Britt Vitalone
Executive Vice President and Chief Financial Officer at McKesson
Well, thank you, Brian, and good afternoon, everyone. Our solid fiscal third quarter financial results reflect continued strong execution and momentum, advancing our company priorities. In the fiscal third quarter, we delivered solid growth across our North American segment, led by strong performance in the U.S. Pharmaceutical and Medical-Surgical Solutions segments. And we continue to evolve and grow our diversified portfolio through focused and strategic investments in oncology and biopharma services. As a result of our solid financial performance and confidence in the underlying business, we are increasing and narrowing our full year outlook for fiscal 2023 adjusted earnings per diluted share to a range of $25.75 to $26.15.
Before I provide more details on our third quarter fiscal 2023 non-GAAP adjusted results, I want to point out two items that impacted our GAAP-only results in the quarter. First, we received proceeds of $129 million related to our share of an antitrust class action settlement. We recognized the gain within cost of sales in the third quarter. And second, we recognized a pretax gain of $97 million from the termination of fixed interest rate swaps. This gain is included under other income in the third quarter.
Let's move now to a review of our third quarter non-GAAP adjusted results on a year-over-year basis. Consolidated revenues of $70.5 billion increased 3%, driven by growth in the U.S. Pharmaceutical segment, resulting from increased specialty product volumes, including retail national account customers, partially offset by lower revenues in the International segment, resulting from the completed divestitures of McKesson's European businesses. Excluding the impact of our European business operations, including completed divestitures, revenues increased 11%.
Gross profit was $3 billion for the quarter, a decrease of 10%. Excluding the impact of our European business operations and completed divestitures, gross profit increased 7%, primarily a result of growth in the U.S. Pharmaceutical segment. Operating expenses in the quarter decreased 14%, largely driven by completed European divestitures in the International segment. Excluding the impact of our European business operations, including the completed divestitures, operating expenses increased 9%.
Operating profit was $1.4 billion, an increase of 9%, driven by a pretax benefit of $126 million related to the early termination of a tax receivable agreement, or TRA, with Change Healthcare and due to growth across North American businesses led by the strong performance in the U.S. Pharmaceutical segment. As a reminder, McKesson was a party to a TRA entered as part of the formation of the joint venture with Change Healthcare. Under the terms of the TRA, Change was generally required to pay McKesson a portion of net tax savings resulting from amortization by the joint venture. In October of 2022, Change exercised its right to terminate the agreement and paid McKesson $126 million. Consistent with our prior practice recognizing similar items, this benefit is reflected in other income in both our GAAP and adjusted operating results in the quarter.
Moving below the line, interest expense increased to $69 million in the quarter, primarily due to higher interest rates and unfavorable impacts in our derivative portfolio as we exit the European region. And the effective tax rate was 23.4% for the quarter. As a reminder, our effective tax rate can vary quarter to quarter, driven by our mix of income and the timing of discrete tax items. For the full year, we continue to expect an adjusted effective tax rate in the range of 18% to 20%.
Wrapping up our consolidated results, third quarter diluted weighted average shares outstanding was approximately 141 million, a decrease of 8%, resulting from share repurchase activity. Overall, third quarter adjusted earnings per diluted share was $6.90, an increase of 12% compared to the prior year. When excluding the impacts from COVID-19-related items and the benefit from the early termination of the tax receivable agreement with Change, adjusted earnings per diluted share increased 6%.
Moving now to our third quarter segment results, which can be found on Slides 7 through 12 and starting with U.S. Pharmaceutical, where revenues were $61.9 billion, an increase of 13% year-over-year, resulting from increased volume of specialty products, including higher volumes from retail national account customers, branded pharmaceutical price increases and strength in oncology, which included increased patient visits, partially offset by branded to generic conversions. Operating profit increased 6% to $778 million.
Our contract with the U.S. government for COVID-19 vaccine distribution provided a benefit of approximately $0.25 per share in the quarter compared to $0.26 per share in the third quarter of fiscal 2022. When excluding the impact of COVID-19 vaccine distribution, U.S. Pharmaceutical segment delivered operating profit growth of 7%, driven by growth in distribution of specialty products to providers and health systems, contributions from our generics programs, and improvements in pharmaceutical prescription volumes and oncology visits.
In the Prescription Technology Solutions segment, revenues were $1.1 billion, an increase of 9% year-over-year, driven by increased prescription volumes, faster growth in our third-party logistics business and higher technology service revenues. Operating profit increased 7% to $155 million, driven by growth in access, affordability and adherence solutions, partially offset by continued organic investments as we position our products and services for sustainable long-term growth.
Next, moving on to Medical-Surgical Solutions, revenues were $3 billion, a decrease of 3%. Lower volumes of COVID-19 tests and kitting, storage and distribution of ancillary supplies for the U.S. government's COVID-19 vaccine program partially offset the growth in the primary care business. Operating profit increased 2% to $336 million.
The contribution from COVID-19 tests and our contract with the U.S. government for the kitting, storage and distribution of ancillary supplies provided a total benefit of approximately $0.38 per share in the quarter as compared to $0.57 per share in the third quarter of fiscal 2022. Excluding the impact of COVID-related items, the Medical-Surgical Solutions segment delivered operating profit growth of 25%, driven by growth in the primary care business and favorable sourcing activities, which partially offset lower volumes of COVID-19 tests and lower contribution from kitting, storage and distribution of ancillary supplies from the U.S. government's COVID-19 vaccine program.
Next, let me address our international results. Revenues were $4.4 billion and operating profit was $143 million, a decrease of 36%. On an FX-adjusted basis, revenues were $4.9 billion, a decrease of 48% and operating profit was $158 million, a decrease of 29%. Third quarter results reflect the year-over-year effect from the divestiture of the European businesses.
Moving next to corporate. Corporate expenses were $19 million, a decrease of 88% year-over-year, driven by the early termination of a tax receivable agreement with Change Healthcare and lower opioid-related litigation expenses. Excluding the benefit from the early termination of the tax receivable agreement, corporate expenses decreased 9%. Additionally, we incurred opioid-related litigation expenses of $9 million in the third quarter and we anticipate that fiscal 2023 opioid-related litigation expenses will be approximately $50 million.
Turning now to our cash position, which can be found on Slide 13. As a reminder, our cash position, working capital metrics and resulting cash flows can each be impacted by timing and vary from quarter to quarter. We ended the quarter with $2.8 billion in cash and cash equivalents. During the first nine months of the fiscal year, we made $376 million of capital expenditures, which includes investments in distribution center capacity, automation and regulatory enhancements and investments in technology, data and analytics to support our growth priorities, including our oncology and biopharma services ecosystems.
For the first nine months of fiscal 2023 and 2022, we had free cash flow of USD1.5 billion and USD1.2 billion, respectively. During the quarter, we allocated $833 million towards M&A activities, including a joint venture with the Sarah Cannon Research Institute and the acquisition of Rx Savings Solutions. We also returned $2.1 billion to shareholders, including $2 billion of share repurchases. Year to date, we returned $3.7 billion of cash to shareholders, which included $3.5 billion of share repurchases and $216 million in dividend payments. At the end of our fiscal third quarter, we had $3.8 billion remaining on our share repurchase authorization.
Let me turn to our fiscal 2023 outlook. A full list of our assumptions can be found on Slides 15 through 18 in our supplemental slide presentation. And I'll begin with our consolidated outlook. Our revised guidance assumes 3% to 7% revenue growth and 2% to 6% operating profit growth as compared to fiscal 2022.
Our guidance includes $2.30 to $2.50 of contribution attributable to the following four items: $0.70 to $0.80 related to the U.S. government's vaccine distribution in our U.S. Pharmaceutical segment; $1.10 to $1.20 related to COVID-19 tests and the kitting, storage and distribution ancillary supplies in our Medical-Surgical Solutions segment; approximately $0.15 related to year-to-date net losses associated with McKesson Ventures' equity investments; and a $0.65 benefit related to the early termination of the tax receivable agreement with Change Healthcare. As a reminder, our contracts with the U.S. government for the distribution of COVID-19 vaccines and the kitting, storage and distribution of ancillary supplies extends through July of 2023.
We anticipate corporate expenses in the range of USD435 million to USD475 million, which includes net losses associated with McKesson Ventures' equity investments, which we recorded in the first three quarters of the fiscal year; and the benefit from the early termination of the tax receivable agreement with Change Healthcare, which was recognized in the third quarter. As a reminder, our practice has been and will continue to not include McKesson Ventures' portfolio estimates in our guidance.
When excluding the impacts from COVID-19-related items, net gains and losses associated with McKesson Ventures' equity investments and the benefit from the early termination of the tax receivable agreement with Change Healthcare, we anticipate operating profit to increase 7% to 11%, above the previous operating profit growth target.
Moving below the line, we anticipate interest expense to be in the range of USD245 million to USD255 million. The increase compared to the prior guidance reflects the higher interest rate environment. Our anticipated full year effective tax rate of approximately 18%, 20% remains unchanged. Based on our third quarter results and our outlook for the fiscal year, we're increasing and narrowing our guidance range for adjusted earnings per share to $25.75 to $26.15 from the previous range of $24.45 to $24.95.
When excluding the impacts of COVID-19-related items, net gains and losses from McKesson Ventures' equity investments for both fiscal 2023 guidance and fiscal 2022 results and the fiscal 2022 benefit from the early termination of the tax receivable agreement with Change Healthcare, our adjusted earnings per diluted share guidance indicates approximately 13% to 16% growth over the prior year.
Moving now to the segment outlook for fiscal 2023. In the U.S. Pharmaceutical segment, we anticipate reported revenue to increase 12% to 15% and operating profit to increase 5% to 8%. As I outlined earlier, our outlook includes approximately $0.70 to $0.80 related to COVID-19 vaccine distribution for the U.S. government.
When excluding the impact of COVID-19 vaccine distribution for the U.S. government, we anticipate 7% to 9% operating profit growth. We are pleased with the momentum of the segment. Our Pharmaceutical Distribution business continues to deliver stable growth through focused execution and operational excellence. Let me highlight a few of the factors that are leading to the strong segment performance.
First, we've observed stable prescription utilization growth, which underpins the momentum in our health system and retail offerings. Second, we maintain a favorable outlook for our oncology platform, which we see delivering higher growth and higher margin contributions. We continue to execute and invest against our oncology strategy. And as Brian touched on earlier, we continue to add practices and providers to our scale and growing US Oncology network and we are well positioned to capture increased oncology volumes.
Third, we have a scaled and efficient generic sourcing operation, delivering stability of supply and low-cost products for our customers and patients. And specific to fiscal 2023, through the month of January, we observed branded pharmaceutical pricing that was modestly above our expectations. While fiscal 2023 results benefit from this modest increase, I would make the following two comments: first, the impact from higher branded pharmaceutical pricing remains less material now than historically, as more than 95% of our manufactured contracts are now on a fixed fee-for-service arrangement; and second, we would not anticipate this modest benefit to repeat in future years.
Our U.S. Pharmaceutical segment is well positioned and has exhibited strong performance, leading to the increased fiscal 2023 growth outlook. As a result of our execution and the factors that I just noted, we anticipate that this segment will now grow above the 4% earnings growth target rate that we previously provided, including at our 2021 Investor Day.
The products and services within the Prescription Technology Solutions segment delivered differentiated access adherence and affordability products. We are pleased with the solid growth in both revenue and operating profit this quarter. Biopharma Services remain an important strategic growth and investment area for McKesson. We're confident this segment will exhibit faster growth and higher margin.
We remain confident in our differentiated assets and capabilities. We have unmatched scale across transaction, provider and retail connectivity and product breadth. Our commitment to this segment is evidenced by the investments that we have made. Over the past three years, on average, we've organically invested approximately $100 million a year into new and existing products and services. And the recent acquisition of Rx Savings Solutions will accelerate the breadth of capabilities we continue to build out.
We also anticipate further organic investments in new capabilities as well as more M&A. The internal investment pattern, the mix of technology products and third-party logistics services and the life cycle of the products we serve, including the timing of launches, have resulted in variability in performance quarter-to-quarter. As we continue to invest and grow the business, we anticipate that there could be charges to further integrate product portfolios and supporting infrastructure.
We anticipate delivering revenue growth of 10% to 16% and operating profit growth of 14% to 17%, which is in line with the 14% to 20% initial guidance that we communicated on our May 2022 earnings call and above the operating profit growth target of 11% provided at our Investor Day event in 2021. We are well positioned for strong growth, and we're committed to the operating growth targets that we've previously communicated.
In the Medical-Surgical Solutions segment, we anticipate reported revenues to decrease 1% to 5% and operating profit to decrease 1% to 4%. As previously mentioned, our outlook includes approximately $1.10 to $1.20 related to COVID-19 tests and the kitting storage and distribution of ancillary supplies for the U.S. government. Excluding the impact of COVID-19-related items, we anticipate Medical-Surgical operating profit to increase 12% to 15%.
Finally, in the International segment, we anticipate revenues to decline by 42% to 46% and operating profit to decline by 26% to 29%. This year-over-year decrease includes the loss of operating profit contribution from businesses and transactions that we have closed to date.
For fiscal 2023, we anticipate our European operations will contribute operating profit of approximately $0.90 to $0.95 per diluted share, primarily in the first nine months of the fiscal year. This includes year-to-date contributions from operations prior to completed sales, our operations in Norway and the contribution resulting for held-for-sale accounting for the transaction with PHOENIX Group.
Let me conclude our outlook with a review of cash flow and capital deployment. We continue to anticipate free cash flow of approximately USD3.2 billion to USD3.6 billion, which is net of property acquisitions and capitalized software expenses. In fiscal 2023, our cash flows have also been impacted by European divestiture activities and other transactions.
As discussed last quarter, our free cash flow guidance includes approximately $900 million of negative impacts from our European operations and divested assets. We remain committed to be good stewards of capital for our shareholders. We have and will continue to take a disciplined approach to capital allocation. We strategically think about capital allocation in three broad categories.
First, we prioritize growth by investing internally and through M&A. We are focused on accelerating our strategic growth pillars of oncology and biopharma services. These growth platforms have differentiated asset scale and network capabilities.
Next, we will continue to return capital to shareholders through a combination of our growing dividend and share repurchases. And the third piece of our framework is a strong balance sheet and adequate liquidity, underpinned by the maintenance of an investment-grade credit rating.
Our outlook continues to incorporate plans to repurchase approximately $3.5 billion of shares, which has been largely completed by the end of our fiscal third quarter. As a result of the share repurchase activity, we estimate weighted average diluted shares outstanding to be approximately 142 million.
Let me take a moment and reflect on the fiscal 2023 outlook and our growth targets. At our 2021 Investor Day event, we shared with you a set of growth metrics that reflect our commitment to drive continued momentum across the business segments. Since then, we've executed on our strategy and delivered operating profit growth consistently at or above the targets that we communicated on a consolidated and on a segment level.
Some of the business dynamics that we outlined previously have materialized as tailwinds and contributed to recent growth, including growth in prescription volume and patient mobility, our ability to grow through macroeconomic unpredictability and successful execution on a disciplined capital deployment strategy that focuses on growth and maximizing shareholder return.
More importantly, the solid performance is further demonstration of our shareholder value creation framework. We continue to be focused on profitable growth and efficient deployment of capital. Our 24% return on invested capital illustrates our focus on shareholder value creation.
In closing, we are pleased with the results of our fiscal third quarter. We continued to deliver solid operating results through focused execution and strategic investment. Looking ahead, we're confident in our ability to deliver sustainable long-term growth. Our disciplined growth strategy and financial framework give us the confidence we will deliver on our operating profit growth targets. Thank you.
And now with that, I'll turn the call over to the operator for your questions.
