Christopher DelOrefice
Executive Vice President and Chief Financial Officer at Becton, Dickinson and Company
Thanks, Tom. Echoing Tom's comments, our BD2025 strategy is driving consistent performance and demonstrates our strong growth profile. With our year-to-date performance, we are well on track to achieve our FY '25 long-term targets.
Beginning with some color on our revenue performance. We delivered strong Q2 base revenue growth of 8.7% or 7% organic. This includes growing over prior-year flu-COVID combination sales, which negatively impacted growth by over 200 basis points, and an impact from one-time strategic portfolio exits of about 50 basis points. Adjusting for these impacts, organic volume growth was in the strong mid-single digits at nearly 6%.
In addition to the inorganic revenue contribution from M&A, we continue to drive organic growth from acquisitions that have anniversaried, which was about 30 basis points in the quarter. COVID-only testing revenues were $16 million in the quarter, which, as expected, declined from $214 million last year.
Total company base business growth was strong across BD Medical and BD Interventional with growth of 12.2% and 9.3%, respectively. Base revenue growth in BD Life Sciences of 2.2% includes a negative impact of about 800 basis points due to the comparison to higher combination flu-COVID testing sales last year attributable to the Omicron wave, coupled with the timing of this year's respiratory season that peaked earlier than normal during fiscal Q1 and then declined. Base revenue growth was strong across all regions, with high single-digit growth in the U.S. and double-digit growth internationally, including 9% growth in China. For the full year, we expect to deliver high single-digit growth in China. Our growth continues to reflect consistent performance of our durable core portfolio and our shift into attractive and higher-growth end markets.
Strong performance in our Medical segment reflects execution of our growth strategies across our key end markets. This includes our durable COR, where we continue to drive growth in Vascular Access Management with our BD Posiflush and Catheter Solutions. In Medication Management Solutions, our investments in high-growth areas like pharmacy automation are driving strong growth, led by our Parata acquisition and BD ROWA.
In our dispensing platform, continuous innovations in BD Pyxis, including the recent launch of BD Pyxis ES 1.7 and the BD HealthSight portfolio drove double-digit growth. And in Pharm Systems in the higher-growth pharma and biotech drug delivery end market, our capacity investments and newer innovations in products such as BD Effivax, BD Hylok, and BD Neopak are driving continued double-digit growth.
Strong underlying performance in our Life Sciences segment reflects growth in our durable core and specimen management and execution of our growth strategies across our key end markets, including Single Cell Analysis, Microbiology, and Molecular Diagnostics. In our IDS business, growth in microbiology reflects demand for our BD Kiestra lab automation solution including adoption of the recently launched IdentifA and total modular track solutions. Double-digit growth in molecular IVD assays reflects continued leverage of our large installed base.
In Biosciences, high-teens growth was driven by new innovations in BD Horizon dyes and our expanded antibody portfolio that drove double-digit growth in research reagents and continued strong demand for our BD FACSymphony flow cytometry analyzers.
Strong performance in our Interventional segment reflects execution of our growth strategies across our key end markets, including advanced repair and reconstruction, PBD, oncology and incontinence. Our newer innovations in higher growth areas are all contributing nicely to growth. Our surgery business unit delivered strong double-digit growth with continued market adoption of Phasix hernia resorbable scaffold, driving double-digit growth in advanced repair and reconstruction and double-digit growth in biosurgery that was aided by Arista.
In our PI business unit, the relaunch of Venovo and global penetration of Rotarex are driving high single-digit growth. In our UCC business unit, high single-digit growth continues to be driven by the strong double-digit growth of the PureWick franchise that was aided by the recent launch of PureWick Male. Across BDI, procedure volumes were also strong in the quarter, contributing to growth, particularly in our Surgery business unit. Further details regarding each segment's performance in the quarter to be found in today's earnings announcement and presentation.
Now moving to our P&L. We reported Q2 adjusted diluted EPS of $2.86, which included gross margin of 54.2%. It was slightly ahead of our expectations, and operating margin of 22.7% that was in line with expectations. Our margin performance reflects leveraging our strong revenue growth, the benefit of our simplification and inflation mitigation initiatives and strategic portfolio exits that enabled our ability to more than overcome nearly 200 basis points of outsized inflation, which was in line with our expectations. Gross margin also reflects negative FX, which was slightly higher than anticipated.
SSG&A expense increased 5% year-over-year. Half of the SSG&A increase was driven by the unfavorable impact of an employee benefit-related item that gets recorded in G&A and is offset in other income with no resulting impact to EPS. Excluding the employee benefit-related item, we drove about 50 basis points of leverage in SSG&A with shipping growth in line with revenues and good leverage in selling expense.
As expected, our phasing of R&D continues to be weighted to the first half of the year with R&D as a percent of sales up 6.5% in Q2. Our R&D investments are aligned to our long-term growth strategy and have been a catalyst to increased velocity of product development.
In summary, we continue to execute well and fully delivered our Q2 operating margin goal with operating improvement, excluding the employee benefit item nicely leveraged by 80 basis points, including absorbing a 30 basis point headwind from lower COVID-only testing. Our tax rate in Q2 was lower than anticipated due to the timing of certain discrete items that were contemplated to occur during the year.
Regarding our cash and capital allocation. Cash flows from operations totaled $584 million year-to-date. Operating cash flow reflects an elevated inventory balance that has enabled our strong performance and ability to meet peak demand and support our customers' needs while navigating the complexity of the macro environment. We remain focused on reducing our inventory balance and have several initiatives underway to do so. As a result, while we saw peak inventory levels during the quarter, we exited the quarter with positive progress towards reducing inventory. We expect inventory to continue to decline over the balance of the year with the most prominent reduction expected in Q4 to levels similar to the prior year. We're also driving more effective capital expenditures for the full year and expect expenditures to be similar to the prior year.
We ended the quarter with a cash balance of approximately $2 billion, which includes the proceeds from debt refinancing during the quarter that will be utilized to repay maturing debt over the balance of the year. We ended Q2 with a net leverage ratio of 3.1 times. We expect to pay down our commercial paper over the balance of the year and move towards our net leverage target of 2.5 times. As the year progresses and we build cash, we will increase our capacity to deploy cash towards tuck-in M&A.
Moving to our guidance for fiscal '23. For your convenience, the detailed assumptions underlying our guidance can also be found in our presentation. Given our quarter performance, we are confident in raising the midpoint of our revenue and adjusted EPS guidance ranges. The strength of our base revenue growth and consistent execution of our margin goals is enabling our ability to offset lower COVID-only testing revenues and the latest FX rates while reinvesting in the business to drive future growth.
Starting with revenues, I will provide some insights into some of our key guidance assumptions. First, we are well positioned for strong growth across our 3 segments, which are delivering at or above our expectations, and thus, we are increasing our base revenue guidance. On a currency-neutral basis, we now expect base revenues to grow 6.5% to 7%. This is an increase of 50 basis points at the midpoint from our prior guidance of 5.75% to 6.75% and is driven by our Q2 revenue outperformance and the confidence we have in our team's continued strong execution and our consistent growth profile.
Following our strong FY '22 growth of 9.4%, we again increased our revenue guidance in FY '23, which at the midpoint brings our two-year average growth to about 8% or 7% organic, which is well above our 5.5% plus target. Increased base revenue guidance includes both higher organic and inorganic growth expectations for the full year. We now expect inorganic revenue to contribute approximately 125 basis points of base revenue growth for the full year, which is an increase of 25 basis points driven by the strong execution of Parata. Organic-based revenue growth is now expected to be 5.25% to 5.75%, an increase of 25 basis points at the midpoint. Both our base revenue and base organic revenue growth continue to include a reduction of approximately 100 basis points resulting from our planned one-time strategic portfolio exits.
While we aren't providing segment-specific guidance, we are on track to deliver strong performance across our segments this fiscal year, in line with our long-term planned commitments. We expect Medical segment growth to be above the total company range, which includes the acquisition of Parata, Life Sciences growth to be below given strong prior year comparisons and Interventional to be above the total company range.
For COVID-only testing, we are now assuming about $50 million in revenue versus our previous expectation of about $50 million to $100 million, driven by the reduced testing volumes as a result of the early peak and rapid decline of the respiratory season. All in, we are increasing our reported revenue guidance by approximately $50 million at the midpoint to a range of $19.2 billion to $19.3 billion compared to $19.1 billion to $19.3 billion previously. Regarding Alaris, we continue to only model shipments related to medical necessity in line with fiscal '22 demand.
Regarding our assumptions on earnings, we continue to expect operating margins to improve by at least 100 basis points for the full year. We are executing as planned and the actions required for the year to drive margin improvement remain unchanged. Our focus on driving profitable revenue growth, combined with the significant simplified actions in place, including the previously planned operating model programs that we recently announced, gives us the confidence that we will again deliver meaningful margin expansion this year while absorbing about 200 basis points of outsized inflation and the incremental decline in COVID-only revenue, which has a higher margin profile. Below operating income, our assumptions regarding interest other remain unchanged, and we have narrowed our effective tax rate guidance to 13.25% to 14%.
We expect adjusted EPS to be between $12.10 and $12.32, which represents an increase of $0.015 at the midpoint. This reflects a base business increase of $0.115 that is driving our ability to offset incremental headwinds of approximately $0.05 each from COVID-only testing and foreign currency. Our adjusted EPS guidance reflects currency-neutral growth that is around double digits and within a range of approximately 9.5% to 11%. This includes very strong mid-teens base business growth of approximately 14% to 15.5%, which is over 100 basis points higher than we previously anticipated and is driving our ability to absorb the decline in COVID-only testing.
Our updated guidance reflects significant progress towards delivering the BD2025 financial targets we laid out at our Investor Day, including, a strong two-year organic base revenue CAGR of about 7%, which is well above our 5.5% plus long-term target; at least 380 basis points or about 70% of our targeted 540 basis points of base operating margin expansion toward our targeted 25% margin levels in FY '25; and a strong high-teens two-year base business EPS CAGR, which is also well above our double-digit long-term target.
As we think of fiscal '23 phasing, let me provide some comments for you to consider as you model out the balance of the year. We've outlined more detail in the accompanying presentation slides, but the following are key areas to note. First, regarding base revenues, the midpoint of our updated guidance continues to reflect strong organic growth of about 6% in the second half of the year. We expect organic growth to be fairly ratable over the quarters with some different prior year comparisons in each quarter. As a reminder, we will anniversary the inorganic contribution from the Parata and MedKeeper acquisitions in Q3, which means that Q4 base revenue will be all organic.
Second, as you think about margins, as we have described throughout the year, most of the full-year improvement will come from SSG&A expense leverage with the balance from slight improvement in gross margin, which is muted because of outsized inflation in fiscal year '23. We've seen that play out over the first two quarters where gross margin was slightly below the prior year margin in Q1 and slightly above in Q2. We expect a similar dynamic in Q3 where you should be slightly ahead of the prior year's 52.6%.
For operating margin, our expectation is for Q3 year-over-year margin improvement, similar to our full-year operating margin expansion expectation, and slight improvement sequentially from the 22.7% in Q2. R&D as a percent of revenue will moderate down towards our expected full-year average of about 6% in Q3, while Q4 will be the low at about 5% of sales.
Lastly, the midpoint of our full-year effective tax rate guidance indicates an estimated tax rate of about 16.5% for the balance of the year, which is best to assume occurs evenly in Q3 and Q4 as the exact timing of any other discrete items is hard to predict.
In closing, as we approach the halfway point, our BD2025 strategy has consistently delivered multiple periods of strong financial performance. As we look forward and as reflected in our FY '23 guidance and our progress towards our BD2025 long-term targets, we are well positioned for continued growth.
With that, let's start the Q&A session. Operator, can you assemble our queue, please?
