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31 Jul 2003
MOODY'S ASSIGNS A Ba3 TO BIO-RAD LABORATORIES, INC.'S ("BIO-RAD'S") $200 MILLION SR. UNSEC. SUB. NOTES AND UPGRADES ITS SENIOR IMPLIED RATING TO Ba2 FROM Ba3; OUTLOOK IS CHANGED TO POSITIVE
Approximately $200 million in Debt Securities Affected
New York, July 31, 2003 -- Moody's assigned a Ba3 to the Bio'Rad's $200
million senior unsecured subordinated notes and, at the same time,
upgraded Bio-Rad's senior implied rating to Ba2 from Ba3
and its issuer rating to Ba2 from Ba3, citing the company's
much improved financial performance, the result of its strong franchise,
solid research and development capabilities and significant recurrent
revenues; its bright future prospects; and its significantly
reduced debt burden. The rating action also reflects the company's
exposure to foreign exchange fluctuations, its dependence on government
funding and the possibility that it will make additional acquisitions
over the rating horizon. The outlook for all ratings is positive.
A summary of these rating actions appears below:
(i) Upgrade Bio-Rad's senior implied rating Ba2 from Ba3;
(ii) Upgrade Bio-Rad's issuer rating to Ba2 from B1;
(iii) Assign a Ba3 to Bio-Rad's $200.0 million
sr. unsec. Sub. Notes due 2013.
Moody's will withdraw the ratings on Bio-Rad's existing
revolving credit and subordinated notes once the new facilities are in
place and the refinancing is complete.
The positive rating outlook reflects Moody's belief that Bio-Rad
will continue to increase revenues at a high- single and cash flows
at a mid-single digit rate over the rating horizon, reinvesting
free cash flow to fuel growth, either internal or the result of
modest, strategic acquisitions. Should the company generate
stronger cash flow on a sustained basis, using free cash flow to
retire debt, perhaps through open market purchases, the ratings
may rise. Alternatively, should Bio-Rad increase debt
levels materially, perhaps to fund a major acquisition, or
should cash flow generation falter, perhaps the result of increasing
competitive pressures or adverse foreign currency movements, the
outlook could become stable.
Bio-Rad's financial performance has improved dramatically
over the last two years. Since 1999, the year in which it
acquired Pasteur Sanofi, the company has increased revenues,
reversed a decline in gross profit margins, increased EBITDA margins,
more than tripled free cash flow, and reduced debt (although adjusted
debt levels, which take into account operating leases, are
higher). Not surprisingly, its credit metrics have also improved.
Despite the refinancing, which will add about $85.0
million in debt to the company's balance sheet, the company
should be able to maintain its improved financial profile. Moody's
expects EBITDAR/Interest+Rent of about 4x by the end of 2004,
the result of stronger cash flow and, more importantly, lower
interest expense. Likewise, Moody's anticipates Total
Adjusted Debt/EBITDAR of about 2.0x and Total Adjusted Debt/Adjusted
Book Capital of about 45% within the next year to eighteen months.
Lending further support to the rating is Bio-Rad's franchise
in the life sciences industry. The company has pursued a strategy
of focusing on selected segments, many of which have relatively
high growth rates, of its key markets. In its Life Science
segment, it concentrates on the promising areas of proteomics (the
study of proteins), genomics (the study of genes), biopharmaceutical
production, cell biology and food safety. In serving this
market, Bio-Rad has demonstrated leadership in electrophoresis,
image analysis, gene transfer and BSE testing. Likewise,
in its Clinical Diagnostics segment, the company focuses on specialty
diagnostics and is a leader in the supply of diagnostics for autoimmune
disease, diabetes monitoring, HIV diagnostics and quality
control. Its strategy has enabled it to establish a formidable
presence, albeit in selected niches such as diabetes monitoring,
autoimmune testing, BSE testing and HIV diagnostics, despite
its relatively small size.
Bio Rad has a history of successfully bringing to market new products,
as with its commercialization of hemochromotosis. Towards that
end, the company spends an amount equal to approximately 9%
or 10% of sales on research and development annually. In
addition, it has a history of making successful acquisitions of
companies with promising technologies, a recent example of which
is Pasteur Sanofi Diagnostics ("PSD") purchased in 1999;
PSD gave Bio-Rad a position in new markets, such as blood
virus, infectious disease, and food safety.
Bio-Rad enjoys significant recurrent revenue, which adds
stability to its cash flows. Because they require standardized
materials for their research, Bio-Rad's Life Science
segment customers are reluctant to switch from one supplier to another.
Similarly, its Clinical Diagnostics segment customers rely on Bio-Rad
for the supply of reagents and other consumables. These factors,
combined with the company's position in the provision of quality
control systems, contribute to its high level of recurrent revenue,
estimated at about 70% of the total.
Prospects for continued strong performance appear bright. The two
halves of Bio-Rad's business complement each other well,
as successful research (supported by its Life Science Group) ultimately
leads to new diagnostic tests (supported by its Clinical Diagnostics Group).
Further, within the Life Sciences Group, the company is focusing
on potentially high-growth areas such as proteomics, genomics,
biopharmaceutical production and food safety. Likewise, in
its Clinical Diagnostics Group, it is focusing on quality control
systems, informatics and genetic disorders. Their acquisition
of Pasteur Sanofi has gained them a position in infectious disease testing.
The growth rates for these markets are relatively high and their prospects
Bio-Rad has used its free cash flow to reduce debt. In 1999,
the company entered into a $200.0 million senior credit
agreement, due 2004, to finance the acquisition of Pasteur
Sanofi. The credit agreement consisted of a term loan and a revolving
credit, each in the amount of $100.0 million.
Bio-Rad has since repaid the term loan in full. Outstandings
under the revolving credit are zero and are likely to remain low over
the rating horizon. In addition, in 2000, Bio-Rad
sold $150.0 million in senior subordinated notes.
During 2002, the company repurchased in the open market $43.9
million (par value) of these notes. The company's efforts
to reduce debt have improved its credit metrics considerably.
Constraining the ratings is the possibility that Bio-Rad may make
a significant acquisition, funded at least partially with debt.
Bio-Rad has a history of making strategic acquisition, the
most significant of which was their purchase of SPD for $210 million
in 1999. They have, however, demonstrated their ability
to integrate such acquisitions successfully, which somewhat mitigates
A further limiting factor is the intense competition that Bio-Rad
faces in the markets it serves. Many of its competitors,
particularly in the Clinical Diagnostics segment, are larger and
better capitalized than is Bio-Rad. Given the composition
of the company's revenues, inroads by a competitor into a
major sub-segment of its business could have a material impact
on its financial performance.
The ratings are also constrained by Bio-Rad's exposure to
foreign currency risk. In the twelve months ended March 31,
2003, Bio-Rad generated 60% of its revenues offshore.
Its revenues, and to a significantly lesser extent, its profits
are therefore exposed to fluctuations arising from currency movements.
In 2Q2003, for example, Life Science revenues grew 13.5%
yoy but only 4% on a currency neutral basis. Likewise,
over the same period, Clinical Diagnostics revenues grew 14%
yoy but only about 5% on a currency neutral basis.
Also incorporated in the ratings is the company's reliance on government
funding. Many of the company's customers, particularly
in the Life Science segment, are dependent on government grants
and research contracts for their funding. A significant decrease
in government spending could affect the company's Life Science business
negatively, as a significant portion of that segment's revenues
are derived from government funding.
Bio-Rad, based in Hercules, California, manufactures
and supplies the life science research, healthcare and other markets
with a broad range of products and systems used to separate complex chemical
and biological materials and to identify, analyze and purify their
components. Revenues in 2002 were approximately $893 million.
Andris G. Kalnins
Senior Vice President
Corporate Finance Group
Moody's Investors Service
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
No Related Data.
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