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 in an outsized growth profile. We are advancing our innovation pipeline and delivering against our revenue, margin, and EPS goals. We're also making progress strengthening our balance sheet with lower inventory and net leverage, consistent with the commitments we made strong year-to-date results, we are well on track to achieve our updated FY 2023 guidance. And with the addition of Alaris' return to market, we are increasingly confident in achieving our BD2025 long-term targets of 5.5% plus organic revenue growth and double-digit adjusted EPS growth.
Beginning with some color on our revenue performance, we delivered strong Q3 base revenue growth of 7.9% or 6.3% organic. Base organic growth includes growing over prior year respiratory testing sales which negatively impacted base growth by approximately 100 basis points. Additionally, our tuck-in acquisition strategy continues to enable profitable growth with organic growth from acquisitions that have anniversaried contributing about 40 basis points in the quarter and are expected to contribute 50 basis points for the full year. COVID only testing revenues were $8 million in the quarter, which, as expected, declined from $76 million last year. Revenue growth was strong across BD Medical and BD Interventional with growth of 12.2% and 8.1%, respectively.
As expected, BD Life Sciences revenues declined due to lower COVID-only testing revenues compared to the prior year. Life Sciences base revenues, which exclude COVID-only testing, were about flat, given the comparison to prior year respiratory testing sales that negatively impacted base growth by about 400 basis points. On an underlying basis, Life Sciences base revenues grew approximately 4%. Total company base revenue growth was strong across all regions with high single-digit growth in the U.S. and internationally, including strong double-digit growth in China.
Strong performance in our Medical segment reflects execution of our growth strategies across our key end markets. This includes in MDS where we continue to drive growth in Vascular Access Management with our BD PosiFlush vascular care and PIVC 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. Our MMS dispensing platform reported double-digit growth, reflecting our continuous innovations in BD Pyxis, including the BD HealthSight portfolio.
And in Pharm Systems, in the higher-growth pharma and biotech drug delivery end market, our capacity expansion investments and strong leadership position in prefillable solutions with BD Hypak and newer innovations in products such as BD Neopak, PDF Effivax and BD Hylok are driving our 13th consecutive quarter of double-digit growth, while supporting the increased demand in high-growth categories like biologics. Life Sciences base business growth was about flat and approximately 4% underlying when adjusting for the respiratory testing sales comparison.
This reflects execution of our growth strategies across our key end markets, including microbiology, molecular diagnostics and single-cell analysis. It was partially offset by impact of some U.S. distributors destocking in specimen management. In our IDS business, double-digit growth in microbiology reflects demand for our BD Kiestra lab automation solution, including continued adoption of the IdentifA and total modular track solutions and strong demand for our blood culture and ID/AST reagents. Continued strong growth in Molecular IVD assays reflects leverage of BD COR and the incremental BD MAX installed base.
In Biosciences, high single-digit growth was driven by our clinical business with strong double-digit growth in cancer reagents, leveraging the growth in our installed base of FACSLyric analyzers and adoption of FACSDuet automation. Performance in Research Solutions reflects continued strong growth in research reagents enabled by our innovative BD Horizon dyes. Strong performance in our Interventional segment reflects execution of our growth strategies across our key end markets, including advanced repair reconstruction, PVD and incontinence, where our newer innovations in high-growth areas are continuing to contribute nicely to growth.
Our Surgery business unit delivered strong double-digit growth driven by continued market adoption of Phasix hernia resorbable scaffold and our PI business unit, double-digit growth in peripheral vascular disease was driven by broad-based strength across the portfolio, including global penetration of Rotarex. In our UCC business unit, high single-digit growth was driven by strength across the portfolio, including strong double-digit growth of our PureWick solutions for addressing chronic incontinence in both the acute and alternate care settings and double-digit growth in Endourology.
Further details regarding each segment's performance in the quarter can be found in today's earnings announcement and presentation. Now moving to our P&L. We reported Q3 adjusted diluted EPS of $2.96, which included gross margin of 52.6% and operating margin of 23%. Operating margin improved 100 basis points year-over-year and includes an unfavorable 100 basis point impact from the accounting treatment of an employee benefit-related item that gets recorded in G&A and is fully offset in other income with no resulting impact to EPS. Excluding this item, operating margin increased 200 basis points and was ahead of our expectations driven by strong execution against our margin improvement initiatives.
Foreign currency was a 50 basis point headwind to both gross margin and operating margin. Gross margin performance reflects leveraging our strong revenue growth and the benefit of our simplification and inflation mitigation initiatives that enabled us to overcome 200 basis points of outsized inflation. Our Q3 margin drivers are aligned with what we have been anticipating throughout the year, which is that most of the full year margin improvement will come from SSG&A expense leverage. Q3 SSG&A expense increased about 4% year-over-year.
Excluding the employee benefit-related item, we drove about 150 basis points of leverage in SSG&A, which reflects shipping efficiency and good leverage in selling and G&A expense. As expected, R&D as a percentage of sales of 5.9% and normalized back towards our expected full year average of about 6% in Q3, given our spending was over-indexed in the first half. In summary, we continue to execute well and fully delivered our Q3 operating margin goal with operating improvement, excluding the employee benefit item nicely leveraged by 200 basis points. Below operating margin, the improvement in other income reflects the offset to the employee benefit-related expense recorded in G&A.
Our tax rate in Q3 was 15.7% and due to benefits realized that were not previously contemplated. Regarding our cash and capital allocation. Cash flows from operations totaled $1.7 billion year-to-date. As expected, operating cash flows improved substantially in Q3, including a reduction in inventory from the prior quarter. We anticipate a continued normalization of working capital in Q4, including further improvements in our inventory balance as we trend toward levels that are closer to the prior year. We ended Q3 with a cash balance of approximately $1 billion. During the quarter, we repaid over $1 billion in debt maturities, utilizing the proceeds from the February debt refinancing. We ended the quarter with a net leverage ratio of 2.9 times.
We continue to move towards our net leverage target of 2.5 times. In summary, we executed well against our cash and net leverage improvement goals this quarter. We remain committed to enhancing our cash conversion and net leverage positions and expect more progress in Q4, including benefiting from the net proceeds from the divestiture of our surgical instrumentation platform which will increase our capacity to deploy cash towards tuck-in M&A. Moving to our guidance for fiscal 2023. For your convenience, the detailed assumptions underlying our guidance can also be found in our presentation.
Starting with our updated revenue guidance before the divestiture of the surgical instrumentation platform. Given our strong third quarter performance, we are raising the midpoint of our base revenue guidance by 25 basis points to 7% and we now expect base revenues to be between 6.8% and 7.1%. This includes increases in the midpoint of both organic and inorganic revenue growth and reflects strong third quarter organic performance as well as inorganic momentum driven by our Parata pharmacy automation solution, demonstrating our strong execution and M&A integration capabilities.
Inorganic revenue is now expected to contribute approximately 135 basis points to full year base revenue growth. For the full year, base organic revenue growth is now expected to be 5.5% to 5.8%, which continues to reflect strong fourth quarter organic revenue growth of about 6%. Our guidance continues to include the impact of strategic portfolio exits, which has moderated slightly from our original assumption. Finally, adjusting for the impact of the recently completed surgical instrumentation divestiture adjusts our updated base revenue growth guidance by 20 basis points to a range of 6.6% to 6.9% to reflect net inorganic revenue adjustments to base growth of approximately 115 basis points.
Our increased base organic revenue growth guidance of 5.5% to 5.8% is not impacted. Over a two-year period, we are driving strong base organic revenue CAGR of about 7%, which is well above our long-term target. Our segment-specific growth assumptions have not changed. For COVID-only testing, our guidance only includes year-to-date revenues of $56 million. All in, we expect reported revenues to be approximately $19.3 billion, which is an increase from our previous guidance of $19.2 billion to $19.3 billion. Regarding the Alaris 510k clearance.
As previously disclosed, we expect to ramp our return to market in our infusion business over time with our existing customers and remediation taking first priority. As we scale our manufacturing capacity and ensure we are taking the necessary actions to deliver our products in the right way, we are well positioned to engage with customers and execute as quickly as possible. However, we do not expect any material incremental revenue contribution from Alaris for the remainder of FY 2023, and we expect to begin a more regular rhythm of shipment and installation of devices and recognizing revenue as we progress through FY 2024.
Within our FY 2023 guidance range, we expect to absorb any initial investments beyond the sales and service organizations we retained to successfully support our return to market. 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 have line of sight to our targeted margin improvement. Below operating income, our assumption regarding interest other remains unchanged. We have lowered our effective tax rate guidance to be between 13% and 13.5%. The midpoint of our updated tax guidance range is essentially equivalent to our FY 2022 actual effective tax rate of 13.3% and as a result, is not incrementally contributing to FY 2023 EPS growth.
Our adjusted EPS guidance range of $12.10 to $12.32 remains unchanged but reflects absorbing a $0.02 negative impact from the divestiture of our surgical instrumentation platform and a $0.05 negative impact from the latest FX rates. We are raising our base business earnings forecast by $0.07 based on our strong third quarter performance, including consistent execution of our margin goals, offsetting the impact of the divestiture and FX. On a currency-neutral basis, we now expect adjusted EPS growth of about 10% to 11.5%, driven by very strong mid-teens base business growth of approximately 14.5% to 16%, an increase of 50 basis points from our prior expectation.
As a result, given our strong growth and execution on a year-to-date basis versus our original guidance in November, we've increased our adjusted base business earnings per share by about $0.27, and which added 225 basis points to growth, resulting in the 14.5% to 16% growth on our base. This also includes absorbing another year of outsized inflation of about 200 basis points. These strong base business results enabled us to fully absorb an increased earnings headwind and associated with the loss of COVID-only revenue as well as lost earnings associated with the recent surgical instrumentation divestiture and still increase our total FXN growth rate by 75 basis points to 10% to 11.5% double-digit earnings growth.
As you think about Q4, the following are a few key considerations. We've outlined more detail in the accompanying presentation slides. First, our increased organic guidance continues to reflect strong growth of about 6% in Q4. As a reminder, we've now anniversaried the acquisitions of Parata and MedKeeper. Second, as you think about margins, as we've described throughout the year, most of the full year improvement is expected to come from SSG&A expense leverage with the balance from slight improvement in gross margin which has been muted year-to-date because of outsized inflation. For operating margin, we continue to expect significant year-over-year margin expansion in Q4.
However, versus our last update in May, the amount of expansion needed has been reduced by about 75 basis points, and thus, we derisked our Q4 delivery. There are several factors driving Q4 operating margin, including expense leverage on expected strong revenue performance, inflation mitigation actions to offset outsized inflation and cost of goods sold, SSG&A expense reductions driven by the timing of spend and the full quarter impact of our more recent simplification initiatives. Also, R&D as a percentage of revenue will continue to moderate lower to about 5% of sales, resulting in full year spend of about 6%.
Finally, there is also a favorable comparison to the prior year reinvestment of COVID-only testing profits. As we look ahead to FY 2024, we remain confident in our ability to deliver against our BD2025 strategic and financial goals. While it is premature to commit to specifics, I can offer the following thoughts as we look ahead. As discussed, we continue to operate in a macro environment that remains uncertain and an inflationary environment that has moderated but remains elevated. We are especially focused on monitoring how various governments such as China respond to economic and other dynamics. With that said, med tech in general has proven to be much more durable during times of uncertainty, including economic downturns. And certainly, BD has a proven strategy and has demonstrated not only the ability to be resilient but to deliver strong growth in earnings during the most challenging times.
Our market-leading portfolio, strong innovation pipeline, continued shift into high-growth end markets and track record of execution gives us confidence in delivering against our 5.5% plus target next year. With respect to Alaris, we are excited to shift our focus and reengage with our customers. The clearance of Alaris offers much needed certainty to our stakeholders. As previously noted, it increases our confidence in executing against our BD2025 targets. Just two weeks after clearance, it would be premature to provide a range of expected revenue in FY 2024.
However, consistent with what we've shared we expect to ramp revenues back to our pre ship hold level of approximately $400 million over time. Our focus will be replacing and upgrading pumps for our existing customers. At this juncture, knowing we have some level of Alaris revenue in our FY 2023 base of around $100 million, we would anticipate a modest level of revenue above that, which could result in about a 50 basis point tailwind to growth in FY 2024.
As a result, based on current assumptions and the macro environment factors I mentioned we are monitoring, our base growth with Alaris would be approximately 6%. We will share more about other assumptions across our portfolio when we solidify our FY 2024 plans. As a reminder, if you look outside of our base business, in FY 2023, we have realized nearly $60 million in COVID-only revenue. Based on current dynamics, we would not expect material revenue in FY 2024 which resulted in an expected headwind of about 30 basis points that you need to adjust for.
Additionally, the sale of the surgical instrumentation platform will have nearly a 75 basis point impact to total growth. This does not impact our organic growth, which should be considered in your total FX revenue growth. We will true up for currency when we provide FY 2024 guidance in November. Regarding earnings, we remain confident in our double-digit earnings growth profile of about 10% currency-neutral EPS growth. This includes absorbing the reduction to earnings associated with lower COVID-only testing revenue and the divestiture impact.
Combined, these items are worth about 125 basis points. We will share more details when we give our guidance, but given we expect to finish FY 2023 at 70% of our 25% operating margin goal by 2025, at this point, we are tracking ahead of our 2025 margin goals. Importantly, this gives us the flexibility to deliver on our margin goals while investing to maximize growth and deliver on our double-digit earnings growth target. As we finalize our plans, we will look at optimizing the ratio of growth versus margin increase that delivers against these goals.
In summary, we see our value proposition as differentiated and importantly, have consistently executed against our commitments, which gives us confidence in our ability to continue to deliver against our future goals. In closing, we are consistently delivering multiple periods of outsized financial performance. I would like to thank our associates around the world who are working hard to deliver on our purpose and help us achieve these results. As we look forward and as reflected in our FY 2023 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?
