Stephen Williamson
Senior Vice President and Chief Financial Officer at Thermo Fisher Scientific
Thanks, Mark, and good morning everyone. Before we get into the details of the quarter, I'd like to begin with a quick reminder about the definition of core business. This is a term we introduced at our recent Investor Day. Core includes our base business in the vaccines and therapies response revenue and post-close will also include the PPD acquisition. So moving on to the details of the Q3, it was another excellent quarter. Let me provide a high-level view of how the quarter played out versus our expectations at the time of our last earnings call in July. We had a broad-based speed versus the prior guide. Revenue was $1.2 billion higher, driven by $900 million higher testing response revenue, $250 million higher core business revenue, and $50 million more favorable core FX. On our last earnings call, our guidance derisk testing response revenue and we said that if there were any additional opportunities to support customers' testing needs, we will be ready to do so and flow the benefits through our P&L. That's exactly what we did in Q3.
In total delivering $1.55 billion of testing response revenue in the quarter. It was a great strength in the core business. In Q3, the Base Business Organic Growth was 10%, which is 3% or $190 million higher than included in our prior guide. Also in the core vaccines and therapies response revenue was $60 million higher than in that prior guide. It was $510 million for the quarter. So actual momentum on the top line. Our PPI Business System enabled us to generate excellent pull-through on the very strong top-line performance and at the same time execute really well on our significant growth investments and as a result, adjusted EPS in Q3 was $1.30 higher than included in that prior guide and the components this over achievements or $1 from testing response revenue, $0.20 from the core business and $0.10 from FX on the base business.
Overall, another excellent quarter. Let me now provide some color on the Q3 performance. Beginning with our Q3 earnings results, as you saw in our press release, we grew adjusted EPS by 2% to $5.76. GAAP EPS in the quarter was $4.79, down 1% from Q3 last year. On the top line, our Q3 reported revenues were 9% year-over-year. The components of our Q3 reported revenue increase included 7% organic growth, a tailwind to 1% from foreign exchange, and 1% contribution from acquisition. As I mentioned, the Base Business Organic Growth in the quarter with 10%. Turning to our performance by geography during the quarter, North America was flat, Europe grew over 20%, Asia Pacific grew low double digits, China grew in the low single digits, and the rest of the world declined in the high single digits. The organic growth rates by geo skewed by the response revenue in the current and prior quarters as well as the scale of the impact of the pandemic on the base business in the prior year. Since our operational performance, Q3 adjusted operating income decreased 1%, and adjusted operating margin was 29.8%, 310 basis points lower than Q3 last year.
In the quarter, our PPI Business System enabled us to deliver strong productivity, which is more than offset by unfavorable business mix and the ongoing strategic investments across our businesses, including investments in our colleagues all of these are being made to support our near and long term growth. Looking at the details of the P&L, total company adjusted gross margin in the quarter came in at 51.4%, 90 basis points lower than Q3 last year. The decrease in gross margin had similar drivers to those I just mentioned for our adjusted operating margin in the quarter. Adjusted SG&A in the quarter was 17.9% of revenue, an increase of 190 basis points for Q3 2020. Total R&D expense was approximately $350 million, representing growth of 19% versus Q3 2020 and reflects our ongoing investments in high-impact innovation to fuel future growth. Looking at our results below the line for the quarter and net interest expense was $119 million, $17 million lower than Q3 last year, largely due to lower average interest rates on our debt. Adjusted EBITDA income and expense was net income in the quarter of $9 million, $7 million higher than Q3 2020 mainly due to changes in nonoperating FX.
Adjusted tax rate in the quarter was 14.2%, down 150 basis points versus Q3 last year due to the benefits of our tax planning initiatives. Average diluted shares were $397 million in Q3, $2 million lower year-over-year, driven by the share repurchases, net of option dilution. Turning to cash flow on the balance sheet, the cash flow performance enabled by our PPI Business System, continue to be very strong. Year-to-date cash flow from continuing operations was $6.9 billion, up 38% from the same period last year. Year-to-date free cash flow was $5.2 billion, up 27% from the same period last year and that's after investing $1.7 billion of net capital expenditure. This reflects the strong returns we're generating in the short term and 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. And during the quarter we issued $1 billion in new debt as part of the pre-financing for the PPD acquisition. We ended Q3 with $12 billion in cash and $21.7 billion of the total debt. Our leverage ratio at the end of the quarter with 1.6 times, Gross debt to adjusted EBITDA, and 0.7 times on a net debt basis.
Concluding my comments on total company performance, adjusted ROIC was 22.3%, up 740 basis points from Q3 last year as we continue to generate exceptional returns. Now provide some color on the performance of our four business segments. Similar to last quarters, I'll start with some framing thoughts on the impact of COVID-19 response in our segments. From a revenue standpoint, as was the case in the past quarters, the majority of our COVID-19 response revenue was recognized in Life Sciences Solutions with the remainder recognized in the party 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 that's but does skew some of the reported in the segment margin.
Moving on to the segment details, starting with Life Sciences Solutions, Q3 reported revenue in this segment increased 9% and organic growth was 4%. In the quarter, we delivered very strong growth in our bioproduction and biosciences businesses. Q3 adjusted operating income in Life Science Solutions decreased 3% and adjusted operating margin was 48.9%, down 600 basis points year-over-year. In the quarter, we saw positive volume leverage, which is more than offset by strategic investments and unfavorable business mix. In the Analytical Instruments segment, reported revenue increased 11% in Q3, and organic growth was 9%. Growth in the segment this quarter was driven by the electron microscopy and chromatography and mass spectrometry businesses. Q3 adjusted operating income in Analytical Instruments increased 54% and adjusted margin was 17.8%, 500 basis points year-over-year.
During the quarter, we delivered very strong volume pull-through and productivity, which is partially offset by the strategic investments we're making across this segments. Turning to Specialty Diagnostics. In Q3, reported revenue decreased by 5% and the segment declined organically by 5%. In the quarter, we saw a strong growth in our immunodiagnostics, clinical diagnostics, and transplant diagnostics businesses which is offset by lower COVID-19 testing revenue versus the year-ago quarter. Adjusted operating income decreased 22% in the quarter and adjusted operating margin was 22.7%, down 520 basis points from the prior year. In Q3, we drove positive productivity enabled by our PPI Business System. This is more than offset by unfavorable volume mix and strategic investments in the quarter. Finally, in the margin Products and Services segment, Q3 reported revenue increased 12%, organic growth with 10%.
In the quarter, we saw very strong growth in all of our businesses in this segment. Adjusted operating income in the segment increased 8% and adjusted operating margin was 11%, which is 40 basis points lower than the prior year. In the quarter, we drove good volume pull through and productivity by our PPI Business System, which is more than offset by strategic investments. With that, let me now turn to our updated guidance and as Marc mentioned, we're increasing full-year guidance for both 2021 and 2022. For 2021, we're banking the Q3 beat and maintaining our prior guidance assumptions for Q4. Then for 2022, we're carrying over the base business and vaccines and therapies from Q3 2021 into the 2022 full-year numbers. This is making a strong beaten raised for both years, reflecting the continued excellent strength of the business. Let me now provide you with more details starting with 2021.
In terms of revenue, we're raising our full-year 21 guidance by $1.2 billion to $37.1 billion and increasing our full-year organic growth outlook from 9% to 12%, an increase in the base business organic growth outlook for the full year from 12% to 13% and an increase in the COVID-19 response revenue for the year from $6.7 billion to $7.7 billion, which represents $5.8 billion of testing response revenue and $1.9 billion of vaccines and therapies response revenue. As I mentioned previously, there are no changes in the revenue assumptions for Q4 and our revised 2021 guidance. We're continuing to the same derisked approach to guidance for COVID-19 testing response revenue and continue to assume $450 million of testing-related revenue in Q4. And continue to be a range of outcomes for testing in the fourth quarter and for 2022, there are scenarios where testing demand could be higher than that included in our guidance. Should that be the case? We'll be well-positioned to support customer needs. And as we did in Q3 we'll flow the benefits of that through our P&L. But for now, we thought it was prudent to continue to take a derisked approach to the outlook. And as a reminder, there are four fewer selling days in Q4 21, but at the same period last year.
Incorporating a very strong Q3 performance into the revised 21 guidance, we now expect adjusted operating margin for the full year will be approximately 30.4%, 70 basis points higher than both our prior guide and 2020. In terms of adjusted EPS by banking the Q3 beat, we're raising our full-year 21 adjusted EPS guidance by a $1.30 to $23.37 which would result in 20% growth over 2020. The revised guidance range and adjusted income tax rate of 14.3% in 2021, slightly higher than the prior guide to reflect the marginal tax rate on our increased profitability. The rest of the assumptions underlying the 2021 guidance remain the same and to call out a few of those, we've not included any operational benefits in 2021 for the acquisition of PPD which is assumed to close at the end of the year.We expect full-year net interest cost to be approximately $510 million. We're assuming net capital expenditures of approximately $2.5 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, $1.4 billion completed M&A and $400 million of capital returned to shareholders through dividends.
I mean you have to make the full-year average diluted share count will be 397 million shares. Now moving on to the 22 guidance rates. As I mentioned, we're carrying over the base business and vaccines and therapies from Q3 21 into the 2022 full-year numbers. In terms of revenue, we're raising our full year 2022 guidance by $200 million to $40.5 billion. That reflects a $250 million increase in core revenue, offset partially by $50 million less FX tailwind for the year. The guidance for 2022 continues to see in core organic growth of 8% and $750 million of testing response revenue for the year. In terms of adjusted EPS, we're raising our full-year 2022 guidance by $0.20 to $21.36. As Marc mentioned, the 2022 guidance increase reflects the increased strength of our core business adding to the already very strong outlook for 2022 I shared with you at the recent Investor Day. So to conclude, we are delivering another excellent quarter. I mean, great position to achieve both at 21 and 22 goals. With that, I'll turn the call back over to Raf.
