Fitch Affirms Sanmina at 'BB '; Withdraws Ratings
--Long-Term Issuer Default Rating (IDR) at 'BB+':
--Senior Secured Revolver Credit Facility (RCF) at 'BBB-/RR1';
--Senior Secured Notes at 'BB+/RR3'.
Fitch has withdrawn Sanmina's ratings for commercial reasons. Fitch reserves the right in its sole discretion to withdraw or maintain any rating at any time for any reason it deems sufficient.
KEY RATING DRIVERS
Fitch expects steady operating performance through the intermediate term, driven by increasing exposure to faster-growing emerging end markets, including industrial, defense and automotive. Profit margins and annual free cash flow (FCF) should expand with a higher mix of emerging end-market sales, which are characterized by higher profit margins and longer product lifecycles.
Strength in Sanmina's industrial, medical and defense end markets (roughly 40% of total sales) should continue, with design wins adding to growing electronics content. Fitch expects communications and networks end markets (35%-40% of sales) will remain uneven given cyclical wireless carrier spending. Embedded computing and storage markets should benefit from increasing electronic content in the automotive and other non-technology sectors and data center growth.
Increased penetration of emerging industrial, defense and automotive end markets and investments in Components, Products and Service segment (CPS) should drive positive low-single-digit mid-cycle revenue growth over the longer term. In addition, Fitch expects the increased mix of faster growing and higher gross margin CPS sales will drive mid-cycle profitability higher, although operating EBITDA margins will remain in the mid-single digits, consistent with the operating profile of the electronics manufacturing services (EMS) industry.
Fitch estimates operating EBITDA margin was 5.3% for the latest 12 months (LTM) ended Jan. 2, 2016, versus 5.4% for the prior year, driven by negative year-over-year top-line growth. Fitch expects annual FCF of more than \\$200 million, although quarterly FCF will remain uneven, given higher the inventory levels that come with larger-scale new program ramps.
Fitch expects Sanmina will use FCF for share repurchases and small technology-focused acquisitions, targeting new capabilities and customer relationships. Fitch expects future acquisitions to be similar in size and funded with FCF. Beyond acquisitions, \\$175.2 million remains available for repurchase as of Jan. 2, 2016 under Sanmina's current share repurchase authorization.
Fitch expects Sanmina will maintain strong credit protection measures for the rating, including total leverage (total debt to operating EBITDA) below 2x and FCF-to-total debt of more than 20%. For the LTM ended Jan. 2, 2015, Fitch estimates total leverage was 1.6x and FCF-to-total debt was 24%, versus 1.4x and 36% in the comparable prior year period.
The ratings are supported by:
--Favorable industry trends toward increased outsourcing in underpenetrated markets for product design consultation, component sourcing, manufacturing, fulfillment, logistic and repair/reverse logistics.
--Significant capabilities in low-volume, high mix design and assembly, positioning Sanmina to gain share in non-traditional end markets.
--Consistent annual FCF from profitability expansion during positive demand environments and cash generation from lower inventory levels in a downturn.
Ratings concerns center on:
--Low mid-cycle profit margins associated with the EMS model, resulting in minimal room for execution missteps.
--Ongoing volatility associated with revenues in more project-oriented legacy networking and communications end markets, although this revenue contribution should continue to decline.
--Customer concentration with Sanmina's top 10 customers representing roughly half of revenues, in line with the EMS industry.
Fitch's key assumptions within our rating case for the issuer include:
--Low-single-digit revenue growth for the fiscal year ending Sept. 30, 2016 and longer term, driven by increased penetration of emerging markets.
--Operating EBITDA margin in the 5%-5.5% range, driven by an increasing mix of higher margin emerging markets sales.
--Consistent inventory turns and capital spending, resulting in annual FCF of \\$100 million to \\$250 million.
--Limited incremental debt reduction through the forecast period and FCF used primarily for acquisitions and share repurchases, given sufficient cash levels.
Rating sensitivities are no longer relevant given today's rating withdrawal.
Sanmina's liquidity was solid as of Jan. 2, 2016, and supported by:
--\\$398 million of cash and short-term investments, roughly half of which is in the U.S.;
--\\$267 million available under a \\$375 million senior secured cash flow revolver due May 20, 2020.
Fitch's expectation for \\$100 million to \\$250 million of annual FCF also supports liquidity.
Total debt was \\$514 million as of Jan 2, 2016 and consisted of:
--\\$40 million loan secured by the company's corporate campus due December 2017;
--\\$375 million of senior secured 4.375% notes due June 2019;
--\\$12.5 million of non-interest bearing notes payable;
--\\$86 million of borrowings under the RCF.
Fitch has affirmed and withdrawn the following ratings:
--Long-Term IDR at 'BB+'';
--RCF at 'BBB-/RR1';
--Senior secured notes at 'BB+/RR3'.