Fitch Upgrades Sanmina's IDR to 'BB'; Outlook Stable

CHICAGO--()--Fitch Ratings has upgraded the Issuer Default Rating (IDR) for Sanmina Corporation (Sanmina) to 'BB' from 'BB-'. The Rating Outlook is Stable.

Fitch has also assigned a 'BB+' rating to Sanmina's senior secured notes due 2019. Sanmina's $375 million of senior secured 4.375% notes due June 2019 are legally subordinated to the company's first-lien senior secured revolving credit facility (RCF), resulting in the secured notes being rated one notch lower than the RCF rating of 'BBB-'.

The ratings affect total debt of $675 million. A full list of rating actions follows at the end of this release.

The ratings and Outlook reflect Fitch's expectations for improving operating performance through the intermediate term. Fitch anticipates the resumption of positive revenue growth, continued profit margin expansion, and solid free cash flow (FCF) following a challenging fiscal 2012 and 2013.

Fitch expects increased penetration in emerging industrial, defense, and auto end-markets and intensified investments in the Components, Products, and Service segment (CPS) will drive solid mid-cycle revenue growth over the longer-term. This will offset inherent volatility in legacy communications end markets that still represent a significant share of revenues.

For fiscal 2014, Fitch expects new product ramps and an improving macroeconomic environment will drive low- to mid-single digit revenue growth. The top line is recovering from supply constraints related to the Thai floods in fiscal 2012 and weak end demand in fiscal 2013.

Fitch believes an increased mix of faster growing and higher gross margin CPS sales will drive mid-cycle profitability higher, although operating EBITDA margins will continue to range in the mid-single digits, consistent with the operating profile of the EMS industry.

In the near term, Fitch expects operating EBITDA margins will exceed 5%, versus recent lows near mid-4%, due to higher utilization rates from the resumption of revenue growth and lower revenue break even profitability level from recent restructuring.

Fitch expects annual FCF of $100 million to 200 million, driven by higher profitability. Longer-term visibility continues to be limited due to the volatility and project-oriented nature of legacy communications businesses. However, Fitch believes Sanmina will continue to generate free cash flow from lower working capital requirements during periods of softer demand.

Sanmina will likely use FCF for opportunistic share repurchases and relatively modest-sized acquisitions, targeting new capabilities or customers. Fitch believes debt levels have stabilized, following the use of free cash flow over the past several years to meaningfully reduce debt associated with historical acquisitions.

Sanmina's credit metrics should continue to remain strong for the rating, with total debt to operating EBITDA near or below 2 times (x) and FCF to total debt of more than 20% through the intermediate term. This compares to Fitch estimates of 2.2x and 36%, respectively, for the LTM ended June 28, 2014.

Ratings Drivers

Rating strengths include Sanmina's:

--Favorable industry trends toward increased outsourcing in underpenetrated markets for product design consultation, component sourcing, manufacturing, fulfillment logistics, and repair/reverse logistics.

--Significant capabilities in low volume, high mix design and assembly, positioning the company to gain share in non-traditional end markets.

--Consistent annual FCF from profitability expansion during positive demand environments and cash generation from lower working capital requirements in a downturn.

Ratings concerns include:

--Low mid-cycle profit margins associated with the electronics manufacturing services model, resulting in minimal room for execution missteps.

--Ongoing volatility associated with roughly 45% of revenues coming from more project oriented legacy networking and communications end markets.

--Customer concentration with Sanmina's top 10 customers representing roughly 50% of revenue.

Rating Sensitivities:

Positive: Future developments that may, individually or collectively, lead to positive rating action include:

--Higher focus revenue growth translating into mid-cycle FCF approaching $200 million or FCF approaching 3%; or

--Mid-cycle operating EBITDA structurally above 5% resulting in leverage remaining near or below 2x

Positive rating action would result in the compression of notching for the secured debt ratings.

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

--Profitability pressures (operating EBITDA approaching 4%) or debt financed acquisitions of manufacturing assets in order to win new business resulting in operating EBITDA in total Debt to operating EBITDA sustained above 3x; or

--Volatility in legacy markets resulting in mid-cycle FCF below $100 million

Sanmina's liquidity was solid as of June 28, 2014, and supported by:

--$416 million of cash and short-term investments pro forma for the redemption of $136 million of senior unsecured notes on July 7, 2014;

--$277 million available net of $22.7 million in letters of credit under a $300 million senior secured asset-backed credit facility due March 2017.

Fitch's expectations for $100 million to $200 million of annual free cash flow through the intermediate-term also supports liquidity.

Pro forma total debt was $515 million as of July 7, 2014 and consisted of:

--$40 million loan secured by the company's corporate campus due July 2015;

--$100 million of senior unsecured notes due May 2019, pro forma for redemption of $136 million on July 7, 2014; and

--$375 million of senior secured 4.375% notes due June 2019.

Fitch has upgraded the following ratings for Sanmina:

--Long-term IDR to 'BB' from 'BB-';

--Senior secured credit facility rating to 'BBB-' from 'BB+';

--Senior unsecured notes rating to 'BB' from 'BB-';

The Rating Outlook is Stable.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research

--'Corporate Rating Methodology' (May 28, 2014).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=847094

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Contacts

Fitch Ratings
Primary Analyst
Jason Pompeii, +1 312-368-3210
Senior Director
Fitch Ratings, Inc.
70 W. Madison St.
Chicago, IL 60602
or
Secondary Analyst
John M. Witt, CFA, +1 212-908-0673
Senior Director
or
Committee Chairperson
Megan Neuburger, +1 212-908-0501
Senior Director
or
Media Relations:
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Jason Pompeii, +1 312-368-3210
Senior Director
Fitch Ratings, Inc.
70 W. Madison St.
Chicago, IL 60602
or
Secondary Analyst
John M. Witt, CFA, +1 212-908-0673
Senior Director
or
Committee Chairperson
Megan Neuburger, +1 212-908-0501
Senior Director
or
Media Relations:
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com