Britt Vitalone
Executive Vice President and Chief Financial Officer at McKesson
Thank you, Brian, and good afternoon everyone. I'm pleased to be here today to discuss our fiscal second quarter results, which reflect strong performance and momentum across the business, driven by operational excellence and execution against our growth strategies. This momentum could be seen in each of our segments. A summary of our second quarter results and updated guidance assumptions can be found in our earnings slide presentation, which is posted on the Investors section of our website.
Let me start with an update on Europe. This morning we announced that we've entered into a definitive agreement to divest our retail and distribution businesses in UK to Aurelius, for approximately $438 million. The ultimate proceeds from this transaction are subject to certain adjustments under the agreement. Therefore, the proceeds may differ from the announced purchase price. The customer will continue to operate these businesses and record revenue and income until the transaction is closed, which is expected to occur in our fourth quarter of fiscal 2022, pursuant to the satisfaction of customary closing conditions, including receipt of regulatory approvals.
The assets involved in this transaction contributed approximately $7.8 billion in revenue and $64 million in adjusted operating profit in fiscal 2021. The net assets included in the transaction will be classified as held for sale, and held for sale accounting will be effective beginning with our fiscal 2022 third quarter. We will re-measure the net assets to the lower of carrying amount or fair value, less cost to sell, and we estimate that this will result in a GAAP only charge of between $700 million to $900 million in our third quarter of fiscal 2022. Due to held for sale accounting treatment, we will discontinue recording depreciation and amortization on the assets involved in the transaction. This impact is not included in the fiscal 2022 outlook provided today.
This transaction provides us the focus to pursue the growth strategies of oncology and biopharma services in North America and as Brian mentioned, we remain committed to a full exit of our European businesses, which includes announced transactions to the Phoenix Group and Aurelius, as well as our remaining operations in Norway, Austria and Denmark.
Let me now turn to our second quarter results. Before I provide more details on our second quarter adjusted results, I want to point out two additional items that impacted our GAAP only results in the quarter. First, we recorded a GAAP only after tax charge of $472 million related to our agreement to sell certain European businesses to the Phoenix Group to account for the re-measurement of the net assets to lower of carrying amount or fair value, less cost to sell. This transaction is expected to close within the next 12-months. Also during the quarter we recorded an after-tax loss of $141 million on debt extinguishment related to the successful completion of a bond tender offer.
Moving now to our adjusted results for the second quarter, beginning with our consolidated results, which can be found on Slide seven. Our second quarter results were highlighted by strong operating performance, which included record revenue and double-digit adjusted operating profit growth across all segments. We are encouraged by the ongoing market improvement in both prescription volumes and patient visits, which we observed in our second quarter. These improvements are supported by our strategic agenda setting us on a path of disciplined approach. And our work to support US government's COVID-19 domestic and international vaccine and kitting efforts continues to contribute to growth in addition to the momentum we have built across the business.
Second quarter adjusted earnings per diluted share was $6.15, an increase of 28%, compared to the prior year. This was -- this result was driven by the contribution from COVID-19 vaccine and kitting distribution and growth in the Medical-Surgical Solutions segment partially offset by a higher tax rate.
Second quarter adjusted earnings per diluted share, also includes net pre-tax gains of approximately $97 million or $0.46 per diluted share associated with McKesson Ventures equity investments, as compared to $49 million in the second quarter of fiscal 2021. Consolidated revenues of $66.6 billion increased 9% above the prior year. Principally driven by growth in US Pharmaceutical segment, largely due to increased pharmaceutical volumes, including growth in specialty products and our largest retail national account customers to partially offset by branded to generic conversions.
Adjusted gross profit was $3.3 billion for the quarter, up 12% compared to the prior year. Comparable adjusted gross margins for the quarter was up 10 basis points versus the prior year. Adjusted operating expenses in the quarter increased 4% year-over-year. and adjusted operating profit of $1.3 billion for the quarter was an increase of 34%, compared to the prior year and reflected double-digit growth in each segment.
Interest expense was $45 million in the quarter, a decline of 10%, compared to the prior year driven by the net reduction of debt in the quarter. Our adjusted tax rate was 18.8% for the quarter, which was in line with our expectations. In wrapping up our consolidated results second quarter diluted weighted average shares were 155.8 million, a decrease of 5% year-over-year.
Moving now to our second quarter segment results, which can be found on Slides eight through 13, and I'll start with US Pharmaceutical. Revenues were $53.4 billion, an increase of 11% year-over-year as increased pharmaceutical volumes, including growth in specialty products and our largest retail national account customers were partially offset by branded to generic conversions. Adjusted operating profit increased 12% to $735 million, driven by growth in the distribution of specialty products to providers and health systems and the contribution from COVID-19 vaccine distribution.
The contribution from our contract with the US government-related to the distribution of COVID-19 provided a benefit of approximately $0.28 per share in the quarter, which is above our original expectations. In the Prescription Technology Solutions segment revenues were $932 million, an increase of 40% driven by higher biopharma service offerings, including third-party logistics services and increased technology service revenue, partially resulting from the growth of prescription volumes. Adjusted operating profit increased 38% to $144 million, driven by organic growth from access and adherence solutions.
Moving now to Medical-Surgical Solutions, revenues were $3.1 billion, an increase of 23%, driven by increased sales of COVID-19 tests and growth in the primary care business. Adjusted operating profit increased 52% to $319 million, driven by growth in the primary care business, increased sales of COVID-19 tests, and the contribution from kitting, storage and distribution of ancillary supplies for the US governments COVID-19 vaccine program.
The contribution from our contract with US government-related to the kitting, distribution and storage of ancillary supplies for COVID-19 vaccines provided a benefit of approximately $0.14 per share in the quarter, which was above our original expectations.
Next, let me address our international results. Revenues in the quarter were $9.1 billion, a decrease of 5%, primarily driven by the contribution of McKesson's German wholesale business to a joint venture with Walgreens Boots Alliance, partially offset by volume increases in the pharmaceutical distribution and retail businesses. Excluding the impact from the contribution of our German wholesale business, which was completed in the third quarter of fiscal 2021. Segment revenue increased 13% year-over-year and was up 9% on an FX adjusted basis. Adjusted operating profit increased 41% year-over-year to $163 million. On an FX adjusted basis adjusted operating profit increased 34% to $155 million, driven by the discontinuation of depreciation and amortization on certain European assets classified as held for sale beginning in the second quarter of fiscal 2022. The held for sale accounting in our international business contributed $0.13 to adjusted earnings in our second quarter of fiscal 2022.
Moving on to Corporate. Adjusted corporate expenses were $83 million, a decrease of 39% year-over-year, driven by gains of approximately $97 million or $0.46 from equity investments within our McKesson Ventures portfolio. This quarter we had fair value adjustments related to multiple portfolio companies within McKesson Ventures, compared to fiscal 2021 gains from McKesson Ventures contributed $0.24 year-over-year. As previously discussed it's difficult to predict when gains or losses on our Ventures portfolio companies may occur and therefore our practice has been, it will continue to be to not include Ventures portfolio impacts in our guidance.
We also reported opioid related litigation expenses of $36 million for the second quarter and anticipate that fiscal 2022 opioid-related litigation expenses will be approximately $155 million. Consistent with the proposed settlement announced in July, we also made the first annual payment into escrow of approximately $354 million during the quarter.
Let me now turn to our cash position, which can be found on Slide 14. We ended the quarter with a cash balance of $2.2 billion for the first six months of the fiscal year, we had negative free cash flow of $109 million. In Q2, we completed several debt transactions. In July, we redeemed EUR600 million denominated note prior to maturity. In August, we completed a cash funded upsize tender offer, which resulted in the redemption of $922 million principal outstanding debt. And finally, we completed a public offering of a note in the principal amount of $500 million at 1.3%. These actions aligned with our previously stated intent to modestly delever and to further strengthen our balance sheet and financial position.
Year-to-date, we made $279 million of capital expenditures, which included investments to support our strategic pillars of oncology and biopharma services. For the first six months of the fiscal year, we returned $1.4 billion in cash to our shareholders through $1.3 billion of share repurchases and the payment of $134 million in dividends. We have $1.5 billion remaining on our share repurchase authorization and continue to expect diluted weighted average shares outstanding to range from 154 million to 156 million for fiscal 2022.
Let me transition now and speak to our outlook for the remainder of fiscal 2022. For our full list of fiscal 2022 assumptions, please refer to Slide 16 through 19 in our supplemental slide presentation. As a result of our strong first half performance and our outlook for the remainder of the year, we are raising our previous adjusted earnings per share guidance range for fiscal 2022 to $21.95 to $22.55, which is up from our previous range of $19.80 to $20.40.
Our updated outlook for adjusted earnings per diluted share reflects 27.5% to 31% growth from the prior year. And our guidance assumes growth across all of our segments. Additionally, fiscal 2022 adjusted earnings per diluted share guidance includes $2.30 to $3.05 of impacts attributable to the following items: $0.50 to $0.70 related to the US governments COVID-19 vaccine distribution, which is an increase from the previous range of $0.45 to $0.55; $0.80 to $1.10 related to the kitting storage and distribution of ancillary supplies, an increase from the previous range of $0.50 to $0.70 as discussed at recent conference; $0.50 to $0.75 related to COVID-19 tests impairments for PPE related products; and approximately $0.49 from gains or losses associated with McKesson Ventures equity investments within our corporate segment year-to-date. Excluding the impact of these items from both fiscal 2022 guidance and fiscal 2021 results this indicates 20% to 29% forecasted growth.
Let me provide a few additional assumptions related to our guidance. We continue to expect prescription and patient engagement volumes will return to pre-COVID levels in the second half of our fiscal 2022, which is in line with our original guidance. In US Pharmaceutical segment, we now expect revenue to increase 8% to 11% and adjusted operating profit to deliver 4.5% to 7.5% growth over the prior year.
We continue to see stable fundamentals. Specifically, our outlook for branded pharmaceutical pricing remains consistent with our original guidance and the prior year of mid single-digit increases in fiscal 2022 and our views that the generics market remains competitive yet stable, as our volumes have continued to improve in the September quarter. Our guidance includes contribution related to our role as a centralized distributor for the US governments COVID-19 vaccine distribution. This includes we're preparing vaccines for international missions.
Our current outlook remains in mind to the volume distribution schedule provided by the CDC and the US government. The current guidance excludes booster shots, due to the timing of the recent approvals, as well as vaccines for pediatrics, which have not been approved by the CDC. We will continue to update you on the progress and contribution from this program.
When excluding COVID-19 vaccine distribution in the segment, we expect approximately 3% to 6% adjusted operating profit growth. In addition, our investments in our leading and differentiated position in oncology will continue to represent an approximate $0.20 headwind in fiscal 2022. In our Prescription Technology Solutions segment, we see revenue growth of 31% to 37%, and adjusted operating profit growth of 23% to 29%, this growth reflects the strong service and transaction momentum in the business.
Now transitioning to Medical-Surgical our revenue outlook assumes a 8% to 14% growth and adjusted operating profit to deliver 35% to 45% growth over the prior year. As mentioned previously, our outlook includes $0.80 to $1.10 related to the contribution from the US government's distribution of ancillary supply kits and storage programs, and $0.50 to $0.75 related to COVID-19 tests and PPE impairments related products.
Excluding the impacts from these items from both fiscal 2022 guidance and fiscal 2021 results, this indicates 13% to 19% forecasted growth. One additional note related to our US distribution businesses. One of the pillars of our enterprise strategy is talent, the ability to attract and retain the best workforce in health care. The labor market remains competitive and we have assumed a modest expense impact to ensure there is continued service continuity through the holiday season and the back half of our fiscal year. Therefore, the guidance that we're providing today includes approximately $0.10 to $0.20 of adjusted operating expense impact for labor investments in our US distribution businesses in the second half of the year.
Finally in the international segment, our revenue guidance is 1% decline to 4% growth as compared to the prior year. As a reminder, this reflects the impact of the contribution of our German wholesale business to a joint venture with Walgreens Boots Alliance. For adjusted operating profit our guidance reflects growth in the segment of 39% to 43%, which includes approximately $0.38 of expected adjusted earnings accretion in fiscal 2022, as a result of the held for sale accounting related to our agreement to sell certain European assets to the Phoenix Group. It also includes our strong performance in the second quarter and the contribution from COVID-19 vaccine distribution in the segment.
Turning now to the consolidated view. Our increased guidance assumes a 8% to 11% revenue growth and 18% to 22% adjusted operating profit growth, compared to fiscal 2021. Our full-year adjusted effective tax rate guidance of 18% to 19% remains unchanged. And we anticipate corporate expenses in the range of $610 million, $660 million. On our May 6th earnings call we outlined an initiative to rationalize office space in North America to increase efficiencies and to support employee flexibility. We've made good progress against this initiative. And based on this progress we now expect earlier benefits from these actions, resulting in the realization of annual operating expense savings of approximately $15 million to $25 million in the second half of fiscal 2022, with annual savings of $50 million to $70 million, when fully implemented. These savings will be realized across all of our segments. [Technical Issues] which is net of property acquisitions and capitalized software expenses.
As a reminder, historically we generate the majority of our cash flows in the fourth quarter of our fiscal year. This strong cash flow generation provides the financial flexibility to execute a balanced capital allocation approach; investing in our strategies of oncology and biopharma services; positioning our business for long-term growth, while remaining committed to returning capital to shareholders through our dividend and share repurchases. Our investment grade credit rating remains a priority and underpins our financial flexibility.
In closing, we are encouraged by our strong performance in the first half of our fiscal year. The momentum across the business, including our partnership with the US government positions us to deliver the updated fiscal 2022 outlook provided here today. Finally, we're looking forward to providing additional details on our strategies and the strength of our businesses at our upcoming Investor Day on December 8th.
Thank you for your time and now I'll turn the call over to the operator for your questions.
