NEW YORK – Fitch Ratings has affirmed Bio-Rad Laboratories Inc.’s (Bio-Rad) ratings, including the ‘BBB-‘ Issuer Default Rating (IDR). The ratings apply to approximately $738 million in debt outstanding at Sept. 30, 2011. The Rating Outlook is Stable. A full ratings list follows at the end of this press release.

Bio-Rad’s ‘BBB-‘ IDR reflects the following credit considerations:

–The company’s operating profile and cash generation are supported by a high proportion of recurring revenue sales.

–Economic headwinds will continue to impact operating performance, particularly in the company’s life sciences segment.

–Bio-Rad had solid liquidity and financial flexibility.

–Fitch expects the company to prioritize use of cash for acquisitions as opposed to debt reduction or shareholder friendly capital deployment.

–The primary credit concerns center on corporate governance risk (Bio-Rad is closely held by its founding family) and the potential for acquisition related event risk.

Operating Profile Supported By Recurring Revenue Sales:

Bio-Rad operates within sub-segments of the life science and clinical diagnostics markets, with revenue composed 35% of sales through the life science business and 65% through the clinical diagnostics business. While the market for the type of larger capital equipment sold through the life science segment slowed significantly in 2009, it has rebounded somewhat over the past 18 months.

During the global slowdown in life science segment sales, the relatively greater resilience of market demand in the clinical diagnostics segment supported the company’s sales growth. Bio-Rad’s clinical diagnostics segment sales are almost entirely comprised of consumable products, which are relatively inexpensive and are often critical inputs to diagnostic procedures conducted in hospital and laboratory settings.

The company generates about 70% of its consolidated sales through these types of consumable products and a large percentage of that 70% represent sales contracted through the placement of Bio-Rad’s capital equipment with the end-user. This supports an expectation of relatively stable sales volumes and reliable cash generation.

Economic Headwinds Continue to Impact Operations:

The life sciences segment proved to be relatively more sensitive to the global economic slowdown than the clinical diagnostics segment. Although the industry is less cyclical than certain industries, some degree of cyclicality is driven by end market performance and funding of government grants and research contracts.

Fitch expects low single digit growth for the life sciences sector over the next several years. Despite persistently weak global economic conditions there are some factors supporting the expectation of positive growth for the industry. These include increasing demand for health-care world wide because of favorable demographics and developing countries’ demand for more sophisticated healthcare. There is also growing demand for environmental and consumer safety applications, such as food safety.

Relative to the life sciences segment, Fitch expects growth that is slightly more robust – in the mid-single digit range – in the clinical diagnostics segment over the next several years. Although still influential, government fiscal pressures and weak research funding trends affect this segment somewhat less. Rather, growth is more dependent on trends in consumer’s use of healthcare services.

Recently Improved Profitability:

In 2010, Bio-Rad reported 8% currency neutral sales growth and 4.8% growth excluding the contribution of a clinical diagnostics segment acquisition. EBITDA grew 16% – to $403 million from $345 million in 2009, double the rate of sales growth, mostly as the result of improvement in the gross margin; the gross margin improved by 200 bps to 56.6% in 2010 from 54.6% in 2008.

The recent gross margin expansion is attributable to several factors, including a redesign of manufacturing processes in the life sciences segment to reduce overhead costs, moving some manufacturing to Singapore, slower growth in relatively low margin cash instrument sales and a reduction of royalty payments in the clinical diagnostic segment due to patent expirations.

At least a portion of the improvement in gross margin is based on sustainable factors, most importantly shifting manufacturing to lower cost international locations.

Gross margin improvement has mostly driven expansion of operating margins, the EBITDA margin expanded by 300 bps to 20.9% in 2010 from 17.9% in 2008, although decreases in SG&A and R&D spending also helped. Fitch does forecast some gross margin and operating margin compression in its operating outlook for Bio-Rad in 2012-2013, although not back to the 2008 levels. There is some indication that competitive pricing pressures are mounting which will weight on gross margins. Fitch also expects that SG&A expense will increase due to an ERP overhaul project the company began in 2011.

Solid Liquidity Profile:

At Sept 30, 2011 Bio-Rad’s solid liquidity is supported by cash and short-term investments of about $910 million and $183 million in availability on the company’s $200 million revolving credit facility, reduced by $16.8 million LOCs outstanding. Debt maturities are nominal through 2015, aside from the undrawn revolver, which matures in June 2014.

Bio-Rad’s liquidity is further supported by its strong level of free cash flow (FCF; cash from operations less dividends and capital expenditures) generation. The company generated $182 million of FCF in the LTM period ended Sept. 30, 2011, representing a solid 8.9% FCF margin. Annual FCF has moderated somewhat since 2009, which Fitch had anticipated, due to the combined effect of higher cash taxes, capital expenditure and a reduced benefit to working capital from inventory shifts. Cash taxes increased due to a change in geographic sales and profit mix as business has shifted to higher tax jurisdictions in the wake of a slow Euro economy. Going forward, Fitch projects annual FCF generation maintained around $170 million annually.

Bio-Rad’s bank facility terms include financial maintenance covenants that require the company to maintain leverage below 3.5 times (x) and interest coverage above 4.0x. Bio-Rad has ample operating cushion relative to the covenant levels. As of Sept. 30, 2011 total debt-to-EBITDA equaled 1.8x and EBITDA-to-interest expense equaled 6.7x.

Event Risk Related To Potential For Leveraging Acquisitions:

Bio-Rad operates in highly competitive industries in which there has been a good deal of consolidation in recent years. However, Bio-Rad’s acquisition history has been measured. Aside from a $370 million transaction in 2007, acquisitions over the past decade have been comprised of smaller tuck-ins which complement Bio-Rad’s existing technologies and R&D program. However, many of its competitors have a history of consummating larger, leveraging acquisitions. Fitch believes the company could undertake a leveraging transaction. A $300 million notes issuance in 2009 has provided Bio-Rad with some dry-powder for acquisitions. Since the note issuance, the company has completed two cash funded acquisitions.

With respect to potential cash deployment for share holder friendly actions, including dividends and share repurchases, the ‘BBB-‘ IDR reflects Fitch’s expectation that Bio-Rad will continue to prioritize use of cash to fund strategic acquisitions. The company is closely held by its founding family, which currently controls about 30% of the company’s equity and 68% of its voting stock. The owners do not appear to have a history of heavily extracting corporate resources seeing as the company has not historically funded a dividend or share repurchases.

Guidelines for Further Rating Actions:

Maintenance of a ‘BBB-‘ IDR contemplates debt-to-EBITDA maintained between 2.0x and 2.5x in the near to medium term. Leverage temporarily outside of the target range to fund acquisitions could be tolerated within the current rating category. Maintenance of the IDR post a leveraging acquisition would be based upon Fitch’s assessment of Bio-Rad’s willingness and ability to reduce leverage to within the 2.0x-2.5x range 12-18 months following the acquisition.

An upgrade of the ratings would be precipitated Fitch believing that the company is committed to maintaining debt-to-EBITDA closer to 1.5x. This is unlikely, given the company’s stated growth through acquisition strategy.

Debt Issue Ratings:

Fitch has affirmed the following ratings on Bio-Rad:

–IDR at ‘BBB-‘

–Senior Secured Bank Facility at ‘BBB-‘

–Senior Unsecured Notes at ‘BBB-‘

–Senior Subordinated Notes at ‘BB+’

The Rating Outlook is Stable.

Fitch rates the senior secured debt and the senior unsecured debt on par with the ‘BBB-‘ IDR. Senior secured debt consists solely of the bank facility, which is comprised of a $200 million revolver; the bank debt collateral consists of equity security. A one-notch distinction from the IDR for the senior subordinated debt class rating of ‘BB+’ reflects a low proportion of secured debt in the capital structure.