Fitch Affirms Bio-Rad's IDR at 'BBB-'; Outlook Stable

NEW YORK--()--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 $438 million of debt at Sept. 30, 2015.

The Rating Outlook is Stable.

A full list of rating actions follows at the end of this release.

KEY RATING DRIVERS

Bio-Rad's historically conservative financial policy is reflected by gross leverage that has consistently remained below 2.5x. Following the repayment of subordinated debt in 2013, leverage has been maintained below 1.5x, due to the absence of acquisitions of significant size. While current leverage is strong for the rating level, Fitch believes the reduction is likely temporary given the rapid pace of consolidation taking place within the life sciences industry. In the meantime, Bio-Rad's low debt load provides ample cushion while EBITDA remains pressured by elevated expenses dedicated to internal projects.

A significant proportion of recurring sales, representing around 70% of the company total, has supported a history of relatively stable currency neutral revenues and cash flows. In addition, Bio-Rad's geographically diversified product portfolio and end-markets limits exposure to various challenges within the life science and clinical diagnostic industries, including tightened government funding in certain countries. Given these favorable attributes, Fitch sees sustained organic revenue growth in the low single digits over the ratings horizon, although foreign exchange (FX) headwinds will lead to reported revenue declines in 2015.

Bio-Rad considers itself to be a value-based acquirer and, given high valuations of targets in the life sciences space, activity since 2012 has been modest and directed at filling gaps in the product portfolio via tuck-in purchases. Although Bio-Rad has not completed any acquisitions of meaningful size for the past three years, Fitch views this as a reflection of the company's disciplined investment approach rather than a lack of commitment to business development. As industry consolidation is endemic, Fitch anticipates that Bio-Rad will continue to focus on reasonably priced targets to extend capabilities, but also does not discount the possibility of a transformational acquisition under the premise of Bio-Rad's conservative financial stance.

Bio-Rad's EBITDA margins in 2014 and year-to-date 2015 have generally ranged between 14%-15%, which is roughly 400-500 basis points (bp) lower than peak levels last achieved in 2011 and 2012. While 200 bps of the decline in 2015 may be attributed to FX headwinds, the remaining deterioration reflects enhanced investments in infrastructure and systems that began in 2013 and is unlikely to dissipate until the company's roll out of its enterprise resource planning (ERP) system is completed, likely not before 2018.

Leverage Historically Low

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. Fitch believes this approach will continue through the long term.

In 2013, 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. The company has one outstanding debt issue of $425 million that is due in 2020.

Life Sciences Outpacing Clinical Diagnostics

Bio-Rad's operates in two segments Life Sciences (roughly one-third of revenue) and Clinical Diagnostics (two-thirds of revenue). The Life Sciences business has recently grown faster than the Clinical Diagnostics segment, benefitting from strong demand for the company's Bio-Rad's Droplet Digital PCR, western blotting, process chromatography media, and cell biology products. Growth in the Clinical Diagnostics segment has recently been pressured by consolidation and pricing pressures in European markets, particularly in France.

Looking forward, Fitch believes the Clinical Diagnostics business will continue to grow at a steady rate in the low single digits (currency neutral), as the unfavorable impact of lab consolidation and pricing pressure is offset by steady patient need and stabilized by a high percentage of recurring revenues. Fitch anticipates that growth in Bio-Rad's Life Sciences business will outpace Clinical Diagnostics over the next three years, aided by new product introductions, with average sales growth expected to hover in the low- to mid-single digits on a currency-neutral basis. As Life Sciences historically generates lower margins than diagnostics, the shift in product mix will also challenge margin expansion.

Internal Investment Prioritized

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 views internal research and development investment that averages around 10% of overall company revenues at approximately $200 million annually favorably. 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.

Higher Capital Investment Sustained

The installation of a corporate-wide ERP system will require elevated operating expenses through the next 2-3 years. Investment into the program has led to 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 April 2017 at a total cost of between $150 million-$200 million over the next three 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 2015.

Fitch therefore expects that EBITDA margins will continue to approximate recent levels between 14%-15% for the next three years. Possible upside to this expectation could result from a reversal in FX exchange rates or if sales ramp up quickly for recent new products, including Bio-Rad's Droplet Digital PCR and Bio-Plex Multiplex diagnostic system, providing these products with sufficient scale to offset their development costs.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:

--Reported revenues increase in 2014 to 2018 by a CAGR of 0.3%, reflecting sustained FX headwinds in 2015 followed by stronger growth later in the forecast period.

--EBITDA growth resulting from modest revenues growth and largely stable operating margins

--Free cash flow averages between $90 million-$100 million reflecting continued, elevated investments in capital projects, partially offset by modest debt servicing requirements and lack of shareholder dividend.

--Modest-sized debt-funded acquisitions over the forecast period, resulting in gross debt leverage ranging between 2.0x-2.5x.

--Fitch views the likelihood of share repurchasing and/or transformational leveraging transactions as low, however, given the company's traditionally conservative financial policy.

RATING SENSITIVITIES

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 the rapid pace of consolidation taking place within the life sciences industry. 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 would require a return of EBITDA margins to historical levels in the high teens driven by cost savings capture, successful uptake of new product introductions, and benefits from ERP system completion, as well as gross leverage maintained below 2.0x

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.

SIMPLE MATURITY PROFILE, SOLID LIQUIDITY

Bio-Rad's cash and short-term investments of $866 million exceeded outstanding debt of $438 million on Sept. 30, 2015, and consisted primarily of $425 million of senior unsecured notes due 2020. Approximately 53% of the cash and securities balance resides in the U.S. and is sufficient to fund operations and on-going projects given no commitment to share repurchasing or dividend initiation. In addition, the company has full availability under its $200 million senior unsecured revolving credit facility. Cash balances may remain high in the absence of business development activities.

FULL LIST OF RATING ACTIONS

Fitch affirms Bio-Rad's ratings as indicated:

--IDR at 'BBB-';

--Senior Unsecured Notes rating at 'BBB-';

--Senior Unsecured bank facility rating at 'BBB-'.

The Rating Outlook is Stable

Additional information is available on www.fitchratings.com

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

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Contacts

Fitch Ratings
Primary Analyst
Greg Dickerson
Director
+1-212-908-0220
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Jacob Bostwick, CPA
Director
+1-312-368-3169
or
Committee Chairperson
Megan Neuburger, CFA
Managing Director
+1-212-908-0501
or
Media Relations:
Sandro Scenga, New York, +1 212-908-0278
Email: sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Greg Dickerson
Director
+1-212-908-0220
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Jacob Bostwick, CPA
Director
+1-312-368-3169
or
Committee Chairperson
Megan Neuburger, CFA
Managing Director
+1-212-908-0501
or
Media Relations:
Sandro Scenga, New York, +1 212-908-0278
Email: sandro.scenga@fitchratings.com