2008-01-31 17:45:51 -
- Fitch has affirmed the following ratings for Sanmina-SCI Corporation (Sanmina) (Nasdaq: SANM):
--Issuer Default Rating (IDR) at 'B+';
--Senior secured credit facility at 'BB+/RR1'.
--Senior unsecured notes at 'BB+/RR1';
--Senior subordinated debt at 'B/RR5'.
The Outlook is Negative. Fitch's action affects approximately $1.5 billion in debt securities.
The Negative Outlook reflects continued uncertainty
surrounding Sanmina's ability to satisfactorily exit the Personal Computer business via a sale or, conversely, potential restructuring costs associated with exiting this business. In addition, revenue for Sanmina's core EMS business continues to decline, down 7.7% in fiscal 1Q08 (end December 2007) versus the prior year period due to weakness in communications equipment and Enterprise PC segments which together represent approximately 60% of total core EMS revenue.
The affirmation reflects the following considerations:
--Sanmina has significantly improved its working capital efficiency, lowering cash conversion cycle (CCC) days to 25 from a recent high of 45 in fiscal 1Q07 (end December 2007);
--Sanmina's improved CCC days, in conjunction with lower working capital requirements due to a 5% decline in revenue, positively impacted free cash flow in fiscal 2007 (end September 2007) by approximately $470 million, enabling the company to reduce long term debt by $200 million to $1.5 billion as of calendar 2007. Fitch estimates Sanmina's leverage (total debt to total operating EBITDA) at 5.5 times (x) as of Dec 2007 compared to 4.5x at FYE 2006. Fitch estimates adjusted leverage (total adjusted debt to total operating EBITDAR) at 6.7x as of Dec 2007;
--Fitch believes Sanmina's planned exit from the Personal Computer business should enable the company to focus on more profitable segments of its core EMS business and potentially lead to more consistent positive free cash flow;
--Fitch believes that the long-term opportunity for revenue growth in non-traditional markets for Sanmina including industrial, defense and medical supplies, should partially mitigate potential further revenue declines in the Enterprise PC and Communications markets;
--Fitch believes that Sanmina should achieve greater stabilization in profitability going forward as its reorganization actions have reduced excess manufacturing capacity and shifted an increased percentage of operations to low cost regions making the company more competitive with its peers.
Ratings concerns include Fitch's expectation that the EMS market will remain highly competitive with continued pressure on profitability across all North American tier one competitors in addition to concerns over Sanmina's ability to stabilize its revenue base following several quarters of negative growth in its core EMS business. While recent and on-going restructuring initiatives have reduced excess capacity and transferred manufacturing assets to lower cost regions, the above factors could drive the need for additional restructuring initiatives beyond the approximately $70 million in restructuring costs currently anticipated for the remainder of fiscal 2008.
Changes to the rating could occur under the following scenarios:
--A resolution to Sanmina's effort to divest its Personal Computer business and clarification of the financial impact, if any, on the company of exiting this business;
--Continued improvement in profitability and use of free cash flow to further reduce debt could positively impact the ratings.
As of Dec. 31, 2007, liquidity was solid and consisted of $941 million in cash plus a $500 million senior secured credit facility, expiring December 2008, which was fully available to the company. In addition, Sanmina utilizes various off-balance sheet accounts receivable sales facilities, totaling approximately $400 million, for additional liquidity purposes. Fitch expects free cash flow in fiscal 2008 (ending September 2008) to be break-even to slightly positive, positively impacted by reduced working capital requirements.
Total debt as of Dec. 31, 2007 was $1.5 billion and consisted of: i) $180 million in senior unsecured floating rate notes due June 2010; ii) $300 million in senior unsecured floating rate notes due June 2014; iii) $400 million in senior subordinated 6.75% notes due Feb 2013; and iv) $600 million in senior subordinated 8.125% notes due March 2016.
The Recovery Ratings and notching reflect Fitch's recovery expectations under a distressed scenario, as well as Fitch's expectation that the enterprise value of Sanmina, and hence recovery rates for its creditors, will be maximized in liquidation rather than in a going concern enterprise value scenario. In estimating Sanmina's liquidation value under a distressed scenario, Fitch applied advanced rates of 80%, 20%, and 10% to Sanmina's current balance of accounts receivable, inventory, and property, plant and equipment, respectively. That leads to a distressed enterprise value estimate of approximately $1.3 billion, providing the basis for a waterfall analysis to determine recovery ratings. The current 'RR1' recovery rating for Sanmina's secured credit facility and unsecured notes reflects Fitch's belief that 100% recovery is realistic. As is standard with Fitch's recovery analysis, the revolver is fully drawn and cash balances fully depleted to reflect a stress event. The current 'RR5' Recovery Rating for the senior subordinated debt reflects Fitch's estimate that a recovery of only 10%-30% would be achievable.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
Fitch Ratings, New York
Jason Paraschac, +1-212-908-0746
Nick P. Nilarp, CFA, +1-212-908-0649
Media Relations:
Brian Bertsch, +1-212-908-0549
