VCA Inc. Reports Second Quarter 2016 Results and Revises Financial Guidance for 2016

  • Revenue increased 19.1% to a second quarter record of $653.5 million
  • Gross profit increased 16.4% to $163.9 million
  • Operating income increased 19.4% to $116.0 million
  • Diluted earnings per common share increased 20.0% to $0.78
  • Non-GAAP diluted earnings per common share increased 24.3% to $0.87

LOS ANGELES–(BUSINESS WIRE)–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, 2016, as follows: revenue increased
19.1% to a second quarter record of $653.5 million; gross profit
increased 16.4% to $163.9 million; operating income increased 19.4% to
$116.0 million; net income increased 18.0% to $64.0 million; and diluted
earnings per common share increased 20.0% to $0.78.

Excluding acquisition-related amortization expense, transaction expenses
related to the acquisition of Companion Animal Practices, North America
(“CAPNA”) and debt retirement costs detailed in this press release,
Non-GAAP operating income increased 22.3% to $126.1 million; Non-GAAP
net income for the quarter increased 22.3% to $70.8 million; and
Non-GAAP diluted earnings per common share for the quarter increased
24.3% to $0.87.

We also reported our financial results for the six months ended June 30,
2016 as follows: revenue increased 16.1% to $1.2 billion; gross profit
increased 18.1% to $300.7 million; operating income increased 21.5% to
$202.1 million; net income increased 19.1% to $110.3 million; and
diluted earnings per common share increased 21.6% to $1.35. Excluding
acquisition-related amortization expense, transaction expenses related
to the acquisition of CAPNA, other discrete items and debt retirement
costs detailed in this press release, our financial results for the six
months ended June 30, 2016, on a Non-GAAP basis, are as follows: gross
profit increased 18.9% to $316.1 million; operating income increased
24.5% to $221.3 million; net income increased 25.1% to $124.5 million;
and Non-GAAP diluted earnings per common share increased 27.5% to $1.53.

Bob Antin, Chairman and CEO, stated, “We had an outstanding quarter
highlighted by the acquisition and integration of CAPNA, and 24.3%
growth in our adjusted diluted earnings per common share. We have
continued to experience strong organic revenue growth and gross margins
in both our core Animal Hospital and Laboratory businesses. Given our
results relative to our expectations and our future acquisition
pipeline, we are extremely optimistic with respect to our results for
the full year ended December 31, 2016.

“Animal Hospital revenue in the second quarter increased 24.1%, to
$540.4 million, driven by acquisitions made during the past 12 months
and same-store revenue growth of 6.3%. Our same-store gross profit
margin increased to 18.3%, from 17.0% in the prior-year quarter and our
total gross margin increased to 17.5%, from 16.9% in the prior-year
quarter. Excluding acquisition-related amortization expense, our
Non-GAAP same-store gross profit margin increased to 19.1% from 18.1%;
and Non-GAAP Animal Hospital total gross profit margin increased to
19.0% from 17.9% in the prior year quarter. During the 2016 second
quarter, we acquired CAPNA with 56 hospitals which had historical
combined annual revenue of $178.3 million; and 13 independent animal
hospitals which had historical combined annual revenue of $23.8 million.

“Our Laboratory internal revenue increased 5.5% to $112.1 million from
$106.2 million; laboratory gross profit margin increased 60 basis points
to 54.0%, from 53.4%; and our operating margin increased 100 basis
points to 45.4%, from 44.4% in the prior-year quarter. Excluding
acquisition-related amortization expense, Non-GAAP Laboratory gross
profit increased to 54.4% from 53.8%; and Non-GAAP Laboratory operating
margin increased to 45.8% from 44.8% in the prior year quarter.”

2016 Guidance

We are revising our previously provided guidance to include our expected
impact from the CAPNA acquisition 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 second quarter 2016 financial results during a
conference call today, July 27th, 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 (888) 311-3471 (domestic) or
(503) 406-4063 (international) and refer to conference ID 34372463.
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
June 30,
Six Months Ended
June 30,
2016     2015 2016     2015
Revenue:
Animal hospital $ 540,376 $ 435,376 $ 998,999 $ 828,402
Laboratory 112,060 106,222 218,787 200,194
All other 23,397 28,669 42,810 62,896
Intercompany (22,344 ) (21,482 ) (43,668 ) (43,254 )
653,489   548,785   1,216,928   1,048,238  
 
Direct costs 489,541 407,938 916,200 793,529
 
Gross profit:
Animal hospital 94,679 73,385 168,096 128,869
Laboratory 60,547 56,703 117,263 104,685
All other 8,917 11,389 15,827 22,813
Intercompany (195 ) (630 ) (458 ) (1,658 )
163,948   140,847   300,728   254,709  
 
Selling, general and administrative expense:
Animal hospital 14,277 10,453 26,362 21,674
Laboratory 9,702 9,487 19,998 18,352
All other 6,022 7,741 11,321 16,428
Corporate 18,189   16,804   40,637   32,429  
48,190 44,485 98,318 88,883
 
Net (gain) loss on sale or disposal of assets (271 ) (819 ) 292   (484 )
Operating income 116,029 97,181 202,118 166,310
Interest expense, net 7,867 5,104 14,962 9,941
Debt retirement costs 1,600 1,600
Other (income) expense (600 ) (37 ) (864 ) 29  
Income before provision for income taxes 107,162 92,114 186,420 156,340
Provision for income taxes 40,736   36,191   72,272   60,864  
Net income 66,426 55,923 114,148 95,476
Net income attributable to noncontrolling interests 2,376   1,624   3,871   2,876  
Net income attributable to VCA Inc. $ 64,050   $ 54,299   $ 110,277   $ 92,600  
 
Diluted earnings per share $ 0.78   $ 0.65   $ 1.35   $ 1.11  
 
Weighted-average shares outstanding for diluted earnings per share 81,729   83,084   81,630   83,227  
 
VCA Inc.
Condensed, Consolidated Balance Sheets
(Unaudited)

(In thousands)

       
June 30,
2016
December 31,
2015
Assets
Current assets:
Cash and cash equivalents $ 109,684 $ 98,888
Trade accounts receivable, net 83,157 76,634
Inventory 61,829 51,523
Prepaid expenses and other 36,221 30,521
Prepaid income taxes 1,153   24,598  
Total current assets 292,044 282,164
Property and equipment, net 564,034 507,753
Other assets:
Goodwill 1,963,377 1,517,650
Other intangible assets, net 257,648 97,377
Notes receivable 2,173 2,194
Other 99,851   93,994  
Total assets $ 3,179,127   $ 2,501,132  
Liabilities and Equity
Current liabilities:
Current portion of long-term debt $ 25,980 $ 33,623
Accounts payable 53,177 52,337
Accrued payroll and related liabilities 80,817 75,519
Other accrued liabilities 81,907   70,828  
Total current liabilities 241,881 232,307
Long-term debt, net 1,279,453 832,718
Deferred income taxes 130,209 131,478
Other liabilities 39,236   36,084  
Total liabilities 1,690,779 1,232,587
Redeemable noncontrolling interests 12,053 11,511
VCA Inc. stockholders’ equity:
Common stock 81 81
Additional paid-in capital 28,696 19,708
Retained earnings 1,385,484 1,275,207
Accumulated other comprehensive loss (37,827 ) (50,034 )
Total VCA Inc. stockholders’ equity 1,376,434 1,244,962
Noncontrolling interests 99,861   12,072  
Total equity 1,476,295   1,257,034  
Total liabilities and equity $ 3,179,127   $ 2,501,132  
 
VCA Inc.
Condensed, Consolidated Statements of Cash Flows
(Unaudited)

(In thousands)

   
Six Months Ended
June 30,
2016     2015
Cash flows from operating activities:
Net income $ 114,148 $ 95,476
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 46,978 40,163
Amortization of debt issue costs 865 870
Provision for uncollectible accounts 2,891 3,379
Debt retirement costs 1,600
Net loss (gain) on sale or disposal of assets 292 (484 )
Share-based compensation 9,104 8,269
Excess tax benefit from share-based compensation (1,421 ) (4,729 )
Other 6,665 (658 )
Changes in operating assets and liabilities:
Trade accounts receivable (7,065 ) (24,217 )
Inventory, prepaid expense and other assets (15,607 ) (8,942 )
Accounts payable and other accrued liabilities 5,889 (4,196 )
Accrued payroll and related liabilities 2,817 8,300
Income taxes 23,557   16,525  
Net cash provided by operating activities 190,713   129,756  
Cash flows from investing activities:
Business acquisitions, net of cash acquired (540,878 ) (66,529 )
Property and equipment additions (58,814 ) (34,521 )
Proceeds from sale of assets 282 6,164
Other (4,924 ) 205  
Net cash used in investing activities (604,334 ) (94,681 )
Cash flows from financing activities:
Repayment of long-term debt (1,256,250 ) (7,924 )
Proceeds from issuance of long-term debt 1,255,000
Proceeds from revolving credit facility 435,000 61,000
Payment of financing costs (3,829 )
Distributions to noncontrolling interest partners (2,554 ) (2,447 )
Purchase of noncontrolling interests (3,730 ) (1,493 )
Proceeds from issuance of common stock under stock option plans 1,122 679
Excess tax benefit from share-based compensation 1,421 4,729
Repurchase of common stock (843 ) (96,674 )
Other (1,233 ) (80 )
Net cash provided (used) in financing activities 424,104   (42,210 )
Effect of currency exchange rate changes on cash and cash equivalents 313   78  
Increase (decrease) in cash and cash equivalents 10,796 (7,057 )
Cash and cash equivalents at beginning of period 98,888   81,383  
Cash and cash equivalents at end of period $ 109,684   $ 74,326  
 
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) 2016 2015 2016 2015
 
Net income attributable to VCA Inc. $ 64,050 $ 54,299 $ 110,277 $ 92,600
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
Acquisitions related amortization, net of tax (1) 5,628   3,565   9,419   6,928
 
Non-GAAP net income attributable to VCA Inc. $ 70,793   $ 57,864   $ 124,483   $ 99,528
 
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) 2016 2015 2016 2015
 
Diluted earnings per share $ 0.78 $ 0.65 $ 1.35 $ 1.11
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
Acquisitions related amortization, net of tax (1) 0.07   0.04   0.12   0.08
Non-GAAP diluted earnings per share (6) $ 0.87   $ 0.70   $ 1.53   $ 1.20
 
Shares used for computing diluted earnings per share 81,729   83,084   81,630   83,227
 
Table #3 Three Months Ended
June 30,
Six Months Ended
June 30,
Reconciliation of consolidated gross profit to
Non-GAAP consolidated gross profit (1) 2016 2015 2016 2015
 
Consolidated gross profit $ 163,948 $ 140,847 $ 300,728 $ 254,709
Acquisitions related amortization (1) 9,187   5,798   15,415   11,263
Non-GAAP consolidated gross profit $ 173,135   $ 146,645   $ 316,143   $ 265,972
Non-GAAP consolidated gross profit margin 26.5% 26.7% 26.0% 25.4%
 
Table #4 Three Months Ended
June 30,
Six Months Ended
June 30,
Reconciliation of consolidated operating income to
Non-GAAP consolidated operating income (1) 2016 2015 2016 2015
 
Consolidated operating income $ 116,029 $ 97,181 $ 202,118 $ 166,310
Adjustments to Other Long-term liabilities (2) 1,954
Transaction costs related to the CAPNA acquisition (4) 231 1,197
Acquisitions related amortization (1) 9,799   5,858   16,027   11,384
Non-GAAP consolidated operating income $ 126,059   $ 103,039   $ 221,296   $ 177,694
Non-GAAP consolidated operating margin 19.3% 18.8% 18.2% 17.0%

_________________________________________________

(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 second quarter, we have recorded transaction
costs of $1.2 million or $728,000 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) 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,
2016
    December 31,
2015
Selected consolidated balance sheet data
Debt:
Senior term notes $ 880,000 $ 585,000
Revolving credit 375,000 232,000
Other debt and capital leases 57,919   55,474  

Total debt

$ 1,312,919   $ 872,474  
 
Three Months Ended
June 30,
Six Months Ended
June 30,
Table #6
Selected expense data 2016 2015 2016 2015
 
Rent expense $ 23,449   $ 18,841   $ 44,313   $ 37,621  
 

Depreciation and amortization included in direct costs:

Animal hospital $ 21,190 $ 16,381 $ 38,714 $ 32,343
Laboratory 2,803 2,676 5,551 5,151
All other 767 963 1,519 1,903
Intercompany (597 ) (530 ) (1,183 ) (1,053 )
$ 24,163 $ 19,490 $ 44,601 $ 38,344

Depreciation and amortization included in selling, general and
administrative expense

1,526   876   2,377   1,819  
Total depreciation and amortization $ 25,689   $ 20,366   $ 46,978   $ 40,163  
 
Share-based compensation included in direct costs:
Laboratory $ 181 $ 163 $ 358 $ 324
 

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

Animal hospital 724 673 1,508 1,337
Laboratory 407 376 836 742
All other 147 198 300 400
Corporate 2,739   2,727   6,102   5,466  
4,017   3,974   8,746   7,945  
Total share-based compensation $ 4,198   $ 4,137   $ 9,104   $ 8,269  
 

Source: VCA Inc.

Contacts

VCA Inc.
Tomas Fuller, 310-571-6505
Chief Financial Officer