Christopher DelOrefice
Executive Vice President and Chief Financial Officer at Becton, Dickinson and Company
Thanks, Tom. So echoing Tom's comments, our Q2 results demonstrate the strength of our business and the momentum of our strategy. Additionally, we remain committed to supporting our customers and their patients and have made investments in many areas, including inventory, transportation, portfolio simplification and innovation so that we can continue to do our best to ensure continuity of delivering critical health care offerings. We are delivering strong performance while simultaneously managing the increasing macroeconomic pressures through our simplification and mitigation programs. This balanced approach is helping us make strong progress against both our short- and longer-term commitments. Turning to our revenue performance. we delivered $5 billion in revenue in the second quarter, comprised of $4.8 billion in base business revenues, which had strong growth of 10.2% or 9.6% organic, which excludes the impact of acquisitions. Our revenue performance is supported by our durable core portfolio and an increasing contribution from the transformative solutions we are bringing to the market through our innovation pipeline and tuck-in acquisitions.
Price contributed 180 basis points to growth in Q2. While this is well below inflationary levels, it is one of many factors that is enabling our investments to ensure we can continue to deliver our health care offerings to our customers. COVID-only testing revenues were $214 million, which is expected to decline from $474 million last year. BD's unique ability to continue to deliver strong performance during these uncertain times is reflected in the performance across our segments with Medical growing 6.4%, Life Sciences base revenues growing 17.1% and Interventional growing 11.2%. Total company-based business growth was also strong regionally with double-digit growth in the U.S. and Europe, along with mid-single-digit growth in Latin America, which helped to offset lower-than-normal mid-single-digit growth in China, which was impacted by restrictions implemented to mitigate the spread of COVID late in the quarter. Let me now provide some further insight into each segment's performance. Our Medical segment delivered $2.4 billion in revenues in the second quarter, growing 6.4%. Strong performance across our Pharmaceutical Systems, Medication Management Solutions and Medication Delivery Solutions businesses was partially offset by an expected decline in Diabetes Care. Excluding Diabetes Care, BD Medical revenues grew 7.5%.
MDS revenues increased 5.3%, reflecting continued strong demand for our durable core products. Performance in MDS reflects execution of our comprehensive Vascular Access Management strategy, including early momentum of our one-stick hospital stay, which is driving competitive gains in catheters and vascular care devices, particularly in the U.S. Performance also reflects a tough comparison due to a decline in syringe utilization for vaccinations. MMS revenues grew 7.8%. In our Dispensing business, high single-digit revenue growth was driven by continued strong worldwide demand for connected Medication Management Solutions in both acute and nonacute care settings. Within our Infusion business, revenue growth reflects strong performance in infusion sets, driven by increased pump placements outside the U.S. during the course of the COVID pandemic. Pharm Systems revenue grew 12.2%, driven by continued strong demand for prefillable devices supported by our differentiated and expanding supply capacity.
Demand for these devices continues to be aided by the fast-paced vial to prefilled device conversion for biologics, vaccines and other injectable drugs. Growth was also aided by the expansion of services provided to small and midsized pharma customers through the recent acquisition of ZebraSci. BD Life Sciences revenue totaled $1.5 billion in the second quarter. The decline of 4.2% year-over-year is solely due to the lower COVID-only testing revenues previously discussed. Excluding COVID-only testing, Life Sciences base revenues grew 17.1%. IDS revenues declined 6.8%, which reflects the decline in COVID-only testing, partially offset by strong base business revenue growth of 21.8%. Performance in our IDS base business includes sales of our new combination flu/COVID assays for BD Veritor and BD MAX that were ahead of our expectations. It also reflects the soft comparison to the prior year where the flu season was limited. Demand for our combination assays was driven by strong adoption of our broader respiratory panel and timing of dealer stocking. IDS base revenues were also driven by strong demand for specimen management products and strong performance in our molecular diagnostics portfolio, driven by growth in both BD COR and BD MAX reagents with increased utilization across our larger install base.
Biosciences revenues increased 5.6%, driven by continued strong demand for research reagents as a result of lab utilization having returned to more normal pre-COVID levels and increasing adoption of our e-commerce platform. Instrument production in the quarter was limited by supply challenges for electronic components. And as a result, we ended the quarter with a record backlog. We expect to fulfill those orders over the balance of the year. BD Interventional revenues totaled $1.1 billion in the second quarter, growing 11.2%. This reflects strong performance across the segment with double-digit growth in the U.S. and China. Our strong global performance is driving our ability to offset the impact of planned product line discontinuations, particularly in PI and UCC, of lower margin and nonstrategic products as part of our portfolio simplification strategy. The segment's results also reflect the easier prior year comparison resulting from the Delta variant. Revenues in Surgery grew 17.5%. Again, as a reminder, Q2 reflects a soft comparison to the prior year when revenues declined 7.7%. Excluding the soft comparison, revenues grew in the high single digits, driven by hernia, biosurgery and infection prevention, including the recent acquisitions of Tepha and TissueMed. Revenues in Peripheral Intervention grew 8.5%.
Performance was driven by double-digit growth in the U.S. with strength across our peripheral vascular disease, end-stage kidney disease and oncology platforms. We continue to expand our peripheral vascular innovations and are driving strong growth through share gains from our recent acquisition of Straub and Venclose. Urology and Critical Care revenues grew 8.8%, driven by continued strong demand for our PureWick chronic female incontinence platform in both acute and nonacute care settings as we continue to expand our addressable market and deliver transformative solutions for alternate care settings. Also contributing to growth was continued back order recovery in acute urology and continued solid performance in targeted temperature management with our smart connected care enabled Arctic Sun platform. Now moving to our P&L. In Q2, we delivered adjusted net income and EPS above our expectations with adjusted net income of $937 million and adjusted diluted EPS of $3.18. We delivered base gross margin of 55.2% and base operating margin of 24% in Q2. Key drivers of gross margin include a benefit from our strategic portfolio initiatives, including mix optimization and increased volume utilization given our strong base revenue growth.
And while inflation was broadly in line with our expectations, we did realize an escalating impact during the quarter that was largely offset by our simplification and inflation-mitigation initiatives. In addition, as expected, we have favorable FX that was recorded in inventory in 2021 that benefited our GP this quarter as it flowed through sales. We leveraged our base SG&A as a percent of sales by over 200 basis points, driven by our focus on leveraging our base G&A expenses, partially offset by inflationary impacts primarily in customer shipping. R&D of 6.4% of sales reflects some accelerated phasing of investments and planned increases year-over-year, consistent with our strategy to support our long-term growth outlook. Our tax rate in Q2 was higher than anticipated due to the geographic mix of sales. Regarding our cash and capital allocation. Cash flows from operations totaled approximately $1.1 billion year-to-date. Q2 cash flow from operations reflects a higher-than-normal inventory balance as we made strategic investments to increase stocking of raw materials, such as electronic components as part of our actions to optimize product delivery to meet customer demand in this uncertain environment.
We ended Q2 with a strong cash balance of $3.1 billion and a net leverage ratio of 2.8 times. Our cash balance includes the receipt of a cash distribution from embecta at the end of Q2. In accordance with the tax-free nature of the spin and consistent with our capital allocation priorities, including our net leverage goals, we intend to utilize $1 billion of the embecta distribution over the coming quarters for debt paydown. The remaining $400 million of the distribution provides additional flexibility and will likely be deployed early in fiscal '23 with a bias towards share repurchases, subject to market conditions and other strategic considerations. With the spin of embecta now complete, we've achieved our targeted dividend payout ratio of about 30% as we've maintained our dividend. Our current cash and leverage position and continued focus on strong cash flows provide us the flexibility to advance our balanced capital allocation framework and support our BD 2025 growth strategy through investments in R&D, capital and M&A.
As Francesca mentioned to assist you with your FY '22 models, we provided our best estimates of the impact of the spin on certain line items for Q2 in today's slide presentation. We estimate a $260 million impact to revenue, 100 basis points to adjusted gross margin and 160 basis points to adjusted operating margin and $0.45 to adjusted EPS. Turning to our fiscal '22 guidance assumptions. First, some macro considerations that support our guidance. While we still expect some global COVID-driven variability, our guidance assumes the continued easing of COVID-19 restrictions and no significant or lasting disruptions to deferrable procedure volumes. Regarding China specifically, we expect to mitigate the impact from the current lockdowns over the balance of the fiscal year as we're assuming the restrictions will ease in May, with recovery ramping up through fiscal Q3. In addition, our guidance assumes that the port congestion does begin to ease and will not have a lasting impact on our China business and other markets.
While there could be additional lockdowns in China and other markets, our guidance assumes countries continue to be more efficient in managing safety protocols and the containment of new COVID variants to allow continuity of care for patients. Additionally, we anticipate continued inflationary and supply chain pressure over the balance of the year and into next fiscal year, but we're not planning for significant escalation of macro headwinds. While these pressures are meaningful, we believe we are on track with our margin recovery initiatives, and we'll continue to proactively manage this. We expect to be able to largely offset these incremental inflationary impacts given our strong performance in Q2 and increased focus in the back half of our fiscal year to execute our company-wide mitigation initiatives. As our first half results included Diabetes Care, we are providing guidance today on a legacy BD basis that includes Diabetes Care so you have a like-for-like comparison versus our February guidance.
Then we're also providing RemainCo guidance for the full fiscal year, which excludes Diabetes Care in all four quarters, along with the spin impact for each guidance metric. This is also laid out on the FY '22 guidance summary slide in the guidance section in our earnings presentation. As a reminder, going forward, our first half Diabetes Care results will be reflected as discontinued operations and we will only be discussing RemainCo performance. Now moving to our updated guidance for fiscal '22. We are well positioned for strong growth across our three segments given our performance and momentum in our base business. And thus, on a legacy BD basis, before adjusting for the Diabetes Care spin, we are increasing our base revenue guidance. We now expect legacy BD base revenues to grow 6.75% to 7.75% on an FX-neutral basis from $18.3 billion in fiscal '21. This is an increase of 100 basis points from our previous guidance of 5.75% to 6.75% growth. On a RemainCo basis, we expect base revenues to grow 7.25% to 8.25% on an FX-neutral basis. This is an acceleration of approximately 50 basis points over BD legacy growth as our Diabetes Care business was a negative contributor to growth rates.
The spin impact also includes a small contribution of revenues BD will earn in connection with agreements with embecta. For COVID-only testing, we continue to assume approximately $450 million in revenue. As expected, testing demand has slowed, and our full year COVID-only revenue expectations are weighted to the first half of the year. Based on current spot rates, for illustrative purposes, currency is now estimated to be a headwind of approximately 200 basis points or about $400 million to total company revenues on both a BD legacy and RemainCo basis on a full year basis. This is an incremental impact of 75 basis points or $150 million compared to our prior guidance and is driven by the strengthening of the U.S. dollar. So all in, we're increasing our legacy BD total reported revenue guidance by $50 million to a range of $19.6 billion to $19.8 billion. On a RemainCo basis, we expect total revenues of $18.5 billion to $18.7 billion. On a legacy BD basis, we still expect base operating margins to improve by approximately 200 basis points over 21.7% in fiscal '21.
Despite a more challenging macro environment anticipated over the back half of the year, our focused execution on driving profitable revenue growth, combined with our simplified programs, gives us the confidence that we will be able to offset the incremental inflationary pressures. On a RemainCo basis, the embecta spin enhances our anticipated base margin expansion by approximately 50 basis points. And as a result, we expect base operating margins to improve by approximately 250 basis points in comparison to 19.6% in FY '21 as recasted. We also still expect operating margin on COVID-only testing to be modestly above our base business margins. A few additional items for your models. On a RemainCo basis, we expect $60 million to $75 million in year-over-year improvement in interest/other, which reflects a minimal benefit from the use of embecta proceeds compared to our legacy BD expectation of $50 million to $75 million. On a legacy BD basis, we now expect an effective tax rate of 13% to 14% for the full year compared to 12.5% to 13.5% previously due to geographic mix as reflected in our revised guidance. For RemainCo, we anticipate an effective tax rate of 13.5% to 14.5%, which reflects the tax rate, excluding our Diabetes Care business.
Our updated guidance still assumes share repurchases that at a minimum offset any dilution from share-based compensation and thus does not assume material change in shares outstanding. All in, on a legacy BD basis, we expect adjusted EPS to be between $12.85 and $13 compared to $12.80 to $13 previously, which reflects an increase of $0.025 at the midpoint. The core drivers of the increase include $0.125 driven by the momentum and strength in our base business with a series of strategic mitigation actions we discussed earlier expected to largely offset increased inflationary pressures. And a $0.05 headwind from a higher effective tax rate. So operationally, this is an increase of $0.075. We expect an estimated incremental negative impact from currency of about $0.05, resulting in a $0.025 increase to our adjusted reported earnings guidance at the midpoint. On a RemainCo basis, we anticipate adjusted EPS of $11.15 to $11.30. This reflects an adjustment from the embecta spin of about $1.70. This accounts for a half year of TSA income of about $35 million that will be realized in the second half of the fiscal year and recorded in other operating income on an adjusted basis.
And it includes the contribution from supply agreements with embecta and the benefit from financing, which are both expected to be minimal. As you think about the TSA income next year for your models, it would not be accurate to double the half year of TSA income as the services provided and income received will decline over time. As a reminder, BD shareholders received embecta shares upon completion of the spin. As you think of the commitments we made during our Investor Day, on a BD RemainCo basis, our long-term targeted growth profile has been enhanced and increases our confidence in our ability to deliver a 5.5% plus base revenue growth target. Additionally, we are now targeting more than 400 basis points of base operating margin expansion through fiscal year '25 against the recasted fiscal year '21 margin. And notably, based on what we know today, all things being equal, we think BD RemainCo can deliver the absolute pre-pandemic operating margin level of legacy BD, which was about 25% by the end of that same time period. As we previously shared, this will lend itself nicely to double-digit EPS growth and a strong value proposition.
As you think about phasing for the balance of the year, the following are a few key considerations as you think of your RemainCo base revenue and earnings. We continue to expect base revenue growth to be fairly ratable in the back half of the year. Regarding our margins and P&L. First, on a year-over-year basis for Q3, we expect significant improvement in base operating margin compared to the recasted 17.7% in the prior year. Additionally, we expect the Q3 year-over-year improvement to be larger than what we delivered in Q2. Sequentially, from Q2 to Q3, we expect a modest step down due to a stronger Q2, primarily driven by product mix, most notably our flu/COVID combo test and increased inflationary pressures in the second half. As a result, Q3 is now projected to be the low watermark for the year. In Q4, we expect the impact of increased inflation on our business to continue.
However, we see a larger benefit from our offsetting initiatives flowing through. In addition, we continue to see our SSG&A and R&D dollars relatively evenly spread over the remainder of the year, which will drive strong operating leverage on Q4's higher revenue dollars. At the midpoint of our full year guidance range, our average tax rate for the balance of the year is about 14.5%, which is best to apply for the subsequent quarters. So in summary, we are advancing our BD 2025 strategic objectives. Our underlying business is strong as evidenced by our strong base revenue and earnings performance. We remain focused on execution and are confident in delivering against our performance goals despite navigating a complex macro environment as evidenced by our updated guidance, which increases the midpoint of both our reported revenue and adjusted EPS. Further, we are well positioned to deliver consistent and sustainable value with our long-term commitments enhancing with the completion of the spin. I'll now turn the call back to the operator to open the line for Q&A.
