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WOOF > SEC Filings for WOOF > Form 10-Q on 7-Nov-2016All Recent SEC Filings

Show all filings for VCA INC

Form 10-Q for VCA INC


7-Nov-2016

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

                                        Page

  Introduction                           31

  Executive Overview                     32

  Critical Accounting Policies           33

Consolidated Results of Operations 34

Segment Results 36

Liquidity and Capital Resources 44


Introduction
The following discussion should be read in conjunction with our condensed, consolidated financial statements provided under Part I, Item I of this Quarterly Report on Form 10-Q. 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 report using words like "believe," "intend," "expect," "estimate," "may," "plan," "should plan," "project," "contemplate," "anticipate," "predict," "potential," "continue," or similar expressions. You may find some of these statements below and elsewhere in this report. 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 report 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 report will be important in determining future results. Consequently, no forward-looking statement can be guaranteed. Actual future results may vary materially. Factors that may cause our plans, expectations, future financial condition and results to change are described throughout this report and in our Annual Report on Form 10-K, particularly in "Risk Factors," Part I, Item 1A of that report.
The forward-looking information set forth in this Quarterly Report on Form 10-Q is as of November 7, 2016, and we undertake no duty to update this information unless required by law. Shareholders and prospective investors can find information filed with the SEC after November 7, 2016 at our website at http://investor.vca.com or at the SEC's website at www.sec.gov.
We are a leading North American animal healthcare company. We provide veterinary services and diagnostic testing services to support veterinary care and we sell diagnostic imaging equipment and other medical technology products and related services to veterinarians. We also franchise a premier provider of pet services including dog day care, overnight boarding, grooming and other ancillary services at specially designed pet care facilities. Our reportable segments are as follows:

         Our Animal Hospital segment operates the largest network of
          freestanding, full-service animal hospitals in the nation. Our animal
          hospitals offer a full range of general medical and surgical services
          for companion animals. We treat diseases and injuries, offer
          pharmaceutical and retail products and perform a variety of pet
          wellness programs, including health examinations, diagnostic testing,
          routine vaccinations, spaying, neutering and dental care. At
          September 30, 2016, our animal hospital network consisted of 776 animal
          hospitals in 43 states and in five Canadian provinces.


         Our Laboratory segment operates the largest network of veterinary
          diagnostic laboratories in the nation. Our laboratories provide
          sophisticated testing and consulting services used by veterinarians in
          the detection, diagnosis, evaluation, monitoring, treatment and
          prevention of diseases and other conditions affecting animals. At
          September 30, 2016, our laboratory network consisted of 60 laboratories
          serving all 50 states and certain areas in Canada.

For the three and nine months ended September 30, 2016, our "All Other" category includes the results of our Medical Technology and Camp Bow Wow operating segments. For the comparable prior periods in 2015, our "All Other" category included the results of operations of our Vetstreet operating segment, which we sold in December 2015. Each of these segments did not meet the materiality thresholds to be considered reportable segments.
The practice of veterinary medicine is subject to seasonal fluctuation. In particular, demand for veterinary services is significantly higher during the warmer months because pets spend a greater amount of time outdoors where they are more likely to be injured and are more susceptible to disease and parasites. In addition, use of veterinary services may be affected by levels of flea infestation, heartworms and ticks, and the number of daylight hours.


Use of Supplemental Non-GAAP Financial Measures

In this management's discussion and analysis, we use supplemental measures of our performance, which are derived from our consolidated financial information, but which are not presented in our consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). These financial measures, which are considered "Non-GAAP financial measures" under SEC rules, include our Non-GAAP gross profit and our Non-GAAP gross margin on a consolidated basis for our Animal Hospital segment, and the same measures expressed on a same-store basis. Additionally, our Non-GAAP financial measures also include our Non-GAAP SG&A, our Non-GAAP operating income and Non-GAAP operating margin on a consolidated basis. Lastly, our Non-GAAP financial measures also include our Non-GAAP consolidated net income and Non-GAAP diluted earnings per share. See Consolidated Results of Operations - Non-GAAP Financial Measures below for information about our use of these Non-GAAP financial measures, including our reasons for including the measures, material limitations with respect to the usefulness of the measures, and a reconciliation of each Non-GAAP financial measure to the most directly comparable GAAP financial measure.
Executive Overview
During the three and nine months ended September 30, 2016, we experienced increases in consolidated revenue, gross profit and operating income. The increases were primarily driven by revenue from our acquisitions and organic growth in our Animal Hospital and Laboratory segments. Our Animal Hospital same-store revenue increased 5.4% and 6.5% for the three and nine months ended September 30, 2016, respectively, as compared to the same periods in the prior year. Our Laboratory internal revenue increased 5.5% and 6.6% for the three and nine months ended September 30, 2016, respectively, as compared to the same periods in the prior year. Our consolidated operating income increased 10.2% and 17.4% for the three and nine months ended September 30, 2016, respectively, as compared to the same periods in the prior year. Our consolidated operating margin decreased by 130 basis points and remained flat for the three and nine months ended September 30, 2016, respectively, as compared to the same periods in the prior year. Our Non-GAAP consolidated operating income, which excludes the impact of intangible asset amortization associated with acquisitions, and other discrete items, increased 19.8% and 22.8% for the three and nine months ended September 30, 2016, respectively, as compared to the same periods in the prior year. Our Non-GAAP consolidated operating margins increased by 10 basis points and 80 basis points for the three and nine months ended September 30, 2016, respectively, as compared to the same periods in the prior year. The increase in Non-GAAP consolidated operating income was primarily due to improved results from our Animal Hospital and Laboratory business segments. Share Repurchase Program
In April 2013, our Board of Directors authorized a share repurchase for up to $125 million of our common shares, which was completed in August 2014. In August 2014, our Board of Directors authorized the continuance of that share repurchase program, authorizing us to repurchase up to an additional $400 million of our common shares. These repurchases may be made from time to time in open market transactions, pursuant to trading plans established in accordance with SEC rules, through privately negotiated transactions, block trades or accelerated share repurchases. The timing and number of shares repurchased will depend on a variety of factors, including price, capital availability, legal requirements and economic and market conditions. As of September 30, 2016, we had repurchased $298.9 million of our common shares pursuant to our current share repurchase program. Accordingly, $101.1 million remains available for future repurchases. The Company is not obligated to purchase any shares under the repurchase program, and repurchases may be suspended or discontinued at any time without prior notice. During the three and nine months ended September 30, 2016, no share repurchases were made since we elected to deploy our capital to fund acquisitions. Our share repurchase program has no expiration date. The repurchases have been and will continue to be funded by existing cash balances and by our revolving credit facility. Refer to Item 2. Unregistered Sales of Equity Securities and the Use of Proceeds in Part II of this report. Recent Developments
On May 1, 2016, we acquired an 80% ownership interest in CAPNA for approximately $350.4 million. CAPNA, founded in 2010, and operated at the time of its acquisition, a network of 56 free standing animal hospitals in 18 states. On June 29, 2016, we entered into a new senior credit facility with various lenders for approximately $1.7 billion of senior secured credit facilities. The New Senior Credit Facility replaced our previous senior credit facility which provided for $600 million of term notes and a $800 million revolving credit facility. The New Senior Credit Facility provides for $880 million of senior secured term notes and an $800 million senior secured revolving facility, which may be used to borrow, on a same-day notice under a swing line, the lesser of $25 million and the aggregate unused amount of the revolving credit facility then in effect. Refer to Note 6, Long-Term Obligations to the Unaudited Condensed, Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.


Acquisitions
Our annual growth strategy includes the acquisition of independent animal hospitals. We also evaluate the acquisition of animal hospital chains, laboratories and related businesses if favorable opportunities are presented. For the nine months ended September 30, 2016, we acquired $145.5 million and $178.3 million of annualized Animal Hospital revenue for independent animal hospitals and CAPNA, respectively.
The following table summarizes the changes in the number of facilities operated by our Animal Hospital and Laboratory segments during the nine months ended September 30, 2016 and 2015, respectively:

                         Nine Months Ended
                           September 30,
                         2016         2015
Animal Hospitals:
Beginning of period       682          643
Acquisitions               49           42
CAPNA acquisition          56            -
Acquisitions, merged       (3 )         (4 )
Sold, closed or merged     (8 )         (7 )
End of period             776          674

Laboratories:
Beginning of period        60           59
Acquisitions                -            1
Acquisitions, merged        -           (1 )
End of period              60           59

Critical Accounting Policies
Our condensed, consolidated financial statements have been prepared in accordance with GAAP, which require management to make estimates and assumptions that affect reported amounts. The estimates and assumptions are based on historical experience and on other factors that management believes to be reasonable. Actual results may differ from those estimates. Critical accounting policies represent the areas where more significant judgments and estimates are used in the preparation of our condensed, consolidated financial statements. A discussion of such critical accounting policies, which include revenue recognition, goodwill, other intangible assets, and income taxes, can be found in our 2015 Annual Report on Form 10-K. There have been no material changes to the policies noted above as of this Quarterly Report on Form 10-Q for the period ended September 30, 2016.

Recent Accounting Pronouncements

A discussion of recent accounting pronouncements is included in Note 13, Recent Accounting Pronouncements to the Unaudited Condensed, Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.


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