VCA Inc.
Jul 26, 2017

VCA Inc. Reports Second Quarter 2017 Results

LOS ANGELES, July 26, 2017 (GLOBE NEWSWIRE) -- VCA Inc. (NASDAQ:WOOF), a leading animal healthcare company in the United States and Canada, today reported financial results for the second quarter ended June 30, 2017, as follows: revenue increased 13.7% to a second quarter record of $743.1 million; gross profit increased 12.9% to $185.1 million; operating income increased 7.8% to $125.1 million; net income increased 5.7% to $67.7 million; and diluted earnings per common share increased 5.1% to $0.82. Excluding transaction expenses related to the proposed acquisition of VCA by Mars, Incorporated ("Mars"), and acquisition-related amortization expense, our results for this quarter are as follows: Non-GAAP operating income increased 11.8% to $140.9 million; Non-GAAP net income increased 11.0% to $78.6 million; and Non-GAAP diluted earnings per common share increased 10.3% to $0.96. Our results for the prior-year quarter included transaction expenses related to the acquisition of Companion Animal Practices, North America ("CAPNA") and debt retirement costs, detailed in the supplemental schedules of this press release.

We also reported our financial results for the six months ended June 30, 2017 as follows: revenue increased 16.8% to $1.4 billion; gross profit increased 12.9% to $339.6 million; operating income increased 9.3% to $220.9 million; net income increased 7.7% to $118.8 million; and diluted earnings per common share increased 7.4% to $1.45. Excluding acquisition-related amortization expense, transaction expenses related to the proposed acquisition of VCA by Mars, our financial results for the six months ended June 30, 2017, on a Non-GAAP basis, are as follows: gross profit increased 13.7% to $359.3 million; operating income increased 13.7% to $251.5 million; net income increased 12.1% to $139.5 million; and Non-GAAP diluted earnings per common share increased 11.1% to $1.70.

Bob Antin, Chairman and CEO, stated, "We had a good quarter highlighted by 10.3% growth in our adjusted diluted earnings per common share.  We continue to experience organic revenue growth and increasing gross margins in both our core Animal Hospital and Laboratory businesses." Bob Antin added, "On a personal basis, it's been a great pleasure to have achieved such excellent growth over the past 30 years, while at the same time working alongside many great people, including my two co-founders, Art Antin and Neil Tauber, as well as Tom Fuller, our chief financial officer, and Todd Tams, our chief medical officer, who have been with VCA since the beginning.  In addition to providing consistent growth and returns to our shareholders, VCA has established itself as a leading provider of petcare, with an incredible group of people that have dedicated themselves to creating a better world for pets.

"Animal Hospital revenue in the second quarter increased 16.4%, to $628.8 million, driven by acquisitions made during the past 12 months and same-store revenue growth of 5.2%.  Our same-store gross profit margin increased 80 basis points to 18.6%, and our total gross margin increased 40 basis points to 17.9%. Excluding acquisition-related amortization expense, both our Non-GAAP same-store gross profit margin and Non-GAAP Animal Hospital total gross profit margin increased 40 basis points to 19.4%. During the second quarter, we acquired nine independent animal hospitals which had historical combined annual revenue of $26.7 million.

"Our Laboratory internal revenue in the second quarter increased 4.6% to $117.2 million; laboratory gross profit margin increased 10 basis points to 54.1% and operating margin increased 20 basis points to 45.6%. Excluding acquisition-related amortization expense, Non-GAAP Laboratory gross profit increased 10 basis points to 54.5%; and Non-GAAP Laboratory operating margin increased 10 basis points to 45.9%."

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."

Forward-Looking Statements

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 document using words like "believe," "intend," "expect," "estimate," "may," "plan," "should," "could," "forecast," "looking ahead," "possible," "will," "project," "contemplate," "anticipate," "predict," "potential," "continue," or similar expressions. You may find some of these statements below and elsewhere in this document. 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 document may turn out to be incorrect. 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 document will be important in determining future results. Consequently, no forward-looking statement can be guaranteed. Actual future results may vary materially. Many factors could cause actual future events to differ materially from the forward-looking statements in this document, including but not limited to: (i) the risk that the proposed transaction with Mars may not be completed in a timely manner or at all, which may adversely affect the Company's business and the price of the common stock of the Company; (ii) the failure to satisfy or obtain waivers of the conditions to the consummation of the proposed transaction with Mars, including the receipt of certain governmental and regulatory approvals; (iii) the occurrence of any event, change or other circumstances that could give rise to the termination of the proposed transaction with Mars; (iv) the effect of the announcement or pendency of the proposed transaction on the Company's business relationships, operating results and business generally; (v) risks that the proposed transaction disrupts current plans and operations of the Company, including the risk of adverse reactions or changes to business relationships with customers, suppliers and other business partners of the Company; (vi) potential difficulties in the hiring or retention of employees of the Company as a result of the proposed transaction; (vii) risks related to diverting management's attention from the Company's ongoing business operations; (viii) potential litigation relating to the proposed transaction with Mars; (ix) unexpected costs, charges or expenses resulting from the proposed transaction; (x) competitive responses to the proposed transaction; and (xi) legislative, regulatory and economic developments. The foregoing list of factors is not exclusive. Additional risks and uncertainties that could affect the Company's financial and operating results are included under the captions "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in the Company's most recent Annual Report on Form 10-K for the year ended December 31, 2016 filed with the Securities and Exchange Commission (the "SEC") on February 28, 2017, and the Company's more recent reports filed with the SEC. The Company can give no assurance that the conditions to the proposed transaction will be satisfied, or that it will close within the anticipated time period. Investors and security holders are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which statements were made. Except as required by applicable law, the Company undertakes no obligation to revise or update any forward-looking statement, or to make any other forward-looking statements, whether as a result of new information, future events or otherwise.

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
June 30,
 Six Months Ended
June 30,
  2017 2016 2017 2016
Revenue:        
Animal hospital $628,798  $540,376  $1,196,979  $998,999 
Laboratory 117,201  112,060  228,349  218,787 
All other 22,533  23,397  45,102  42,810 
Intercompany (25,400) (22,344) (49,047) (43,668)
  743,132  653,489  1,421,383  1,216,928 
         
Direct costs 558,039  489,541  1,081,822  916,200 
         
Gross profit:        
Animal hospital 112,559  94,679  198,869  168,096 
Laboratory 63,424  60,547  123,017  117,263 
All other 9,356  8,917  18,042  15,827 
Intercompany (246) (195) (367) (458)
  185,093  163,948  339,561  300,728 
         
Selling, general and administrative expense:        
Animal hospital 16,745  14,277  34,356  26,362 
Laboratory 9,975  9,702  19,881  19,998 
All other 7,512  6,022  14,152  11,321 
Corporate 25,544  18,189  49,788  40,637 
  59,776  48,190  118,177  98,318 
         
Net loss (gain) on sale or disposal of assets 230  (271) 480  292 
Operating income 125,087  116,029  220,904  202,118 
Interest expense, net 10,169  7,867  19,196  14,962 
Debt retirement costs   1,600    1,600 
Other income (280) (600) (582) (864)
Income before provision for income taxes 115,198  107,162  202,290  186,420 
Provision for income taxes 44,774  40,736  79,413  72,272 
Net income 70,424  66,426  122,877  114,148 
Net income attributable to noncontrolling interests 2,712  2,376  4,072  3,871 
Net income attributable to VCA Inc. $67,712  $64,050  $118,805  $110,277 
         
Diluted earnings per share $0.82  $0.78  $1.45  $1.35 
         
Weighted-average shares outstanding for diluted earnings per share 82,228  81,729  82,204  81,630 


VCA Inc.
Condensed, Consolidated Balance Sheets
(Unaudited)
(In thousands)
 
  June 30,
 2017
 December 31,
 2016
Assets    
Current assets:    
Cash and cash equivalents $119,052  $81,409 
Trade accounts receivable, net 86,323  85,593 
Inventory 56,541  57,590 
Prepaid expenses and other 42,721  44,752 
Prepaid income taxes   11,705 
Total current assets 304,637  281,049 
Property and equipment, net 656,362  613,224 
Other assets:    
Goodwill 2,264,265  2,164,422 
Other intangible assets, net 207,158  212,577 
Notes receivable 2,196  2,147 
Other 103,107  99,909 
Total assets $3,537,725  $3,373,328 
Liabilities and Equity    
Current liabilities:    
Current portion of long-term obligations $49,347  $38,320 
Accounts payable 57,231  68,587 
Accrued payroll and related liabilities 96,072  97,806 
Income tax payable 4,732   
Other accrued liabilities 93,053  91,783 
Total current liabilities 300,435  296,496 
Long-term obligations, net 1,325,411  1,309,397 
Deferred income taxes, net 148,368  142,535 
Other liabilities 47,472  44,560 
Total liabilities 1,821,686  1,792,988 
Redeemable noncontrolling interests 10,558  11,615 
VCA Inc. stockholders' equity:    
Common stock 81  81 
Additional paid-in capital 40,985  32,157 
Retained earnings 1,603,196  1,484,391 
Accumulated other comprehensive loss (37,075) (45,406)
Total VCA Inc. stockholders' equity 1,607,187  1,471,223 
Noncontrolling interests 98,294  97,502 
Total equity 1,705,481  1,568,725 
Total liabilities and equity $3,537,725  $3,373,328 


VCA Inc.
Condensed, Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
 
  Six Months Ended
June 30,
  2017 2016
Cash flows from operating activities:    
Net income $122,877  $114,148 
Adjustments to reconcile net income to net cash provided by operating activities:    
Depreciation and amortization 60,920  46,978 
Amortization of debt issue costs 767  865 
Provision for uncollectible accounts 4,319  2,891 
Debt retirement costs   1,600 
Net loss on sale or disposal of assets
 480  292 
Share-based compensation 7,993  9,104 
Excess tax benefits from share-based compensation   (1,421)
Other (1,332) 6,665 
Changes in operating assets and liabilities:    
Trade accounts receivable (5,318) (7,065)
Inventory, prepaid expense and other assets 1,287  (15,607)
Accounts payable and other accrued liabilities 8,777  5,889 
Accrued payroll and related liabilities (1,936) 2,817 
Income taxes 16,449  23,557 
Net cash provided by operating activities 215,283  190,713 
Cash flows from investing activities:    
Business acquisitions, net of cash acquired (123,852) (540,878)
Property and equipment additions (54,638) (58,814)
Proceeds from sale of assets 1,747  282 
Other (7,900) (4,924)
Net cash used in investing activities (184,643) (604,334)
Cash flows from financing activities:    
Repayment of long-term obligations (58,259) (1,256,250)
Proceeds from issuance of long-term obligations   1,255,000 
Proceeds from revolving credit facility 70,000  435,000 
Payment of financing costs   (3,829)
Distributions to noncontrolling interest partners (2,333) (2,554)
Proceeds from formation of noncontrolling interests 335   
Purchase of noncontrolling interests (1,401) (3,730)
Proceeds from issuance of common stock under stock incentive plans 90  1,122 
Excess tax benefits from share-based compensation   1,421 
Stock repurchases (129) (843)
Other (1,479) (1,233)
Net cash provided by financing activities 6,824  424,104 
Effect of currency exchange rate changes on cash and cash equivalents 179  313 
Increase in cash and cash equivalents 37,643  10,796 
Cash and cash equivalents at beginning of period 81,409  98,888 
Cash and cash equivalents at end of period $119,052  $109,684 


VCA Inc.
Supplemental Operating Data
(Unaudited - In thousands, except per share amounts)
 
Table #1        
Reconciliation of net income attributable to Three Months Ended
June 30,
 Six Months Ended
June 30,
VCA Inc., to Non-GAAP net income attributable  
to VCA Inc. (1) 2017  2016  2017  2016 
         
Net income attributable to VCA Inc. $67,712  $64,050  $118,805  $110,277 
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)   141    728 
Debt retirement costs, net of tax (5)   974    974 
Transaction costs related to the Mars transaction (6) 4,468    7,851   
Acquisitions related amortization, net of tax (1) 6,411  5,628  12,876  9,419 
         
Non-GAAP net income attributable to VCA Inc. $78,591  $70,793  $139,532  $124,483 
         
Table #2 Three Months Ended
June 30,
 Six Months Ended
June 30,
Reconciliation of diluted earnings per share to  
Non-GAAP diluted earnings per share (1) 2017  2016  2017  2016 
         
Diluted earnings per share $0.82  $0.78  $1.45  $1.35 
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    0.01 
Transaction costs related to the Mars transaction (6) 0.05    0.10   
Acquisitions related amortization, net of tax (1) 0.08  0.07  0.16  0.12 
Non-GAAP diluted earnings per share (7) $0.96  $0.87  $1.70  $1.53 
         
Shares used for computing diluted earnings per share 82,228  81,729  82,204  81,630 
         
Table #3 Three Months Ended
June 30,
 Six Months Ended
June 30,
Reconciliation of consolidated gross profit to  
Non-GAAP consolidated gross profit (1) 2017  2016  2017  2016 
         
Consolidated gross profit $185,093  $163,948  $339,561  $300,728 
Acquisitions related amortization (1) 9,606  9,187  19,757  15,415 
Non-GAAP consolidated gross profit $194,699  $173,135  $359,318  $316,143 
Non-GAAP consolidated gross profit margin 26.2% 26.5% 25.3% 26.0%
         


VCA Inc.
Supplemental Operating Data (cont)
(Unaudited - In thousands, except per share amounts)
 
Table #4 Three Months Ended
June 30,
 Six Months Ended
June 30,
Reconciliation of consolidated operating income to  
Non-GAAP consolidated operating income (1) 2017  2016  2017  2016 
         
Consolidated operating income $125,087  $116,029  $220,904  $202,118 
Adjustments to other long-term liabilities (2)       1,954 
Transaction costs related to the CAPNA acquisition (4)   231    1,197 
Transaction costs related to the Mars transaction (6) 4,468    7,851   
Acquisitions related amortization (1) 11,338  9,799  22,763  16,027 
Non-GAAP consolidated operating income $140,893  $126,059  $251,518  $221,296 
Non-GAAP consolidated operating margin 19.0% 19.3% 17.7% 18.2%
         

_______________________________________________

(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 second quarter of 2016, we have recorded transaction costs of $1.2 million or $728,000 net of tax related to our acquisition of CAPNA.

(5) In June of 2016, we incurred debt retirement costs of $1.6 million, or $974,000 net of tax, in connection with our new credit facility.

(6) As of the second quarter of 2017, we have recorded transaction costs of $7.9 million related to the proposed transaction with Mars.

(7) Amounts may not foot due to rounding.


VCA Inc.
Supplemental Operating Data (cont)
(Unaudited - In thousands, except per share amounts)
 
    As of
Table #5     June 30,
 2017
 December 31,
 2016
Selected consolidated balance sheet data        
Long-term obligations:        
Senior term notes     $858,000  $869,000 
Revolving credit     440,000  400,000 
Other debt and capital leases     82,689  85,415 
Total long-term obligations     $1,380,689  $1,354,415 
         
  Three Months Ended
June 30,
 Six Months Ended
June 30,
Table #6  
Selected expense data 2017 2016 2017 2016
         
Rent expense $25,609  $23,449  $50,777  $44,313 
         
Depreciation and amortization included        
in direct costs:        
Animal hospital $25,196  $21,190  $50,575  $38,714 
Laboratory 3,139  2,803  6,011  5,551 
All other 124  767  698  1,519 
Intercompany (704) (597) (1,390) (1,183)
  $27,755  $24,163  $55,894  $44,601 
Depreciation and amortization included in selling,        
general and administrative expense 2,764  1,526  5,026  2,377 
Total depreciation and amortization $30,519  $25,689  $60,920  $46,978 
         
Share-based compensation included in direct costs:        
Laboratory $192  $181  $381  $358 
         
Share-based compensation included in        
selling, general and administrative expense:        
Animal hospital 864  724  1,696  1,508 
Laboratory 362  407  703  836 
All other 159  147  313  300 
Corporate 2,454  2,739  4,900  6,102 
  3,839  4,017  7,612  8,746 
Total share-based compensation $4,031  $4,198  $7,993  $9,104 

 

Contact: Tomas Fuller
Chief Financial Officer
(310) 571-6505