BRIEF-Delek US Holdings Q4 earnings per share $0.72
* Delek US Holdings reports fourth quarter and full year 2016 results
Overview -- U.S.-based animal hospital and laboratory operator VCA Antech has maintained debt leverage below 4x, a level we thought might be breached with aggressive acquisition activity and EBITDA pressure from weak pet spending. -- This increases our confidence that VCA can produce increasing EBITDA and free operating cash flow that limits additional borrowing for acquisitions. -- We are affirming our 'BB' corporate credit rating on VCA Antech, and our 'BB+' issue-level ratings on subsidiary Vicar Operating Inc. -- We are revising our rating outlook to stable, because we believe VCA will maintain a "significant" financial risk profile Rating Action On July 12, 2012, Standard & Poor's Ratings Services affirmed its 'BB' corporate credit rating on Los Angeles-based veterinary health company VCA Antech Inc., and its 'BB+' issue-level rating on subsidiary Vicar Operating Inc. We revised our rating outlook to stable from negative, because we are increasingly confident that VCA can expand, while maintaining leverage below 4x. Rationale The ratings on Los Angeles-based VCA Antech Inc. reflect our assessment of VCA's business risk profile as "fair," based on a leading, but narrow market focus. Its financial risk profile is "significant," revised from "aggressive," according to our criteria. The ratings incorporate our expectation that VCA, through acquisitions, will increase revenues through 2013 at low-double-digit rates. We assume some limited price increases will blunt a decline in margins, given still-weak volume and costs tied to a Web-based veterinary initiative, and that debt-financed expansion will not take debt leverage above 3.5x. The fair business risk profile reflects VCA's narrow focus in a mature business, subject to a sluggish economy. Fueled by acquisitions, the company has grown over time to become the largest player in veterinary services, by far, with 589 animal hospitals (77% of revenues) and 53 veterinary diagnostic laboratories (21%). In the 2012 first quarter, acquisitions increased its animal hospital count nearly 10%. Its leading market position provides scale advantages in a fragmented field, and benefits from pet owners' reluctance to cut spending on non-elective visits to animal hospitals. At the same time, VCA's business concentration in the animal health field exposes the company to the uncertain level of pet spending, given the discretion of owners to limit expenditures, especially if the U.S. economy is soft. Two companies with similar sensitivity to consumer spending are Service Corp. International (BB/Stable/--) and Butler Animal Health Supply (BB/Stable/--). A larger consolidator in a different business, Service Corp. International, also has a "fair" business risk descriptor, incorporating its similar narrow, albeit leading, position in its field--death care services. Butler Animal Health Supply, a leading distributor of animal health products with a revenue base about two-thirds the size of VCA, with lower margins, has a business risk profile we assess as "weak." Beginning in the third quarter of 2011, VCA posted low-single-digit same-store sales growth in its hospital segment, following a downtrend beginning in the fourth quarter of 2007. Through 2013, we expect VCA to register low-single-digit organic revenue growth, given our economic forecast of a 2% increase in U.S. GDP, a rise in consumer spending of 2%, and an 8% unemployment rate during that time. We expect VCA to continue generating some revenue growth through increased pricing, but believe the sustainability of price increases is limited by competition with numerous local and regional veterinary providers. We expect revenue growth over the next 18 months to be in the low-double-digit range, aided by ongoing acquisition activity. On Jan. 31, 2012, VCA completed the $71 million acquisition of the 80% of Associated Veterinary Clinics (44 animal hospitals in Canada) it did not already own. In 2011, among other acquisitions, VCA acquired VetStreet, with $23 million in annualized revenue, for $146 million. Along with its acquisition of ThinkPet for $21 million ($11 million cash and stock) in February 2012, this investment is a strategy for leveraging a large pet database in its existing business and with the larger veterinary community. Through 2013, our base-case expectation is for adjusted EBITDA margins to be below last year's 22.2%. We assume ongoing economic sluggishness and the VetStreet integration challenges to contribute to an EBITDA margin squeeze of almost 100 basis points in 2012. We expect more effective marketing and operations of VetStreet to contribute to some recovery in 2013 margins, overall, but expect them to remain below 22%. We assume improvement in animal hospital margins will be limited by consumer sensitivity to the weak economy. This could be evidenced by VCA's limited ability to raise prices (in the low-single-digit range), pet owners' proclivity to purchase pet medications through distribution channels outside of the veterinary clinic, and their tendency to limit more discretionary services and lab tests. We expect continued pressure on VCA's laboratory margins, because of price discounting on services that compete with unrated IDEXX Laboratories' bundled diagnostic machine/reagent offering. Still, we believe that a maturation of new investments should contribute to an upward inflection in overall return on capital that has trended lower, to 12% at March 31, 2012, from 15% since the first quarter of 2010. VCA's significant financial risk profile incorporates our view that adjusted debt to EBITDA should gradually recede from a peak level of 3.5x at March 31, 2012, as debt-financed investments that increased leverage this year add to EBITDA. This contributes to our belief that funds from operations (FFO) to debt (including capitalized operating leases that comprise almost half of the total) will be sustained above the 20% level. These expectations are more consistent with guidelines for a significant financial risk profile, rather than our former aggressive assessment. Liquidity We consider VCA's liquidity as adequate. We expect sources of cash to exceed uses over the next 12 to 24 months. Relevant aspects of VCA's liquidity are: -- With sources exceeding uses by more than $150 million, we expect coverage of uses to be more than 1.2x over the next 12 to 24 months. -- Sources of liquidity include cash on hand of $73 million (March 31, 2012) and funds from operations in excess of $225 million annually. VCA has full availability of its $125 million revolving credit facility maturing in 2016. The cushion under loan covenants are ample: at March 31, 2012, the fixed-charge coverage ratio of 1.76 to 1.00 exceeded the required 1.20 to 1.00, and the leverage ratio was 2.16 to 1.00, well above the 3.00 to 1.00 mandate. -- We expect uses of cash to include some investment in working capital, capital expenditures of roughly $80 million, and mandatory amortization payments on the term loan A of $24 million in 2012 and 36 million in 2013. Recovery analysis Our rating on the senior secured credit facility of VCA subsidiary Vicar Operating Inc. is 'BB+' (one notch higher than the corporate credit rating on VCA) and the recovery rating is '2', indicating our expectation of substantial (70% to 90%) recovery in the event of a payment default. (For the complete recovery analysis, please see the recovery report VCA Antech, to be published following this report on RatingsDirect.) Outlook Our stable rating outlook on VCA reflects our expectation for acquisition-aided double-digit revenue growth, even in the face of ongoing economic weakness. We assume margin pressure in 2013 will ease as the VetStreet integration issues are addressed. Under these circumstances, we believe VCA can produce increasing EBITDA and free operating cash flow that limits additional borrowing for acquisitions, contributing to a decline in adjusted leverage (at a historic high 3.5x). There is substantial capacity in the financial risk profile for debt-financed acquisitions and share repurchases (although there is a history of limited buybacks) within a 4x debt to EBITDA guideline. Accordingly, the most likely cause of a downgrade would be lackluster returns on new investment contributing to the prospect of an extended decline in return on capital. A rating upgrade is unlikely, given VCA's narrow business focus and acquisitive nature. Related Criteria And Research -- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- Criteria Guidelines For Recovery Ratings, Aug. 10, 2009 -- Business Risk/Financial Risk Matrix Expanded, May 27, 2009 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 Ratings List Ratings Affirmed; Outlook Action To From VCA Antech Inc. Corporate Credit Rating BB/Stable/-- BB/Negative/-- Ratings Affirmed Vicar Operating Inc. Senior Secured Debt BB+ Recovery Rating 2
* Delek US Holdings reports fourth quarter and full year 2016 results
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* VSE reports financial results for fourth quarter and year ended 2016