Stephen Williamson
Senior Vice President and Chief Financial Officer at Thermo Fisher Scientific
Thanks, Marc, and good morning, everyone. As you saw in our press release and as Mark just outlined, the macroeconomic environment became more challenging in the second quarter. We're leveraging our PPI business system to effectively manage these conditions. In the quarter, we delivered $10.7 billion of revenue, which included just over 2% core organic revenue growth, and we delivered $5.15 of adjusted EPS.
Revenue in the quarter was $300 million lower than we'd incorporated in our previous 2023 guidance. $280 million of this was related to the core business and $20 million related to testing. Approximately one-third of the change in core revenue was driven by lower economic activity in China, and the remainder was driven by more cautious spending across our customer base globally, particularly in biotech. Adjusted EPS in the quarter was $0.28 lower than we'd incorporated in our previous 2023 guidance. $0.07 of this was driven by FX and $0.21 by the lower revenue. Given the lower core revenue both in the quarter and assumed in our full-year outlook, we're using the PPI business system to aggressively manage our cost base. In Q2, this enabled us to offset $75 million of the profit impact of the lower-than-expected revenue. This highlights that we're actively managing the business.
Let me now provide you with some more details on our performance. Beginning with our earnings results, as I mentioned, we delivered $5.15 of adjusted EPS in Q2. GAAP EPS in the quarter was $3.51. On the top line, reported revenue was 3 percentage points lower year over year. The components of our Q2 reported revenue included 3% lower organic revenue, a 1% contribution from acquisitions, and a slight headwind from foreign exchange. As I mentioned earlier, core organic revenue growth in the quarter was just over 2 percentage points. For context, core organic revenue growth includes the runoff in our COVID-19 vaccines and therapies revenue. Without that runoff impact, growth would have been 5% in the quarter.
Turning to our organic revenue performance by geography. The organic growth rates by region are skewed by the pandemic-related revenue in the current and prior year. In Q2, North America declined mid-single digits, Europe grew in the low-single digits, and Asia-Pacific declined in the mid-single digits, with China declining in the low teens.
With respect to our operational performance, adjusted operating income in the quarter decreased 9% and adjusted operating margin was 22.2%, a 150 basis points lower than Q2 last year. In the quarter, we delivered very strong productivity and achieved strong price realization. This was more than offset by lower pandemic-related revenue, continued strategic investments, and FX. Given the change in the macro environment, we're using the PPI business system to drive significantly more productivity this year than initially planned. We've initiated $450 million of additional cost actions. And as I mentioned earlier, we already began to see this benefit in Q2. Total company adjusted gross margin in the quarter came in at 41%, 220 basis points lower than Q2 last year. For the quarter, the change in gross margin was due to the same drivers as those for adjusted operating margin.
Moving on to the details of the P&L, adjusted SG&A in the quarter was 15.6% of revenue, an improvement of 50 basis points over Q2 last year. Total R&D expense was $345 million in Q2, reflecting our ongoing investments in high impact innovation. R&D as a percent of our manufacturing revenue was 7.1% in the quarter.
Looking at our results below the line for the quarter, our net interest expense was $148 million, which is $36 million higher than Q2 last year, mainly due to capital deployment. Our adjusted tax rate in the quarter was 10%. This was 300 basis points lower than Q2 last year, reflecting the results of our tax planning activities. Average diluted shares were 388 million in Q2, approximately 6 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 operations was $2.3 billion. Year-to-date free cash flow was $1.5 billion after investing $730 million of net capital expenditures. During the quarter, we repaid $1 billion of senior notes and returned $135 million of capital through dividends. Shortly after the quarter end, we announced the definitive agreement to acquire CorEvitas for approximately $900 million. We ended the quarter with $3.1 billion in cash and $34 billion of total debt. Our leverage ratio at the end of the quarter was 3.2 times gross debt to adjusted EBITDA and 2.9 times on a net debt basis.
Concluding my comments on our total company performance, adjusted ROIC was 11.9%, reflecting the strong returns on investment that we're generating across the company.
Now I'll 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 pandemic-related revenue varies by segments and that revenue was higher in the prior year. That does skew some of the reported segment growth rates and margins. We continue to execute strong pricing realization across all segments to address higher inflation.
Moving on to the segment details. Starting with Life Sciences Solutions, Q2 reported revenue in this segment declined 25% and organic revenue was also 25% lower than the prior year quarter. This was driven by the moderation in pandemic-related revenue in the segment versus the year-ago quarter and, to a lesser extent, the macro factors that I described earlier. Q2 adjusted operating income in Life Sciences Solutions decreased 38% and adjusted operating margin was 33.2%, down 710 basis points versus the prior year quarter. During the quarter, we delivered very strong productivity, which is more than offset by unfavorable volume mix.
In the Analytical Instruments segment, reported revenue increased 9% in Q2 and organic growth was 10%. The strong growth in the segment this quarter was led by the electron microscopy business. Q2 adjusted operating income in this segment increased 26% and adjusted operating margin was 24.7%, up 330 basis points year over year. In the quarter, we delivered very strong productivity and had strong volume and mix, and that was partially offset by strategic investments and FX.
Turning to Specialty Diagnostics. In Q2, revenue increased 1% and organic revenue was 5% lower than the prior year quarter. In Q2, we continued to see strong underlying growth in the core, led by our microbiology, immunodiagnostics and transplant diagnostics businesses. This was offset by lower pandemic-related revenue versus the year ago quarter. Q2 adjusted operating income increased 22% in the quarter and adjusted operating margin was 26.7%, which is 460 basis points higher than Q2 2022. During the quarter, we delivered very strong productivity and favorable business mix, which is partially offset by the impact of lower COVID-19 testing volume and strategic investments.
And finally, in Laboratory Products and Biopharma Services segment, Q2 reported revenue increased 5% and organic growth was also 5%. During Q2, organic revenue growth in this segment was led by the pharm services and clinical research businesses. Q2 adjusted operating income in the segment increased 19% and adjusted operating margin was 14.1%, which is a 160 basis points higher than Q2 2022. We delivered very strong productivity in the quarter, partially offset by FX and strategic investments.
Let me now turn to guidance. And as Marc outlined, we're revising our full year 2023 guidance to reflect both the more challenging macroeconomic environment and the offsetting actions that we're taking to navigate these conditions. Revenue for 2023 is now expected to be in the range of $43.4 billion to $44 billion, with core organic revenue growth in the range of 2% to 4%. Adjusted EPS is now expected to be in the range of $22.28 and $22.72. For modeling purposes, our current estimate of where we're likely to end up for the year within that range is $43.5 billion of revenue, rounding up to 3% core organic revenue growth, and adjusted EPS of $22.36.
Let me provide you with some additional details behind the change in guidance. Starting with revenue, our revised guidance reflects a change in the assumption for core organic revenue growth from 7% to a range of 2% to 4%, and it also assumes $100 million lower testing revenue. Our core organic revenue change is driven by two factors, a reduction in the assumed level of economic activity in China and an assumption that the more cautious spending that we saw across our customer base in Q2 will continue throughout the remainder of the year.
In relation to China, at the beginning of the year, we saw positive momentum in the Chinese economy. We had previously assumed that this momentum would continue through the rest of the year. However, as the second quarter progressed, economic activity in China significantly slowed, resulting in less customer activity in the quarter. We think it's appropriate to assume that this condition remains in place for the remainder of the year.
With regards to customer spending patterns more broadly, in Q2, customers in our end markets began the year with somewhat cautious spending. And this was something that was not confined to our end markets. Companies across most business segments were cautious with their spending, given the uncertain macro conditions. This dynamic became more challenging in Q2. We'd previously assumed that this would lessen an impact as the year progressed. And we now think it's appropriate to assume that the cautious spending will continue through the remainder of the year.
With strong commercial execution from our team, we expect to successfully navigate these macro dynamics and deliver 2% to 4% core organic revenue growth for the year. And for context, as Marc mentioned, with the changes in the macro, we're now assuming core market growth for our industry to be in the range of 0% to 2% for 2023. It's a reduction of approximately 4 percentage points versus the 4% to 6% assumed previously for market growth.
When I think about the range of outcomes for the full-year core organic revenue growth, the largest swing factor is the extent of the budget flush at the end of the year. Should that be weaker than normal, then core organic revenue growth would round down to 2% and, if stronger, it could round up to 4% for the year. And if China gets traction stimulating the economy, then that could also be an upside late in the year.
So moving now -- on now to profitability. As I mentioned earlier, we're using the PPI business system to aggressively manage our cost base. We put in place $450 million of additional cost actions to limit the impact of the expected lower revenue on the P&L. This demonstrates our active management of the business. As a result, the high profitability pull-through on the lower revenue is expected to be reduced to 35% in terms of how it flows through to the bottom line. Factoring in this and the updated view of FX, we now expect our adjusted operating income margin to be in the range of 23.2% to 23.4% for the year.
Let me provide some more additional details on the updated 2023 guidance. We're assuming that we'll deliver $300 million of testing revenue in 2023. This is $100 million lower than our prior guidance. And through the half-year point, we've delivered $225 million of testing revenue. Within the core, we continue to expect $500 million of vaccines and therapies revenue in 2023. This is $1.2 billion less than the prior year, a 3 percentage point impact on core organic revenue growth. Through the half-year point, we've delivered $365 million of vaccines- and therapies-related revenue.
Moving on to FX. We continue to assume that FX will be a year-over-year tailwind to revenue of approximately $100 million. And then in terms of adjusted EPS, we now expect FX to be a headwind of $0.11, which is $0.05 higher than our previous guidance.
The Binding Site acquisition is performing well, and we now assume it will contribute approximately $260 million to our reported revenue growth for the year and $0.09 to adjusted EPS.
Below the line, we continue to expect net interest expense in 2023 to be approximately $480 million. The adjusted tax rate assumption for the year has improved to 10% versus our prior guidance of 10.8%, driven by our tax planning initiative. We're now expecting net capital expenditures will be approximately $1.7 billion, and we continue to expect that free cash flow will be $6.9 billion for the year.
In terms of capital deployment, our guidance includes $3 billion of share buybacks, which were already completed in January. We continue to assume that full-year average diluted share count will be approximately 388 million shares, and that will return approximately $540 million of capital to shareholders this year through dividends, a 17% increase over 2022. And as is our normal convention, our guidance does not assume any future acquisitions or divestitures. We've not included any operational benefit in 2023 for the acquisition of CorEvitas. When we get more clarity on the actual close date for that acquisition, we'll provide an estimate of any potential impact in 2023.
So to conclude, we recognize that the change in guidance is significant. We think it's appropriate, given the change in the macro environment. As we said at our Investor Day, should market growth be lower than normal, we will leverage the PPI business system and step up productivity, and that's what we've done. We're well positioned to navigate the near-term environment. And while the near-term environment may be more challenging, the long-term fundamentals supporting the growth of our end markets remains unchanged, as does the strength of our position to serve them.
Now, let me turn the call back over to Raf.
