WOOF Petco Health and Wellness Company Inc

• Revenue increased 12.8% to a first quarter record of $563.4 million
• Gross profit increased 20.1% to $136.8 million
• Operating income increased 24.5% to $86.1 million
• Diluted earnings per common share increased 23.9% to $0.57
• Non-GAAP diluted earnings per common share increased 32.0% to $0.66

VCA Inc. (NASDAQ: WOOF), a leading animal healthcare company in the United States and Canada, today reported financial results for the first quarter ended March 31, 2016, as follows: revenue increased 12.8% to a first quarter record of $563.4 million; gross profit increased 20.1% to $136.8 million; operating income increased 24.5% to $86.1 million; net income increased 20.7% to $46.2 million; diluted earnings per common share increased 23.9% to $0.57.

Excluding acquisition-related amortization expense, transaction expenses related to the acquisition of Companion Animal Practices, North America (“CAPNA”) and other discrete items detailed in this press release, Non-GAAP operating income increased 27.6% to $95.2 million; Non-GAAP net income for the quarter increased 28.9% to $53.7 million; and Non-GAAP diluted earnings per common share for the quarter increased 32.0% to $0.66.

Bob Antin, Chairman and CEO, stated, "We had an outstanding quarter highlighted by 32.0% growth in our adjusted diluted earnings per common share. We have continued to experience increasing organic revenue growth and gross margins in both our core Animal Hospital and Laboratory business segments. Given our results relative to our expectations and our future acquisition pipeline, we are increasing our guidance for the full year ended December 2016.

"Animal Hospital revenue in the first quarter increased 16.7%, to $458.6 million, driven by acquisitions made during the past 12 months and same-store revenue growth of 7.6%. Our same-store gross profit margin increased to 16.4%, from 14.3% in the prior-year quarter and our total gross margin increased to 16.0%, from 14.1% in the prior-year quarter. During the 2016 first quarter, we acquired 24 independent animal hospitals which had historical combined annual revenue of $84.0 million.

"Laboratory revenue increased 13.6%, to $106.7 million. Our Laboratory internal revenue growth increased 9.1% to $102.5 million from $94.0 million; laboratory gross profit margin increased 200 basis points to 53.1%, from 51.1%; and our operating margin increased 190 basis points to 43.5%, from 41.6% in the prior-year quarter."

2016 Guidance

We revise our previously provided guidance as follows:

• Revenue from $2.39 billion to $2.41 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 $2.82 to $2.92.

The above revised guidance does not include the impact of the CAPNA acquisition. Assuming a closing date during the second quarter of 2016, we estimate an additional $0.03 to $0.04 in 2016 Non-GAAP adjusted diluted earnings per share excluding amortization, transaction and integration costs.

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 first quarter 2016 financial results during a conference call today, April 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. Interested parties should call at least ten minutes prior to the start of the call to register. Replay of the webcast will be available for ninety days 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; our ability to consummate the acquisition of CAPNA; a material adverse change in the financial condition or operations of either company; the ability to successfully integrate the two companies and achieve expected operating synergies following the transaction; 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 EndedMarch 31, 2016   2015 Revenue: Animal hospital $ 458,623 $ 393,026 Laboratory 106,727 93,972 All other 19,413 34,227 Intercompany (21,324 ) (21,772 ) 563,439   499,453     Direct costs 426,659 385,591   Gross profit: Animal hospital 73,417 55,484 Laboratory 56,716 47,982 All other 6,910 11,424 Intercompany (263 ) (1,028 ) 136,780   113,862     Selling, general and administrative expense: Animal hospital 12,085 11,221 Laboratory 10,296 8,865 All other 5,299 8,687 Corporate 22,448   15,625   50,128   44,398     Net loss on sale or disposal of assets 563   335   Operating income 86,089 69,129 Interest expense, net 7,095 4,837 Other (income) expense (264 ) 66   Income before provision for income taxes 79,258 64,226 Provision for income taxes 31,536   24,673   Net income 47,722 39,553 Net income attributable to noncontrolling interests 1,495   1,252   Net income attributable to VCA Inc. $ 46,227   $ 38,301   Diluted earnings per share $ 0.57   $ 0.46   Weighted-average shares outstanding for diluted earnings per share 81,523   83,373      

VCA Inc.

Condensed, Consolidated Balance Sheets

(Unaudited)

(In thousands)

    March 31, 2016   December 31, 2015 Assets Current assets: Cash and cash equivalents $ 74,480 $ 98,888 Trade accounts receivable, net 79,540 76,634 Inventory 54,961 51,523 Prepaid expenses and other 33,090 30,521 Prepaid income taxes 7,798   24,598   Total current assets 249,869 282,164 Property and equipment, net 540,017 507,753 Other assets: Goodwill 1,656,389 1,517,650 Other intangible assets, net 114,469 97,377 Notes receivable 5,472 2,194 Deferred financing costs, net 5,699 6,133 Other 97,459   93,994   Total assets $ 2,669,374   $ 2,507,265   Liabilities and Equity Current liabilities: Current portion of long-term debt $ 33,947 $ 33,623 Accounts payable 46,573 52,337 Accrued payroll and related liabilities 88,510 75,519 Other accrued liabilities 77,417   70,828   Total current liabilities 246,447 232,307 Long-term debt, less current portion 924,322 838,851 Deferred income taxes 131,150 131,478 Other liabilities 39,167   36,084   Total liabilities 1,341,086 1,238,720 Redeemable noncontrolling interests 11,787 11,511 VCA Inc. stockholders’ equity: Common stock 81 81 Additional paid-in capital 22,681 19,708 Retained earnings 1,321,434 1,275,207 Accumulated other comprehensive loss (37,789 ) (50,034 ) Total VCA Inc. stockholders’ equity 1,306,407 1,244,962 Noncontrolling interests 10,094   12,072   Total equity 1,316,501   1,257,034   Total liabilities and equity $ 2,669,374   $ 2,507,265      

 

VCA Inc.

Condensed, Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

    Three Months EndedMarch 31, 2016   2015 Cash flows from operating activities: Net income $ 47,722 $ 39,553 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 21,289 19,797 Amortization of debt issue costs 434 434 Provision for uncollectible accounts 851 1,183 Net loss on sale or disposal of assets 563 335 Share-based compensation 4,906 4,132 Excess tax benefit from stock based compensation (445 ) (791 ) Other 4,489 (989 ) Changes in operating assets and liabilities: Trade accounts receivable (3,339 ) (14,570 ) Inventory, prepaid expense and other assets (7,569 ) 2,862 Accounts payable and other accrued liabilities (4,802 ) (6,954 ) Accrued payroll and related liabilities 12,955 14,052 Income taxes 16,855   21,581   Net cash provided by operating activities 93,909   80,625   Cash flows from investing activities: Business acquisitions, net of cash acquired (160,385 ) (33,652 ) Property and equipment additions (25,806 ) (16,526 ) Proceeds from sale of assets 12 92 Other (7,346 ) (576 ) Net cash used in investing activities (193,525 ) (50,662 ) Cash flows from financing activities: Repayment of debt (9,678 ) (5,165 ) Proceeds from revolving credit facility 90,000 — Distributions to non-controlling interest partners (1,238 ) (1,325 ) Purchase of non-controlling interests (3,730 ) (1,483 ) Proceeds from issuance of common stock under stock option plans 286 404 Excess tax benefit from stock based compensation 445 791 Repurchase of common stock (843 ) (44,845 ) Other (333 ) (80 ) Net cash provided (used) in financing activities 74,909   (51,703 ) Effect of currency exchange rate changes on cash and cash equivalents 299 (365 ) Decrease in cash and cash equivalents (24,408 ) (22,105 ) Cash and cash equivalents at beginning of period 98,888   81,383   Cash and cash equivalents at end of period $ 74,480   $ 59,278      

VCA Inc.

Supplemental Operating Data

(Unaudited - In thousands, except per share amounts)

 

Table #1

    Reconciliation of net income attributable to Three Months EndedMarch 31, VCA Inc., to Non-GAAP net income attributable to VCA Inc. (1) 2016   2015     Net income attributable to VCA Inc. $ 46,227 $ 38,301 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) 587 — Acquisitions related amortization, net of tax (1) 3,791   3,363   Non-GAAP net income attributable to VCA Inc. $ 53,690   $ 41,664    

Table #2

Three Months EndedMarch 31, Reconciliation of diluted earnings per share to Non-GAAP diluted earnings per share (1) 2016   2015     Diluted earnings per share $ 0.57 $ 0.46 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 — Acquisitions related amortization, net of tax (1) 0.05   0.04   Non-GAAP diluted earnings per share $ 0.66   $ 0.50   Shares used for computing diluted earnings per share 81,523   83,373       Table #3 Three Months EndedMarch 31, Reconciliation of consolidated gross profit to Non-GAAP consolidated gross profit (1) 2016   2015     Consolidated gross profit $ 136,780 $ 113,862 Acquisitions related amortization (1) 6,228   5,465   Non-GAAP consolidated gross profit $ 143,008   $ 119,327   Non-GAAP consolidated gross profit margin 25.4 % 23.9 %   Table #4 Three Months EndedMarch 31, Reconciliation of consolidated operating income to Non-GAAP consolidated operating income (1) 2016   2015     Consolidated operating income $ 86,089 $ 69,129 Adjustments to Other Long-term liabilities (2) 1,954 — Transaction costs related to the CAPNA acquisition (4) 966 — Acquisitions related amortization (1) 6,228   5,526   Non-GAAP consolidated operating income $ 95,237   $ 74,655   Non-GAAP consolidated operating margin 16.9 % 14.9 %  

VCA Inc.

Supplemental Operating Data (cont)

(Unaudited - In thousands, except per share amounts)

_________________________________________________

(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)

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)

We recorded a tax adjustment to our income tax liabilities for $1.0 million.

  (4) In the first quarter of 2016, we recorded transaction costs of $966,000, or $587,000 net of tax related to our acquisition of CAPNA.    

VCA Inc.

Supplemental Operating Data (cont)

(Unaudited - In thousands, except per share amounts)

    As of Table #5

March 31, 2016

  December 31, 2015 Selected consolidated balance sheet data Debt: Senior term notes $ 577,500 $ 585,000 Revolving credit 322,000 232,000 Other debt and capital leases 58,769   55,474   Total debt $ 958,269   $ 872,474     Three Months EndedMarch 31, Table #6

Selected expense data

2016 2015   Rent expense $ 20,864   $ 18,780    

Depreciation and amortization included in direct costs:

Animal hospital $ 17,524 $ 15,962 Laboratory 2,748 2,475 All other 752 940 Intercompany (586 ) (523 ) $ 20,438 $ 18,854

Depreciation and amortization included in selling, general and administrative expense

851   943   Total depreciation and amortization $ 21,289   $ 19,797     Share-based compensation included in direct costs: Laboratory $ 177 $ 161  

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

Animal hospital 784 664 Laboratory 429 366 All other 153 202 Corporate 3,363   2,739   4,729   3,971   Total share-based compensation $ 4,906   $ 4,132    

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