Stephen Williamson
Senior Vice President and Chief Financial Officer at Thermo Fisher Scientific
Thanks, Marc and good morning, everyone. We delivered another excellent quarter in Q2. This included 13% core organic revenue growth, $630 million of COVID-19 testing revenue, $5.51 of adjusted earnings per share, and over $1 billion of free cash flow. Revenue in Q2 was $930 million higher than we had incorporated in our previous 2022 guidance, with $640 million driven by ongoing strength in the core business and $400 million from testing, partially offset by $110 million due to higher headwind from foreign exchange.
Similar to last quarter, the strength in the core was broad-based across businesses and end markets. From a geographic lens, $200 million of the beat was from China. In our previous guidance, we had assumed a $200 million headwind from the lockdowns in China and we offset all of that, half from strong local core growth and half from local testing support, a great achievement by our China team. Our PPI business system enabled us to generate very strong pull-through on the revenue beat and adjusted EPS for Q2 was $0.52 higher than included in our previous guidance. So Q2 was a continuation of our excellent financial performance track record.
Let me now provide you with some more details. Beginning with our earnings results, as I mentioned, we delivered $5.51 of adjusted EPS in Q2 and GAAP EPS in the quarter was $4.22. On the top line, our Q2 reported revenue grew 18% year-over-year. The components of our Q2 reported revenue increase included 3% organic revenue growth, a 19% contribution from acquisitions, and a headwind of 4% from foreign exchange.
Turning to our organic revenue performance by geography, the organic growth rates by region are skewed by the COVID-19 testing revenue in the current and prior year. In Q2, North America grew in the high single-digits, Europe declined in the low double-digits, Asia-Pacific grew in the low double-digits, with China growing over 20% and rest of world declined low double-digits.
With respect to our operational performance, adjusted operating income in the quarter decreased 3% and adjusted operating margin was 23.7%, 530 basis points lower than Q2 last year. Adjusted operating margin was slightly higher than we had anticipated in our prior guidance for Q2, reflecting how our growth strategy and PPI business system enabled us to continue to manage dynamic times.
In the quarter, we achieved strong price realization to effectively address inflation while also driving strong productivity and positive volume leverage in the core business. This was more than offset by the expected impact of incorporating PPD into our financials, lower testing volumes and continued strategic investments, including investments in our colleagues.
Moving on to the details of the P&L. Total company adjusted gross margin in the quarter came in at 43.2%, 740 basis points lower than Q2 last year. For the second quarter, the change in gross margin was due to the same drivers as those for our adjusted operating margin. Adjusted SG&A in the quarter was 16.1% of revenue, a decrease of 180 basis points versus Q2 2021. The R&D expense was approximately $360 million in Q2, representing growth of 6% over the prior year quarter. You can see the benefits of our prior R&D investments in our differentiated core organic growth rate and the exciting new products that Marc outlined. Moreover, the continued investments we are making in R&D are helping to fuel an even brighter future.
Looking at our results below the line for the quarter, our net interest expense was $112 million, approximately flat to Q2 last year. Our adjusted tax rate in the quarter was 13%. This was 100 basis points lower than Q2 last year, driven by our tax planning initiatives. Average diluted shares were $394 million in Q2, approximately $2 million lower year-over-year, driven by share repurchases net of option dilution.
Turning to cash flow and the balance sheet, year-to-date cash flow from continuing operations was $3.7 billion and free cash flow was $2.6 billion. Our capacity and capability investments continue to progress well and our year-to-date net capital expenditures were $1.1 billion. We returned over $115 million to shareholders through dividends in the quarter and this reflects the 15% dividend increase we announced in February. We paid down $1.85 billion of commercial paper in Q2 and ended the quarter with approximately $1.9 billion in cash and $30.3 billion of total debt. Our leverage ratio at the end of the quarter was 2.3x gross debt to adjusted EBITDA and 2.2x on a net debt basis. Concluding my comments on our total company performance, adjusted ROIC was 16.6%, reflecting the strong returns on investment that we are generating across the company.
Now I will provide some color on the performance of our four business segments. Let me start with a couple of framing comments. The scale and margin profile of our COVID-19 testing revenue varies by segment and the testing revenue was significantly higher in the prior year quarter that does skew some of the reported segment margins. And as I mentioned earlier, we are executing strong pricing realization across all segments to address higher inflation. And as we outlined at the beginning of the year, we are referring to our acquired PPD business as our clinical research business and that resides in laboratory products in Biopharma Services segment.
So, moving on to the segment details, starting with Life Science Solutions, Q2 reported revenue in this segment declined 7% and organic revenue was 5% lower than the prior year quarter. In Q2, we delivered very strong growth in our bioproduction business. This is offset by lower revenue in the genetic sciences business driven by the moderation in testing revenue versus the year ago quarter. Q2 adjusted operating income in Life Science Solutions decreased 23% and adjusted operating margin was 40.3%, down 800 basis points year-over-year. In the quarter, we delivered strong productivity, which is more than offset by unfavorable business mix and the strategic investments we are making across the segment.
In the Analytical Instruments segment, reported revenue increased 9% in Q2, and the organic growth was 13%. The strong growth in this segment this quarter was led by electron microscopy and the chromatography and mass spectrometry businesses. Q2 adjusted operating income in this segment increased 23% and adjusted operating margin was 21.4%, up 250 basis points year-over-year. During the quarter, we delivered strong volume flow-through and productivity that was partially offset by strategic investments.
Turning to Specialty Diagnostics, in Q2, reported revenue declined 11% and organic revenue was 8% lower than the prior year quarter. In Q2, we saw strong underlying growth in our immunodiagnostics and microbiology businesses, as well as our healthcare market channel. This is offset by lower COVD-19 testing revenue versus the year ago quarter. While Q2 adjusted operating income decreased 1% in the quarter, adjusted operating margin was 22.1%, up 220 basis points from the prior year quarter.
In Q2, the impact of lower testing volume was more than offset by strong productivity enabled by our PPI Business System and positive business mix. And finally, in Laboratory Products & Biopharma Services segment. Q2 reported revenue increased 55%. Organic growth was 10% and the impact of acquisitions was 48%. During Q2, we had strong growth in the research and safety market channel and in the Pharma Services and Laboratory Products businesses.
PPD, our clinical research business, is performing very well and continues to exceed our expectations. During the quarter, it grew slightly higher than the rest of the segment, contributing $1.72 billion of revenue. Q2 adjusted operating income in the segment increased 55% and adjusted operating margin was 12.5%, which is 10 basis points higher than the prior year quarter. In the quarter, we drove strong productivity and also still the benefit from acquisitions. This was partially offset by strategic investments and unfavorable business mix.
Let me now turn to our updated 2022 guidance. And as Marc outlined, we're raising our full year revenue guidance by $700 million to $43.15 billion. We're also raising our core organic revenue growth outlook from 9% to 11%. And on the bottom line, we're raising our adjusted EPS guidance for 2022 by $0.28 to $22.93. The increase in revenue guidance is driven by three elements: a $750 million increase in the outlook for the core business; $500 million higher assumed COVID-19 testing revenue; and a $550 million decrease to reflect the recent changes in FX rates.
Let me provide you some color on each of these elements. So starting with the $750 million increase in the outlook for the core business, this reflects a strong performance in Q2 and a $100 million increase in the core organic outlook for the second half of the year, and that second half raise reflects higher price we put in place to offset higher inflation versus the previous guidance.
As I mentioned previously, the increase in core revenue guidance raised the full year outlook for core organic revenue growth from 9% to 11%. This very strong growth performance reflecting excellent commercial execution and strong share gains. In terms of our COVID-19 testing revenue assumptions, the $500 million increase for the year includes $400 million beat in Q2 and a $100 million increase in the assumption for Q3. This reflects an assumed glide path from Q2 to an endemic run rate level in Q4. There continue to be scenarios where testing demand could be higher than this level. And should that be the case, we're well positioned to support customer needs. And as we did in the first half of the year, will flow the benefits of that through our P&L. But for now, we thought it was prudent to continue to take a de-risked approach to the outlook.
In terms of FX, we've incorporated current rates into guidance, and we now expect FX to be a year-over-year headwind on of $1.25 billion on revenue, up 3.2%. The FX headwind on adjusted EPS in 2022 has increased by $0.31 to $0.84 for the full year or 3.3%. The $0.31 change includes a 34% headwind in the second half of the year versus that previous guidance. In terms of profitability, we expect to deliver $110 million more adjusted operating income, up the $700 million raise in revenue guidance. This reflects strong pull-through in the higher core and testing volume, additional price offsetting inflation and the impact of the headwind from FX.
We now expect full year 2022 adjusted operating margin to be 25.2%. In terms of adjusted EPS, our stronger outlook is enabling us to raise the 2022 adjusted EPS guidance by $0.28 from $22.65 to $22.93, further building on an already very strong outlook for the year. So to recap on the guidance change, we continue to execute really well and are able to more than offset the significant FX headwinds, effectively manage inflation and still raise our full year outlook. This demonstrates the power of our proven strategy and our PPI business system execution.
Let me now provide you with a couple of other details on the 2022 guidance. PPD, our clinical research business is now expected to deliver $6.8 billion of revenue in 2022, which represents 12% core organic revenue growth on a full year basis for this business, up 1% from our previous guidance. We now expect the business to contribute just over $2 to adjusted EPS in the year, up $0.03 from our prior guidance.
Our guidance now assumes net interest expense of approximately $460 million for the year. We're assuming an adjusted income tax rate of 13.2% in 2022, slightly higher than the prior guidance. We continue to assume net capital expenditures of approximately $2.5 billion to $2.7 billion and free cash flow of approximately $7 billion. Our guidance still assumes $2.5 billion of capital deployment, which is a $2 billion of share buybacks to be completed in January and $475 million of capital returned to shareholders through dividends. And we continue to assume the full year average diluted share count will be between 394 million and 395 million shares.
And finally, I wanted to touch on spacing of the P&L to help you with your modeling. When I think about the revenue dollars in Q3 and Q4, we expect Q4 to contribute just under 52% of the second half total. And looking at adjusted EPS on that same basis, we expect the second half total to be weighted a couple of percentage points more to Q4 than the revenue.
To conclude, we delivered another excellent quarter and in a great position to achieve our 2022 goals. With that, I'll turn the call back over to Raf.