Stephen Williamson
Senior Vice President and Chief Financial Officer at Thermo Fisher Scientific
Thanks, Marc, and good morning, everyone. I'll begin with a high-level summary of our Q2 performance. We had another excellent quarter and grew our revenues 34%, including 28% organic growth. As Marc mentioned, our growth strategy is enabling us to take share on top of strong market conditions. As a result, in Q2, we were able to deliver 27% organic growth in the base business and continue our industry-leading response to the pandemic, generating $1.9 billion of COVID-19 response revenue in the quarter. Our PPI Business System enabled us to generate excellent pull-through on the very strong top line growth and is also enabling us to execute really well on our significant growth investments. As a result, we grew our adjusted EPS in Q2 by 44% to $5.60 and delivered $1.7 billion of free cash flow. Overall, another excellent quarter. Now let me provide some more color on the Q2 performance. GAAP EPS in the quarter was $4.61, up 59% from Q2 last year. On the top line, our Q2 reported revenue grew 34% year-over-year. The components of our Q2 reported revenue increase included 28% organic growth, 2% from acquisitions and a tailwind of approximately 5% from foreign exchange. As I mentioned, the base business organic growth was 27%. Turning to our performance by geography during the quarter. North America grew 25%, Europe grew 35%, Asia Pacific and China both grew just under 30%, and rest of the world grew low double digits. Turning to our operational performance. Q2 adjusted operating income increased 44%, and adjusted operating margin was 29%, 200 basis points higher than Q2 last year. In the quarter, our PPI Business System enabled us to deliver very strong contributions from volume and productivity. We also have favorable business mix. This was partially offset by the ongoing strategic investments across our businesses to support our near- and long-term growth. Included in the investments in the quarter is over $100 million of supplementary cash bonuses for the nonexecutive colleagues, and we recorded a similar amount in Q1.
This is to recognize the extraordinary work that our colleagues continue to do for our customers, communities and shareholders. Our ongoing investments in our colleagues and capacity and capabilities are ensuring a really bright future for the company. Moving on to details of the P&L. Total company adjusted gross margin in the quarter came in at 50.6%, flat to Q2 of the prior year. In the quarter, we delivered strong productivity and had positive business mix. This was offset by strategic investments. Adjusted SG&A in the quarter was 17.9% of revenue, a decrease of 200 basis points versus Q2 2020, reflecting strong volume leverage. Total R&D expense was approximately $340 million, representing growth of 29% versus Q2 2020 and reflects the increased investments in high-impact innovation to fuel future growth. Looking at our results below the line for the quarter. Our net interest expense was $111 million, $17 million lower than Q2 last year largely due to lower net debt. Adjusted other income and expense was a net income in the quarter of $3 million, $30 million lower than Q2 2020 mainly due to changes in nonoperating FX. Our adjusted tax rate in the quarter was 14%. This is 250 basis points versus Q2 last year due to the increase in pretax profit. Average diluted shares were 396 million in Q2, about two million lower year-over-year driven by share repurchases, net of option dilution. Turning to cash flow on the balance sheet. The cash flow performance enabled by our PPI Business System was very strong in the first half of the year. Year-to-date, cash flow from continuing operations was $4.2 billion, up 88% from the same period last year. Year-to-date free cash flow was $3 billion, up 76% over the same period last year, and that's after investing $1.2 billion of net capital expenditure. This reflects the strong returns we're generating in the short term and the investments we're making for the long term. We returned over $100 million to shareholders through dividends in the quarter.
This reflects the 18% dividend increase we announced in February. We ended Q2 with $7 billion in cash and $18.8 billion of total debt. Our leverage ratio at the end of the quarter was 1.4 times gross debt to adjusted EBITDA and 0.9 times on a net debt basis. Concluding my comments on total company performance, adjusted ROIC was 22.5%, up 10 percentage points from Q2 last year as we continue to generate exceptional returns. I'll provide some color on the performance of our four business segments. Similar to the last few quarters, I'll start with some framing thoughts on the impact of the COVID-19 response on our segment results. From a revenue standpoint, as was the case in the last three quarters, the majority of the COVID-19 response revenue is recognized in Life Science Solutions, with the remainder recognized in Laboratory Products and Services and Specialty Diagnostics. From a margin standpoint, the impact of COVID-19 differed across the segments based on the scale of the response revenue and the different levels of profitability on that revenue. In addition, during the quarter, we continued to make strategic investments across all of our businesses. The size of those investments does not necessarily align with the COVID-19 response revenue in each segment, so that does skew some of the reported segment margins. Moving on to the segment details, starting with Life Science Solutions. Q2 reported revenue in this segment increased 37%, and organic growth was 29%. In the quarter, we delivered exceptionally strong growth in our biosciences and bioproduction businesses. Q2 adjusted operating income in Life Sciences Solutions increased 39%, and adjusted operating margin was 48.3%, up 90 basis points year-over-year. In the quarter, we drove strong volume pull-through and saw a positive business mix, which were partially offset by the strategic investments. We also had a tailwind on margins from FX in this segment in Q2. In the Analytical Instruments Segment, reported revenue increased 41% in Q2, and organic growth was 36%.
During the quarter, we saw excellent growth in all businesses within the segment. Q2 adjusted operating income in Analytical Instruments increased 107%, and adjusted operating margin was 18.9%, up 600 basis points year-over-year. During the quarter, we drove very strong volume pull-through and productivity, which more than offset the strategic investments that we're making across this segment. Turning to Specialty Diagnostics. In Q2, reported revenue in this segment increased 25%, and organic growth was 21%. During Q2, we delivered exceptionally strong growth in the immunodiagnostics and transplant diagnostics businesses. Adjusted operating income increased 15% in the quarter, and adjusted operating margin was 19.9%, down 170 basis points from the prior year. In Q2, the positive volume leverage and favorable business mix were more than offset by the continued strategic investments in this segment. Finally, in the Laboratory Products and Services Segment, Q2 reported revenue increased 29%. Organic growth was 23%. In the quarter, we saw excellent growth in all our businesses in this segment. Adjusted operating income in the segment increased 59%, and adjusted operating margin was 12.4%, which is 230 basis points higher than the prior year. In the quarter, we delivered positive volume leverage at a favorable business mix, and this was partially offset by strategic investments. With that, now let me turn to our updated 2021 guidance. As Marc mentioned, we're raising both our revenue and adjusted EPS guidance, reflecting the strength of our Q2 performance along with a stronger outlook for the base business in the second half of the year. In terms of revenue, we're raising our full year guidance by $300 million to $35.9 billion and increasing our full year organic growth to 9%.
The increase in revenue guidance is driven by three factors: an increase in the base business organic growth outlook for the full year from 8% to 12%, an updated assumption of $6.7 billion of COVID-19 response revenue for 2021 and a slightly more favorable FX tailwind than previously assumed. Let me give you additional details on each of these factors. Starting with the base business. Here, we're increasing the outlook by $850 million, reflecting a great Q2 performance and a stronger outlook for growth in the second half of the year. This increases our 2021 full year organic growth outlook for the base business by 400 basis points to 12%. Our end markets are very strong, and we're executing very well on our growth strategy and increased strategic investments to drive excellent performance. Moving on to COVID-19 response revenue. Our role in supporting COVID-19 vaccines and therapies continues to increase, and we now expect $1.8 billion of related revenue in 2021, up $300 million from the prior guide. Approximately half of that $1.8 billion was recognized in the first half of the year. Given the strength of both the base business growth and our vaccine and therapy response, we've taken the opportunity in this revised guidance to significantly derisk the outlook for testing. We've lowered the full year testing-related response revenue by $900 million from the prior guidance. We're now assuming it will be $4.9 billion for 2021, of which $3.8 billion was delivered in the first half of the year, leaving just over $1 billion to go in the second half. There continues to be a wide range of outcomes for testing in the second half of the year. There are scenarios where the pandemic could increase in intensity, driving a higher need for testing. Should that be the case, we'll be well positioned to support customer needs, and we'll flow those benefits of that through our P&L. But for now, we thought it was prudent to take the opportunity to derisk the outlook. The third and final element of the revenue guidance raise is FX. Rates continue to fluctuate.
They were favorable to those from our prior guidance for most of Q2 and then moderated significantly. But net of these results, an increase in our FX revenue tailwind for the year is now assumed to be $525 million, up $50 million versus the prior guidance. Taking account of the different margin profiles of the revenue changes I've just outlined, we're increasing our annual adjusted EPS guidance by $0.10 to $22.07, which will result in 13% growth over 2020. With the revenue mix assumed in the guide, we now estimate that the adjusted operating margin for the full year would be approximately 29.7%, in line with 2020. The other elements of our guidance remain the same as the prior guide. Let me remind you of some of those assumptions. We've not included any operational benefits in 2021 from the acquisition of PPD. When we get more clarity on the actual close date, we'll provide an estimate of any potential impact in 2021. We expect net interest expense in 2021 to be approximately $510 million. As a reminder, included within that number is $40 million or $0.10 to adjusted EPS as a placeholder for prefinancing for the PPD transaction. We expect the adjusted income tax rate to be 14% in 2021. We're assuming net capital expenditures of approximately $2.5 billion to $2.7 billion and free cash flow of approximately $7 billion in 2021. Our guidance still includes $3.8 billion of capital deployment, which is $2 billion of share buybacks, which were completed in Q1, $1.4 billion for completed M&A and $400 million of capital returned to shareholders through dividends. We estimate the full year average diluted share count will be 397 million shares. Finally, I wanted to touch on phasing of revenue dollars and adjusted EPS for the remainder of the year. When I think about the split of the second half P&L between Q3 and Q4, we're assuming that the results will be slightly weighted to Q4. As you think about that split, remember the placeholder for PPD financing is all in Q4. To conclude, we delivered another excellent quarter, and we're in a great position to achieve our 2021 goals as we move into the second half of the year.
With that, I'll turn the call back over to Raf.