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February 21, 2008 |
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SANMINA-SCI: Fitch Holds Issuer Default Rating at B+ Fitch has affirmed these ratings for Sanmina-SCI Corporation: -- Issuer Default Rating 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 US$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 these considerations: -- Sanmina has significantly improved its working capital efficiency, lowering cash conversion cycle 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 by approximately US$470 million, enabling the company to reduce long term debt by US$200 million to US$1.5 billion as of calendar 2007. Fitch estimates Sanmina's leverage at 5.5 times as of Dec 2007 compared to 4.5x at FYE 2006. Fitch estimates adjusted leverage 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 US$70 million in restructuring costs currently anticipated for the remainder of fiscal 2008. Changes to the rating could occur under these 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 US$941 million in cash plus a US$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 US$400 million, for additional liquidity purposes. Fitch expects free cash flow in fiscal 2008 to be break-even to slightly positive, positively impacted by reduced working capital requirements. Total debt as of Dec. 31, 2007 was US$1.5 billion and consisted of: i) US$180 million in senior unsecured floating rate notes due June 2010; ii) US$300 million in senior unsecured floating rate notes due June 2014; iii) US$400 million in senior subordinated 6.75% notes due Feb 2013; and iv) US$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 US$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. Headquartered in San Jose, California, Sanmina-SCI Corporation (NasdaqGS: SANM) -- http://www.sanmina-sci.com/ -- is an Electronics Manufacturing Services (EMS) provider focused on delivering complete end-to-end manufacturing solutions to technology companies around the world. Service offerings include product design and engineering, test solutions, manufacturing, logistics and post-manufacturing repair/warranty services. The company has locations in Brazil, China, Ireland, Finland, Malaysia, Mexico and Singapore, among others. |
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