CHICAGO--(BUSINESS WIRE)--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 $437 million of debt at Sept. 30, 2014. In addition, Fitch has assigned a 'BBB-' rating to the company's senior unsecured bank facility.
The Rating Outlook is Stable.
A full list of rating actions follows at the end of this press release.
KEY RATING DRIVERS
Low Leverage: Bio-Rad's conservative financial policy is evident historically with gross leverage consistently below 2.5x. Leverage has fallen further to below 1.5x, in conjunction with the repayment of subordinated debt in 2013. The company has one outstanding issue due in 2020. The low debt load provides cushion while EBITDA remains pressured by increasing expenses dedicated to internal projects and incremental costs from acquisitions.
Stable Revenue Growth: A significant proportion of recurring sales that represent around 70% of the company total has supported a history of relatively stable revenues and cash flows. In addition, Bio-Rad's diversification geographically, with its product portfolio and end-markets limits exposure to various challenges within the life science and clinical diagnostic industries, including tightened government funding. Given these favorable attributes, Fitch sees sustained revenue growth in the 2% to 3% range over the ratings horizon.
Paced Business Development: Bio-Rad is a value-based acquirer, and as such, activity since 2012 has been modest and directed at filling gaps in the product portfolio via tuck-in purchases. Fitch anticipates continued small-sized purchases to extend capabilities. However, as consolidation in the industry is endemic, Fitch does not discount the possibility of a transformational acquisition under the premise of Bio-Rad's conservative financial stance.
Investigations Resolved: Bio-Rad recently settled investigations by the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) pertaining to past violations of the anti-bribery provisions of the foreign corrupt practices act (FCPA). In the fourth quarter, the company will pay $55 million comprising $14.4 million penalty under a non-prosecution agreement and $40.7 million for a civil settlement. The resolution was without prosecution from the DOJ. The full cost of the litigation settlement is easily manageable given Bio-Rad's solid liquidity.
Maintenance of Bio-Rad's 'BBB-' IDR requires managing leverage (debt-to-EBITDA) in the range of 2.0x to 2.5x. Current leverage below 2.0x is strong for the rating level, but Fitch believes the reduction is likely temporary given Bio-Rad's historically high level of business development. Low leverage provides flexibility as margins are pressured by significant investment to the company's implementation of a system-wide ERP system, and internal and external projects to drive sustained growth and increase scale.
Positive rating action is not anticipated at this time but would require an increase in size to compete more effectively in a highly consolidating industry. Positive momentum could also be derived from a return of EBITDA margins to historical levels driven by cost savings capture, successful uptake of new product introductions, and benefits from ERP system completion.
A downgrade out of investment grade would likely result from a large debt-funded acquisition or shareholder-friendly transaction that would drive leverage above 3.0x without a plan to reduce leverage to below 2.5x within 12-18 months. In addition, negative rating action could be prompted by significantly pressured operating margins from an accelerating weak market environment or heavy competition.
LONG-TERM CONSERVATIVE FINANCIAL POLICY SUSTAINED
Bio-Rad has historically held a conservative stance on balance sheet management favoring internal investment and select bolt-on acquisitions while foregoing shareholder-friendly activities. The financial policy has consistently yielded gross debt leverage below 2.5x even while EBITDA has been pressured by increasing expenses dedicated to internal projects and incremental costs from acquisitions, which Fitch believes will continue through the long-term. Last year, the company repaid subordinated debt from cash that resulted in leverage dropping below 1.5x, leaving significant cushion for the company to continue its long-term ERP implementation as well as acquire external developmental projects.
LIFE SCIENCES PACES CLINICAL DIAGNOSTICS
Bio-Rad's two segments have generated similar sales increases rates of 3.1% for the first nine months of 2014 and full-year 2013. Traditionally, revenue growth in the Life Sciences segment lagged the performance of the Clinical Diagnostics business given reliance of life sciences demand on government funding while diagnostic testing performance influenced more by patient need and stabilized by high percentage of recurring revenues. Life Sciences solid growth has been bolstered, in part, by new product introductions and strong demand for its droplet digital PCR. Nonetheless, Fitch sees higher increases from Clinical Diagnostics yielding overall sales increases in the 2% to 3% range over the ratings horizon.
CAPITAL DEVOTED TO DRIVE GROWTH
Bio-Rad strives to build long-term growth devoting capital to asset purchasing and internal development funding rather than shareholder-friendly activities. Bio-Rad, while strong in its markets, must focus on new product differentiation and technology to maintain share against larger competitors in both the life science and diagnostics spaces. Fitch favorably views internal research and development investment that averages 10% of overall company revenues at around $200 million annually. Business development plays a key role in the company's strategy as it builds scale to compete effectively in its marketplaces. Bio-Rad is a value-based acquirer, and as such, activity since 2012 has been modest and directed at filling gaps in the product portfolio via tuck-in purchases.
IMPLEMENTATION OF ERP SYSTEM CONTINUES THROUGH 2017
The installation of a corporate-wide ERP system will demand a higher level of capital expenditure and heavy operating expenses through the long term. Investment into the program has led to some margin compression since 2013 given the added labor needed to complete the project in the U.S. A more cost and time intensive rollout throughout Europe will start in 2015 and last into 2017 with cost estimates of $250 million for the next four years. Fitch sees the project cost weighing on margins with little benefit derived from the efforts even upon system completion in North America expected in the first half of 2015.
LONGSTANDING U.S. GOVERNMENT FCPA CASES RECENTLY CONCLUDED
Bio-Rad recently announced a non-prosecution agreement with the DOJ and the SEC to resolve a longstanding investigation pertaining to violations of the anti-bribery provisions of the FCPA that occurred from 2005 to 2010. Since the company voluntarily disclosed the allegations to the agencies and fully cooperated thereafter, the DOJ imposed a modest penalty of $14.4 million while the SEC settled civil charges for $40.7 million in disgorgement and prejudgment interest. The company had accrued charges related to the investigation of $43 million in 2013 and the first quarter of 2014, and recorded the balance in the third quarter. The full cost of the litigation settlement is easily manageable given Bio-Rad's solid liquidity.
Fitch has affirmed Bio-Rad's ratings as follows:
--IDR at 'BBB-';
--Senior Unsecured Notes rating at 'BBB-'.
Fitch has assigned the following rating:
--Senior unsecured bank facility rating at 'BBB-'.
The ratings apply to approximately $437 million of debt outstanding at Sept. 30, 2014. The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (May 28, 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage