Fitch Upgrades Sanmina's IDR to 'BB-'; Outlook Stable
NEW YORK -- July 16, 2013
Fitch Ratings has upgraded the Issuer Default Rating (IDR) for Sanmina
Corporation (Sanmina) to 'BB-' from 'B+'. Ratings for the senior secured bank
facility and senior unsecured notes have been affirmed at 'BB+' and 'BB-'
respectively. The Rating Outlook is Stable.
KEY RATING DRIVERS
The upgrade of the IDR to 'BB-' reflects the following:
Sanmina has significantly reduced debt over the past 15 months from $1.24
billion in December 2011 to $744 million as of March 2013. While the business
continues to experience headwinds, margin performance has been steady, cash
flow generation has been positive and management remains committed to
deleveraging. Debt to EBITDA has declined from 3.6x to 2.6x over the same
Total debt of $744 million is roughly equal to working capital at this point
which Fitch views as providing reasonable comfort to debt holders should
revenue continue to decline at the company. Sanmina has been successful in
generating cash from reduced working capital over the past several years and
using the proceeds to reduce debt, in lieu of any material share repurchases.
Fitch believes that in the case of continued business declines, the company
would likely further reduce debt to maintain what is now a reasonably
conservative capital structure. Expectations are for continued volatility in
the business but for Sanmina to benefit from renewed growth in its key market
The ratings and Stable Outlook reflect the following considerations:
--Fitch believes leading EMS providers, such as Sanmina, are strategic to the
business operations and strategy of their customers given their role in
product design consultation, component sourcing, manufacturing, fulfillment
logistics, and repair/reverse logistics.
--Fitch believes Sanmina's service portfolio and cost basis is well suited for
certain markets but the company has trailed its larger competitors in overall
revenue growth over the past several years. Much of that relative
underperformance can be attributed to high-volume, low-mix business that is
outside of Sanmina's core focus. A key consideration going forward is whether
Sanmina can grow consistently and profitably in the markets for which it is
well positioned and maintain its focus on those markets over the long-run.
Rating strengths include:
--Fitch's belief that Sanmina's focus on complex, low-volume manufacturing
services, its expertise in the components space and other vertical integration
capabilities should enable the company to compete effectively in certain
markets and generate a reasonable return on invested capital;
--Sanmina's exposure and potential growth in non-traditional market segments
such as defense, industrial and medical could provide greater diversification
to the business over time and reduce historically high revenue volatility;
--A reasonably conservative balance sheet with expectations for further
deleveraging and no debt financed share repurchases or acquisitions; and
--Sanmina is well diversified geographically and in its end-markets while it
also remains one of the largest global EMS providers in the industry.
Ratings concerns include:
--An intensely competitive environment which pressures profitability across
--The company's challenged performance at various times over the past
five-plus years which has led to weaker than expected margin levels in an
industry with minimal room for operational shortfalls;
--A high degree of vertically integrated operations (components represent 20%
of revenue) which, while typically a driver of higher margins in growth
periods, presents additional challenges for management execution and higher
--Modest segment concentration with roughly 48% of revenue coming from the
highly cyclical networking and communications segment;
--A highly working capital intensive business that may be a drain on liquidity
in periods of growth, although it tends to provide some measure of liquidity
during business downturns.
--Customer concentration risk with Sanmina's top 10 customers representing
roughly 50% of revenue.
As of March 31, 2013, liquidity was solid with $412 million in cash and $177
million available under a $300 million senior secured asset backed lending
facility expiring March 2017. Sanmina also has $184 million of short-term
borrowing facilities at various foreign subsidiaries, under which $59.9
million was outstanding. This includes a $100 million unsecured working
capital loan facility at one of the company's Chinese subsidiaries. These
facilities expire at various dates through the second quarter of 2015.
As of March 31, 2013, total debt outstanding was $744 million consisting
principally of the following:
--$100 million outstanding under the company's $300 million senior secured
asset backed lending facility expiring March 2017;
--$40 million loan secured by the company's corporate campus;
--$500 million of 7% senior unsecured notes due May 2019; and
--$60 million outstanding under various foreign subsidiaries' short-term
Positive: Future developments that may, individually or collectively, lead to
positive rating action include:
--Absent a complete elimination of debt, positive rating action is not likely
in the foreseeable future.
Negative: Future developments that may, individually or collectively, lead to
negative rating action include:
--Leverage in excess of roughly 3x, or debt materially in excess of net
working capital; or
--Use of cash from reduced working capital during periods of revenue declines
for shareholder friendly actions or acquisitions.
Fitch has upgraded the following ratings for Sanmina:
--IDR to 'BB-' from 'B+'.
Fitch has affirmed the following ratings for Sanmina:
--$300 million senior secured asset backed lending facility expiring March
2017 at 'BB+'; and
--$500 million 7% senior unsecured notes due May 2019 at 'BB-'.
The recovery ratings for the senior secured and senior unsecured debt are no
longer applicable following the upgrade of the IDR.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Rating Technology Companies' (Aug. 9, 2012);
--'Evaluating Corporate Governance' (Dec. 12, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Rating Technology Companies
Evaluating Corporate Governance
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Jason Paraschac, CFA
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
Jamie Rizzo, CFA
Brian Bertsch, +1-212-908-0549 (New York)
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