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VCA Inc. Reports Third Quarter 2016 Results and Re-Affirms Financial Guidance for 2016

  • Revenue increased 19.1% to a third quarter record of $656.9 million
  • Gross profit increased 13.7% to $156.6 million
  • Operating income increased 10.2% to $107.0 million
  • Diluted earnings per common share increased 6.0% to $0.71
  • Non-GAAP diluted earnings per common share increased 16.2% to $0.79

LOS ANGELES, Oct. 26, 2016 (GLOBE NEWSWIRE) -- VCA Inc. (NASDAQ:WOOF), a leading animal healthcare company in the United States and Canada, today reported financial results for the third quarter ended September 30, 2016, as follows: revenue increased 19.1% to a third quarter record of $656.9 million; gross profit increased 13.7% to $156.6 million; operating income increased 10.2% to $107.0 million; net income increased 6.2% to $58.2 million; and diluted earnings per common share increased 6.0% to $0.71. Excluding transaction expenses related to the acquisition of Companion Animal Practices, North America (“CAPNA”), and acquisition-related amortization expense, our results for this quarter are as follows: Non-GAAP operating income increased 19.8% to $117.8 million; Non-GAAP net income increased 15.7% to $64.4 million; and Non-GAAP diluted earnings per common share increased 16.2% to $0.79. Our results for the prior-year quarter included business interruption proceeds of $4.5 million, $2.8 million net of tax, or $0.03 per diluted common share.

We also reported our financial results for the nine months ended September 30, 2016 as follows: revenue increased 17.1% to $1.9 billion; gross profit increased 16.5% to $457.3 million; operating income increased 17.4% to $309.1 million; net income increased 14.3% to $168.5 million; and diluted earnings per common share increased 15.7% to $2.06. Excluding acquisition-related amortization expense and other items detailed in the supplemental tables included in this press release, our financial results for the nine months ended September 30, 2016, on a Non-GAAP basis, are as follows: gross profit increased 17.8% to $482.1 million; operating income increased 22.8% to $339.1 million; net income increased 21.7% to $188.8 million; and Non-GAAP diluted earnings per common share increased 22.9% to $2.31.

Bob Antin, Chairman and CEO, stated, "We had an outstanding quarter highlighted by 16.2% growth in our adjusted diluted earnings per common share.  We continue to experience healthy organic revenue growth and increasing gross margins in both our core Animal Hospital and Laboratory businesses.  Given our results relative to our expectations and our future acquisition pipeline, we remain optimistic with respect to our results for the full year ended December 31, 2016.

"Animal Hospital revenue in the third quarter increased 25.2%, to $553.4 million, driven by acquisitions made during the past 12 months and same-store revenue growth of 5.4%.  Our same-store gross profit margin increased 50 basis points to 17.5%, and our total gross margin remained flat at 17.0%. Excluding acquisition-related amortization expense, our Non-GAAP same-store gross profit margin increased 40 basis points to 18.4%; and Non-GAAP Animal Hospital total gross profit margin increased 50 basis points to 18.5%. During the 2016 third quarter, we acquired 12 independent animal hospitals which had historical combined annual revenue of $38 million bringing our year to date total, excluding CAPNA, to 49 independent animal hospitals with historical combined annual revenue of $146 million.

"Our Laboratory internal revenue in the third quarter increased 5.5% to $105.1 million; laboratory gross profit margin increased 40 basis points to 51.6% and our operating margin increased 60 basis points to 42.3%. Excluding acquisition-related amortization expense, Non-GAAP Laboratory gross profit increased 20 basis points to 51.9%; and Non-GAAP Laboratory operating margin increased 60 basis points to 42.7%."

2016 Guidance

We reaffirm our previously provided guidance as follows:

  •  Revenue from $2.52 billion to $2.54 billion;
  •  Net income from $210 million to $218 million;
  •  Diluted earnings per common share from $2.57 to $2.67; and
  •  Non-GAAP diluted earnings per common share from $2.87 to $2.97.

Non-GAAP Financial Measures

We believe investors’ understanding of our total performance is enhanced by disclosing Non-GAAP financial measures including Non-GAAP net income, Non-GAAP gross profit, Non-GAAP operating income and Non-GAAP diluted earnings per common share. We define these adjusted measures as the reported amounts, adjusted to exclude certain significant items and amortization of intangibles acquired in acquisitions.

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

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

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

Conference Call

We will discuss our third quarter 2016 financial results during a conference call today, October 26th, at 9:00 a.m. Eastern Time. A live broadcast of the call may be accessed by visiting our website at investor.vca.com. The call may also be accessed by dialing (877) 293-5492 (domestic) or (720) 545-0007 (international) and referring to conference ID 82975258. Interested parties should call at least five minutes prior to the start of the call to register. Replay of the webcast will be available for one year by visiting the company's website.

Forward-Looking Statements

This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  Among the forward-looking statements in this press release are statements addressing our 2016 guidance and plans, expectations, future financial position and results of operation.  These forward-looking statements are not historical facts and are inherently uncertain and out of our control.  Any or all of our forward-looking statements in this press release may turn out to be wrong.  They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties.  Actual future results may vary materially.  Among other factors that could cause our actual results to differ from this forward-looking information are: the continued effects of the economic uncertainty prevailing in regions in which we operate; our ability to execute on our growth strategy and to manage acquired operations; changes in demand for our products and services; fluctuations in our revenue adversely affecting our gross profit, operating income and margins; a material adverse change in the financial condition or operations of the company; the ability to successfully integrate CAPNA into VCA and achieve expected operating synergies following the acquisition; and the effects of the other factors discussed in our Annual Report on Form 10-K, Reports on Form 10-Q and our other filings with the SEC.

About VCA Inc.

We own, operate and manage the largest networks of freestanding veterinary hospitals and veterinary-exclusive clinical laboratories in the country. We also supply diagnostic imaging equipment to the veterinary industry.

         
VCA Inc.
Condensed, Consolidated Income Statements
(Unaudited)
(In thousands, except per share amounts)
         
    Three Months Ended
September 30,
  Nine Months Ended
September 30,
    2016   2015   2016   2015
Revenue:                
Animal hospital   $ 553,378     $ 441,924     $ 1,552,377     $ 1,270,326  
Laboratory   105,140     100,309     323,927     300,503  
All other   22,987     30,838     65,797     93,734  
Intercompany   (24,651 )   (21,354 )   (68,319 )   (64,608 )
    656,854     551,717     1,873,782     1,599,955  
                 
Direct costs   500,277     414,051     1,416,477     1,207,580  
                 
Gross profit:                
Animal hospital   94,136     74,941     262,232     203,810  
Laboratory   54,206     51,408     171,469     156,093  
All other   8,921     11,761     24,748     34,574  
Intercompany   (686 )   (444 )   (1,144 )   (2,102 )
    156,577     137,666     457,305     392,375  
                 
Selling, general and administrative expense:                
Animal hospital   15,541     10,677     41,903     32,351  
Laboratory   9,728     9,542     29,726     27,894  
All other   6,064     7,660     17,385     24,088  
Corporate   18,010     16,981     58,647     49,410  
    49,343     44,860     147,661     133,743  
                 
Business interruption insurance proceeds, net       (4,523 )       (4,523 )
Net loss (gain) on sale or disposal of assets   236     250     528     (234 )
Operating income   106,998     97,079     309,116     263,389  
Interest expense, net   9,300     5,455     24,262     15,396  
Debt retirement costs           1,600      
Other (income) expense   (121 )   59     (985 )   88  
Income before provision for income taxes   97,819     91,565     284,239     247,905  
Provision for income taxes   37,040     35,097     109,312     95,961  
Net income   60,779     56,468     174,927     151,944  
Net income attributable to noncontrolling interests   2,548     1,614     6,419     4,490  
Net income attributable to VCA Inc.   $ 58,231     $ 54,854     $ 168,508     $ 147,454  
                 
Diluted earnings per share   $ 0.71     $ 0.67     $ 2.06     $ 1.78  
                 
Weighted-average shares outstanding for diluted earnings per share   81,812     81,795     81,695     82,744  
                         


         
VCA Inc.
Condensed, Consolidated Balance Sheets
(Unaudited)
(In thousands)
         
    September 30,
 2016
  December 31,
 2015
Assets        
Current assets:        
Cash and cash equivalents   $ 72,914     $ 98,888  
Trade accounts receivable, net   82,166     76,634  
Inventory   60,811     51,523  
Prepaid expenses and other   33,905     30,521  
Prepaid income taxes       24,598  
Total current assets   249,796     282,164  
Property and equipment, net   582,840     507,753  
Other assets:        
Goodwill   2,063,494     1,517,650  
Other intangible assets, net   209,095     97,377  
Notes receivable   2,142     2,194  
Other   101,695     93,994  
Total assets   $ 3,209,062     $ 2,501,132  
Liabilities and Equity        
Current liabilities:        
Current portion of long-term debt   $ 32,512     $ 33,623  
Accounts payable   54,150     52,337  
Accrued payroll and related liabilities   70,213     75,519  
Income tax payable   8,359      
Other accrued liabilities   85,607     70,828  
Total current liabilities   250,841     232,307  
Long-term debt, net   1,246,122     832,718  
Deferred income taxes   127,104     131,478  
Other liabilities   39,509     36,084  
Total liabilities   1,663,576     1,232,587  
Redeemable noncontrolling interests   12,079     11,511  
VCA Inc. stockholders’ equity:        
Common stock   81     81  
Additional paid-in capital   32,958     19,708  
Retained earnings   1,443,715     1,275,207  
Accumulated other comprehensive loss   (41,028 )   (50,034 )
Total VCA Inc. stockholders’ equity   1,435,726     1,244,962  
Noncontrolling interests   97,681     12,072  
Total equity   1,533,407     1,257,034  
Total liabilities and equity   $ 3,209,062     $ 2,501,132  
                 


   
VCA Inc.
Condensed, Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
   
  Nine Months Ended
September 30,
  2016   2015
Cash flows from operating activities:      
Net income $ 174,927     $ 151,944  
Adjustments to reconcile net income to net cash provided by operating activities:      
Depreciation and amortization 74,072     60,634  
Amortization of debt issue costs 1,247     1,306  
Provision for uncollectible accounts 4,949     6,723  
Debt retirement costs 1,600      
Net loss (gain) on sale or disposal of assets
528     (234 )
Share-based compensation 13,669     12,086  
Excess tax benefit from share-based compensation (7,588 )   (8,008 )
Other 7,668     (431 )
Changes in operating assets and liabilities:      
Trade accounts receivable (8,033 )   (20,568 )
Inventory, prepaid expense and other assets (11,684 )   (931 )
Accounts payable and other accrued liabilities 11,142     (2,451 )
Accrued payroll and related liabilities (7,783 )   18,892  
Income taxes 36,168     28,054  
Net cash provided by operating activities 290,882     247,016  
Cash flows from investing activities:      
Business acquisitions, net of cash acquired (599,655 )   (119,336 )
Property and equipment additions (90,546 )   (61,470 )
Proceeds from sale of assets 1,699     6,469  
Other (7,634 )   (434 )
Net cash used in investing activities (696,136 )   (174,771 )
Cash flows from financing activities:      
Repayment of long-term debt (1,263,394 )   (20,174 )
Proceeds from issuance of long-term debt 1,255,000      
Proceeds from revolving credit facility 465,000     97,000  
Repayment of revolving credit facility (65,000 )    
Payment of financing costs (3,817 )    
Distributions to noncontrolling interest partners (4,752 )   (3,810 )
Purchase of noncontrolling interests (4,239 )   (1,493 )
Proceeds from issuance of common stock under stock option plans 3,949     1,571  
Excess tax benefit from share-based compensation 7,588     8,008  
Repurchase of common stock (9,887 )   (161,117 )
Other (1,310 )   2,210  
Net cash provided (used) in financing activities 379,138     (77,805 )
Effect of currency exchange rate changes on cash and cash equivalents 142     (831 )
Decrease in cash and cash equivalents (25,974 )   (6,391 )
Cash and cash equivalents at beginning of period 98,888     81,383  
Cash and cash equivalents at end of period $ 72,914     $ 74,992  
               


               
VCA Inc.
Supplemental Operating Data
(Unaudited - In thousands, except per share amounts)
               
Table #1              
Reconciliation of net income attributable to Three Months Ended   Nine Months Ended
VCA Inc., to Non-GAAP net income attributable September 30,   September 30,
to VCA Inc. (1)   2016       2015       2016       2015  
               
Net income attributable to VCA Inc. $ 58,231     $ 54,854     $ 168,508     $ 147,454  
Adjustments to Other Long-term liabilities, net of tax (2)             2,040      
Discrete tax items (3)             1,045      
Transaction costs related to the CAPNA acquisition, net of tax (4) 89           817      
Debt retirement costs, net of tax (5)             974      
Business interruption proceeds, net of tax (6)       (2,752 )       (2,752 )
Acquisitions related amortization, net of tax (1) 6,030     3,537     15,449     10,465  
               
Non-GAAP net income attributable to VCA Inc. $ 64,350     $ 55,639     $ 188,833     $ 155,167  
               
Table #2 Three Months Ended   Nine Months Ended
Reconciliation of diluted earnings per share to September 30,   September 30,
Non-GAAP diluted earnings per share (1)   2016       2015       2016       2015  
               
Diluted earnings per share $ 0.71     $ 0.67     $ 2.06     $ 1.78  
Adjustments to Other Long-term liabilities, net of tax (2)             0.02      
Discrete tax items (3)             0.01      
Transaction costs related to the CAPNA acquisition, net of tax (4)             0.01      
Debt retirement costs, net of tax (5)             0.01      
Impact of business interruption proceeds, net of tax (6)       (0.03 )       (0.03 )
Acquisitions related amortization, net of tax (1) 0.07     0.04     0.19     0.13  
Non-GAAP diluted earnings per share (7) $ 0.79     $ 0.68     $ 2.31     $ 1.88  
               
Shares used for computing diluted earnings per share 81,812     81,795     81,695     82,744  
               
Table #3 Three Months Ended   Nine Months Ended
Reconciliation of consolidated gross profit to September 30,   September 30,
Non-GAAP consolidated gross profit (1)   2016       2015       2016       2015  
               
Consolidated gross profit $ 156,577     $ 137,666     $ 457,305     $ 392,375  
Acquisitions related amortization (1) 9,369     5,750     24,784     17,013  
Non-GAAP consolidated gross profit $ 165,946     $ 143,416     $ 482,089     $ 409,388  
Non-GAAP consolidated gross profit margin   25.3 %     26.0 %     25.7 %     25.6 %
               
   
Table #4 Three Months Ended   Nine Months Ended
Reconciliation of consolidated operating income to September 30,   September 30,
Non-GAAP consolidated operating income (1)   2016       2015       2016       2015  
               
Consolidated operating income $ 106,998     $ 97,079     $ 309,116     $ 263,389  
Adjustments to Other Long-term liabilities (2)             1,954      
Transaction costs related to the CAPNA acquisition (4) 146           1,343      
Impact of business interruption proceeds (6)       (4,523 )       (4,523 )
Acquisitions related amortization (1) 10,682     5,811     26,709     17,195  
Non-GAAP consolidated operating income $ 117,826     $ 98,367     $ 339,122     $ 276,061  
Non-GAAP consolidated operating margin   17.9 %     17.8 %     18.1 %     17.3 %
               
   
_______________________________________________  
   
(1)  Management believes that investors' understanding of our performance is enhanced by disclosing adjusted measures as the reported amounts, adjusted to exclude certain significant items and acquisition-related amortization. Non-GAAP net income, Non-GAAP diluted earnings per common share, Non-GAAP consolidated gross profit and Non-GAAP consolidated operating income measures are not, and should not be viewed as substitutes for U.S. generally accepted accounting principles (GAAP) net income, its components and diluted earnings per share.
   
(2)  In the first quarter of 2016, we recorded a non-cash charge to adjust certain long-term liabilities for $3.4 million, or $2.0 million net of tax.  $2.0 million of this amount relates to compensation and $1.4 million relates to interest accretion.
   
(3)  In the first quarter of 2016, we recorded a tax adjustment to our income tax liabilities for $1.0 million.
   
(4)  As of the end of the third quarter, we have recorded transaction costs of $1.3 million or $817,000 net of tax related to our acquisition of CAPNA.
   
(5)  We incurred debt retirement costs of $1.6 million, or $974,000 net of tax, in connection with our new credit facility, entered into on June 29, 2016.
   
(6)  In the third quarter of 2015, we received insurance proceeds related to the fire that damaged the headquarters of our Medical Technology business resulting in a net gain of $4.5 million.
     
(7)  Amounts may not foot due to rounding.
 


      As of
Table #5         September 30,
 2016
  December 31,
 2015
Selected consolidated balance sheet data              
Debt:              
Senior term notes         $ 874,500     $ 585,000  
Revolving credit         340,000     232,000  
Other debt and capital leases         71,236     55,474  
Total debt         $ 1,285,736     $ 872,474  
               
  Three Months Ended
September 30,
  Nine Months Ended
September 30,
Table #6  
Selected expense data 2016   2015   2016   2015
               
Rent expense $ 23,844     $ 19,140     $ 68,157     $ 56,761  
               
Depreciation and amortization included              
in direct costs:              
Animal hospital $ 21,967     $ 16,465     $ 60,681     $ 48,808  
Laboratory 2,788     2,701     8,339     7,852  
All other 701     968     2,220     2,871  
Intercompany (622 )   (549 )   (1,805 )   (1,602 )
  $ 24,834     $ 19,585     $ 69,435     $ 57,929  
Depreciation and amortization included in selling,              
general and administrative expense 2,260     886     4,637     2,705  
Total depreciation and amortization $ 27,094     $ 20,471     $ 74,072     $ 60,634  
               
Share-based compensation included in direct costs:              
Laboratory $ 201     $ 144     $ 559     $ 468  
               
Share-based compensation included in              
selling, general and administrative expense:              
Animal hospital 831     644     2,339     1,981  
Laboratory 434     364     1,270     1,106  
All other 160     226     460     626  
Corporate 2,939     2,439     9,041     7,905  
  4,364     3,673     13,110     11,618  
Total share-based compensation $ 4,565     $ 3,817     $ 13,669     $ 12,086  
                               
Contact: Tomas Fuller
Chief Financial Officer
(310) 571-6505

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