TEXT-Fitch affirms Bio-Rad's ratings at 'BBB-'
Nov 14 () - Fitch Ratings has affirmed the ratings of Bio-Rad Laboratories, Inc. (Bio-Rad), including the 'BBB-' Issuer Default Rating (IDR). The ratings apply to approximately $733 million of debt at Sept. 30, 2012. The Rating Outlook is Stable. A full list of rating actions is provided at the end of this release. KEY RATING DRIVERS --Bio-Rad's stable operating profile and cash flows are supported by a high proportion of recurring revenues; --Given Bio-Rad's large exposure to the Eurozone, material economic headwinds there are showing prominently in the company's financial results; --Large cash and short-term investments balances in excess of $850 million at Sept. 30, 2012, contribute to a strong liquidity profile. A history of financial conservatism and limited debt maturities until 2016 afford the company considerable flexibility at the current 'BBB-' ratings; --Although viewed as unlikely to have an outsized credit impact, Fitch acknowledges event risk related to M&A and concentrated corporate governance. CONSIDERATIONS FOR FUTURE RATING ACTIONS Maintenance of a 'BBB-' IDR will require debt-to-EBITDA maintained between 2.0x and 2.5x over the ratings horizon. A temporary increase in leverage outside this range in order to fund appropriate M&A, with a compelling plan to reduce leverage to below 2.5x within 12-18 months, could be sustained at the 'BBB-' ratings. Stable EBITDA margins and cash flows are also expected at Bio-Rad's current 'BBB-' ratings. An upgrade of the ratings could be the result of a demonstrated commitment to continuing to operate with leverage below 2.0x, accompanied by moderately increasing cash flows. Currently, strong credit metrics are offset by weak top-line growth and somewhat depressed cash flows due to weak economic conditions, especially in Bio-Rad's largest market of Europe. If macroeconomic conditions show signs of improvement and demand for Bio-Rad's products improves, particularly in the life sciences segment, an upgrade could be considered. A downgrade out of investment grade would likely result from an exceptionally large debt-funded acquisition or shareholder-friendly transaction without a plan to reduce leverage to below 2.5x within 12-18 months. Although less likely, it is possible that severe margin erosion leading to suppressed cash flows could also contribute to the possibility of a downward rating action. RELATIVELY STABLE OPERATING PROFILE AND CASH FLOWS Most of Bio-Rad's sales are recurring in nature, as the sale of consumable products comprises approximately 70% of overall revenues. Much of that 70% represents sales contracted through the placement of Bio-Rad's capital equipment with end-users. This ensures relatively stable sales volumes and reliable cash generation. Fitch expects the sale of reagents and other consumables to grow in the mid-single digit range over the intermediate term. This assumption is supported by favorable demographics in developed markets and increasing demand for and access to more advanced forms of healthcare in emerging markets. Potentially favorable volume impacts of healthcare reform legislation in the U.S. is also likely to support sales in 2014. MATERIAL ECONOMIC HEADWINDS, ESPECIALLY IN EUROPE Overall sales, but especially of more expensive capital equipment, have been pressured in 2012. Bio-Rad's Eurozone markets have shown especially depressed demand. Fitch expects the same for much of 2013. Dynamics present in 2012, including strained research budgets due to government expense reductions and more cautious end-users due to a general atmosphere of macroeconomic and fiscal uncertainty, are likely to persist well into 2013. Given that the largest portion of Bio-Rad's sales are generated in the Eurozone, financial results in 2012 have also been unfavorably impacted by the weak Euro. Fitch forecasts 2013 revenue growth in the low-single digits with modestly improving margins, primarily the result of continued pressure in Europe. STRONG LIQUIDITY, EXTENDED DEBT MATURITIES Bio-Rad maintains a strong liquidity profile, with cash and short-term investments of $854 million at Sept. 30, 2012. Liquidity is also supported by a $200 million secured revolver due June 2014 and the expectation for free cash flow (FCF) of $120 million-$150 million in 2012 and 2013. The company has no meaningful debt maturities until its subordinated notes come due in 2016. Bio-Rad also has $425 million of unsecured notes due in 2020. Large cash and short-term investments balances, combined with Bio-Rad's history of financial conservatism and an extended debt maturity profile, afford the company considerable flexibility at the current 'BBB-' ratings. EVENT RISK RELATED TO M&A, CORPORATE GOVERNANCE Bio-Rad operates in highly competitive industries where consolidation has been widespread in recent years. Many of the company's largest competitors have consummated large, leveraging acquisitions. However, Bio-Rad's acquisition history has been measured. Aside from a $370 million transaction in 2007 and the $162 million purchase of QuantaLife in 2011, acquisitions have been comprised of smaller tuck-ins which complement Bio-Rad's existing technologies and R&D program. Despite being closely held by its founding family, which controls approximately 70% of the voting power, the company has not historically paid a dividend or engaged in share repurchases. Fitch expects the company to continue to prioritize its use of excess cash flow to fund targeted M&A rather than for shareholder-friendly distributions over the ratings horizon. Fitch has affirmed Bio-Rad's ratings as follows: -- IDR at 'BBB-'; -- Senior secured bank facility rating at 'BBB-'; -- Senior unsecured notes rating at 'BBB-'; and -- Senior subordinated notes rating at 'BB+'. The Rating Outlook is Stable. ISSUE RATING NOTCHING Fitch rates the senior secured debt and the senior unsecured debt on par with the 'BBB-' IDR. Senior secured debt consists solely of the $200 million bank facility. The bank debt collateral consists of equity security. The one-notch distinction from the IDR for the senior subordinated debt class rating of 'BB+' reflects the relatively low proportion of secured debt in the capital structure. Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. Applicable Criteria and Related Research --'Corporate Rating Methodology' (Aug. 8, 2012); --'Recovery Rating and Notching Criteria for Non-Financial Corporates' (Nov. 13, 2012). Applicable Criteria and Related Research: Corporate Rating Methodology Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers