01—Abstract
Summary
Summary of the 10-K/A filed February 13, 1997. Cited figures are marked; the original filing is the authoritative source.
McKesson's amended fiscal 1996 10-K/A (year ended March 31, 1996) restates results to present Armor All and Service Merchandising as discontinued operations, following the December 31, 1996 sale of its 55%a Armor All stake to The Clorox Company and the decision to divest Service Merchandising.
On a continuing-operations basis, fiscal 1996 revenues rose 5.5% to $9.95 billionb, driven almost entirely by volume growth in Health Care Services, which generated 97% of revenue. Income from continuing operations was $120.7 million ($2.59 per fully diluted share), up about 38% from the prior year's $87.5 million before unusual items. Total net income was $135.4 million ($2.90 per share), including $14.7 million from discontinued operations.
Operating margin improved to 2.4% from 2.0% excluding unusual items, reflecting cost control, though competitive pressure compressed selling margins in the U.S. distribution business. The balance sheet remained solid. Total debt was $471 millionc, a 30.7% debt-to-capital ratio, and cash plus marketable securities totaled $456 million.
The company had $250 milliond of unused credit capacity and an investment-grade rating (S&P A+, Moody's A2). Working capital rose to 8.2% of revenues, largely because of a $239.6 million inventory build aimed at securing favorable vendor purchase terms. Share repurchases of 1.35 million shares for $63 million were completed, and a new authorization for 3.5 million additional shares was announced in May 1996.
Investors should weigh the subsequent events in the filing. In fiscal 1997 McKesson acquired FoxMeyer's healthcare distribution business for roughly $23 million in cash plus about $500 million in secured debt payoff and $75 million of assumed liabilities, and it bought Automated Healthcare for $61.4 million.
The company also faces a pending antitrust class action brought by retail pharmacies over brand-name drug pricing, which management believes it can defend. The Armor All sale produced an after-tax gain of $120.2 million.
02—Key points
Key Highlights
- Continuing-operations revenue rose 5.5% to $9.95 billion in fiscal 1996, almost entirely from volume growth at Health Care Services, which accounted for $9.66 billion of the total.
- Income from continuing operations was $120.7 million, or $2.59 per fully diluted share, up roughly 38% from the prior year's $87.5 million before unusual items.
- Net income was $135.4 million ($2.90 per share), including $14.7 million from discontinued operations (Armor All and Service Merchandising).
- Operating margin reached 2.4%, up from 2.0% excluding unusual items in fiscal 1995, driven by cost control despite intense competition that narrowed selling margins.
- Balance sheet strength: total debt of $471 million (30.7% of capital), $456 million in cash and marketable securities, $250 million of undrawn credit lines, and S&P A+ / Moody's A2 ratings.
- Working capital rose to 8.2% of revenues because inventories grew $239.6 million, partly to secure favorable vendor purchase terms.
- Subsequent events include the FoxMeyer distribution acquisition (about $500 million in debt payoff plus $75 million of assumed liabilities), the $61.4 million Automated Healthcare purchase, and the $120.2 million after-tax gain on the Armor All sale to Clorox.
03—Questions
Frequently Asked Questions
Why was this 10-K amended, and how does the amendment change the reported results?
The amendment restates historical financials to treat Armor All and Service Merchandising as discontinued operations, after Armor All was sold on December 31, 1996 and Service Merchandising was slated for divestiture. Their results are removed from continuing operations for all periods shown, so continuing revenue and profit figures are not comparable to the original filing. Net income is unchanged because the discontinued operations are still included below the continuing-operations line.
How profitable is the core business, and what drove the improvement?
Continuing operations earned $120.7 million after tax in fiscal 1996 versus $87.5 million a year earlier before unusual items. Operating margin rose to 2.4% from 2.0%, helped by operating expense efficiencies and cost control at Health Care Services and Water Products. Gross margin was 9.2%, with the drop in selling margins from competition offset by generic-drug program gains and expense reductions.
What are the main balance sheet and liquidity considerations?
Total debt was $471 million, or 30.7% of total capitalization, down from 32.7% a year earlier, and the company held $456 million in cash and marketable securities. It had $250 million of unused committed revolving credit and an investment-grade rating. Inventories rose to $1.3 billion (LIFO basis) and working capital increased as a share of revenue, so investors should watch inventory turnover and payables.
What risks or events after year-end could affect investors?
The FoxMeyer acquisition in November 1996 is large relative to the company's size, funded through commercial paper and a bank note, and its negative goodwill is subject to preliminary purchase-price estimates. A purported Armor All shareholder class action over the sale price was filed in December 1996. Retail pharmacies have also brought antitrust suits over brand-name drug pricing, and management says it has meritorious defenses. Environmental reserves are modest, at about $24 million for five sites.
04—Continue