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 second quarter. Net sales for the second quarter of 2023 were $681.1 million, which is a decline of 1.4% on a reported basis versus $691.1 million in Q2 of 2022 and a 0.3% decline on a currency-neutral basis. The second quarter year-over-year revenue decline was mainly the result of significantly lower COVID-related sales of about $0.4 million versus approximately $33 million in the same period last year.
Core revenue, which excludes COVID-related sales, increased 4.6% on a currency-neutral basis. The second quarter revenue included $6 million of revenue from a one-time licensing fee as well as royalties of $500,000, both associated with a cross-license agreement related to Digital PCR intellectual property. We currently estimate receiving ongoing royalties from this arrangement of about $500,000 per quarter. We incurred a one-time $2.3 million R&D expense related to this cross-license agreement, and we do not anticipate any royalty obligations on our end for the foreseeable future.
On a geographic basis, we experienced currency-neutral year-over-year core revenue growth in all three regions. Sales of the Life Science Group in the second quarter of 2023 were $300.2 million compared to $322.4 million in Q2 of 2022, which is a decline of 6.9% on a reported basis and a 5.8% decline on a currency-neutral basis. Excluding COVID-related sales, the Life Science Group year-over-year currency-neutral core revenue growth was 4.5% and was primarily supported by strong growth in Droplet Digital PCR and qPCR products.
As Andy alluded to earlier, our Q2 results were impacted by the previously highlighted soft demand within early-stage biotech companies, as well as increased headwinds from larger biopharma companies, who are delaying capital investments and reducing bioprocessing inventory. In addition, we experienced weaker demand from government accounts in China due to softening macroeconomic conditions.
Process chromatography posted a mid-teens year-over-year revenue decline, and we now anticipate a mid-to-high single-digit decline for the full year versus our prior expectation of double-digit growth. Excluding process chromatography sales, the underlying Life Science business decreased 4.2% on a currency-neutral basis versus Q2 of 2022 and was a result of lower COVID-related sales. The Life Science Group revenue, excluding process chromatography and COVID-related sales, grew 8.5% 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 Q2 core revenue posted a decline in Asia.
Sales of the Clinical Diagnostics Group in the second quarter were $380.1 million compared to $367.8 million in Q2 of 2022, or 3.3% growth on a reported basis and a 4.6% growth on a currency-neutral basis. Core Clinical Diagnostics year-over-year revenue, which excludes COVID-related sales, increased 4.8% on a currency-neutral basis, as routine testing continues to normalize to pre pandemic levels. Growth of the Clinical Diagnostics Group was driven by strong demand for diagnostic testing systems, primarily within diabetes and blood typing, as well as nice growth from our quality controls portfolio.
On a geographic basis, the Diagnostics Group hosted strong double-digit, currency-neutral, year-over-year core revenue growth in Asia and was largely flat in the Americas and in Europe.
The reported gross margin for the second quarter of 2023 was 53.2% on a GAAP basis and compares to 57.2% in Q2 of 2022. The year-over-year gross margin decline was mainly due to unfavorable product mix with a higher-than-anticipated percentage of instrument sales versus reagents, as well as lower-than-forecasted revenue in the Life Science Group. The year-over-year gross margin was further impacted by higher material and logistics cost as well as inventory reserves.
Amortization related to prior acquisitions recorded in cost of goods sold was $4.3 million compared to $4.5 million in Q2 of 2022. SG&A expenses for Q2 of 2023 were $207.8 million or 30.5% of sales compared to $207.8 million or 30.1% in Q2 of 2022. We were able to maintain SG&A spend flat from the year-ago level through tight expense management. Total amortization expense related to acquisitions recorded in SG&A for the quarter was $1.6 million versus $1.8 million in Q2 of 2022. Research and development expense in the second quarter was $65 million or 9.5% of sales compared to $64.3 million or 9.3% of sales in Q2 of 2022. Q2 operating income was $89.6 million, or 13.2% of sales compared to $122.9 million or 17.8% of sales in Q2 of 2022 a a result of the softer top line and gross margin fall-through.
Looking below the operating line, the change in fair market value of equity security holdings, which are substantially related to Bio-Rad's ownership of Sartorius AG shares, negatively impacted the reported result by $1.595 billion. During the quarter, interest and other income resulted in net other income of $5.4 million compared to net other expense of $4.9 million last year, primarily driven by increased interest income from investments. The effective tax rate for the second quarter of 2023 was 22.5% compared to 24.2% for the same period in 2022. The tax rate for both periods were driven by the large unrealized loss in equity securities. Reported net loss for the second quarter was $1.162 billion or $39.59 diluted loss per share compared to a loss of $925 million or $31.05 diluted loss per share in Q2 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 the 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 second quarter, in cost of goods sold, we have excluded $4.3 million of amortization of purchased intangibles and $3.4 million of restructuring expense. These exclusions moved the gross margin from 53.2% for the second quarter of 2023 to a non-GAAP gross margin of 54.4% versus 57.8% in Q2 of 2022.
Non-GAAP SG&A in the second quarter of 2023 was 29.2% versus 29.3% in Q2 of 2022. In SG&A, on a non-GAAP basis, we have excluded $6.3 million of restructuring-related expenses, amortization of purchased intangibles of $1.6 million, an in vitro diagnostic registration fee in Europe for previously approved products of $2 million, and an acquisition-related benefit of $800,000.
Non-GAAP R&D in the second quarter of 2023 was 9.3%, which is the same as in Q2 of 2022. In R&D, on a non-GAAP basis, we have excluded $1.1 million of restructuring expenses and $400,000 of acquisition-related costs. The cumulative sum of these non-GAAP adjustments result in moving the quarterly operating margin from 13.2% on a GAAP basis to 15.8% on a non-GAAP basis. This non-GAAP operating margin compares to a non-GAAP operating margin of 19.2% in Q2 of 2022.
We have also excluded certain items below the operating line, which are the decrease in value of the Sartorius equity securities and loan receivable holdings of $1.595 billion and about a $900,000 loss associated with venture investments. The non-GAAP effective tax rate for the second quarter of 2023 was 22.5% compared to 19% for the same period in 2022. The higher rate in 2023 was driven by geographical mix of earnings. And finally, non-GAAP net income for the second quarter of 2023 was $88.5 million or $3 diluted earnings per share compared to $103.4 million or diluted earnings per share of $3.44 in Q2 of 2022.
Moving on to the balance sheet. During the second quarter, we purchased 549,863 shares of our stock at an average share price of $377.20 for a total cost of $207.4 million. Having completed the previous share repurchase program, the Board has authorized a new share repurchase program of up to $500 million of our stock. We plan to continue with our disciplined approach as part of our capital allocation strategy.
Total cash and short-term investments at the end of Q2 was $1.728 billion compared to $1.857 billion at the end of Q1 of 2023. The decline in cash and short-term investments from the first quarter was primarily due to share repurchases during the quarter. Inventory at the end of Q2 reached $776.6 million from $752.9 million in the prior quarter. The higher inventory level was driven mainly by higher finished goods inventory within the Life Science Group as a result of the software demand, as well as higher raw material and working process inventory within the Diagnostics Group as we continue to manage the elevated back order.
For the second quarter of 2023, net cash generated from operating activities was $98.1 million, which compares to $53.3 million in Q2 of 2022. This increase mainly reflects timing of tax payments. The adjusted EBITDA for the second quarter of 2023 was $137.9 million or 20.2% of sales. The adjusted EBITDA in Q2 of 2022 was $160.4 million or 23.2% of sales. Net capital expenditures for the second quarter of 2023 were $34.6 million, and depreciation and amortization for the second quarter was $35.9 million.
Moving on to the non-GAAP guidance. For the balance of the year, we expect much softer sales for the Life Science Group and continued instrument demand within Diagnostics. While we ramped up production for the QX600 and have worked through our back orders for the Life Science Group, an elevated order backlog remains for our Diagnostics Group. We continue to anticipate working through these back orders during the remainder of this year. As we indicated during our Q1 call, we continue to anticipate about $5 million in reduction of our elevated order backlog for each of the two remaining quarters of this year.
Given the current market outlook, we are revising our 2023 financial outlook as follows: We now guide currency-neutral revenue growth in 2023 to be approximately 80 basis points versus about 4.5% previously. For the full year, we estimate -- excuse me, we estimate currency-neutral revenue growth, excluding COVID-related sales, to be about 4.5% versus about 8.5% in our prior guidance. Of the 400 basis points core revenue guide down, 90 basis points are related to the second quarter revenue shortfall driven by weakness in biopharma and software demand in China, somewhat offset by 20 basis points from the one-time license fees. The remaining 330 basis points reduction is attributed to approximately 150 basis points related to process chromatography demand and 140 basis points due to continued softness in other biopharma and in China and 40 basis points for the Diagnostics Group, reflecting a more cautious view around the macro environment in China. For the second half of the year, we expect about 4% year-over-year core revenue growth versus 5.4% year-over-year growth in the first half of 2023. This represents about 7.5% core revenue growth in the second half of 2023 over the first half of 2023.
For the Life Science Group, we expect about 4% currency-neutral revenue decline for 2023. And when excluding COVID-related sales, the Life Science Group full year growth is now projected to be approximately 4%. This represents core revenue growth to be about 7% for the second half of the year over the first half of 2023. The Life Science Group year-over-year sales growth, excluding COVID and process chromatography-related sales, is expected to be about 6%. For the Diagnostics Group, while we remain encouraged with the overall demand, we are now guiding core revenue growth to be about 5.5%. This represents core revenue growth for the Diagnostics Group of about 8% for the second half of the year over the first half of 2023. Full year non-GAAP gross margin is now projected to be about 54.5% versus 55% to 55.5% previously, reflecting our updated expectations of shift in product mix and volumes. For the second half of the year, we now anticipate gross margin to be about 54.5%.
We now project full year non-GAAP operating margin to be about 16% versus approximately 17.5% in our prior guidance as we continue with our disciplined approach with operating expenses. For the second half of the year, we expect operating margin to be about 18% versus our prior guide of 21%. And full year adjusted EBITDA margin is expected to be about 21.5% versus about 23% in our prior guidance. For the second half of the year, we expect adjusted EBITDA margin to be approximately 22% versus our prior guide of 25%. Over the next several months, we expect to gain better visibility of the market dynamics, specifically around the longevity of the softness in biopharma and its impact, if any, on our previously communicated 2025 targets.
That concludes our prepared remarks, and we will now open the line to take your questions.
