Christopher DelOrefice
Executive Vice President and Chief Financial Officer at Becton, Dickinson and Company
Thanks, Tom. Echoing Tom's comments, we delivered strong consistent results this fiscal year, which reflects our growth strategy playing out as planned. Through execution of our BD2025 strategy, we are fulfilling our short-term commitments while progressing towards our long term goals.
Beginning with our revenue performance, we exceeded our revenue growth expectations for the fourth quarter and full year. We delivered $4.8 billion in revenue in Q4, with base business growth of 8.6% or 6.8% organic. Parata contributed about 140 basis points to growth in the quarter and about 40 basis points to the full year.
COVID-only testing revenues were $37 million, which is expected to decline from $316 million last year. For the full fiscal year, we delivered $18.9 billion in revenue, with base business growth of 9.4% or 8.5% organic. COVID-only testing revenues were $511 million, which, as expected, declined from $2 billion last year.
Total company base business growth was strong across all three segments, with double-digit growth in BD Life Sciences and high-single digit growth in BD Medical and BD Interventional. Base revenue growth was strong regionally as well, with double-digit growth in the US, China and Latin America, along with high-single digit growth in EMEA. Our revenue performance continues to be 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. We also continue to benefit from the organic contribution from tuck-in acquisitions we anniversary, which was about 20 basis points for the full year.
Let me now provide some high level insight into each segment's performance in the quarter. Further detail can be found in today's earnings announcement and presentation. BD Medical revenue totaled $2.4 billion in the fourth quarter, growing 10.2% with strong performance across the segment. Growth was driven by strong growth in MDS of 8%, driven by continued execution of our comprehensive vascular access management strategy. MMS growth of 11.5%, driven by strong demand of our connected medication management and pharmacy automation strategies, including our recent acquisition of Parata as customers focus on automation to drive efficiency, to help address the constrained labor market. And another quarter of double-digit growth of 12.8% in pharmaceutical systems based on our strong leadership position in prefillable solutions for biologics and vaccines.
BD Life Sciences revenue totaled $1.3 billion in the fourth quarter. The decline of 11.6% year-over-year is due to the expected lower COVID-only testing revenues previously discussed. Excluding COVID-only testing, Life Sciences base revenues grew 8.3%, with strong growth across both IDS and biosciences. Base business growth was driven by IDS growth of 8.6%, enabled by continued leverage of our molecular testing menu across our expanded BD MAX install base and continued demand for our leading clinical microbiology and specimen management platforms.
And lastly, BDB growth of 7.5%, driven by continued demand for our expanded suite of flow cytometry instruments, as researchers are able to do even higher parameter cellular analysis for cancer and other immune-related conditions.
BD Interventional revenues totaled $1.1 billion in the fourth quarter, growing 5.7%. Growth was driven by surgery growth of 5.4%, supported by our advanced repair and reconstruction portfolio, with strong market adoption of our leading Phasix hernia products.
PI growth of 4.8%, which reflects continued expansion of our venous portfolio, highlighted by Venclose in the US and the global relaunch of Venovo. PI performance also reflects increased backorders, primarily related to a BDI-specific European ERP system implementation.
Urology growth of 7.2% reflects continued strong demand for our PureWick female incontinence solutions in both acute and alternative care settings.
Now moving to our P&L, Q4 adjusted diluted EPS of $2.75 increased 28%. Base business gross margin of 52.5% was up 80 basis points and base operating margin of 22.5% was up 430 basis points year-over-year. Full-year adjusted diluted EPS of $11.35 grew 0.6%.
As we anticipated, we made significant progress towards achieving our pre-pandemic margin improvement goals despite increasing inflation pressures. For the full year, base business gross margin of 53.4% was up 110 basis points and base operating margin of 22.4% was up 280 basis points.
The key full-year drivers of gross margin include: our simplification and inflation mitigation initiatives and increased volume utilization, given our strong base revenue growth. In addition, as expected, we have favorable FX that was recorded in inventory that benefited our GP as they flow through sales this year.
Base operating margin reflects strong operating expense leverage, with base selling and G&A as a percent of sales leveraging by 180 basis points, partially offset by significant inflationary impacts, primarily in shipping.
To put this in perspective, shipping expense increased at a double-digit rate in our base business. This increase in shipping was offset with focused efforts on cost management and leverage of selling and G&A, which only grew at about one-third the rate of sales and was the primary driver of 21% currency neutral growth in base operating income. This is a testament to the tremendous work by our organization to mitigate inflation and execute our margin enhancement initiatives. This was also a key enabler in supporting continued investment in R&D at just over 6% of sales to advance our innovation pipeline.
Regarding our cash and capital allocation, cash flows from operations totaled approximately $2.5 billion in FY 2022. Operating cash flow reflects a higher inventory balance of about $600 million year-over-year. The increase reflects the impact of inflation, longer in-transit lead times and our strategic investments in raw materials to optimize product delivery to meet customer demand. As expected, our free cash flow conversion this year was below our long term target.
We remain very focused on cash flow conversion, and we're taking actions to moderate inventory down. But in the short term, we believe it's a prudent trade off to ensure we support our customers while delivering strong results.
As we execute against our BD2025 strategy and supply chain constraints normalize, we expect to migrate towards our long-term cash conversion target.
In addition to investing in R&D at over 6% of sales to advance our pipeline of innovative programs, we also invested over $2 billion in six tuck-in acquisitions across our businesses that will support our strong growth profile in 2023 and beyond.
Beyond our investments in growth, consistent with what we share regarding the planned use of embecta proceeds, we paid down $500 million in long-term debt this fiscal year and returned $21.6 billion in capital to shareholders through dividends and share repurchases. We ended the year with a cash balance of $1 billion and a net leverage ratio of 2.8 times.
Moving to our guidance for fiscal 2023. For your convenience, the detailed assumptions underlying our guidance can also be found in our presentation. Our fiscal 2023 guidance aligns with the framework we communicated last quarter and the value creation model and long term targets we outlined at our Investor Day to deliver 5.5% plus base revenue growth, continued margin improvement and double-digit base earnings growth on a currency neutral basis.
As a reminder, we manage our business on a currency neutral basis to best represent underlying performance. Consistent with what other companies are discussing in their forward outlook, we're accounting for a headwind to our reported results as we translate currency to a stronger US dollar. Beyond that change, our guidance has only strengthened in a complex macroenvironment, where we continue to see elevated inflation and geopolitical uncertainty.
Starting with revenues, I'll provide you some insights into some of our key guidance assumptions. First, on a currency neutral basis, we expect base revenues to grow 5.25% to 6.25%, which is a strong growth of 5.75% at the midpoint. This midpoint is above our 5.5% plus target we outlined during our Investor Day, given the confidence we have in our strengthening growth profile.
Our revenue guidance includes two proactive strategic portfolio management actions that are consistent with our BD2025 strategy and support our value creation goals.
First, building on our FY 2022 achievements, our base revenue guidance includes planned strategic portfolio exits as part of the acceleration of our portfolio simplification and RECODE programs. These actions will enable increasing manufacturing efficiency and capacity and ensure the reliable supply of the products that matter the most to our customers. We expect these actions to impact revenue by approximately 100 basis points, while being accretive to margin. Second, offsetting this revenue impact is a positive contribution of approximately 100 basis points from the full-year benefit of our recent acquisitions, with Parata being the predominant driver.
We will continue to be active in portfolio management as a lever to create value for all stakeholders. While we aren't providing segment specific guidance, we are on track to achieve our long range plan commitments, and we are assuming strong performance across the segments in FY 2023.
We expect Medical segment growth to be above total company range, which includes the acquisition of Parata; Life Sciences growth to be below, given strong prior year comparisons; and Interventional to be at the high end of the range.
Consistent with what we shared, we expect COVID-only testing revenues and related earnings to be at a level significantly below FY 2022, with revenues more in line with the annualization of our Q4 FY 2022 results, or approximately $125 million to $175 million for the full year.
Regarding Alaris, consistent with what we've done in the past, we're only modeling shipments related to medical necessity. While we will be prepared when clearance is received, we continue to anticipate a gradual ramp to revenues upon clearance.
Regarding our assumptions on earnings, we expect operating margins to improve by at least 100 basis points over the 22.6% reported in FY 2022. Despite the challenging macroenvironment persisting, our focused execution on driving profitable revenue growth, combined with our simplified programs, gives us the confidence that we will be able to continue to offset inflationary pressures and make meaningful progress to achieving pre-pandemic operating margin levels of about 25% in FY 2025.
First, to give you some color on inflationary assumptions, as a reminder, outsized inflation in FY 2022 was a headwind of over 200 basis points, and we expect a similar level of incremental outsized inflation in FY 2023.
The primary drivers of the incremental inflation are raw material costs and labor, which are about equally weighted. Even though we see some signs of costs normalizing in certain areas, a lot of the outsized inflation is from inventory we manufactured in FY 2022 as there's about a four to six month lag from production to sell through. Labor costs, especially in our manufacturing plants, have continued to increase. We've taken proactive actions to ensure we are differentiating BD to retain our skilled workforce. Lastly, transportation costs have stabilized and we've begun to see some downward movement on certain rates. However, we are still above more normalized levels.
We remain committed to leading through the macro complexity, while making investments to support our customers. To offset these inflationary impacts, we continue to leverage our strong growth profile and drive outsized cost reduction and other mitigation programs. We expect over 80% of the improvement in operating margin to come from SSG&A, driven by internal cost containment and leveraging. The balance is expected to come from slight improvement in gross margin and R&D as we normalize back closer to our target of 6% of sales.
Our simplification initiatives include continuing to execute on Project RECODE. You will recall when we announced RECODE, it was intended to deliver $300 million in savings by the end of fiscal year 2024, with portfolio and network optimization representing about 70% of the savings. We are accelerating these efforts and are also making significant progress, with the third pillar of RECODE, operating model simplification, which will result in BD becoming a more agile and less complex organization.
In addition, to provide some color below operating income, we expect an increase of approximately $50 million to $75 million in interest other. This is primarily driven by increased pension expense, which we fully covered in our guidance, and as a result of the negative movement in the financial markets.
For tax, based on what we know today, assuming no major legislative or regulatory changes, we expect our adjusted effective tax rate to be between 13.5% and 14.5%. It would not be unusual for our rate to fluctuate above or below this range on a quarterly basis, given the timing of discrete items.
Our guidance assumes no material change in average common shares outstanding from our average FY 2022 share balance. This takes into account the conversion of all outstanding preferred shares on June 1, 2023, the benefit from the FY 2022 share repurchase associated with the use of the embecta distribution and our commitment to mitigate the dilution from share-based compensation.
So, on an all-in basis, we expect adjusted EPS before the impact of currency to be around double-digit growth and within a range of approximately 9% to 11%. This includes absorbing about a 300 basis point headwind from the anticipated decline in COVID-only testing and, as a result, implies a very strong, low teens base earnings growth of approximately 12% to 14%.
Let me now walk you through the estimated impact from currency. As a reminder, we manage our business and provide guidance on an operational basis, but provide perspective on currency using current spot rates.
Since our last call in August, the US dollar strengthened against all major currencies. Based on current spot rates, for illustrative purposes, currency is now estimated to be a headwind of approximately 450 basis points or about $850 million to total company revenues on a full-year basis. This currency headwind has nearly doubled since our August call. Our guidance assumes the euro at $0.99, which is down about 4% since August.
The Chinese yuan, Japanese yen, British pound, and Canadian dollar have also all declined even more than the euro since August, by almost two times the euro movement. For context, these four currencies combined are in line with our total euro exposure.
The currency headwind to EPS growth has also nearly doubled since our August earnings call. At current rates, currency would represent a total headwind of approximately 420 basis points to adjusted EPS growth.
All-in, including the estimated impact of currency, we expect revenues to be between approximately $18.6 billion to $18.8 billion and adjusted EPS to be in a range of $11.85 to $12.10.
As you think of fiscal 2023 phasing, there are three key items to consider. First, FX. At current spot rates, we expect the headwind to revenue will be over indexed to the first half. For the full year, we expect the drop through to earnings to be below our BDX operating margin. Due to the expected benefit from inventory flow through in Q1, the drop through is expected to start well below the full year average, and most significantly, impact the second and third quarters.
Second is the grow over impact of COVID-related dynamics. As a reminder, in FY 2022, almost 80% of COVID-only testing revenue was realized in the first half of the year, with strong margin drop-through as reinvestment was weighted to the latter part of the year. In addition, there was also a comp to strong first half performance in FY 2022 related to combo testing in the base business.
And the third is inflation. Nearly 40% of the full-year inflation headwind is expected to occur in Q1 as we sell through inventory manufactured in FY 2022 in the first half of the year.
As a result of these items, as you think of the progression of our total operating margin expansion through the year, for Q1, you should expect the year-over-year decline driven primarily by the year-over-year comparison of higher COVID-only testing. We expect operating expansion to ramp over the remainder of the year, with the majority occurring in the second half.
As a reminder, there are some tough comparisons to the prior year in Q1, such as the benefit of about $50 million in licensing revenues in Life Sciences. As a result of these dynamics, we expect Q1 base revenue growth and adjusted EPS to be under-indexed relative to an equal quarterly phasing of the full year.
So, this guide, coupled with our FY 2022 results, has us progressing very well towards our FY 2025 goals, including a two-year revenue CAGR, assuming the FY 2023 midpoint of 5.75% that is well above the 5.5% plus target, at around 7.5%; achievement of nearly 400 basis points of margin improvement or over 70% of the way towards our FY 2025 objective; and two consecutive years of strong double-digit adjusted earnings growth in our base business.
In closing, we are very pleased with our performance, particularly given the macro complexity and inflationary pressure we navigated. The consistent execution we delivered and our ability to mitigate these challenges through FY 2022 enabled our results. This gives us confidence in our ability to continue this momentum into FY 2023 and create long term value for all of our key stakeholders.
With that, let me turn it back to Tom for a few additional comments.
