 4,544 |
| | — |
| | — |
| | — |
| | 4,544 |
|
Issuance of common stock under stock incentive plans | 87 |
| | — |
| | 372 |
| | — |
| | — |
| | — |
| | 372 |
|
Stock repurchases | (307 | ) | | (1 | ) | | (9,792 | ) | | — |
| | — |
| | — |
| | (9,793 | ) |
Excess tax benefit from stock options | — |
| | — |
| | 392 |
| | — |
| | — |
| | — |
| | 392 |
|
Balances, March 31, 2014 | 88,288 |
| | $ | 88 |
| | $ | 380,267 |
| | $ | 962,763 |
| | $ | (11,283 | ) | | $ | 10,022 |
| | $ | 1,341,857 |
|
The accompanying notes are an integral part of these condensed, consolidated financial statements.
4
VCA Antech, Inc. and Subsidiaries Condensed, Consolidated Statements of Cash Flows (Unaudited) (In thousands)
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| | | | | | | |
| Three Months Ended March 31, |
| 2014 | | 2013 |
Cash flows from operating activities: | | | |
Net income | $ | 34,915 |
| | $ | 31,823 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization | 19,767 |
| | 18,239 |
|
Amortization of debt issue costs | 304 |
| | 314 |
|
Provision for uncollectible accounts | 890 |
| | 1,093 |
|
Net (gain) loss on disposal of assets | (1,221 | ) | | 1,726 |
|
Share-based compensation | 4,544 |
| | 3,770 |
|
Deferred income taxes | — |
| | 2,868 |
|
Excess tax benefit from exercise of stock options | (392 | ) | | (62 | ) |
Other | (905 | ) | | (414 | ) |
Changes in operating assets and liabilities: | | | |
Trade accounts receivable | (5,825 | ) | | (16,126 | ) |
Inventory, prepaid expense and other assets | (1,389 | ) | | (2,491 | ) |
Accounts payable and other accrued liabilities | (3,773 | ) | | 12,127 |
|
Accrued payroll and related liabilities | 6,247 |
| | 9,149 |
|
Income taxes | 15,165 |
| | 13,235 |
|
Net cash provided by operating activities | 68,327 |
| | 75,251 |
|
Cash flows from investing activities: | | | |
Business acquisitions, net of cash acquired | (17,295 | ) | | (6,756 | ) |
Real estate acquired in connection with business acquisitions | — |
| | (510 | ) |
Capital expenditures | (16,619 | ) | | (17,969 | ) |
Proceeds from sale of assets | 859 |
| | 177 |
|
Other | 520 |
| | (115 | ) |
Net cash used in investing activities | (32,535 | ) | | (25,173 | ) |
Cash flows from financing activities: | | | |
Repayment of debt | (12,806 | ) | | (8,733 | ) |
Distributions to noncontrolling interest partners | (1,090 | ) | | (1,197 | ) |
Purchase of noncontrolling interests | (326 | ) | | (5,032 | ) |
Proceeds from issuance of common stock under stock option plans | 372 |
| | 1,876 |
|
Excess tax benefit from exercise of stock options | 392 |
| | 62 |
|
Stock repurchases | (9,793 | ) | | (59 | ) |
Net cash used in financing activities | (23,251 | ) | | (13,083 | ) |
Effect of currency exchange rate changes on cash and cash equivalents | (282 | ) | | (144 | ) |
Increase in cash and cash equivalents | 12,259 |
| | 36,851 |
|
Cash and cash equivalents at beginning of period | 125,029 |
| | 68,435 |
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Cash and cash equivalents at end of period | $ | 137,288 |
| | $ | 105,286 |
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| | | |
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The accompanying notes are an integral part of these condensed, consolidated financial statements.
5
VCA Antech, Inc. and Subsidiaries Condensed, Consolidated Statements of Cash Flows - Continued (Unaudited) (In thousands)
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| | | | | | | |
| Three Months Ended March 31, |
| 2014 | | 2013 |
Supplemental disclosures of cash flow information: | | | |
Interest paid | $ | 3,708 |
| | $ | 3,999 |
|
Income taxes paid | $ | 6,853 |
| | $ | 3,808 |
|
| | | |
Supplemental schedule of noncash investing and financing activities: | | | |
Detail of acquisitions: | | | |
Fair value of assets acquired | $ | 18,550 |
| | $ | 6,969 |
|
Noncontrolling interest | (855 | ) | | — |
|
Cash paid for acquisitions, net of acquired cash | (17,295 | ) | | (6,756 | ) |
Contingent consideration | — |
| | (53 | ) |
Holdbacks | (400 | ) | | (160 | ) |
Liabilities assumed | $ | — |
| | $ | — |
|
The accompanying notes are an integral part of these condensed, consolidated financial statements.
6
VCA Antech, Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements
March 31, 2014
(Unaudited)
Our company, VCA Antech, Inc. (“VCA”) is a Delaware corporation formed in 1986 and is based in Los Angeles, California. We are an animal healthcare company with the following four operating segments: animal hospitals (“Animal Hospital”), veterinary diagnostic laboratories (“Laboratory”), veterinary medical technology (“Medical Technology”), and Vetstreet. Our operating segments are aggregated into two reportable segments “Animal Hospital” and “Laboratory”. Our Medical Technology and Vetstreet operating segments are combined in our “All Other” category. See Footnote 8, “Lines of Business” within these notes to unaudited condensed, consolidated financial statements.
Our animal hospitals offer a full range of general medical and surgical services for companion animals. Our animal hospitals treat diseases and injuries, provide pharmaceutical products and perform a variety of pet-wellness programs, including health examinations, diagnostic testing, vaccinations, spaying, neutering and dental care. At March 31, 2014, we operated or managed 608 animal hospitals throughout 41 states and four Canadian provinces.
We operate a full-service veterinary diagnostic laboratory network serving all 50 states and certain areas in Canada. Our laboratory network provides sophisticated testing and consulting services used by veterinarians in the detection, diagnosis, evaluation, monitoring, treatment and prevention of diseases and other conditions affecting animals. At March 31, 2014, we operated 57 laboratories of various sizes located strategically throughout the United States and Canada.
Our Medical Technology business sells digital radiography and ultrasound imaging equipment, provides education and training on the use of that equipment, provides consulting and mobile imaging services, and sells software and ancillary services to the veterinary market.
Our Vetstreet business provides several different services to the veterinary community including, online communications, professional education, marketing solutions and a home delivery platform for independent animal hospitals.
The practice of veterinary medicine is subject to seasonal fluctuation. In particular, demand for veterinary services is significantly higher during the warmer months because pets spend a greater amount of time outdoors where they are more likely to be injured and are more susceptible to disease and parasites. In addition, use of veterinary services may be affected by levels of flea infestation, heartworms and ticks, and the number of daylight hours.
Our accompanying unaudited, condensed, consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information and in accordance with the rules and regulations of the United States Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the disclosures required by GAAP for annual financial statements as permitted under applicable rules and regulations. In the opinion of management, all normal recurring adjustments considered necessary for a fair presentation have been included. The results of operations for the three months ended March 31, 2014 are not necessarily indicative of the results to be expected for the full year ending December 31, 2014. For further information, refer to our consolidated financial statements and notes thereto included in our 2013 Annual Report on Form 10-K.
The preparation of our condensed, consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in our condensed, consolidated financial statements and notes thereto. Actual results could differ from those estimates.
VCA Antech, Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
March 31, 2014
(Unaudited)
| |
3. | Goodwill and Other Intangible Assets |
Goodwill
The following table presents the changes in the carrying amount of our goodwill for the three months ended March 31, 2014 (in thousands):
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| | | | | | | | | | | | | | | |
| Animal Hospital | | Laboratory | | All Other | | Total |
Balance as of December 31, 2013 | | | | | | | |
Goodwill | $ | 1,216,581 |
| | $ | 96,871 |
| | $ | 138,276 |
| | $ | 1,451,728 |
|
Accumulated impairment losses | — |
| | — |
| | (120,811 | ) | | (120,811 | ) |
Subtotal | 1,216,581 |
| | 96,871 |
| | 17,465 |
| | 1,330,917 |
|
Goodwill acquired | 15,115 |
| | — |
| | — |
| | 15,115 |
|
Foreign translation adjustment | (4,030 | ) | | (23 | ) | | — |
| | (4,053 | ) |
Other (1) | (1,925 | ) | | — |
| | — |
| | (1,925 | ) |
Balance as of March 31, 2014 | | | | | | | |
Goodwill | 1,225,741 |
| | 96,848 |
| | 138,276 |
| | 1,460,865 |
|
Accumulated impairment losses | — |
| | — |
| | (120,811 | ) | | (120,811 | ) |
Subtotal | $ | 1,225,741 |
| | $ | 96,848 |
| | $ | 17,465 |
| | $ | 1,340,054 |
|
____________________________
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(1) | "Other" primarily includes measurement period adjustments and an immaterial write-off related to a sale of an animal hospital. |
Other Intangible Assets
Our acquisition related amortizable intangible assets at March 31, 2014 and December 31, 2013 are as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| As of March 31, 2014 | | As of December 31, 2013 |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Non-contractual customer relationships | $ | 109,330 |
| | $ | (44,281 | ) | | $ | 65,049 |
| | $ | 109,842 |
| | $ | (41,895 | ) | | $ | 67,947 |
|
Covenants not-to-compete | 8,718 |
| | (4,361 | ) | | 4,357 |
| | 8,843 |
| | (4,661 | ) | | 4,182 |
|
Favorable lease assets | 9,537 |
| | (4,535 | ) | | 5,002 |
| | 7,458 |
| | (4,373 | ) | | 3,085 |
|
Trademarks | 12,655 |
| | (4,308 | ) | | 8,347 |
| | 13,115 |
| | (4,194 | ) | | 8,921 |
|
Contracts | 608 |
| | (326 | ) | | 282 |
| | 608 |
| | (305 | ) | | 303 |
|
Technology | 5,240 |
| | (3,153 | ) | | 2,087 |
| | 5,240 |
| | (3,015 | ) | | 2,225 |
|
Client lists | 50 |
| | (46 | ) | | 4 |
| | 50 |
| | (42 | ) | | 8 |
|
Total | $ | 146,138 |
| | $ | (61,010 | ) | | $ | 85,128 |
| | $ | 145,156 |
| | $ | (58,485 | ) | | $ | 86,671 |
|
VCA Antech, Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
March 31, 2014
(Unaudited)
| |
3. | Goodwill and Other Intangible Assets, continued |
The following table summarizes our aggregate amortization expense related to acquisition related intangible assets (in thousands):
|
| | | | | | | |
| Three Months Ended March 31, |
| 2014 | | 2013 |
Aggregate amortization expense | $ | 5,147 |
| | $ | 5,044 |
|
The estimated amortization expense related to acquisition related intangible assets for the remainder of 2014 and each of the succeeding years thereafter, as of March 31, 2014, is as follows (in thousands):
|
| | | |
Remainder of 2014 | $ | 15,651 |
|
2015 | 19,094 |
|
2016 | 16,162 |
|
2017 | 9,924 |
|
2018 | 6,350 |
|
Thereafter | 17,947 |
|
Total | $ | 85,128 |
|
The table below reflects the activity related to the acquisitions and dispositions of our animal hospitals and laboratories during the three months ended March 31, 2014 and 2013, respectively:
|
| | | | | |
| Three Months Ended March 31, |
| 2014 | | 2013 |
Animal Hospitals: | | | |
Acquisitions | 4 |
| | 3 |
|
Acquisitions, merged | (1 | ) | | — |
|
Sold, closed or merged | (4 | ) | | (8 | ) |
Net decrease | (1 | ) | | (5 | ) |
| | | |
Laboratories: | | | |
Acquisitions | — |
| | 1 |
|
Created | 1 |
| | — |
|
Net increase | 1 |
| | 1 |
|
VCA Antech, Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
March 31, 2014
(Unaudited)
| |
4. | Acquisitions, continued |
Animal Hospital Acquisitions
The purchase price allocations for the acquisitions in the table below are preliminary. However, adjustments, if any, are not expected to be material. The measurement periods for purchase price allocations do not exceed 12 months from the acquisition date. The following table summarizes the aggregate consideration for our independent animal hospitals acquired during the three months ended March 31, 2014 and 2013, respectively, (in thousands):
|
| | | | | | | |
| Three Months Ended March 31, |
| 2014 | | 2013 |
Consideration: | | | |
Cash | $ | 17,295 |
| | $ | 6,756 |
|
Holdbacks | 400 |
| | 160 |
|
Earnout contingent consideration | — |
| | 53 |
|
Fair value of total consideration transferred | $ | 17,695 |
| | $ | 6,969 |
|
| | | |
Allocation of the Purchase Price: | | | |
Tangible assets | $ | 701 |
| | $ | 491 |
|
Identifiable intangible assets | 2,734 |
| | 1,506 |
|
Goodwill (1) | 15,115 |
| | 4,972 |
|
Fair value of assets acquired | $ | 18,550 |
| | $ | 6,969 |
|
Noncontrolling interest | (855 | ) | | — |
|
Total | $ | 17,695 |
| | $ | 6,969 |
|
____________________________
| |
(1) | We expect that $10.3 million and $4.1 million of the goodwill recorded for these acquisitions, as of March 31, 2014 and 2013, respectively, will be fully deductible for income tax purposes. |
In addition to the purchase price listed above, there were no cash payments made for real estate acquired in connection with our purchase of animal hospitals for the three months ended March 31, 2014. There were $0.5 million in cash payments made for real estate for the three months ended March 31, 2013.
VCA Antech, Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
March 31, 2014
(Unaudited)
| |
5. | Other Accrued Liabilities |
Other accrued liabilities consisted of the following (in thousands):
|
| | | | | | | |
| As of March 31, 2014 | | As of December 31, 2013 |
Deferred revenue | $ | 11,102 |
| | $ | 11,190 |
|
Accrued health insurance | 4,241 |
| | 5,479 |
|
Deferred rent | 4,023 |
| | 4,331 |
|
Accrued other insurance | 4,048 |
| | 4,381 |
|
Miscellaneous accrued taxes(1) | 3,574 |
| | 2,804 |
|
Accrued workers' compensation | 3,757 |
| | 3,267 |
|
Holdbacks and earnouts | 3,150 |
| | 3,040 |
|
Customer deposits | 2,830 |
| | 3,075 |
|
Accrued consulting fees | 3,123 |
| | 3,028 |
|
Accrued lease payments | 2,268 |
| | 2,547 |
|
Other | 12,714 |
| | 15,620 |
|
| $ | 54,830 |
| | $ | 58,762 |
|
____________________________
(1) Includes property, sales and use taxes.
6.Fair Value Measurements
Fair Value of Financial Instruments
The FASB accounting guidance requires disclosure of fair value information about financial instruments, whether or not they are recognized in the accompanying condensed, consolidated balance sheets. Fair value as defined by the guidance is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value estimates of financial instruments are not necessarily indicative of the amounts we might pay or receive in actual market transactions. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
Cash and Cash Equivalents. These balances include cash and cash equivalents with maturities of less than three months. The carrying amount approximates fair value due to the short-term maturities of these instruments.
Receivables, Less Allowance for Doubtful Accounts, Accounts Payable and Certain Other Accrued Liabilities. Due to their short-term nature, fair value approximates carrying value.
Long-Term Debt. The fair value of debt at March 31, 2014 and December 31, 2013 is based upon the ask price quoted from an external source, which is considered a Level 2 input.
The following table reflects the carrying value and fair value of our variable-rate long-term debt (in thousands):
|
| | | | | | | | | | | | | | | |
| As of March 31, 2014 | | As of December 31, 2013 |
| Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
Variable-rate long-term debt | $ | 545,078 |
| | $ | 545,078 |
| | $ | 556,914 |
| | $ | 556,914 |
|
At March 31, 2014, we did not have any material applicable nonrecurring measurements of nonfinancial assets and nonfinancial liabilities.
VCA Antech, Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
March 31, 2014
(Unaudited)
7. Calculation of Earnings per Share
Basic earnings per share is calculated by dividing net income by the weighted-average number of shares outstanding during the period. Diluted earnings per share is calculated by dividing net income attributable to VCA Antech, Inc. by the weighted-average number of common shares outstanding, after giving effect to all dilutive potential common shares outstanding during the period. Basic and diluted earnings per share were calculated as follows (in thousands, except per share amounts):
|
| | | | | | | |
| Three Months Ended March 31, |
| 2014 | | 2013 |
Net income attributable to VCA Antech, Inc. | $ | 34,043 |
| | $ | 30,485 |
|
Weighted-average common shares outstanding: | | | |
Basic | 88,338 |
| | 88,400 |
|
Effect of dilutive potential common shares: | | | |
Stock options | 254 |
| | 284 |
|
Nonvested shares and units | 829 |
| | 695 |
|
Diluted | 89,421 |
| | 89,379 |
|
Basic earnings per share | $ | 0.39 |
| | $ | 0.34 |
|
Diluted earnings per share | $ | 0.38 |
| | $ | 0.34 |
|
There were no potential common shares excluded from the computation of diluted earnings per share for the three months ended March 31, 2014. For the three months ended March 31, 2013, potential common shares of 497,826 were excluded from the computation of diluted earnings per share because their inclusion would have had an antidilutive effect.
Our reportable segments are Animal Hospital and Laboratory. Our Animal Hospital segment provides veterinary services for companion animals and sells related retail and pharmaceutical products. Our Laboratory segment provides diagnostic laboratory testing services for veterinarians, both associated with our animal hospitals and those independent of us. Our other operating segments included in “All Other” in the following tables are our medical technology business, which sells digital radiography and ultrasound imaging equipment, related computer hardware, software and ancillary services to the veterinary market and our Vetstreet business, which provides online and printed communications, professional education, marketing solutions to the veterinary community and an ecommerce platform for independent animal hospitals. These operating segments do not meet the quantitative requirements for reportable segments. Our operating segments are strategic business units that have different services, products and/or functions. The segments are managed separately because each is a distinct and different business venture with unique challenges, risks and rewards. We also operate a corporate office that provides general and administrative support services for our other segments.
The accounting policies of our segments are essentially the same as those described in the summary of significant accounting policies included in our 2013 Annual Report on Form 10-K. We evaluate the performance of our segments based on gross profit and operating income. For purposes of reviewing the operating performance of our segments, all intercompany sales and purchases are generally accounted for as if they were transactions with independent third parties at current market prices.
The segment information presented includes a reclassification to eliminate discounts on certain Laboratory contracts that were previously allocated to the All Other operating segment from Eliminations in the prior year financial data. These reclasses better represent the corresponding discounts and thus the operating results of our standalone entities. These changes in segment reporting only revised the presentation within the table below and did not impact our condensed, consolidated financial statements for any period presented.
VCA Antech, Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
March 31, 2014
(Unaudited)
| |
8. | Lines of Business, continued |
The following is a summary of certain financial data for each of our segments (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Animal Hospital | | Laboratory | | All Other | | Corporate | |
Eliminations | | Total |
Three Months Ended March 31, 2014 | | | | | | | | | | | |
External revenue | $ | 351,588 |
| | $ | 74,783 |
| | $ | 22,201 |
| | $ | — |
| | $ | 935 |
| | $ | 449,507 |
|
Intercompany revenue | — |
| | 13,751 |
| | 5,920 |
| | — |
| | (19,671 | ) | | — |
|
Total revenue | 351,588 |
| | 88,534 |
| | 28,121 |
| | — |
| | (18,736 | ) | | 449,507 |
|
Direct costs | 302,788 |
| | 45,503 |
| | 18,152 |
| | — |
| | (18,387 | ) | | 348,056 |
|
Gross profit | 48,800 |
| | 43,031 |
| | 9,969 |
| | — |
| | (349 | ) | | 101,451 |
|
Selling, general and administrative expense | 9,128 |
| | 8,018 |
| | 8,348 |
| | 15,946 |
| | — |
| | 41,440 |
|
Operating income (loss) before sale or disposal of assets | 39,672 |
| | 35,013 |
| | 1,621 |
| | (15,946 | ) | | (349 | ) | | 60,011 |
|
Net loss (gain) on sale or disposal of assets | 168 |
| | (71 | ) | | (1,184 | ) | | (134 | ) | | — |
| | (1,221 | ) |
Operating income (loss) | $ | 39,504 |
| | $ | 35,084 |
| | $ | 2,805 |
| | $ | (15,812 | ) | | $ | (349 | ) | | $ | 61,232 |
|
Depreciation and amortization | $ | 14,742 |
| | $ | 2,535 |
| | $ | 2,136 |
| | $ | 819 |
| | $ | (465 | ) | | $ | 19,767 |
|
Capital expenditures | $ | 13,068 |
| | $ | 1,981 |
| | $ | 758 |
| | $ | 1,411 |
| | $ | (599 | ) | | $ | 16,619 |
|
Three Months Ended March 31, 2013 | | | | | | | | | | | |
External revenue | $ | 340,615 |
| | $ | 73,638 |
| | $ | 23,628 |
| | $ | — |
| | $ | 725 |
| | $ | 438,606 |
|
Intercompany revenue | — |
| | 13,697 |
| | 4,895 |
| | — |
| | (18,592 | ) | | — |
|
Total revenue | 340,615 |
| | 87,335 |
| | 28,523 |
| | — |
| | (17,867 | ) | | 438,606 |
|
Direct costs | 295,416 |
| | 44,870 |
| | 18,889 |
| | — |
| | (17,492 | ) | | 341,683 |
|
Gross profit | 45,199 |
| | 42,465 |
| | 9,634 |
| | — |
| | (375 | ) | | 96,923 |
|
Selling, general and administrative expense | 8,325 |
| | 8,005 |
| | 8,914 |
| | 14,602 |
| | — |
| | 39,846 |
|
Operating income (loss) before sale or disposal of assets | 36,874 |
| | 34,460 |
| | 720 |
| | (14,602 | ) | | (375 | ) | | 57,077 |
|
Net loss (gain) on sale or disposal of assets | 1,729 |
| | (5 | ) | | 2 |
| | — |
| | — |
| | 1,726 |
|
Operating income (loss) | $ | 35,145 |
| | $ | 34,465 |
| | $ | 718 |
| | $ | (14,602 | ) | | $ | (375 | ) | | $ | 55,351 |
|
Depreciation and amortization | $ | 13,387 |
| | $ | 2,507 |
| | $ | 1,965 |
| | $ | 819 |
| | $ | (439 | ) | | $ | 18,239 |
|
Capital expenditures | $ | 14,441 |
| | $ | 1,918 |
| | $ | 1,333 |
| | $ | 640 |
| | $ | (363 | ) | | $ | 17,969 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
At March 31, 2014 | | | | | | | | | | | |
Total assets | $ | 1,864,993 |
| | $ | 261,178 |
| | $ | 94,145 |
| | $ | 70,046 |
| | $ | (40,431 | ) | | $ | 2,249,931 |
|
At December 31, 2013 | | | | | | | | | | | |
Total assets | $ | 1,854,609 |
| | $ | 247,591 |
| | $ | 96,245 |
| | $ | 77,153 |
| | $ | (37,817 | ) | | $ | 2,237,781 |
|
VCA Antech, Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
March 31, 2014
(Unaudited)
| |
9. | Commitments and Contingencies |
We have certain commitments including operating leases, purchase agreements and acquisition agreements. These items are discussed in detail in our consolidated financial statements and notes thereto included in our 2013 Annual Report on Form 10-K. We also have contingencies as follows:
We have contractual arrangements in connection with certain acquisitions, whereby additional cash may be paid to former owners of acquired companies upon attainment of specified financial criteria as set forth in the respective agreements. The amount to be paid cannot be determined until the earn-out periods have expired and the attainment of criteria is established. If the specified financial criteria are attained, we will be obligated to pay an additional $2.3 million.
In accordance with business combination accounting guidance, contingent consideration, such as earn-out agreements, are recognized as part of the consideration transferred on the acquisition date. A liability is initially recorded based upon its acquisition date fair value. The changes in fair value are recognized in earnings where applicable for each reporting period. The fair value is determined using a contractually stated formula using either a multiple of revenue or Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA"). The formulas used to determine the estimated fair value are Level 3 inputs. The changes in fair value were immaterial to our condensed, consolidated financial statements when taken as a whole. We recorded $1.9 million and $2.2 million in earnout liabilities as of March 31, 2014 and December 31, 2013, respectively, which are included in other accrued liabilities in our consolidated balance sheets.
On May 29, 2013, a former veterinary assistant at one of our animal hospitals filed a purported class action lawsuit against us in the Superior Court of the State of California for the County of Los Angeles, titled Jorge Duran vs. VCA Animal Hospitals, Inc., et. al. The lawsuit seeks to assert claims on behalf of current and former veterinary assistants employed by us in California, and alleges, among other allegations, that we improperly failed to pay overtime wages, improperly failed to provide proper meal and rest periods, and engaged in unfair business practices. The lawsuit seeks damages, statutory penalties, and other relief, including attorneys' fees and costs.
Additionally, on July 12, 2013, an individual who provided courier services with respect to our laboratory clients in California filed a purported class action lawsuit against us in the Superior Court of the State of California for the County of Santa Clara - San Jose Branch, titled Carlos Lopez vs. Logistics Delivery Solutions, LLC, Antech Diagnostics, Inc., et. al. Logistics Delivery Solutions, LLC, a co-defendant in the lawsuit, is a company with which Antech Diagnostics has contracted to provide courier services in California. The lawsuit seeks to assert claims on behalf of individuals who were engaged by Logistics Delivery Solutions, LLC to perform such courier services and alleges, among other allegations, that Logistics Delivery Solutions, and Antech Diagnostics improperly classified the plaintiffs as independent contractors, improperly failed to pay overtime wages, and improperly failed to provide proper meal and rest periods. The lawsuit seeks damages, statutory penalties, and other relief, including attorneys' fees and costs.
We are vigorously defending these lawsuits. Because these lawsuits are in the initial stages, the financial impact to us, if any, cannot be predicted.
In addition to the lawsuits described above, we are party to ordinary routine legal proceedings and claims incidental to our business, but we are not currently a party to any legal proceeding that we believe would have a material adverse effect on our financial position.
The effective tax rate of income attributable to VCA for the three months ended March 31, 2014 was 39.5%, as compared to 38.9% for the year ended December 31, 2013. The increase in the effective tax rate was primarily due to a decrease in income related to our Canadian operations which are taxed at a lower rate.
VCA Antech, Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
March 31, 2014
(Unaudited)
| |
11. | Noncontrolling Interests |
We own some of our animal hospitals in partnerships with noncontrolling interest holders. We consolidate our partnerships in our condensed, consolidated financial statements because our ownership interest in these partnerships is equal to or greater than 50.1% and we control these entities. We record noncontrolling interest in income of subsidiaries equal to our partners’ percentage ownership of the partnerships’ income. We also record changes in the redemption value of our redeemable noncontrolling interests in net income attributable to noncontrolling interests in our condensed, consolidated income statements. We reflect our noncontrolling partners’ cumulative share in the equity of the respective partnerships as either noncontrolling interests in equity, mandatorily redeemable noncontrolling interests in other liabilities, or redeemable noncontrolling interests in temporary equity (mezzanine) in our condensed, consolidated balance sheets.
| |
a. | Mandatorily Redeemable Noncontrolling Interests |
The terms of some of our partnership agreements require us to purchase the partner’s equity in the partnership in the event of the partner’s death. We report these redeemable noncontrolling interests at their estimated redemption value, which approximates fair value and classify them as liabilities due to the certainty of the related event. Estimated redemption value is determined using either a contractually stated formula or a discounted cash flow technique, both of which are used as an approximation of fair value. The discounted cash flow inputs used to determine the redemption value are Level 3 and include forecasted growth rates, valuation multiples, and the weighted average cost of capital. We recognize changes in the obligation as interest cost in our condensed, consolidated statements of income.
The following table provides a summary of mandatorily redeemable noncontrolling interests included in other liabilities in our condensed, consolidated balance sheets (in thousands):
|
| | | | | | | |
| Income Statement Impact | | Mandatorily Redeemable Noncontrolling Interests |
Balance as of December 31, 2012 | | | $ | 11,047 |
|
Noncontrolling interest expense | $ | 473 |
| | |
Redemption value change | 39 |
| | 512 |
|
Purchase of noncontrolling interests | | | (658 | ) |
Dissolution of noncontrolling interests | | | (358 | ) |
Distribution to noncontrolling interests | | | (559 | ) |
Currency translation adjustment | | | (219 | ) |
Balance as of March 31, 2013 | | | $ | 9,765 |
|
| | | |
Balance as of December 31, 2013 | | | $ | 9,355 |
|
Noncontrolling interest expense | $ | 368 |
| | |
Redemption value change | 5 |
| | 373 |
|
Distribution to noncontrolling interests | | | (312 | ) |
Currency translation adjustment | | | (305 | ) |
Balance as of March 31, 2014 | | | $ | 9,111 |
|
| |
b. | Redeemable Noncontrolling Interests |
We also enter into partnership agreements whereby the minority partner is issued certain “put” rights. These rights are normally exercisable at the sole discretion of the minority partner. We report these redeemable noncontrolling interests at their estimated redemption value and classify them in temporary equity (mezzanine). We recognize changes in the obligation in net income attributable to noncontrolling interests in our condensed, consolidated statements of income.
VCA Antech, Inc. and Subsidiaries
Notes to Condensed, Consolidated Financial Statements (Continued)
March 31, 2014
(Unaudited)
| |
11. | Noncontrolling Interests, continued |
The following table provides a summary of redeemable noncontrolling interests (in thousands):
|
| | | | | | | |
| Income Statement Impact | | Redeemable Noncontrolling Interests |
Balance as of December 31, 2012 | | | $ | 6,991 |
|
Noncontrolling interest expense | $ | 212 |
| | |
Redemption value change | 26 |
| | 238 |
|
Distribution to noncontrolling interests | | | (186 | ) |
Balance as of March 31, 2013 | | | $ | 7,043 |
|
| | | |
Balance as of December 31, 2013 | | | $ | 10,678 |
|
Noncontrolling interest expense | $ | 303 |
| | |
Redemption value change | (152 | ) | | 151 |
|
Formation of noncontrolling interests | | | 855 |
|
Purchase of noncontrolling interests | | | (356 | ) |
Distribution to noncontrolling interests | | | (276 | ) |
Balance as of March 31, 2014 | | | $ | 11,052 |
|
| |
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Introduction
The following discussion should be read in conjunction with our condensed, consolidated financial statements provided under Part I, Item I of this Quarterly report on Form 10-Q. We have included herein statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We generally identify forward-looking statements in this report using words like “believe,” “intend,” “expect,” “estimate,” “may,” “plan,” “should plan,” “project,” “contemplate,” “anticipate,” “predict,” “potential,” “continue,” or similar expressions. You may find some of these statements below and elsewhere in this report. These forward-looking statements are not historical facts and are inherently uncertain and outside of our control. Any or all of our forward-looking statements in this report may turn out to be wrong. They can be affected by inaccurate assumptions we might make, or by known or unknown risks and uncertainties. Many factors mentioned in our discussion in this report will be important in determining future results. Consequently, no forward-looking statement can be guaranteed. Actual future results may vary materially. Factors that may cause our plans, expectations, future financial condition and results to change are described throughout this report and in our Annual Report on Form 10-K, particularly in “Risk Factors,” Part I, Item 1A of that report.
The forward-looking information set forth in this Quarterly Report on Form 10-Q is as of May 9, 2014, and we undertake no duty to update this information unless required by law. Shareholders and prospective investors can find information filed with the SEC after May 9, 2014 at our website at http://investor.vcaantech.com or at the SEC’s website at www.sec.gov.
We are a leading North American animal healthcare company. We provide veterinary services and diagnostic testing services to support veterinary care and we sell diagnostic imaging equipment and other medical technology products and related services to veterinarians. We also provide both online and printed communications, education and information, and analytical-based marketing solutions to the veterinary community.
Our reportable segments are as follows:
| |
• | Our Animal Hospital segment operates the largest network of freestanding, full-service animal hospitals in the nation. Our animal hospitals offer a full range of general medical and surgical services for companion animals. We treat diseases and injuries, offer pharmaceutical and retail products and perform a variety of pet wellness programs, including health examinations, diagnostic testing, routine vaccinations, spaying, neutering and dental care. At March 31, 2014, our animal hospital network consisted of 608 animal hospitals in 41 states and in four Canadian provinces. |
| |
• | Our Laboratory segment operates the largest network of veterinary diagnostic laboratories in the nation. Our laboratories provide sophisticated testing and consulting services used by veterinarians in the detection, diagnosis, evaluation, monitoring, treatment and prevention of diseases and other conditions affecting animals. At March 31, 2014, our laboratory network consisted of 57 laboratories serving all 50 states and certain areas in Canada. |
Our “All Other” category includes the results of our Medical Technology and Vetstreet operating segments. Each of these segments did not meet the materiality thresholds to be reported individually.
The practice of veterinary medicine is subject to seasonal fluctuation. In particular, demand for veterinary services is significantly higher during the warmer months because pets spend a greater amount of time outdoors where they are more likely to be injured and are more susceptible to disease and parasites. In addition, use of veterinary services may be affected by levels of flea infestation, heartworms and ticks, and the number of daylight hours.
Consumer spending habits, including spending for pet healthcare, are affected by, among other things, prevailing economic conditions, levels of employment, salaries and wage rates, consumer confidence and consumer perception of economic conditions. These factors continue to impact consumer spending and may continue to cause levels of spending to remain depressed for the foreseeable future. Additionally, these factors may cause pet owners to elect to defer expensive treatment options or to forgo treatment for their pets altogether.
Use of Supplemental Non-GAAP Financial Measures
In this management's discussion and analysis, we use supplemental measures of our performance, which are derived from our consolidated financial information, but which are not presented in our consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). These financial measures, which are considered “Non-GAAP financial measures” under SEC rules, include our Non-GAAP gross profit, Non-GAAP gross margin, Non-GAAP gross profit, excluding acquisition related amortization and Non-GAAP gross margin, excluding acquisition related amortization on both a consolidated basis and with respect to our Animal Hospital segment. Additionally, our Non-GAAP financial measures include our Non-GAAP operating income, Non-GAAP operating margin, Non-GAAP operating income, excluding acquisition related amortization and Non-GAAP operating margin, excluding acquisition related amortization on a consolidated basis and lastly our Non-GAAP net income, Non-GAAP diluted earnings per share, Non-GAAP net income, excluding acquisition related amortization and Non-GAAP diluted earnings per share, excluding acquisition related amortization. See “Consolidated Results of Operations - Non-GAAP Financial Measures” below for information about our use of these Non-GAAP financial measures, including our reasons for including the measures, material limitations with respect to the usefulness of the measures, and a reconciliation of each Non-GAAP financial measure to the most directly comparable GAAP financial measure. All references to Non-GAAP figures in the discussion that follows refer to Non-GAAP results excluding acquisition related amortization.
Executive Overview
During the three months ended March 31, 2014, we experienced increases in both consolidated revenue and gross profit. The increases were primarily driven by revenue from our acquisitions, as well as organic growth in our Animal Hospital and Laboratory segments. Our Animal Hospital same-store revenue increased 0.5% as compared to the same period in the prior year. Our Laboratory internal revenue increased 1.9%, adjusted for one-half less billing day in 2014, as compared to the same period in the prior year. Our consolidated operating income increased 10.6%, on a 100 basis point increase in consolidated operating margin, as compared to the same period in the prior year. Our Non-GAAP consolidated operating income, excluding acquisition related amortization, increased 3.4%, on a 20 basis point increase in Non-GAAP consolidated operating margin, excluding acquisition related amortization, as compared to the same period in the prior year. The increase in Non-GAAP consolidated operating income was primarily due to improved results from each of our operating segments.
Share Repurchase Program
In April 2013, our Board of Directors authorized a share repurchase program, authorizing us to repurchase up to $125.0 million of our common shares from time to time in open market purchases, pursuant to trading plans established in accordance with SEC rules or through privately negotiated transactions. The extent and timing of our repurchases will depend upon market conditions, our cash requirements to fund the long-term growth investments in our business and other corporate considerations. The repurchases have been and will continue to be be funded by existing cash balances and by our revolving credit facility. The share repurchase program has no expiration date. The repurchase program may be suspended or discontinued at any time. Refer to Item 2. Unregistered Sales of Equity Securities and the Use of Proceeds in Part II of this report.
Acquisitions
Our annual growth strategy includes the acquisition of independent animal hospitals. We also evaluate the acquisition of animal hospital chains, laboratories or related businesses if favorable opportunities are presented. For the three months ended March 31, 2014, we acquired $16.0 million of annualized Animal Hospital revenue. These acquisitions are immaterial individually and accordingly, have not been separately disclosed. We currently anticipate that during the year, we will acquire $50 million to $85 million of annualized Animal Hospital revenue.
The following table summarizes the changes in the number of facilities operated by our Animal Hospital and Laboratory segments during the three months ended March 31, 2014 and 2013, respectively:
|
| | | | | |
| Three Months Ended March 31, |
| 2014 | | 2013 |
Animal Hospitals: | | | |
Beginning of period | 609 |
| | 609 |
|
Acquisitions | 4 |
| | 3 |
|
Acquisitions, merged | (1 | ) | | — |
|
Sold, closed or merged | (4 | ) | | (8 | ) |
End of period | 608 |
| | 604 |
|
| | | |
Laboratories: | | | |
Beginning of period | 56 |
| | 55 |
|
Acquired | — |
| | 1 |
|
Created | 1 |
| | — |
|
End of period | 57 |
| | 56 |
|
Groupe Veteri - Medic Inc.
On July 5, 2013, AVC acquired 90% of the shares of Groupe Veteri - Medic Inc. for approximately CDN $17.2 million, which included contingent consideration. Groupe Veteri - Medic operates three animal hospitals in Montreal, Quebec. The acquisition expanded AVC's presence within the Canadian market by increasing operations into a fourth province, Quebec.
Critical Accounting Policies
Our condensed, consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”), which require management to make estimates and assumptions that affect reported amounts. The estimates and assumptions are based on historical experience and on other factors that management believes to be reasonable. Actual results may differ from those estimates. Critical accounting policies represent the areas where more significant judgments and estimates are used in the preparation of our condensed, consolidated financial statements. A discussion of such critical accounting policies, which include revenue recognition, goodwill, other intangible assets, and income taxes, can be found in our 2013 Annual Report on Form 10-K. There have been no material changes to the policies noted above as of this quarterly report on Form 10-Q for the period ended March 31, 2014. A summary of our valuation of goodwill accounting policy is discussed below.
Valuation of Goodwill
At March 31, 2014, we had $1.3 billion of goodwill, accounting for 60% of our total assets. Our goodwill represents the excess of the cost of our acquired entities over the net of the amounts assigned to identifiable assets acquired and liabilities assumed.
We test our goodwill for impairment annually, or sooner if circumstances indicate impairment may exist, in accordance with goodwill guidance. We adopted the end of October as our annual impairment testing date, which allows us time to accurately complete our impairment testing process in order to incorporate the results in our annual financial statements and timely file those statements with the Securities and Exchange Commission (“SEC”) in accordance with our accelerated filing requirements.
The recognition and measurement of a goodwill impairment loss involves either a qualitative assessment of the fair value of each reporting unit or a more detailed two-step process. We have not presently elected to rely on a qualitative assessment, accordingly we measure our goodwill for impairment based upon the following two-step process:
First we identify potential impairment by comparing the estimated fair value of our reporting units with the carrying value of our reporting units, with carrying value defined as the reporting unit’s net assets, including goodwill. If the estimated
fair value of our reporting units is greater than our carrying value, there is no impairment and the second step is not needed.
If we identify a potential impairment in the first step, we then measure the amount of impairment. The amount of the impairment is determined by allocating the estimated fair value of the reporting unit, as determined in step one, to the reporting unit's net assets based on fair value as would be done in an acquisition. In this hypothetical purchase price allocation, the residual estimated fair value, after allocation to the reporting units' identifiable net assets, is the implied current fair value of goodwill. If the implied current fair value of goodwill is less than the carrying amount of goodwill, goodwill is considered impaired and written down to the implied current fair value with a corresponding charge to earnings. However, if the implied current fair value of goodwill is greater than the carrying amount of goodwill, goodwill is not considered impaired and is not adjusted to the implied current fair value. Determining the fair value of the net assets of our reporting units under this step requires significant estimates.
Our estimated fair values are calculated in accordance with generally accepted accounting principles related to fair value and utilize generally accepted valuation techniques, consisting primarily of discounted cash flow techniques and market comparables, where applicable. These valuation methods involve the use of significant assumptions and estimates such as forecasted growth rates, valuation multiples, the weighted-average cost of capital, and risk premiums, which are based upon the best available market information and are consistent with our long-term strategic plans. The performance of our reporting units, and in turn the risk of goodwill impairment, is subject to a number of risks and uncertainties, some of which are outside of our control.
Negative changes in the undiscounted cash flows related to variables such as revenue growth rates, margins, or the discount rate could result in a decrease in the estimated fair value of our reporting units and could ultimately result in a substantial goodwill impairment charge. We monitor our reporting units on a quarterly basis and have not identified any events subsequent to December 31, 2013, which would indicate any impairment may have occurred in any of our reporting units.
Our Vetstreet reporting unit's estimated fair value, which has a carrying value of approximately $9.2 million of goodwill as of March 31, 2014, exceeded its carrying value by 10% during the 2013 testing. The fair value of the Vetstreet reporting unit was determined based upon estimated future cash flows generated by the business and market comparables. In the event that we are not able to timely deliver enhancements to our services necessary to reestablish our competitive advantage, our forecasted growth rates may not be attainable and therefore we could incur an impairment charge. We will continue to closely monitor the development of these enhancements in an effort to identify any potential expected further delays and their related impact on our impairment determination.
Consolidated Results of Operations
The following table sets forth components of our condensed, consolidated income statements expressed as a percentage of revenue:
|
| | | | | |
| Three Months Ended March 31, |
| 2014 | | 2013 |
Revenue: | | | |
Animal Hospital | 78.2 | % | | 77.7 | % |
Laboratory | 19.7 |
| | 19.9 |
|
All Other | 6.3 |
| | 6.5 |
|
Intercompany | (4.2 | ) | | (4.1 | ) |
Total revenue | 100.0 |
| | 100.0 |
|
Direct costs | 77.4 |
| | 77.9 |
|
Gross profit | 22.6 |
| | 22.1 |
|
Selling, general and administrative expense | 9.2 |
| | 9.1 |
|
Net (gain) loss on sale of assets | (0.2 | ) | | 0.4 |
|
Operating income | 13.6 |
| | 12.6 |
|
Interest expense, net | 0.9 |
| | 1.0 |
|
Income before provision for income taxes | 12.7 |
| | 11.6 |
|
Provision for income taxes | 4.9 |
| | 4.4 |
|
Net income | 7.8 |
| | 7.2 |
|
Net income attributable to noncontrolling interests | 0.2 |
| | 0.3 |
|
Net income attributable to VCA Antech, Inc. | 7.6 | % | | 6.9 | % |
Revenue
The following table summarizes our revenue (in thousands, except percentages):
|
| | | | | | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2014 | | 2013 | | |
| $ | | % of Total | | $ | | % of Total | | % Change |
Animal Hospital | $ | 351,588 |
| | 78.2 | % | | $ | 340,615 |
| | 77.7 | % | | 3.2 | % |
Laboratory | 88,534 |
| | 19.7 | % | | 87,335 |
| | 19.9 | % | | 1.4 | % |
All Other | 28,121 |
| | 6.3 | % | | 28,523 |
| | 6.5 | % | | (1.4 | )% |
Intercompany | (18,736 | ) | | (4.2 | )% | | (17,867 | ) | | (4.1 | )% | | (4.9 | )% |
Total revenue | $ | 449,507 |
| | 100.0 | % | | $ | 438,606 |
| | 100.0 | % | | 2.5 | % |
Consolidated revenue increased $10.9 million for the three months ended March 31, 2014, as compared to the same period in the prior year. The increase in revenue were primarily attributable to revenue from animal hospitals acquired since January 1, 2013. Excluding the impact of acquisitions, revenue decreased $1.6 million for the three months ended March 31, 2014, primarily due to the impact of foreign currency translation, partially offset by an increase in organic growth in our Laboratory, Animal Hospital and Vetstreet operating segments.
Gross Profit
The following table summarizes our consolidated gross profit, Non-GAAP consolidated gross profit and Non-GAAP consolidated gross profit, excluding acquisition related amortization in dollars and as a percentage of applicable revenue (in
thousands, except percentages):
|
| | | | | | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2014 | | 2013 | | |
| $ | | Gross Margin | | $ | | Gross Margin | | % Change |
Animal Hospital | $ | 48,800 |
| | 13.9 | % | | $ | 45,199 |
| | 13.3 | % | | 8.0 | % |
Laboratory | 43,031 |
| | 48.6 | % | | 42,465 |
| | 48.6 | % | | 1.3 | % |
All Other | 9,969 |
| | 35.5 | % | | 9,634 |
| | 33.8 | % | | 3.5 | % |
Intercompany | (349 | ) | | | | (375 | ) | | | | |
Consolidated gross profit and gross margin | $ | 101,451 |
| | 22.6 | % | | $ | 96,923 |
| | 22.1 | % | | 4.7 | % |
Impact of vacant property adjustment | — |
| | | | 2,046 |
| | | | |
Non-GAAP consolidated gross profit and Non-GAAP gross margin(1) | $ | 101,451 |
| | 22.6 | % | | $ | 98,969 |
| | 22.6 | % | | 2.5 | % |
Intangible asset amortization associated with acquisitions | 5,080 |
| | | | 5,063 |
| | | | |
Non-GAAP consolidated gross profit, excluding acquisition related amortization and Non-GAAP gross margin, excluding acquisition related amortization(1) | $ | 106,531 |
| | 23.7 | % | | $ | 104,032 |
| | 23.7 | % | | 2.4 | % |
____________________________
| |
(1) | Non-GAAP consolidated gross profit, Non-GAAP gross margin, Non-GAAP consolidated gross profit, excluding acquisition related amortization and Non-GAAP gross margin, excluding acquisition related amortization, are not measurements of financial performance prepared in accordance with GAAP. See “Non-GAAP Financial Measures” below for information about these Non-GAAP financial measures, including our reasons for including the measures, material limitations with respect to the usefulness of the measures, and a reconciliation of each Non-GAAP financial measure to the most directly comparable GAAP financial measure. |
Consolidated gross profit increased $4.5 million for the three months ended March 31, 2014, as compared to the same period in the prior year. Excluding the impact of the Non-GAAP adjustments detailed in the table above, Non-GAAP consolidated gross profit, excluding acquisition related amortization, increased $2.5 million for the three months ended March 31, 2014, as compared to the same period in the prior year. The increase in Non-GAAP consolidated gross profit, excluding acquisition related amortization, was primarily attributable to organic revenue growth and increased gross margins at our Animal Hospital segment and our Medical Technology business.
Segment Results
Animal Hospital Segment
Revenue
Animal Hospital revenue increased $11.0 million for the three months ended March 31, 2014, as compared to the same period in the prior year. The components of the increase are summarized in the following table (in thousands, except percentages and average revenue per order):
|
| | | | | | | | | | |
| Three Months Ended March 31, |
| 2014 | | 2013 | | % Change |
Same-store facilities: | | | | | |
Orders (1) | 1,892 |
| | 1,936 |
| | (2.3 | )% |
Average revenue per order (2) | $ | 179.07 |
| | $ | 174.10 |
| | 2.9 | % |
Same-store revenue (1) | $ | 338,721 |
| | $ | 337,043 |
| | 0.5 | % |
Foreign currency impact | (3,047 | ) | | — |
| | |
Acquisitions | 15,647 |
| | 453 |
| | |
Closures | 267 |
| | 3,119 |
| | |
Net acquired revenue (3) | $ | 15,914 |
| | $ | 3,572 |
| | |
Total | $ | 351,588 |
| | $ | 340,615 |
| | 3.2 | % |
____________________________
| |
(1) | Same-store revenue and orders were calculated using Animal Hospital operating results, adjusted to exclude the operating results for newly acquired animal hospitals that we did not own, as of the beginning of the comparable period in the prior year. Same-store revenue also includes revenue generated by customers referred from our relocated or combined animal hospitals, including those merged upon acquisition. |
| |
(2) | Computed by dividing same-store revenue by same-store orders. The average revenue per order may not calculate exactly due to rounding. |
| |
(3) | Net acquired revenue represents the revenue from animal hospitals acquired, net of revenue from animal hospitals sold or closed, on or after the beginning of the comparable period, which was January 1, 2013. Fluctuations in net acquired revenue occur due to the volume, size, and timing of acquisitions and dispositions during the periods from this date through the end of the applicable period. |
Our business strategy is to place a greater emphasis on comprehensive wellness visits and advanced medical procedures, which typically generate higher priced orders. The migration of lower priced orders from our animal hospitals to other distribution channels and our emphasis on comprehensive wellness visits has, over the past several years, resulted in a decrease in lower priced orders and an increase in higher priced orders.
During the three months ended March 31, 2014, we experienced a decrease in both the number of lower-priced and higher- priced orders. The decrease in higher-priced orders was primarily a consequence of the severe weather experienced in the Northeastern part of the United States during the current quarter. The decrease in lower-priced orders was primarily a consequence of the overall competitive environment and the impact of changes in our business environment on the mix of procedures performed.
Price increases as well as the aforementioned mix in year over year growth rates of low to high-priced orders contributed to the overall increase in the average revenue per order. Prices at each of our animal hospitals are reviewed regularly and adjustments are made based on market considerations, demographics and our costs. These adjustments historically approximated 3% to 6% on most services at the majority of our animal hospitals and are typically implemented in November of each year; however, price increases in 2013 generally ranged between 3% and 4%.
Gross Profit
Animal Hospital gross profit is calculated as Animal Hospital revenue less Animal Hospital direct costs. Animal Hospital direct costs comprise all costs of services and products at the animal hospitals including, but not limited to, salaries of veterinarians, technicians and all other animal hospital-based personnel, facilities rent, occupancy costs, supply costs, depreciation and amortization, certain marketing and promotional expense and costs of goods sold associated with the retail sales of pet food and pet supplies.
The following table summarizes gross profit, gross margin, Non-GAAP gross profit, Non-GAAP gross margin, Non-GAAP gross profit, excluding acquisition related amortization and Non-GAAP gross margin, excluding acquisition related amortization, for our Animal Hospital segment (in thousands, except percentages) and the same measures on a same-store basis:
|
| | | | | | | | | | |
| Three Months Ended March 31, |
| 2014 | | 2013 | | % Change |
Gross profit | $ | 48,800 |
| | $ | 45,199 |
| | 8.0 | % |
Impact of vacant property adjustment | — |
| | 2,046 |
| | |
Non-GAAP gross profit(1) | $ | 48,800 |
| | $ | 47,245 |
| | 3.3 | % |
Intangible asset amortization associated with acquisitions | 3,945 |
| | 3,757 |
| | |
Non-GAAP gross profit, excluding acquisition related amortization(1) | $ | 52,745 |
| | $ | 51,002 |
| | 3.4 | % |
Gross margin | 13.9 | % | | 13.3 | % | | |
Non-GAAP gross margin(1) | 13.9 | % | | 13.9 | % | | |
Non-GAAP gross margin, excluding acquisition related amortization(1) | 15.0 | % | | 15.0 | % | | |
| | | | | |
Same-store gross profit | 48,857 |
| | 45,714 |
| | 6.9 | % |
Impact of vacant property adjustment | — |
| | 1,768 |
| | |
Non-GAAP same-store gross profit(1) | $ | 48,857 |
| | $ | 47,482 |
| | 2.9 | % |
Intangible asset amortization associated with acquisitions | 3,273 |
| | 3,763 |
| | |
Non-GAAP same-store gross profit, excluding acquisition related amortization(1) | $ | 52,130 |
| | $ | 51,245 |
| | 1.7 | % |
Same-store gross margin | 14.4 | % | | 13.6 | % | | |
Non-GAAP same-store gross margin(1) | 14.4 | % | | 14.1 | % | | |
Non-GAAP same-store gross margin, excluding acquisition related amortization(1) | 15.4 | % | | 15.2 | % | | |
____________________________
| |
(1) | Non-GAAP gross profit, Non-GAAP gross margin, Non-GAAP gross profit, excluding acquisition related amortization and Non-GAAP gross margin, excluding acquisition related amortization and the same measures expressed on a same store basis, are not measurements of financial performance prepared in accordance with GAAP. See “Non-GAAP Financial Measures” below for information about these Non-GAAP financial measures, including our reasons for including the measures, material limitations with respect to the usefulness of the measures, and a reconciliation of each Non-GAAP financial measure to the most directly comparable GAAP financial measure. |
Consolidated Animal Hospital gross profit increased $3.6 million for the three months ended March 31, 2014, as compared to the same period in the prior year. Excluding the impact of the Non-GAAP adjustments detailed in the table above, Non-GAAP gross profit, excluding acquisition related amortization, increased $1.7 million for the three months ended March 31, 2014, as compared to the same period in the prior year. The increase in Non-GAAP consolidated gross profit, excluding acquisition related amortization, was primarily attributable to an increase in Animal Hospital same-store gross margin, which increased as a result of increased same-store revenue, managing costs and from additional gross profit from acquired animal hospitals.
Over the last several years, we have acquired a significant number of animal hospitals. Many of these newly acquired animal hospitals had lower gross margins at the time of acquisition than those previously operated by us. We have improved
these lower gross margins, in the aggregate, subsequent to the acquisition primarily through cost efficiencies.
Laboratory Segment
The following table summarizes revenue and gross profit for our Laboratory segment (in thousands, except percentages):
|
| | | | | | | | | | |
| Three Months Ended March 31, |
| 2014 | | 2013 | | % Change |
Revenue | $ | 88,534 |
| | $ | 87,335 |
| | 1.4 | % |
Gross profit | $ | 43,031 |
| | $ | 42,465 |
| | 1.3 | % |
Gross margin | 48.6 | % | | 48.6 | % | | |
Laboratory revenue increased $1.2 million for the three months ended March 31, 2014, as compared to the same period in the prior year. The components of the changes in Laboratory revenue are detailed below (in thousands, except percentages and average revenue per requisition):
|
| | | | | | | | | | |
| Three Months Ended March 31, |
| 2014 | | 2013 | | % Change |
Internal growth: | | | | | |
Number of requisitions (1) | 3,114 |
| | 3,191 |
| | (2.4 | )% |
Average revenue per requisition (2) | $ | 28.39 |
| | $ | 27.18 |
| | 4.5 | % |
Total internal revenue (1) | $ | 88,395 |
| | $ | 86,736 |
| | 1.9 | % |
Billing-day adjustment (3) | — |
| | 599 |
| | |
Acquired revenue (4) | 139 |
| | — |
| | |
Total | $ | 88,534 |
| | $ | 87,335 |
| | 1.4 | % |
____________________________
| |
(1) | Internal revenue and requisitions were calculated using Laboratory operating results, which are adjusted (i) to exclude the operating results of acquired laboratories that we did not own as of the beginning of the comparable period in the prior year, and (ii) for the impact resulting from any differences in the number of billing days in comparable periods, if applicable. |
| |
(2) | Computed by dividing internal revenue by the number of requisitions. |
| |
(3) | The billing-day adjustment reflects the impact of one-half less billing day in 2014, as compared to 2013. |
| |
(4) | Acquired revenue represents the current-year period revenue recognized from our acquired laboratories that we did not own as of the beginning of the comparable prior-year period. |
The increase in Laboratory revenue for the three months ended March 31, 2014 was due to an increase in average revenue per requisition. The average revenue per requisition increased for the three months ended March 31, 2014, as compared to the same period in the prior year, due to price increases in February 2014 and changes in product mix.
Laboratory gross profit is calculated as Laboratory revenue less direct costs. Laboratory direct cost comprises all costs of laboratory services including, but not limited to, salaries of veterinarians, specialists, technicians and other laboratory-based personnel, transportation and delivery costs, facilities rent, occupancy costs, depreciation and amortization and supply costs.
Our Laboratory gross margin remained unchanged at 48.6% for the three months ended March 31, 2014, as compared to the same period in the prior year. The gross margin was primarily impacted by lower revenue growth as result of the aforementioned severe weather experienced during the current quarter.
Intercompany Revenue
Laboratory revenue for the three months ended March 31, 2014 included intercompany revenue of $13.8 million, generated by providing laboratory services to our animal hospitals, as compared to $13.7 million for the respective prior year period. All Other revenue for the three months ended March 31, 2014 included intercompany revenue of $5.9 million, generated by providing products and services to our animal hospitals and laboratories, as compared to $4.9 million for the respective prior year period. For purposes of reviewing the operating performance of our segments, all intercompany transactions are accounted for as if the transaction was with an independent third party at current market prices. For financial reporting purposes, intercompany transactions are eliminated as part of our consolidation.
Selling, General and Administrative Expense
The following table summarizes our selling, general and administrative (“SG&A”) expense in both dollars and as a percentage of applicable revenue (in thousands, except percentages):
|
| | | | | | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2014 | | 2013 | | |
| $ | | % of Revenue | | $ | | % of Revenue | | % Change |
Animal Hospital | $ | 9,128 |
| | 2.6 | % | | $ | 8,325 |
| | 2.4 | % | | 9.6 | % |
Laboratory | 8,018 |
| | 9.1 | % | | 8,005 |
| | 9.2 | % | | 0.2 | % |
All Other | 8,348 |
| | 29.7 | % | | 8,914 |
| | 31.3 | % | | (6.3 | )% |
Corporate | 15,946 |
| | 3.5 | % | | 14,602 |
| | 3.3 | % | | 9.2 | % |
Total SG&A | $ | 41,440 |
| | 9.2 | % | | $ | 39,846 |
| | 9.1 | % | | 4.0 | % |
Consolidated SG&A expense increased $1.6 million for the three months ended March 31, 2014, as compared to the same period in the prior year. The increase in consolidated SG&A expense for the three months ended March 31, 2014 was primarily due to an increase in compensation related costs incurred at Corporate and in our Animal Hospital segment, partially offset by a decrease in SG&A at our Vetstreet business due to our cost containment efforts. As a result of the above mentioned increases in compensation costs and decreased Vetstreet SG&A, consolidated SG&A as a percentage of consolidated revenue increased 10 basis points.
Operating Income
The following table summarizes our consolidated operating income, Non-GAAP consolidated operating income and Non-GAAP consolidated operating income, excluding acquisition related amortization in both dollars and as a percentage of applicable revenue (in thousands, except percentages):
|
| | | | | | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2014 | | 2013 | | |
| $ | | % of Revenue | | $ | | % of Revenue | |