Ilan Daskal
Executive Vice President & Chief Financial Officer at Bio-Rad Laboratories
Great. Thank you, Andy. Now, I would like to review the results of the first quarter.
Net sales for first quarter 2023 were $676.8 million which is a 3.3% decline on a reported basis versus $700.1 million in Q1 of 2022. On a currency neutral basis, the year-over-year revenue decline was 0.3%. The first quarter year-over-year revenue decline was mainly as result of significantly lower COVID-related sales of approximately $2.6 million versus $45 million in first quarter of last year. Core revenue which excludes COVID-related sales, increased 6.1% year-over-year on a currency neutral basis.
As Andy alluded to earlier, our Q1 results were impacted by increased sanctions in Russia, increased early-stage biotech companies' pressures and continuing certain supply chain challenges, including those associated with our manufacturing lines transfer and ramp-up in Asia. The production transition contributed to continued elevated order backlogs, mainly within the Diagnostics groups. In addition, we continued to ramp capacity to accommodate growing demands for the new QX600 ddPCR system. On a geographic basis, we experienced currency neutral year-over-year core revenue growth in Americas and Europe while core revenue modestly declined in Asia, primarily due to a tough compare for the process chromatography franchises related to very large customer orders in the year-ago period.
Sales of the Life Science Group in first quarter of 2023 were $323.6 million compared to $347.2 million in Q1 of 2022 which was decrease of 6.8% on a reported basis and decline of 3.6% on a currency neutral basis. The underlying Life Science year-over-year currency neutral core revenue growth was 9.6% and was primarily driven by our qPCR products, western blotting and Droplet Digital PCR. This growth was lower than we projected as a result of increased sanctions' effect of sales of certain products to Russia, as well as growing revenue headwind from biopharma companies due to funding environment for early-stage biotech companies.
As I mentioned earlier, we continue to ramp capacity to accommodate the growing demand for the new QX600 ddPCR system. Process chromatography revenue which can fluctuate on a quarterly basis, posted mid-single-digit year-over-year decline due to tough compare, as well as some softness in the bioprocessing market. With that being said we still expect double-digit growth for 2023 despite low revenue projection relative to our prior forecast. Excluding process chromatography sales, underlying Life Science business declined 3.3% on a currency neutral basis versus Q1 of 2022 and was a result of lower COVID-related sales. The Life Science Group revenue excluding process chromatography and COVID-related sales, grew 13.6% on a currency neutral basis.
On a geographic basis, Life Science experienced currency neutral year-over-year core revenue growth in the Americas and Europe, while Q1 core revenue posted a decline in Asia due to the previously mentioned tough compare for process chromatography. Sales of the Clinical Diagnostics Group in the first quarter were $352.1 million compared to $351.8 million in Q1 of 2022 or largely flat on reported basis and 2.8% increase on a currency neutral basis.
Core Clinical Diagnostics year-over-year revenue which excludes COVID related sales increased 3.1% on a currency neutral basis. Growth of the Clinical Diagnostics group was primarily driven by robust demand for diagnostics instruments, primarily with blood typing and diabetes which was not entirely fulfilled due to our manufacturing constraints. We continued to see strong rebound in placements of instruments in China which should contribute to reagent pull-through volumes in coming quarters.
On geographic basis, currency neutral year-over-year core revenue for the Diagnostics Group posted double-digit growth in Asia and were largely flat in the Americas and Europe versus the year-ago period. The reported gross margin for the first quarter of 2023 was 53.5% on a GAAP basis and compared to 57.5% in Q1 of 2022. The year-over-year gross margin decline was mainly due to lower COVID-related sales, unfavorable product mix and higher cost raw materials. The gross margin this year was further impacted by higher-than-anticipated percentage of instrument sales versus reagents, as well as from the lower-than-forecasted revenue in the Life Science Group. In addition, we were not able to fully recover higher inflationary costs this year as the increases in certain raw materials and elevated logistics cost were not fully recovered in selling prices.
Amortization related to prior acquisitions recorded in cost of goods sold was $4.3 million compared to $4.5 million in Q1 of 2022. SG&A expenses for Q1 of 2023 were $225.6 million or 33.3% of sales, compared to $196.7 million or 28.1% in Q1 of 2022. The increase in SG&A expenses was driven by higher employee-related expenses, a restructuring charge and higher discretionary spend. Total amortization expense related to acquisitions recorded in SG&A for the quarter was $1.7 million versus $1.8 million Q1 of 2022. Research and development expense in first quarter was $75 million, or 11.1% of sales, compared to $59.5 million or 8.5% of sales in Q1 of 2022. The year-over-year increase was due to increased employee-related expenses following Curiosity [Phonetic] acquisition in the third quarter of 2022, higher project-related spend and the restructuring costs.
Q1 operating income was $61.9 million or 9.1% of sales compared to $146.4 million or 20.9% of sales in Q1 2022. Looking below the operating line, the change in fair market value of equity securities holdings which are substantially related to Bio-Rad's ownership of Sartorius AG shares, negatively impacted reported results by $17.5 million. During the quarter, interest and other income resulted in net other income of $40.4 million compared to net other income of $30.7 million last year. Q1 of 2023 included $34.8 million dividend from Sartorius versus $31.6 million dividend in first quarter of 2022. The effective tax rate for the first quarter of 2023 was 18.7% compared to 22.9% for the same period in 2022.
The effective tax rate reported in Q1 of 2023 was primarily affected by geographical mix of earnings. The effective tax rate reported in Q1 2022 was primarily affected by unrealized loss in equity securities. Reported net income for first quarter was $69 million or $2.32 diluted earnings per share compared to loss of $3.367 billion or $112.50 diluted loss per share in Q1 of 2022. This change from last year is largely related to changes in the valuation of the Sartorius Holdings.
Moving on to the non-GAAP results. Looking at the results on a non-GAAP basis we have excluded certain atypical and unique items that impacted both, gross and operating margins, as well as other income. These items are detailed in the reconciliation table in the press release. Looking at the non-GAAP results for the first quarter, in cost of goods sold, we have excluded $4.3 million of amortization of purchased intangibles and a small restructuring expense. These exclusions moved the gross margin from 53.5% for first quarter of 2023 to non-GAAP gross margin of 54.2%, versus 58.2% in Q1 of 2022. Non-GAAP SG&A in the first quarter of 2023 was 31.3% versus 27.2% in Q1 of 2022. In SG&A, on a non-GAAP basis, we have excluded amortization of purchased intangibles of $1.7 million, an invitro diagnostic registration fee in Europe for previously approved products of $1.9 million, acquisition related costs of $800,000 and $9 million of restructuring related expenses.
Non-GAAP R&D expense in the first quarter of 2023 was 10.4% versus 8.5% in Q1 of 2022. In R&D, on non-GAAP basis we have excluded $4.2 million of restructuring expense. The cumulative sum of these non-GAAP adjustments result in moving the quarterly operating margin from 9.1% on GAAP basis to 12.4% on a non-GAAP basis. This non-GAAP operating margin compares to a non-GAAP operating margin of 22.4% in Q1 of 2022. We have also excluded certain items below the operating line which are decreases in value of Sartorius equity securities and loan receivable holdings of $17.5 million and about $1 million loss associated with venture investments. The non-GAAP effective tax rate for the first quarter of 2023 was 20.9% compared to 19.6% for the same period in 2022. The higher rate in 2023 was driven by geographical mix of earnings and lower compensation-related deductions.
And finally, non-GAAP net income for the first quarter of 2023 was $99.4 million or $3.34 diluted earnings per share, compared to $151.5 million or diluted earnings per share of $5.02 in Q1 of 2022.
Moving on to the balance sheet; total cash and short-term investments at the end of Q1 was $1.857 billion compared to $1.796 billion at the end of 2022. The change in cash and short-term investments from the fourth quarter of 2022 was primarily due to the change in working capital. Inventory at the end of Q1 reached $752.9 million from $719.3 million in prior quarter. The higher inventory level was driven mainly rebuilding of finished goods safety stock for certain instruments. In addition, we are rebalancing inventory levels as we complete the transition of some of our manufacturing. We did not purchase any shares of stock during first quarter. But as we have done in recent years, coming out of blackout periods, we will continue to be opportunistic with share buybacks, particularly when we believe there is significant dislocation in valuation of our stocks.
To that end, we have over $200 million available to deploy under current Board authorized program. For the first quarter of 2023, net cash generated from operating activities was $98.1 million which compares to $50.5 million in Q1 of 2022. This increase mainly reflects change in working capitals. The adjusted EBITDA for the first quarter of 2023 was $148.5 million or 21.9% of sales and excluding the Sartorius dividend was 16.8%. The adjusted EBITDA in Q1 of 2022 was $215.4 million or 30.8% of sales and excluding the Sartorius dividend was 26.3%. Net capital expenditures for the first quarter of 2023 was $35.7 million and depreciation and amortization for the first quarter was $35.6 million.
Moving to the non-GAAP guidance; taking into account macroeconomic factors as well as our continued operational transformation initiatives, we are revising our 2023 financial outlook as follows; we are guiding currency neutral revenue growth in 2023 to be about 4.5% versus 6% to 7% previously. For the full year, we estimate currency neutral revenue growth excluding COVID-related sales to be about 8.5% versus 10% to 11% in our prior guidance. We expect first half of 2023 core growth to be between 6.5% and 7% over the first half of 2022 and about 10% core growth in the second half of the year over the second half of 2022. The Life Science Group year-over-year currency neutral revenue growth is expected to be about 3% versus 8% to 9% and excluding COVID-related sales, the Life Science Group growth is projected to be about 11% versus 16% to 18% in our prior guidance.
For first half of 2023, we expect for the Life Science Group about 9.5% core growth over the first half of 2022 and about 12.5% core growth for the second half of the year over the second half of 2022. For the Diagnostics Group, we estimate currency neutral revenue growth of about 6% versus 5% previously, as we are seeing improved demand dynamics in 2023. Excluding COVID-related sales, the Diagnostics Group growth is projected between 6% and 6.5% versus 5% to 5.5% in prior guidance. For first half of 2023, we expect for the Diagnostics group about 4.5% core growth over the first half of 2022 and about 8% core growth for the second half of the year over the second half of 2022. Full year non-GAAP gross margin is now projected to gradually improve throughout 2023 and be between 55% and 55.5% for the full year.
For the first half of the year, we anticipate gross margins to be between 54.5% and 55% and for the second half of the year to be between 55.5% and 56%. We now project full year non-GAAP operating margins of approximately 17.5% versus 19.5% in our prior guidance as we plan to focus on expense management for remainder of the year. For the first half of the year, we expect operating margin to be about 14% and reaching 21% for the second half of 2023. And full year adjusted EBITDA margin is expected to be about 23%, versus 25% in prior guidance. For first half of the year, we expect adjusted EBITDA margins to be about 21%, and in second half of the year to be about 25%. We are also revising our targeted 2021 to 2025 currency neutral compounded annual core revenue growth rate to be 8% versus our previous target of 8.9%.
For Life Science business, we are now targeting about 12.4% between 2021 and 2025 versus our prior expectations of approximately 13.9%. For Clinical Diagnostics business, we now expect 4.4% versus 4.6% previously. Our gross margin in 2025 is targeted to be about 57% versus our previous target of 59% and our adjusted EBITDA for 2025 is targeted to be about 26% versus previous target of 28%.
That concludes our prepared remarks and we will now open the line to take your questions. Operator?
