01—Abstract
Summary
Summary of the 10-K filed June 19, 1997. Cited figures are marked; the original filing is the authoritative source.
McKesson's fiscal 1997 (year ended March 31, 1997) was a transformational year.
Revenues rose 29% to $12.9 billiona, driven largely by the November 1996 FoxMeyer pharmaceutical distribution acquisition (about $598 million) and the February 1997 General Medical acquisition (about $775 million). Net income was $133.9 million, or $2.98 per fully diluted share, but this figure is flattered by a $120.2 million after-tax gain on the sale of Armor All. Income from continuing operations was only $5.1 million, reflecting $147.0 million of pre-tax unusual items, mainly FoxMeyer distribution-center consolidation and integration charges, a $48.2 million in-process technology write-off from Automated Healthcare, and a $15.1 million receivables reserve.
Before unusual items, continuing income fell about 5% to $114.6 millionb, which management attributes to the temporary dilution from the acquisitions. The balance sheet shifted materially. Total assets nearly doubled to $5.17 billion, and total debt rose to $985 million.
Including the $200 millionc trust convertible preferred securities, the debt-to-capital ratio reached 40.4%, and management reports a net debt-to-capital ratio of 34%. Cash and marketable securities fell to $230 million. Management targets 20% EPS growth, ROE above 15%, and a debt-to-total-capital ratio of 40% to 50%, and expects the acquisitions to be accretive in fiscal 1998.
The company is also consolidating roughly 22 distribution centers, with seven closed by March 31, 1997. Investors should weigh the strategic logic, which centers on health care supply management and the institutional and alternate-site markets, against the execution risk.
Integration costs, thin operating margins (0.7% reported, 1.8% before unusual items), and significant litigation exposure, including a $400 milliond+ FoxMeyer suit and antitrust class actions, all bear on the outlook. The filing shows margin recovery is expected to depend on successful consolidation over the next two years.
02—Key points
Key Highlights
- Revenue up 29% to $12.9 billion, with about 15 points from acquired businesses and 14% growth from existing business
- Net income of $133.9 million ($2.98 per diluted share) includes a $120.2 million after-tax gain on the Armor All sale; continuing operations earned only $5.1 million
- $147.0 million of pre-tax unusual items, including FoxMeyer integration charges, a $48.2 million AHI in-process R&D write-off, and receivables reserves
- Acquisitions of FoxMeyer (~$598M) and General Medical (~$775M) significantly expanded the institutional and medical-surgical supply franchise; General Medical's run-rate is about $1.7 billion
- Total assets rose to $5.17 billion from $3.36 billion; total debt reached $985 million, with a net debt-to-capital ratio of 34%
- Management targets 20% EPS growth and ROE above 15%; the company is closing about 22 FoxMeyer-related distribution centers, with seven closed by year-end
- Significant litigation pending, including a FoxMeyer Health Corp. suit seeking at least $400 million and multiple retail pharmacy antitrust class actions
03—Questions
Frequently Asked Questions
Why did net income look stable while continuing operations earnings collapsed?
Net income of $133.9 million includes $128.8 million from discontinued operations, mostly the $120.2 million after-tax gain on selling the 55% Armor All stake. Continuing operations contributed only $5.1 million because of $147.0 million in pre-tax unusual items. Excluding those items, continuing operations income was $114.6 million, down about 5% from $120.7 million a year earlier.
What drove the revenue jump and how much was organic?
Revenues rose $2.9 billion (29%) to $12.9 billion. Existing business grew 14%, while acquisitions contributed about 15 points, mainly FoxMeyer and General Medical. U.S. Health Care internal growth was 17%, led by retail chains (28%) and institutions (19%). Management also cited an estimated $3.4 billion of annualized FoxMeyer sales retained, which supports pro forma revenue of $16.5 billion.
How leveraged is McKesson after the acquisitions and what are its financial targets?
Total debt rose to $985 million from $398 million, and the debt-to-capital ratio including the $195 million trust preferred securities was 40.4%, up from 27.2%. Management reports a net debt-to-capital ratio of 34% and has $400 million of available revolving credit. Stated targets are 20% EPS growth, ROE above 15%, and a debt-to-total-capital ratio of 40% to 50%. The company was rated A by S&P and A3 by Moody's.
When should investors expect the acquisitions to become accretive, and what are the main risks?
Management expects the FoxMeyer and AHI acquisitions and strategic investments to be accretive to earnings in fiscal 1998. Key risks include completing the distribution-center consolidation (about 22 sites, targeted through calendar 1998), integrating FoxMeyer's customer base, thin operating margins (0.7% reported, 1.8% before unusual items), and pending litigation such as the FoxMeyer suit and antitrust class actions by retail pharmacies.
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