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Rating Action:

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

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 appear bright.

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 the risk.

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.

New York
Andris G. Kalnins
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Kathryn Kerle
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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