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 Marc just outlined, while the macroeconomic environment became more challenging in the third quarter, we continued to deliver differentiated performance. In Q3, we delivered $10.6 billion of revenue, which included 1% core organic revenue growth. Our PPI business system enabled us to generate 200 basis points of adjusted operating margin expansion and we delivered $5.69 of adjusted EPS, a 12% increase over Q3 last year. We're continuing to successfully navigate the current environments.
Let me now provide you with some additional details on our performance, beginning with our earnings results. And as I mentioned, we delivered $5.69 of adjusted EPS in Q3, GAAP EPS in the quarter was $4.42. On the top-line, reported revenue was 1% lower year-over-year. The components of our Q3 reported revenue included 3% lower organic revenue, a 1% contribution from acquisitions and a tailwind of 1% from foreign exchange.
Turning to our organic revenue performance by geography. The organic growth rates by region is skewed by the pandemic-related revenue in the current and prior year. In Q3, North America declined mid-single digits, Europe grew in the low-single digits, Asia Pacific declined in the low-single digits with China declining in the high-single digits.
With respect to our operational performance, adjusted operating income in the quarter increased 8% and adjusted operating margin was 24.2%, 200 basis points higher than Q3 last year. In the quarter, we delivered exceptionally strong productivity and achieved good price realization. This was partially offset by lower pandemic-related revenue, continued strategic investments and FX. The strength of our productivity reflects the impact of our PPI business system. It's enabling us to manage our cost base appropriately given the macro conditions. Total company adjusted gross margin in the quarter came in at 42%, a 30 basis points higher than Q3 last year.
Moving onto the details of the P&L. Adjusted SG&A in the quarter was 14.8% of revenue, an improvement of 140 basis points over Q3 last year. Total R&D expense was $320 million in Q3, reflecting our ongoing investments in high-impact innovation. R&D as a percent of our manufacturing revenue was 6.7% in the quarter.
Looking at results below-the-line for the quarter, our net interest expenses was $113 million which is similar to Q3 last year. Our adjusted tax rate in the quarter was 10%, which is a 180 basis points lower than Q3 last year, reflecting results of our tax planning activities. Average diluted shares were $388 million in Q3, approximately $7 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 $4.7 billion, year-to-date free cash flow was $3.7 billion, after investing $1 billion of net capital expenditures. During the quarter, we returned $136 million of capital to shareholders through dividends and we deployed just over $900 million of capital for the acquisition of CorEvitas. We ended the quarter with $6.2 billion in cash and $35.3 billion of total debt. Our leverage ratio at the end of the quarter was 3.2 times gross debt-to-adjusted EBITDA and 2.7 times on a net-debt basis. In concluding my comments in our total Company performance, adjusted ROIC was 12%, reflecting the strong returns on investment that we generating across the company.
And 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. Net revenue was higher than the prior year. So it does skew some of the reported segment growth rates and margins. And we continue to execute strong pricing realization across all segments to address inflation.
Moving on to the segment details, starting with Life Sciences Solutions. Q3 reported revenue in this segment declined 18% and organic revenue was 19% lower than the prior year quarter. This was driven predominantly by the run-off of our pandemic-related revenue in this segment versus the year-ago quarter. Q3 adjusted operating income for Life Science Solutions decreased 16% and adjusted operating margin was 35.9%, up 80 basis points versus the prior year quarter. During the quarter, we delivered exceptionally strong productivity and had favorable FX, which was partially offset by unfavorable volume mix.
In the Analytical Instruments segment, reported revenue increased 8% in Q3 and organic growth was also 8%. The strong growth in this segment this quarter was led by electron microscopy business. In this segment, Q3 adjusted operating income increased 21% and adjusted operating margin was 26.7%, up 290 basis points year-over-year. In the quarter, we delivered very strong productivity and had strong volume pull-through, which was partially offset by FX and strategic investments.
Then to Specialty Diagnostics. In Q3, reported revenue increased 2% and organic revenue was 6% lower than the prior year quarter. In Q3, we continued to see strong underlying growth in the core, led by our immunodiagnostics microbiology and transplant diagnostics businesses. This was offset by lower pandemic-related revenue versus the year-ago quarter. Q3 adjusted operating income for Specialty Diagnostics increased 29% in the quarter and adjusted operating margin was 26.1%, which is a 550 basis points higher than Q3 2022. During the quarter, we delivered favorable volume mix and very strong productivity. That was partially offset by the impact of lower COVID-19 testing volume and strategic investments.
Finally in Laboratory Products and Biopharma Services segments, Q3 reported revenue increased 3% and organic growth was 1%. During Q3, organic revenue growth in this segment was led by the Pharma Services business. In this segment, Q3 adjusted operating income increased 29% and adjusted operating margin was 16.4%, which is 340 basis points higher than Q3 2022. During the quarter, we delivered exceptionally strong productivity and favorable mix, which was partially offset by FX.
Let me now turn to guidance. As Marc outlined, we are revising our full-year 2023 guidance to reflect the more challenging macroeconomic environment. Our revised estimate for 2023 is revenue of $42.7 billion with core organic revenue growth of just under 1% and $21.50 of adjusted EPS.
Let me now provide you with some details behind the change in guidance versus the estimate we provided on our last earnings call. Starting with revenue, our revised guidance is $850 million lower than the prior outlook. $200 million of this is driven by an increased headwinds from FX. We've increased our guide by $45 million to reflect the acquisitions of CorEvitas and the rest of the change is due to our lower core revenue assumption. We now see core organic growth for the year just under 1%, which is a little less than 2% lower than the prior guide. This is driven by the same factors that we've seen throughout the year, the weak economic conditions in China and cautious spending in general across our customer base.
As we indicated during Q3, these factors increased an impact during the quarter and our assumption is that the conditions we saw at the end of Q3 will continue throughout the remainder of the year. And as a result, we now expect core market growth for our industry to be slightly negative for the year. However, we continue to effectively navigate the macro dynamics and expect to continue to deliver differentiated core organic revenue growth for the year despite the more challenging conditions.
Moving on to profitability. The revised guidance assumes a pull-through on the lower revenue of just over 40%, and we now expect our adjusted operating margin to be 22.9% for the year. We continue to use the PPI business system to manage our costs appropriately, given the market conditions. From an adjusted EPS standpoints, the revised guidance is $0.17 lower due to FX and $0.69 related to the change in core revenue. So, we now expect to deliver $21.50 of adjusted EPS in 2023, a strong result given the challenging macro environment.
Let me now provide you with some additional details of the updated 2023 guidance. We continue to assume that will deliver $300 million of testing revenue in 2023. We expect the total vaccines and therapies related revenue will be $1.6 billion less than the prior year, an impact of over 4% on our core organic revenue growth. This assumes we recognize $1.3 billion of vaccine therapies revenue in 2023, $600 million of which is in our clinical research business.
Moving on to FX. Given recent rate changes, we're now assuming that FX will be a year-over-year headwind to revenue of approximately $100 million, And in terms of adjusted EPS, we now expect FX to be a year-over-year headwind of $0.28, which is $0.17 more of a headwind than our previous guidance. The Binding Site and CorEvitas acquisitions are performing well. And we now assume that they'll contribute approximately $300 million to our reported revenue growth for the year. Below-the-line, we now expect just under $500 million of net interest expense in 2023, a slight increase reflecting the acquisition of CorEvitas. We continue to assume that the adjusted tax rate for 2023 will be 10%. And we're now expecting net capital expenditures will be between $1.3 billion and $1.5 billion. And we now expect the free cash flow will be between $6.7 billion and $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, $3.7 billion in acquisitions completed this year and $3.1 billion committed to the acquisition of Olink, which we expect to close in 2024. We continue to assume that full-year average diluted share count will be approximately 388 million shares, and then we'll return approximately $540 million of capital to shareholders this year through dividends, a 17% increase over 2022.
Now before I conclude my prepared remarks, I thought it'd be helpful to share some more detailed thoughts around how to frame 2024. At this point in time, a good starting assumption is that our core organic revenue growth in 2024 is similar to 2023, approximately 1% growth. With our proven growth strategy, we expect to continue to take share and that would mean market growth in 2024 will be similar to 2023 with the market declining one to two points.
In terms of phasing of our core organic revenue growth, it's best to assume a more challenging first-half and then moderate growth in the second-half. The pandemic-related revenues both testing and total vaccines and therapies are likely to be around $300 million in 2024. This is a headwind of approximately $1.3 billion or 3% of revenue. M&A is expected to increase revenue a $175 million year-over-year. That's a combination of six months of Olink and the inorganic portion of the CorEvitas revenue in 2024. And based on current rates, we would expect FX to be a headwind to revenue in 2024 of approximately $375 million, just under 1%. So wrapping all this together, 2024 revenue dollars would be very similar to 2023.
In terms of adjusted operating income dollars, with this topline setup, we would expect to deliver similar adjusted operating income dollars to 2023. We'll continue to use the PPI business system to manage costs very carefully, but also continue to make the right long-term investments to enable us to continue to strengthen our industry leadership. Strong underlying productivity and cost controls are expected to offset the run-off in the remaining pandemic revenue, inflation and the normalization of incentive compensation across the company and appropriate investments in our colleagues. Below-the-line, the interest income benefit from our cash generation and an assumption of $3 billion of buybacks in 2024 would more than offset the impact of a slight increase in our tax rate to 10.5%. All of this would enable us to deliver around $21.75 of adjusted EPS for the year.
So the high-level summary is that with these assumptions, we'd expect 2024 organic revenue growth to be similar to 2023. And that our proven growth strategy in PPI business system would enable us to continue to manage the macro conditions and the run-off in pandemic revenue very effectively so we can deliver revenue and profitability similar to 2023 and a slight increase in adjusted EPS. Should the market conditions to be better than I just outlined, our growth strategy and proven execution capabilities will enable us to deliver the upside benefit. I look-forward to providing you a formal guidance for 2024 on our next earnings call along with our usual supporting details for the year ahead. At that point, we'll have the insight from a full-year of 2023, we'll have a better view on the macro conditions entering 2024.
So in conclusion, we continue to navigate the environment really well, delivering differentiated financials and further strengthening our industry leadership. We remain really well-positioned to capitalize on additional opportunities as market growth normalizes over-time. And as we think about our cost base, we're really well-positioned to drive strongly accretive growth going forward.
Now let me turn the call-back over to Raf.
