Britt Vitalone
Executive Vice President and Chief Financial Officer at McKesson
Thank you, Brian, and good afternoon.
We're pleased with our fiscal third quarter 2024 results, which reflect another quarter of solid momentum with growth across our North American businesses. Our results exceeded expectations, demonstrating our ability to consistently execute against Company priorities and create long-term sustainable value for our shareholders.
Before I turn to our consolidated results, I want to highlight one item that impacted our third quarter GAAP-only results. We recorded an additional pre-tax GAAP provision for bad debts of $515 million or $381 million after tax within the U.S. Pharmaceutical segment. This provision is for uncollected trade accounts receivable from sales to Rite Aid in October of 2023 prior to its bankruptcy petition filing. We continue to provide distribution services to Rite Aid through an interim distribution agreement, providing the same efficiency and operational excellence as we have for over 20 years. We're closely monitoring developments. Rite Aid's bankruptcy will not have a material impact on our fiscal 2024 adjusted earnings per diluted share results.
The remainder of my comments will refer to our fiscal 2024 adjusted results. Let me start with the review of the fiscal third quarter. McKesson delivered solid growth in the third quarter, led by sustained strong performance in the U.S. Pharmaceutical and Prescription Technology Solutions segments. This year-over-year growth underscores operating execution across our diversified and differentiated portfolio, including investments in oncology and biopharma services. As a result of the third quarter operating performance and our confidence in the business, we're increasing and narrowing our full year outlook for fiscal 2024 adjusted earnings per diluted share to a new range of $27.25 to $27.65.
Let me move to our consolidated results. Revenues increased 15% to $80.9 billion, led by continued strong utilization trends, growth in the U.S. Pharmaceutical segment, including higher volumes from specialty products, retail national account customers, and GLP-1 medications, partially offset by lower revenues in the International segment, resulting from fiscal 2023 divestitures within McKesson's European business. Excluding the impact of our European business operations, including completed divestitures, revenues increased 16%.
Gross profit was $3.1 billion for the quarter, an increase of 3%. When excluded the impact of our European business operations, including completed divestitures and the impact from the U.S. government COVID-19 programs in fiscal 2023, gross profit increased 10%.
Operating expenses increased 4% in the quarter due to higher cost to support growth in the U.S. Pharmaceutical and Prescription Technology Solutions segments. When excluding the impact of our European business operations, including the completed divestitures, operating expenses increased 6% year-over-year.
Third quarter operating profit decreased 9% to $1.3 billion. Fiscal 2023 results included a pre-tax benefit of $126 million related to the early termination of the tax receivable agreement, or TRA, with Change Healthcare. Year-over-year results were also impacted by anticipated lower contributions from the U.S. government COVID-19 programs, which were mitigated by contributions from commercial COVID-19 distribution, and a non-recurring $30 million charge in our U.S. Pharmaceutical segment.
These items were partially offset by growth in the U.S. Pharmaceutical and Prescription Technology Solutions segments. When adjusting for these items, including the $126 million or $0.65 benefit from the early termination of the TRA in fiscal 2023 and gains and losses associated with McKesson Ventures' equity investments in fiscal 2023 and 2024, operating profit increased 7% in the quarter.
Moving below the line. Interest expense was $58 million, a decrease of 16% year-over-year driven by effective management of our loan portfolio. The effective tax rate for the quarter was 10.6%, resulting from the recognition of a discrete tax benefit in the quarter. As a reminder, our effective tax rate can vary quarter-to-quarter, driven by our mix of income and the timing of the discrete tax items.
Third quarter diluted weighted average shares outstanding was 133.3 million, a decrease of 5% year-over-year. Consolidated third quarter earnings per diluted share was $7.74, which represents an increase of 12% over the prior year. This increase includes the impacts of approximately $0.63 related to the U.S. government COVID-19 program and the $0.65 benefit from the termination of the TRA in fiscal 2023, an increased commercial COVID-19 vaccine distribution and a non-recurring charge in our U.S. Pharmaceutical segment in fiscal 2024.
Turning to our third quarter segment results, which can be found on slides seven through 11, and starting with the U.S. pharmaceutical. During the quarter, we experienced volume increases across all product categories and customer channels. Specialty pharmaceuticals and GLP-1 medications continued to grow at a faster pace compared to the prior year. Third quarter revenues were $73 billion, an increase of 18% year-over-year, driven by increased prescription volumes, including higher volumes from specialty products, retail national account customers, GLP-1 and medications.
In the quarter, GLP-1 revenues were $7.5 billion, an increase of approximately $2.8 billion, or 60% compared to fiscal 2023. During the quarter, we also noted increased contributions from commercial COVID-19 vaccine distribution. In our fiscal third quarter, commercial COVID-19 vaccine distribution peaked in October, then declined significantly in November and December. We do not anticipate material contributions from commercial COVID-19 vaccine distribution in our fiscal fourth quarter. For the third quarter, operating profit increased 6% to $828 million, driven by growth in the distribution of specialty products to providers and health systems. Adjusting for the impact of the U.S. government COVID-19 vaccine distribution in fiscal 2023, commercial COVID-19 distribution in fiscal 2024, and the $30 million nonrecurring charge in the U.S. Pharmaceutical segment delivered operating profit growth of 8% year-over-year.
In our Prescription Technology Solutions segment, the growth of GLP-1 medications and new brand launches led to increased demand for access solutions, such as prior authorization services. For the third quarter, revenues increased 7% year-over-year to $1.2 billion, and operating profit increased 25% to $193 million. Third quarter results reflect increased prescription transaction volumes, which drove higher demand for access solutions, principally prior authorization services and growth in our third-party logistics business. In addition to the strength of prior authorization services, year-over-year growth was also supported by increased sales to new customers and programs across our access and affordability solutions.
Turning to Medical-Surgical Solutions. Revenues were $3 billion in the quarter, an increase of 2%, primarily driven by growth in the primary care and extended care businesses, partially offset by anticipated lower contributions in the kitting, storage, and distribution of ancillary supplies for the U.S. government's COVID-19 vaccine program compared to the prior year. In the third quarter, primary care patient visits moderately increased on a sequential basis. Demand for commercialized COVID-19 vaccine distribution across the alternate sites of care that we serve was also modestly higher compared to prior expectations.
The overall illness season dynamics, including vaccinations and testing, continue to be an operating profit headwind in the quarter when compared to the prior year. As a reminder, each illness season is unique, depending on the onset and severity of various respiratory illnesses during that particular year. Operating profit was $282 million, a decrease of 16%, driven by anticipated lower contributions from the kitting, storage, and distribution of ancillary supplies for the U.S. government's COVID-19 vaccine program, and a softer illness season as compared to fiscal 2023.
When excluding the impact of COVID-19 related items from the third quarter of fiscal 2023, the segment delivered operating profit growth of 7%, driven by growth in the primary care and extended care businesses.
Next, let me address our International results. Revenues in the third quarter were $3.6 billion, a decrease of 18% year-over-year driven by divestitures within McKesson's European business, partially offset by higher pharmaceutical distribution volumes in Canada. Operating profit was $105 million, a decrease of 27% driven by divestitures within McKesson's European business.
Wrapping up our segment review. Corporate expenses were $147 million in the quarter, which included losses of $8 million or $0.05 per share related to equity investments within the McKesson Ventures portfolio. McKesson Ventures impact on consolidated financials can be influenced by the performance of each individual investment quarter-to-quarter. As a result, McKesson's investments may result in gains or losses, the timing and magnitude which can vary for each investment.
We remain pleased with the insights and the results that we're obtaining through this portfolio. Excluded the benefit from the early termination of the tax receivable agreement in fiscal 2023 and gains and losses within our McKesson Ventures portfolio in fiscal 2023 and 2024, Corporate expenses in the third quarter decreased 5% year-over-year.
Turning now to cash flows and capital deployment, which can be found on slide 12. We ended the quarter with $2 billion in cash and cash equivalents. We delivered free cash flow of $100 million in the third quarter and $2.9 billion for the trailing 12 months. Third quarter free cash flow was impacted by the Rite Aid bankruptcy in October and its associated $725 million provision for bad debts. As a reminder, our cash position, working capital metrics, and resulting cash flows can each be impacted by timing, which includes the day of the week that a quarter ends on, and therefore, can vary from quarter-to-quarter.
During the first nine months of the fiscal year, we made capital expenditure investments of $418 million, which included new and existing distribution centers, as well as investments in technology, data, and analytics to support our growth priorities. Year to date, we returned $2.6 billion of cash to shareholders, which included $2.3 billion of share repurchases and $232 million in dividend payments.
Now, let me turn to our updated fiscal 2024 outlook. As a reminder, we do not provide forward-looking guidance on a GAAP basis. The following metrics are provided on an adjusted non-GAAP basis. A full list of our assumptions can be found on slides 13 through 17 in our supplemental slide presentation. Let me start with the fiscal 2024 outlook for our segments. For the full year, we now anticipate U.S. Pharmaceutical revenues to increase 16% to 18% and operating profit to increase 6% to 8% year-over-year. Excluding the impact of COVID-19 vaccine distribution for the U.S. government in fiscal 2023, we anticipate operating profit to increase 11% to 14%.
The impact of elevated commercial COVID-19 distribution in the third quarter, net of the $30 million nonrecurring charge also in the third quarter of fiscal 2024, accounts for approximately 2% of segment growth. The updated segment revenue outlook incorporates the strong third quarter performance and continued growth in specialty distribution, supported by stable utilization trends. Revenue growth assumes that GLP-1 medication volumes will continue to be robust, although the rate of growth will moderate in our fiscal fourth quarter. These medications are lower margin and represent a headwind to year-over-year operating profit growth.
Our full year operating profit growth also reflects our leading generics program, which continues to deliver on the dual mandate of lower cost and product availability. And we continue to be pleased with the strength of our scaled and broad oncology platform. This quarter, as Brian mentioned, we expanded into Tennessee with the addition of two practices. With these additions and organic growth, U.S. oncology is now over 2,500 providers.
In the Prescription Technology Solutions segment, we anticipate revenue growth of 9% to 13%, and we've increased our operating profit growth outlook to 24% to 28%, reflecting strong third quarter performance, continued organic growth and higher transaction volumes across our access and affordability solutions. The quarter-to-quarter variability in this segment is driven by prescription and transaction volumes, the timing, pace, and trajectory of new product drug launches, the timing and size of investments to support and expand our product portfolio, and the annual verification programs that we provide for our customers that occur in our fiscal fourth quarter.
Our Medical-Surgical Solutions segment continues to be a leader across all the alternate sites of care. We anticipate revenues to be approximately flat to 4% growth and operating profit to decrease 11% to 15%. When excluding the impact of COVID-19-related items from fiscal 2023 results, we anticipate operating profit to increase 6% to 8% year-over-year. Our updated outlook incorporates the third quarter results that I discussed earlier, which reflect a modest improvement in sequential primary care traffic.
Finally, in the International segment, we anticipate revenues to decline by 29% to 33%, and operating profit to decline by 21% to 26%, reflecting divestitures within McKesson's European business that closed during fiscal 2023. In the Corporate segment, we anticipate expenses to be in the range of $615 million to $655 million, which includes losses associated with McKesson Ventures' equity investments recorded in the first nine months of the year, and elevated technology spend to support the growth of our business.
Moving below the line, we anticipate interest expense to be approximately $220 million to $230 million, and income attributable to non-controlling interests to be in the range of $155 million to $165 million. We anticipate no change to the full year effective tax rate of approximately 18% to 19%. The timing of discrete tax item is difficult to predict, and therefore, we do not provide quarterly effective tax rate guidance.
Turning to cash flow and capital deployment. We now anticipate free cash flow of approximately $3.2 billion to $3.6 billion. Our working capital metrics and resulting free cash flow will vary from quarter-to-quarter, impacted by timing, including the day of the week that marks the close of a quarter. Our outlook also incorporates the impact of the October Rite Aid bankruptcy. Our guidance reflects plans to repurchase approximately $3 billion to $3.5 billion of shares. As a result of this share repurchase activity, we estimate weighted average diluted shares outstanding to be in the range of approximately 134 million.
Wrapping up fiscal 2024 guidance. As a result of solid performance in the third quarter of fiscal 2024, combined with our momentum and confidence moving forward, we are increasing and narrowing our earnings per diluted share outlook for fiscal 2024 to a new range of $27.25 to $27.65. We anticipate operating profit will be a 2% decline to 1% growth compared to the prior year. Excluding certain items, we anticipate operating profit to increase by approximately 8% to 11% year-over-year, above the long-term target range.
As a reminder, certain items include the following. $1.90 related to fiscal 2023 U.S. government COVID-19 program and COVID-19 tests in our U.S. Pharmaceutical and Medical-Surgical segments. A $0.65 benefit related to the early termination of the tax receivable agreement with Change Healthcare in fiscal 2023, and gains and losses associated with McKesson Ventures' equity investments in fiscal 2023 and 2024. The increase to our outlook for adjusted earnings per diluted share indicates growth of 16% to 18% when excluding these certain items.
Before I close, I'd like to share some initial thoughts on fiscal 2025. The momentum we've seen across our business over the past several years is expected to continue in fiscal 2025. We anticipate the U.S. Pharmaceutical and Medical-Surgical Solutions segments will be more closely aligned to long-term growth targets that we've previously provided for these segments, demonstrating our leading market positions and stable financial performance. We anticipate that the strength we're seeing across our solution set in Prescription Technology Solutions will lead to growth at the top-end or slightly above the long-term target.
In U.S. Pharmaceutical, we remain confident in our long-term target of 5% to 7% growth, supported by sustainable momentum in the core distribution business and across our oncology platform. The U.S. Oncology Network, Ontada, and the joint venture with Sarah Cannon Research Institute. As the leader in the alternate site market, we believe that the Medical-Surgical Solutions segment is well-positioned as care continues to move across the alternate site settings. Our experience and our relationships in every channel and setting of the alternate site markets enable us to capture this growth opportunity in the years ahead.
We anticipate that the Prescription Technology Solutions segment may perform modestly above the long-term growth target of 11% to 12%, driven by organic growth, as we expand our higher margin biopharma services platform. For the International segment, we anticipate continued growth in our Canadian operations. And throughout fiscal 2023, we completed divestitures of the business operations in 11 of the 12 countries that we operated in Europe. As a reminder, Norway remains the only country that we have not entered into an agreement to sell, and we intend to exit Norway as part of the completion of our European exit.
Finally, we will continue to materially invest in the business on multiple fronts. We will sustain the pace and cadence of investment in product development and enhancements across our oncology and biopharma services platforms. These investments will further our differentiated capabilities and market-leading positions. We will also continue to invest in adding capacity and capabilities to our North American distribution footprint. These investments include increased capacity, automation, and regulatory excellence capabilities.
And we will continue to invest in data and analytics, including the acceleration of several investments in artificial intelligence. We see AI as unlocking the potential to deliver customer and foundational enhancements. Although in the early stages, we're using AI to improve patient intake and workflow, improve productivity throughout the system, including automatic clinical note generation, and several supply chain use cases, including supply chain disruption predictions, forecast accuracy algorithms, and fraud detection. Although we're in the early stages of our AI development and implementation, we're committed to increased investment to further extend our leadership positions and deliver value to our partners and stakeholders.
To sum up, we see strength and stability in the underlying fundamentals of the business. We're pleased with our strong fiscal 2024 performance, and we remain optimistic about the outlook. McKesson is well-positioned to continue to deliver strong results as we successfully execute against our strategic and financial framework to drive long-term sustainable growth for all stakeholders.
And with that, let's move to our Q&A session.
