VCA Inc.
Feb 9, 2017

VCA Inc. Reports Fourth Quarter 2016 Results

LOS ANGELES, Feb. 09, 2017 (GLOBE NEWSWIRE) --  VCA Inc. (NASDAQ:WOOF), a leading animal healthcare company in the United States and Canada, today reported financial results for the fourth quarter ended December 31, 2016, as follows: revenue increased 20.5% to a fourth quarter record of $643.1 million; gross profit increased 14.5% to $134.8 million; operating income increased 16.3% to $77.2 million; net income decreased 36.0% to $40.7 million; diluted earnings per common share decreased 35.9% to $0.50; and Non-GAAP diluted earnings per common share increased 16.0% to $0.58.

Our results for the prior-year quarter included a gain of $43.3 million, $26.4 million net of tax, or $0.32 per diluted common share related to the sale of our Vetstreet business. Excluding this item and acquisition-related amortization expense, our Non-GAAP net income increased 15.7% to $47.4 million and Non-GAAP diluted earnings per share increased 16.0% to $0.58.

We also reported our financial results for the twelve months ended December 31, 2016 as follows: revenue increased 18.0% to $2.5 billion; gross profit increased 16.1% to $592.1 million; operating income increased 17.2% to $386.3 million; net income decreased 0.9% to $209.2 million; and diluted earnings per common share remained flat at $2.56. Our financial results for the twelve months ended December 31, 2016, on a Non-GAAP basis, are as follows: gross profit increased 17.5% to $626.8 million; operating income increased 22.8% to $428.2 million; net income increased 20.4% to $236.3 million; and Non-GAAP diluted earnings per common share increased 21.4% to $2.89.

Our financial results for the twelve months ended December 31, 2015 included the aforementioned gain on the sale of our Vetstreet business and a business interruption insurance gain of $4.5 million, $2.8 million net of tax, or $0.03 per diluted common share.

Bob Antin, Chairman and CEO, stated, "We had a strong fourth quarter, which concluded another excellent year.  We experienced solid organic revenue growth of 4.9% and 5.3% in our core Animal Hospital and Laboratory business segments, respectively.

"Animal Hospital revenue in the fourth quarter of 2016 increased 26.2% to $539.4 million driven by acquisitions made in the past twelve months and same-store revenue growth of 4.9%.  Our same-store gross profit margin increased to 15.4%, from 14.3% and our total gross margin increased to 14.4% from 14.2% in the prior-year quarter. During the quarter, we acquired 22 independent animal hospitals, which had historical combined annual revenue of $73.1 million, bringing our year-to-date total (including CAPNA) to 127 independent animal hospitals with historical combined annual revenue of $397.0 million.

"Our Laboratory internal revenue in the fourth quarter of 2016 increased 5.3% to $98.4 million driven by an increase in average revenue per requisition of 4.3%. Laboratory gross profit margin decreased slightly to 48.5% from 48.8% and Non-GAAP Laboratory operating margin increased to 39.1% from 38.4%."

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."

As previously announced on January 9, 2017, we entered into an Agreement and Plan of Merger with Mars, Incorporated ("Mars") under which Mars will acquire all of the outstanding shares of VCA for $93 per share, or a total value of approximately $9.1 billion, including $1.4 billion in outstanding debt.  The Boards of Directors of both companies have approved the transaction, which is subject to certain customary closing conditions including, among other things, VCA shareholder approval and customary regulatory approvals. We expect the transaction to close in Q3 2017.

Conference Call and Webcast

In light of the previously announced agreement with Mars, the previously scheduled earnings conference call and webcast with analysts and investors scheduled for February 9, 2017 has been cancelled.  VCA does not intend to provide guidance for fiscal 2017.

Forward-Looking Statements

This document contains forward-looking statements within the meaning of the securities laws with respect to the proposed transaction between VCA Inc. (the "Company"), Mars and certain subsidiaries of Mars.  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 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, including the adoption of the merger agreement by the stockholders of the Company and 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 merger agreement; (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 merger agreement or the proposed transaction; (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, 2015 filed with the Securities and Exchange Commission (the "SEC") on February 26, 2016, 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.

Additional Information and Where to Find It

This document is being made in respect of the proposed transaction between the Company, Mars and certain subsidiaries of Mars. In connection with the proposed transaction, the Company filed a preliminary proxy statement on Schedule 14A with the SEC on February 3, 2017. Following the filing of the definitive proxy statement with the SEC, the Company will mail the definitive proxy statement and a proxy card to each stockholder entitled to vote at the special meeting relating to the proposed transaction.  The Company also plans to file with the SEC other documents regarding the proposed transaction. INVESTORS AND SECURITY HOLDERS OF THE COMPANY ARE URGED TO CAREFULLY READ THESE MATERIALS (INCLUDING ANY AMENDMENTS OR SUPPLEMENTS THERETO) IN THEIR ENTIRETY AND ANY OTHER RELEVANT DOCUMENTS IN CONNECTION WITH THE PROPOSED TRANSACTION THAT THE COMPANY WILL FILE WITH THE SEC WHEN THEY BECOME AVAILABLE BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION ABOUT THE COMPANY AND THE PROPOSED TRANSACTION.  When completed, a definitive proxy statement and form of proxy will be mailed to the stockholders of the Company. The definitive proxy statement, the preliminary proxy statement and other relevant materials in connection with the proposed transaction (when they become available), and any other documents filed by the Company with the SEC, may be obtained free of charge at the SEC's website (http://www.sec.gov) or through the investor relations section of the Company's website (http://investor.vca.com).

Participants in Solicitation

This document does not constitute a solicitation of proxy, an offer to purchase or a solicitation of an offer to sell any securities.  The Company and its directors, executive officers and certain employees may be deemed to be participants in the solicitations of proxies from the Company's stockholders with respect to the meeting of stockholders that will be held to consider the proposed transaction.  Information about the persons who may, under the SEC rules, be considered to be participants in the solicitation of stockholders of the Company in connection with the proposed transaction, is set forth in the proxy statement for the Company's 2016 Annual Meeting of Stockholders filed with the SEC on March 4, 2016.  Stockholders may obtain additional information regarding the direct and indirect interests of any such persons who may, under the SEC rules, be considered to be participants in the solicitation of stockholders of the Company in connection with the proposed transaction, including the interests of the Company's directors and executive officers in the proposed transaction, which may be different than those of the stockholders of the Company generally, by reading the proxy statement and other relevant documents regarding the proposed transaction when they become available, which the Company will file with the SEC.  Copies of these documents (when they become available) may be obtained free of charge as described in the preceding paragraph.

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
December 31,
 Twelve Months Ended
December 31,
 2016 2015 2016 2015
Revenue:       
Animal hospital$539,403  $427,544  $2,091,780  $1,697,870 
Laboratory98,374  93,397  422,301  393,900 
All other27,954  33,254  93,751  126,988 
Intercompany(22,650) (20,475) (90,969) (85,083)
 643,081  533,720  2,516,863  2,133,675 
        
Direct costs508,322  416,024  1,924,799  1,623,604 
        
Gross profit:       
Animal hospital77,756  60,525  339,988  264,335 
Laboratory47,689  45,609  219,158  201,702 
All other10,126  12,128  34,874  46,702 
Intercompany(812) (566) (1,956) (2,668)
 134,759  117,696  592,064  510,071 
        
Selling, general and administrative expense:       
Animal hospital17,049  11,960  58,952  44,311 
Laboratory10,253  10,181  39,979  38,075 
All other7,533  9,481  24,918  33,569 
Corporate22,228  18,630  80,875  68,040 
 57,063  50,252  204,724  183,995 
Business interruption insurance gain, net      (4,523)
Net loss on sale of assets478  1,063  1,006  829 
Operating income77,218  66,381  386,334  329,770 
Interest expense, net8,191  5,680  32,453  21,076 
Debt retirement costs    1,600   
Other expense (income)83  271  (902) 359 
Gain on sale of business, net  (43,306)   (43,306)
Income before provision for income taxes68,944  103,736  353,183  351,641 
Provision for income taxes26,468  39,582  135,780  135,543 
Net income42,476  64,154  217,403  216,098 
Net income attributable to noncontrolling interests1,788  559  8,207  5,049 
Net income attributable to VCA Inc.$40,688  $63,595  $209,196  $211,049 
        
Diluted earnings per share$0.50  $0.78  $2.56  $2.56 
        
Weighted-average shares outstanding for diluted earnings per share81,811  81,461  81,725  82,414 



VCA Inc.
Condensed, Consolidated Balance Sheets
(Unaudited)
(In thousands)
 
 December 31,
 2016
 December 31,
 2015
Assets   
Current assets:   
Cash and cash equivalents$81,409  $98,888 
Trade accounts receivable, net85,593  76,634 
Inventory57,590  51,523 
Prepaid expenses and other44,752  30,521 
Prepaid income taxes11,705  24,598 
Total current assets281,049  282,164 
Property and equipment, net613,224  507,753 
Other assets:   
Goodwill2,164,422  1,517,650 
Other intangible assets, net212,577  97,377 
Notes receivable, net2,147  2,194 
Other99,909  93,994 
Total assets$3,373,328  $2,501,132 
Liabilities and Equity   
Current liabilities:   
Current portion of long-term obligations$38,320  $33,623 
Accounts payable68,587  52,337 
Accrued payroll and related liabilities97,806  75,519 
Other accrued liabilities91,783  70,828 
 Total current liabilities296,496  232,307 
Long-term obligations, less current portion1,309,397  832,718 
Deferred income taxes142,535  131,478 
Other liabilities44,560  36,084 
Total liabilities1,792,988  1,232,587 
Redeemable noncontrolling interests11,615  11,511 
VCA Inc. stockholders' equity:   
Common stock81  81 
Additional paid-in capital32,157  19,708 
Retained earnings1,484,391  1,275,207 
Accumulated other comprehensive loss(45,406) (50,034)
Total VCA Inc. stockholders' equity1,471,223  1,244,962 
Noncontrolling interests97,502  12,072 
Total equity1,568,725  1,257,034 
Total liabilities and equity$3,373,328  $2,501,132 



VCA Inc.
Condensed, Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
 
 Twelve Months Ended
December 31,
 2016 2015
Cash flows from operating activities:   
Net income$217,403  $216,098 
Adjustments to reconcile net income to net cash provided by operating activities:   
Gain on sale of business  (43,306)
Depreciation and amortization102,942  81,688 
Amortization of debt issue costs1,652  1,741 
Provision for uncollectible accounts8,306  8,401 
Debt retirement costs1,600   
Net loss on sale or disposal of assets1,006  829 
Share-based compensation18,762  16,264 
Deferred income taxes18,339  56,722 
Excess tax benefit from share-based compensation(10,711) (11,089)
Other7,229  2,159 
Changes in operating assets and liabilities:   
Trade accounts receivable(13,555) (28,720)
Inventory, prepaid expense and other assets(22,784) (9,716)
Accounts payable and other accrued liabilities16,124  10,812 
Accrued payroll and related liabilities19,993  11,323 
Income taxes23,525  4,339 
Net cash provided by operating activities389,831  317,545 
Cash flows from investing activities:   
Business acquisitions, net of cash acquired(697,673) (151,586)
Investment in Vetstreet Inc.  (9,552)
Property and equipment additions(122,946) (95,234)
Proceeds from sale of assets1,729  6,762 
Proceeds from sale of business  48,000 
Other(9,351) (2,042)
Net cash used in investing activities(828,241) (203,652)
Cash flows from financing activities:   
Repayment of long-term obligations(1,274,924) (35,017)
Proceeds from issuance of long-term obligations1,255,000   
Proceeds from revolving credit facility555,000  97,000 
Repayment of revolving credit facility(95,000)  
Payment of financing costs(3,817)  
Distributions to noncontrolling interest partners(6,134) (4,962)
Purchase of noncontrolling interests(4,552) (2,500)
Proceeds from issuance of common stock under stock incentive plans3,965  2,683 
Excess tax benefit from share-based compensation10,711  11,089 
Stock repurchases(17,219) (165,607)
Other(1,714) 2,041 
Net cash provided by (used in) financing activities421,316  (95,273)
Effect of currency exchange rate changes on cash and cash equivalents(385) (1,115)
(Decrease) increase in cash and cash equivalents(17,479) 17,505 
Cash and cash equivalents at beginning of year98,888  81,383 
Cash and cash equivalents at end of year$81,409  $98,888 



VCA Inc.
Supplemental Operating Data
(Unaudited - In thousands, except per share amounts)
 
Table #1       
Reconciliation of net income attributable toThree Months Ended
December 31,
 Twelve Months Ended
December 31,
  VCA Inc. to Non-GAAP net income 
attributable to VCA Inc.(1)2016 2015 2016 2015
        
Net income attributable to VCA Inc.$40,688  $63,595  $209,196  $211,049 
Adjustments to Other Long-term liabilities, net of tax (2)    2,040   
Discrete tax items (3)    1,045   
Transaction costs related to the Mars Plan of Merger, net of tax (4)464    464    
Transaction costs related to the CAPNA acquisition, net of tax (5)26    843   
Debt retirement costs, net of tax (6)    974   
Business interruption proceeds, net of tax (7)      (2,752)
Gain on sale of business, net of tax (8)  (26,356)   (26,356)
Acquisitions related amortization, net of tax (1)6,254  3,774  21,703  14,239 
        
Non-GAAP net income attributable to VCA Inc.$47,432  $41,013  $236,265  $196,180 
        
Table #2Three Months Ended
December 31,
 Twelve Months Ended
December 31,
Reconciliation of diluted earnings per share to 
  Non-GAAP diluted earnings per share (1)2016 2015 2016 2015
        
Diluted earnings per share$0.50  $0.78  $2.56  $2.56 
Adjustments to Other Long-term liabilities, net of tax (2)    0.02   
Discrete tax items (3)    0.01   
Transaction costs related to the Mars Plan of Merger, net of tax (4)0.01    0.01   
Transaction costs related to the CAPNA acquisition, net of tax (5)    0.01   
Debt retirement costs, net of tax (6)    0.01   
Business interruption proceeds, net of tax (7)      (0.03)
Gain on sale of business, net of tax (8)  (0.32)   (0.32)
Acquisitions related amortization, net of tax (1)0.08  0.05  0.27  0.17 
        
Non-GAAP diluted earnings per share (9)$0.58  $0.50  $2.89  $2.38 
Shares used for computing       
diluted earnings per share81,811  81,461  81,725  82,414 



VCA Inc.
Supplemental Operating Data (continued)
(Unaudited - In thousands, except per share amounts)
        
Table #3Three Months Ended
December 31,
 Twelve Months Ended
December 31,
Reconciliation of consolidated gross profit to 
  Non-GAAP consolidated gross profit (1)2016 2015 2016 2015
        
Consolidated gross profit$134,759  $117,696  $592,064  $510,071 
Acquisitions related amortization (1)9,918  6,140  34,702  23,153 
        
Non-GAAP consolidated gross profit$144,677  $123,836  $626,766  $533,224 
Non-GAAP consolidated gross profit margin22.5% 23.2% 24.9% 25.0%
        
Table #4Three Months Ended
December 31,
 Twelve Months Ended
December 31,
Reconciliation of consolidated operating income to 
  Non-GAAP consolidated operating income (1)2016 2015 2016 2015
        
Consolidated operating income$77,218  $66,381  $386,334  $329,770 
Adjustments to Other Long-term liabilities (2)    1,954   
Transaction costs related to the Mars Plan of Merger (4)762     762    
Transaction costs related to the CAPNA acquisition (5)43    1,386   
Business interruption proceeds (7)      (4,523)
Acquisitions related amortization (1)11,073  6,201  37,782  23,396 
        
Non-GAAP consolidated operating income$89,096  $72,582  $428,218  $348,643 
Non-GAAP consolidated operating margin13.9% 13.6% 17.0% 16.3%
        

_________________________________________________

(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 fourth quarter, we have recorded transaction costs of $762,000, or $464,000 net of tax, related to the Plan of Merger between VCA and Mars.

(5) As of the end of the fourth quarter, we have recorded transaction costs of $1.4 million, or $843,000 net of tax, related to our acquisition of CAPNA.

(6) 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.

(7) 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.

(8) In the fourth quarter of 2015, we recognized a gain of $43.3 million related to the sale of our wholly-owned subsidiary, Vetstreet, Inc.

(9) Amounts may not foot due to rounding.


VCA Inc.
Supplemental Operating Data (continued)
(Unaudited - In thousands, except per share amounts)
 
     As of
Table #5    December 31,
 2016
 December 31,
 2015
Selected consolidated balance sheet data       
Long-term Obligations:       
Senior term notes    $869,000  $585,000 
Revolving credit    400,000  232,000 
Other debt and capital leases    85,415  55,474 
Total long-term obligations    $1,354,415  $872,474 
        
 Three Months Ended
December 31,
 Twelve Months Ended
December 31,
Table #6 
Selected expense data2016 2015 2016 2015
        
Rent expense$23,831  $19,933  $91,988  $76,694 
        
Depreciation and amortization included       
in direct costs:       
Animal hospital$23,751  $17,042  $84,432  $65,850 
Laboratory2,941  2,754  11,280  10,606 
All other691  926  2,911  3,797 
Intercompany(658) (554) (2,463) (2,156)
 $26,725  $20,168  $96,160  $78,097 
Depreciation and amortization included in selling,       
general and administrative expense2,145  886  6,782  3,591 
Total depreciation and amortization$28,870  $21,054  $102,942  $81,688 
        
Share-based compensation included in direct costs:       
 Laboratory$324  $217  $883  $685 
        
Share-based compensation included in       
  selling, general and administrative expense:       
Animal hospital1,203  715  3,542  2,696 
Laboratory485  405  1,755  1,511 
All other256  493  716  1,119 
Corporate2,825  2,348  11,866  10,253 
 4,769  3,961  17,879  15,579 
Total share-based compensation$5,093  $4,178  $18,762  $16,264 

 

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