Senior Vice President and Chief Financial Officer at Thermo Fisher Scientific
Thanks, Marc, and good morning, everyone. We delivered another excellent quarter in Q3. This includes 14% core organic revenue growth from [Phonetic] $5.08 of adjusted earnings per share.
Revenue in Q3 was approximately $800 million higher than we'd incorporated in our previous 2022 guidance with just over $600 million driven by another quarter of extremely strong core organic growth, just over $200 million from additional COVID-19 testing revenue, partially offset by a small additional headwind from FX. So, continued strengthening the core [Phonetic] once again broad-based across businesses and end markets.
In terms of adjusted EPS, our PPI Business System enabled us to generate very strong pull-through on the revenue beat. And after accruing $0.18 of additional compensation in the quarter to help our colleagues with the temporary impacts of inflation, we delivered $0.36 of adjusted EPS higher than included in our previous guidance. So, Q3 was another quarter of excellent financial performance.
Let me now provide you with some more details. Beginning with our earnings results. And as I mentioned, we delivered $5.08 of adjusted EPS in Q3. GAAP EPS in the quarter was $3.79. On the top line in Q3, we delivered 14% core organic revenue growth and $440 million of testing revenue.
Reported revenue grew 14% year-over-year. The components of our Q3 reported revenue increase included 1% lower organic revenue, a 20% contribution from acquisitions and a headwind of 5% 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 Q3, North America grew in the low single digits. Europe declined 10%. Asia Pacific grew in the low single digits with China growing high single digits, and rest of the world declined high single digits.
With respect to our operational performance, adjusted operating income in the quarter decreased 15%. And adjusted operating margin was 22.2%, 760 basis points lower than Q3 last year. In the quarter, we achieved strong price realization to effectively address inflation while also driving strong productivity. This is more than offset by lower testing volumes, continued strategic investments and the expected impact of incorporating PPD into our financials.
The Company's adjusted gross margin in the quarter came in at 41.7%, 970 basis points lower than Q3 last year. For the third quarter, the change in gross margin was due to the same drivers as those for our adjusted operating margin. After factoring in the decision we took to accrue the additional colleague compensation that I mentioned earlier, both adjusted operating margin and adjusted gross margin came in as we had anticipated in our prior guidance.
Moving on to the details of the P&L. Adjusted SG&A in the quarter was 16.2% of revenue, a decrease of 170 basis points versus Q3 2021. Total R&D expense was approximately $350 million in Q3, and R&D as a percent of our manufacturing revenue in Q3 was 6.7%.
Looking at our results below the line for the quarter, our net interest expense was $106 million. Our adjusted tax rate in the quarter was 11.8%. This was 240 basis points lower than Q3 last year. The Q3 rate was 75 basis points lower than we had assumed in the quarter in the prior guide due to the timing of discrete tax planning items between Q3 and Q4 with no net change for the year overall. Average diluted shares were 395 million in Q3, approximately 2 million lower year-over-year driven by share repurchases [Indecipherable] option dilution.
Turning to cash flow on the balance sheet. Year-to-date cash flow from continuing operations was $5.7 billion, and free cash flow was $4 billion. Our capacity and capability investments continue to progress well, and the year-to-date net capital expenditures were $1.7 billion.
We returned $118 million to shareholders through dividends in the quarter. This reflects the 15% dividend increase we announced in February. We ended the quarter with approximately $2.9 billion in cash and $29.2 billion of total debt. Our leverage ratio at the end of the quarter was 2.3 times gross debt to adjusted EBITDA and 2.1 times on a net debt basis.
Concluding my comments on our total company performance, adjusted ROIC was 15.2%, reflecting the strong returns on investment that we're generating across the Company.
Now, let me [Phonetic] 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 than the prior year quarter, but does skew some of the reported segment margins. As I mentioned earlier, we're executing strong pricing realization across all segments to address higher inflation. And we outlined at the beginning of the year, we're referring to the acquired PPD business as our clinical research business, and that resides in the laboratory products and biopharma services segment.
So, moving on to the segment details, starting with Life Sciences Solutions. Q3 reported revenue in this segment declined 20%, and organic revenue was 17% lower than the prior year quarter. In Q3, we delivered very strong growth in our bioproduction business. This was more than offset by the moderation in testing revenue in the segment versus the prior year quarter. Q3 adjusted operating income in Life Sciences Solutions decreased 43%. And adjusted operating margin was 35.1%, down 14 percentage points year-over-year. In the quarter, we delivered good productivity, which was more than offset by unfavorable volume mix and the strategic investments that we're making across this segment.
In the Analytical Instruments segment, reported revenue increased 10% in Q3, and organic growth was 16%. The strong growth in this segment this quarter was broad-based led by chromatography and mass spectrometry and electron microscopy businesses. Q3 adjusted operating income in this segment increased 47%, and adjusted operating margin was 23.8%, up 600 basis points year-over-year. During the quarter, we delivered strong volume pull-through, favorable business mix and strong productivity. This was partially offset by strategic investments.
Turning to Specialty Diagnostics. In Q3, reported revenue declined 22%, and organic revenue was 19% lower than the prior year quarter. In Q3, we saw a strong underlying growth in our transplant diagnostics and microbiology businesses. This is offset by lower COVID-19 testing revenue versus the year-ago quarter.
Q3 adjusted operating income decreased 29% in the quarter, and adjusted operating margin was 21%, down 210 basis points year-over-year. During the quarter, we delivered positive business mix and good productivity, which is more than offset by the impact of lower testing volumes.
Finally, in Laboratory Products and Biopharma Services segment. In Q3, reported revenue increased 60%. Organic growth was 12%, and the impact of acquisitions was 53%. During Q3, we had strong growth in the Pharma Services business as well as the research and safety market channel.
PPD, our clinical research business, is performing very well. And during the quarter, we delivered high-teens core organic growth and contributed $1.82 billion of revenue to the segment. Q3 adjusted operating income in the segment increased 89%, and adjusted operating margin was 13%, which is 200 basis points higher than Q3 2021. In the quarter, we drove favorable business mix, good productivity and also saw the benefit from acquisitions. This was partially offset by strategic investments.
Let me now turn to our updated 2022 guidance. As Marc outlined, we're raising our full year revenue guidance by $650 million to $43.8 billion. This includes a raise in the core organic growth outlook for the year from 11% to 12%. And on the bottom line, we're raising our adjusted EPS guidance for 2022 by $0.08 to $23.01 per share. The increase in the revenue guidance is driven by three elements: An increase of just over $600 million in the outlook for the core business, an increase of just over $200 million for COVID-19 testing revenue and a $200 million decrease to reflect the recent changes in FX rates.
From a core organic revenue perspective, the strength of our performance is enabling us to raise our full year core organic revenue growth outlook from 11% to 12%, and there's no change in the assumptions for core organic revenue growth in the fourth quarter.
Turning to COVID-19 testing revenue. We now expect $2.8 billion of testing revenue for the year, which includes the assumption of an endemic run rate level of $100 million per quarter in Q4. Our Q4 testing assumption has not changed from our previous guidance.
In terms of adjusted EPS, the $0.08 raise for the year consists of $0.54 of operational beat in Q3, partially offset by the decision to pay $180 million or $0.36 of additional onetime colleague compensation. And half of this is accrued in Q3, and the remainder will be in Q4.
The full year guidance change also incorporates $0.10 lower EPS in Q4 for the additional FX headwind in the quarter and the revised phasing of our tax rate. All of this is enabling us to raise the 2022 adjusted EPS guidance by $0.08 from $22.93 to $23.01, further improving a very strong outlook for the year.
From a margin standpoint, we now expect the full year 2022 adjusted operating margin to be 24.9%. To help you with your modeling, I think it's worth spending a moment on the impact of the inflationary environment on the Company's financial profile. During the year, we've been very effective in passing on higher price to offset higher-than-normal inflation. This results in no net impact on our adjusted operating income dollars as we're effectively offsetting the added inflation, but it does affect the calculation of margins because of the revenue base being higher. The impact on margins for the full year from this dynamic is about 60 basis points, but again, no net impact on adjusted operating income or adjusted EPS.
So, now let me provide you with some additional details on the updated 2022 guidance. PPD, our clinical research business, is expected to deliver $6.8 billion of revenue in 2022, which represents 14% core organic revenue growth on a full year basis for this business. We now expect the business to contribute $2.03 to adjusted EPS in the year, up $0.03 from our prior guidance.
In terms of FX, we've incorporated current rates into our guidance, and we now expect FX to be a year-over-year headwind of $1.46 billion on revenue or 3.7%. The FX headwind on adjusted EPS in 2022 is now expected to be $0.77 for the full year or 3.1%. Should FX rates stay the same as they are right now, we estimate the impact on FX in 2023 would be a year-over-year headwind of approximately $1 billion on revenue and $0.75 on adjusted EPS.
Our guidance now assumes net interest expense of approximately $440 million in 2022. We continue to assume an adjusted income tax rate of 13.2% in 2022, which includes a 13.6% tax rate in Q4. We now expect net capital expenditures of approximately $2.3 billion to $2.5 billion.
For free cash flow, we see $7 billion at the high end of the range of outcomes for the year. The actual free cash flow will depend on the year-end level of working capital. Our guidance still assumes $2.5 billion of capital deployment, which is the $2 billion of share buybacks that we completed in January and $475 million of capital returned to shareholders through dividends. Our guidance also continues to assume the full year average diluted share count will be between 394 million and 395 million shares.
And to conclude, we delivered another excellent quarter in Q3. We're in a great position to achieve our 2022 goals.
With that, I'll turn the call back over to Raf.