Christopher DelOrefice
Executive Vice President and Chief Financial Officer at Becton, Dickinson and Company
Thanks, Tom. We delivered strong consistent results this fiscal year, which reflect the diversity of our portfolio and our BD 2025 strategy in action. Beginning with our revenue performance, we delivered $5.1 billion in revenue in Q4, exceeding our expectations with base organic growth of 7% and total base growth of 6.3%, which reflects the impact from the Surgical Instrumentation divestiture. For the full fiscal year, we delivered $19.4 billion in revenue, with base organic revenue growth of 5.8%, that is 100 basis points higher than our initial guidance. Total base revenue growth was 7% driven by strong performance in BD Medical and BD Interventional. Base revenue growth was strong regionally as well with high-single digit growth in EMEA and Latin America and mid-single digit growth in the US and Greater Asia, despite low-single digit growth in China.
Our revenue performance continues to be supported by our durable core portfolio and an increasing contribution from higher-growth spaces that are driving the plus side of our targeted 5.5%-plus revenue growth profile. We also continue to benefit from the organic contribution from tuck-in acquisitions we anniversaried, which was about 40 basis points for the full-year. Over a two-year period, we drove a strong base organic revenue CAGR of about 7%, which is well above our long-term target.
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 $2.6 billion in the fourth quarter, growing 6.2% with strong performance in Medication Management Solutions and Pharmaceutical Systems. BD Medical performance reflects a decline in Medication Delivery Systems resulting from softness in China, driven by market dynamics, including some impacts from volume-based procurement. This was partially offset by strong performance in Catheter Solutions in North America and Europe through continued execution of our Vascular Access Management strategy.
MMS delivered exceptional growth of 13.7% driven by double-digit growth in both Dispensing and Pharmacy Automation as customers focused on solutions, which improved workflows and efficiencies and helped pharmacies address rising costs and labor shortages. Pharmaceutical Systems delivered another quarter of double-digit growth of 10.6%, driven by continued strong demand for pre-fillable solutions for biologics, partially offset by a slowdown in China exports of anticoagulants.
BD Life Sciences revenue totaled $1.3 billion in the fourth quarter. Excluding COVID-only testing, Life Sciences base revenues grew 3.8% driven by strong double-digit growth in Biosciences. Life Sciences base business growth reflects IDS base business growth of 0.6% driven by continued adoption of our BD Kiestra, microbiology lab automation solution and strong ID/AST instrument placements and continued growth of our Molecular IVD assays, leveraging the BD COR system and our expanded BD Max installed base. Growth was partially offset by the comparison to prior year COVID-related recovery in China and the decline in Specimen Management that was driven by distributor and customer stocking in the prior year.
BDB grew 11.7% driven by strong demand for our recently-launched BD FACSDiscover S8 Cell Sorter, that is enabling an entirely new level of biological depth of speed, ease-of-use and solution integration for researchers across fields like immunology, cancer research and cell biology. BDB's performance also reflects strong growth in clinical reagents, leveraging our increasing installed base of FACSLyric analyzers and FACSDuet automation.
BD Interventional revenues totaled $1.2 billion in the fourth quarter, growing 9.6% and 12.8% organic. This strong double-digit organic growth was driven by Surgery growth of 5% or 15.5% organic, which excludes the impact from the divestiture of the Surgical Instrumentation platform of 10.5 percentage points. Organic growth reflects strong market adoption of our leading Phasix hernia products in our advanced repair and reconstruction portfolio and strong demand for our ChloraPrep infection prevention solution.
PI grew 11.7%, which reflects strong performance in Peripheral Vascular Disease, driven by global penetration of the Rotarex Atherectomy System, and our Venous portfolio in China. Growth was aided by improved supply and distribution stabilization in EMEA following a new ERP implementation in fiscal 2002. Urology grew 11.7%, primarily driven by continued strong demand for our PureWick chronic incontinence solutions in both the acute care and alternative care settings.
Now, moving to our P&L. Q4 adjusted diluted EPS of $3.42 reflects strong double-digit growth of 24% or 25% on a currency-neutral basis. Gross margin increased 20 basis points to 52.6%. And as anticipated, we delivered very strong margin improvement, with adjusted operating margin of 25.4%, up 340 basis points. As expected, margin improvement was driven by leverage on our strong revenue performance, our ability to offset outsized inflation, lower SSG&A, driven by our simplification initiatives, moderated R&D expense as a percent of sales due to investment timing, and a favorable comparison to last year's COVID profit reinvestment.
Full-year adjusted diluted EPS of $12.21 grew 7.6% or 11% currency-neutral. This includes delivering an additional $0.14 of currency-neutral earnings versus our original guidance. Additionally, we absorbed almost 400 basis points associated with reduced COVID-only testing, implying base currency-neutral EPS growth of approximately 15%. For the full-year, gross margin of 53.5% was flat to the prior year, despite absorbing over 200 basis points of outsized inflation in cost-of-goods sold. Operating margin of 23.5% was up about 90 basis points or 110 basis points when excluding the 20 basis point impact from the accounting treatment of an employee benefit-related item, exceeding our margin goal for the year.
The employee benefit item is recorded in G&A and is fully offset in other income with no resulting impact to EPS. While delivering our margin goals, we also maintained investment in R&D at 6% of sales or about $1.2 billion to advance our pipeline of innovation programs that will support our strong growth profile in fiscal year '24 and beyond.
As anticipated, we made significant progress towards achieving our pre-pandemic margin improvement goals. Our FY '23 adjusted operating margin is ahead of our 2019 spin-adjusted margin, which is particularly significant, given it includes overcoming 500 basis points or almost $1 billion of outsized inflation in the past three years. Over the next two years, we remain well-positioned to return to our targeted 25% operating margins.
Regarding our cash and capital allocation. Cash flows from operations totaled approximately $3 billion in FY '23 as expected cash flow accelerated over the back half of the year and was strongest in Q4 due to normalization of working capital, including continued moderation of our inventory balances. We remain focused on free cash flow conversion; and as anticipated, delivered a step-up in FY '23 with free cash flow increasing by over $600 million. We are planning another step improvement in FY '24 and expect free cash flow to increase double-digits. This will be achieved through further moderation of inventory levels by the end of the year and continued discipline around capex investments through focused prioritization in the areas of targeted reduction, both of which we expect to more than offset cash investments to support the Alaris remediation. As we execute against our BD 2025 strategy, we remain well-positioned to achieve our long-term cash conversion target of around 90%.
Beyond our investments in growth, we paid down over $700 million in debt this fiscal year and returned $1.1 billion in capital to shareholders through dividends. We ended the year with a cash balance of $1.4 billion and a net leverage ratio of 2.6 times. This is our strongest net leverage position since FY '21, which positions us well to capitalize on opportunities to accelerate our investment in higher-growth categories through our tuck-in M&A strategy.
Moving to our guidance for fiscal '24. For your convenience, the detailed assumptions underlying our guidance can also be found in our presentation. As demonstrated by our results over the past two years, BD has the ability to deliver strong performance in the most challenging times. Our performance reflects strong execution of our BD 2025 strategy, the benefit of our diversified and durable portfolio or simplification and outsized cost improvement programs and bold, purposeful capital allocation and investment decisions, all further optimized by our ability to execute with agility. As we look to fiscal '24, while the macro landscape has evolved since our last earnings call, I'm pleased to share we remain committed to the revenue growth profile we previously outlined. And at the midpoint of our guidance, we expect to deliver another year of organic growth above our 5.5%-plus profile.
Let me share some of the key puts and takes contemplated in our guidance. First, we see strong momentum in many parts of our business. We have six key areas in our portfolio, now totaling over $5 billion or 25% of our sales that we expect to deliver high-single to double-digit growth. These include our Pharm Systems pre-fillable syringes, which are benefiting from the strong trends in biologics. Our Bioscience business, our Peripheral Vascular Disease platform, our Medication Management Systems business including Pharmacy Automation and Infusion, given the recent cleared Alaris pump; urinary incontinence, supported by our PureWick franchise; and finally, our molecular diagnostic platforms.
This allows us to deliver strong results, despite some heightened macro dynamics affecting many industries, most notably in China, along with increasing risk and complexity as the result of the war in the Middle East and other geographies. Specific to the healthcare industry, providers continue to feel the pressure of elevated inflation and labor dynamics. And while they remain very focused on cost and working capital management, our portfolio has proven to be more resilient in this type of environment, given BD's essential role in the healthcare ecosystem, and our ability to transform healthcare processes and drive efficiencies.
As it relates to BD, the largest headwind we anticipate from these macro dynamics is in our China business, where we see market softness and increasing levels of volume-based procurement predominantly impacting our MDS business along with some impact in Pharma Systems from reduced demand as our Chinese pharmaceutical customers' export business is slow. As a result, we are projecting China to be flat to modest growth in FY '24, which creates nearly a 75 basis point headwind to our revenue growth this year.
Taking these factors into account, we expect to deliver base organic growth of about 6% at the midpoint, which is consistent with the view we provided on our last earnings call. We still expect COVID-only testing to step-down from the 73 million reported this year and result in a headwind to organic growth of over 25 basis points. This brings the midpoint of our total organic growth to 5.75% within our 5.25% to 6.25% range.
To help simplify our reporting, unless there is a significant change in the COVID-only testing market, effective this year, we will no longer be reporting base organic growth that excludes COVID-only testing. However, it was important to give this context with our initial guidance. As a reminder, while the sale of the Surgical Instrumentation platform that closed in Q4 FY '23 does not impact our organic growth, we'll have nearly a 75 basis point impact to total revenue growth in FY '24 and is accounted for in our total currency-neutral revenue growth guidance of 4.5% to 5.5%.
Moving to margins and earnings. We plan to deliver another year of strong profitable growth including progressing our adjusted operating margin towards our FY '25 goal of 25%, while generating cash flow improvements to support our strong and reliable growth profile. On gross margin, we expect to be about flat year-over-year on a reported basis, including the impact of currency headwinds of approximately 75 basis points. Excluding the impact of currency, we expect gross margin to improve with our simplification strategy, more than offsetting a 150 basis points of headwinds from outsized inflation of about 100 basis points and another 50 basis points from inventory reduction efforts that occurred in FY '23, and then we plan to further moderate down by the end of FY '24, which will improve cash flow.
The value from our simplification programs continue to be driven by our RECODE network optimization, SKU rationalization and operating model simplification programs. Additionally, our BD Excellence program, which focuses on the application of lean principles is driving productivity gains across our operations. As it pertains to opex, we anticipate SSG&A expense leverage on strong revenue performance and continued benefit from our operating model simplification programs. After three consecutive years of investing in R&D at over 6% on average, in FY '24, we anticipate a consistent year-to-year dollar spend in R&D, that is needed to advance our pipeline, which will result in some modest leverage. As a result, we expect adjusted operating margin to improve by around 50 basis points on a reported basis over the 23.5% reported in FY '23, primarily driven by SSG&A leverage. This puts us well on track to achieve our 25% margin goal by FY '25.
For tax, assuming no major legislative or regulatory changes, we expect our adjusted effective tax rate to be between 13% and 15%. As a reminder, it would not be unusual for our tax rate to fluctuate on a quarterly basis, given the timing of discrete items.
Given all these considerations, we expect adjusted EPS growth before the impact of currency of 8.25% to 10.25% or 9.25% at the midpoint. This includes absorbing about a 75 basis point headwind from the divestiture of the Surgical Instrumentation business. And as a result, implies double-digit earnings growth, excluding the divestiture of 10% at the midpoint and within a range of approximately 9% to 11%.
Let me now walk you through the estimated impact from currency. As a reminder, we manage our business and provide guidance on a currency-neutral basis to best represent underlying performance to provide perspective on currency using current spot rates, consistent with what other companies are discussing in their forward outlook, we are accounting for a headwind to our reported results as we translate currency to a stronger US dollar. Along with normal FX translation, given our global manufacturing and distribution footprint, we also face the impact of currency fluctuations in our P&L, including the impact from the sourcing and timing of inventory production, movements throughout our network.
Since our last call in August, the US dollar significantly strengthened against most major currencies. And the change over this time period accounts for nearly two-thirds of the expected FX impact. Additionally, as it relates to sourcing from Mexico, where we have a large manufacturing footprint, the dollar weakened versus the peso by about 10%, taking the average rate over the last four months ending in October versus the average over the first nine months of fiscal year '23, with the peso achieving peak rates that in that timeframe has not been seen in well over five years.
Based on current spot rates for illustrative purposes, currency is estimated to be a headwind of approximately 75 basis points to total Company revenues and approximately 375 basis points to adjusted EPS growth on a full-year basis. All-in, including the estimated impact of currency, we expect revenues to be between approximately $20.1 billion to $20.3 billion, and adjusted EPS to be in a range of $12.70 to $13, which represents growth of 4% to 6.5%.
As a reminder, currency can fluctuate over time. And it would not be prudent to deviate from our investment profile that is resulting in consistently strong base organic growth, which is delivering an expected three-year base organic CAGR of about 6.8%, well above our 5.5%-plus growth profile. We continue to deliver margin improvement, resulting in earnings growing 1.3 times the rate of sales. And with our focus on improved cash conversion, we expect to deliver double-digit free cash flow growth.
As you think of fiscal '24 phasing, the following are considerations for Q1 in context on how revenue and margin will index through the remainder of the year. As it relates to Q1, we expect organic revenue growth to under-index the full year by over 200 basis points and we expect a decline in adjusted EPS versus the prior year of about $0.55 to $0.60.
There are three key items to consider. First, sales was driven by the prior year base and COVID-only respiratory testing comparison, along with the market dynamics in China. These impacts are about equally weighted and primarily impact the IDS and MDS business with a modest impact in Pharm Systems associated with China. We also expect Alaris revenues to ramp over the year and be weighted to the second-half.
Second, we expect operating margin to decline by around 350 basis points on a reported basis in Q1 with 200 basis points driven by inventory-related FX dynamics and another 200 basis points from the negative absorption impact from our planned inventory reductions, which we expect to partially offset through our simplification and cost mitigation initiatives, while also overcoming outsized inflation. Lastly, we had a discrete tax item in Q1 of last year that creates a negative comparison.
As you think about the remainder of the year, we expect organic sales growth to be higher than our full-year range in the second-half, partially driven by the ramp-up of Alaris. We expect our Q2 margins to expand significantly on a sequential basis, resulting in year-over-year operating margin being nearly flat on a reported basis or slightly up on a currency-neutral basis.
In closing, we are very pleased with our performance this past year, particularly given our ability to navigate another year of significant macro complexity and inflationary pressure. The momentum in our durable and strong portfolio along with our track record of successfully executing and delivering against our commitments, gives us confidence in our ability to continue this momentum into FY '24 and create long-term value for all of our stakeholders.
Let me take a moment to thank our talented employees across BD, who, through growth mindset and an unwavering commitment to our purpose, are core to delivering this performance.
With that, let's start the Q&A session. Operator, can you assemble our queue, please?
