Fitch Upgrades Sanmina-SCI's IDR to 'B+'; Outlook Stable

--Sanmina has reduced debt by $190 million since March 2009 to $1.3 billion, a 13% reduction. While operating results bottomed during 2009 reflecting the economic downturn, quarterly results over the past two quarters have produced significant top-line growth and solid EBITDA margin expansion. Specifically, revenue in fiscal 2Q'10 (ended April 3, 2010) was up 28% over the prior year period while EBITDA margins of 5% are higher than any period over the past five-plus years. Principally as a result of debt reduction, leverage has declined to 5.3 times (x) from 6.2x in the prior year period. However, when measured using fiscal 2Q'10 EBITDA run rate, leverage is closer to 4.1x.

--Sanmina has seemingly successfully refocused its corporate strategy over the past several years in an effort to differentiate itself from larger competitors and target more niche market opportunities. The company has a historical strength in complex, low-volume, high-mix manufacturing operations and has right-sized operations and rationalized the cost basis of its manufacturing base to target these opportunities. Fitch believes that the company could produce EBITDA margins in excess of its peers with this strategy as recent results have demonstrated.

The ratings and Outlook reflect Fitch's estimates and considerations as follows:

--Fitch expects revenue growth in the mid-single digits in fiscal 2011 (ending September) and beyond following approximately 15% revenue growth in fiscal 2010. Revenue growth expectations reflect the continued secular trend towards increased outsourcing of manufacturing partially mitigated by macro economic weakness. Sanmina's revenue declined nearly 30% in fiscal 2009 over the prior year period, and while Fitch believes that decline was exacerbated by market share losses and strategic refocusing, the above average volatility in its end-market demand negatively impacts the ratings. Of note, Sanmina's revenue decline in the latest 12 month (LTM) period ending March 2010 was materially less than its peers for the first time in years, which Fitch believes is further evidence of stabilization in its business.

--Fitch expects EBITDA margins to be in the range of 4% to 5% going forward. While recent results have demonstrated upside to this range, the company's historically volatile and below peer average margin performance suggests the company needs to establish a track record of achieving and maintaining higher profitability before being reflected in the ratings.

--Fitch expects free cash flow to be modestly positive beyond fiscal 2010 although susceptible to swings in working capital requirements. Funds from operations are expected to be approximately 2.5% of revenue with capital expenditures equal to nearly 1.5% of revenue leaving minimal cash flow to absorb working capital outflows.

--Fitch expects leverage (total debt to operating EBITDA) to decline to 4.8x by the end of fiscal 2010 versus 8.5x at the end of fiscal 2009. Interest coverage is expected to increase to 2.5x from 1.4x over the same periods. Funds from operations less capital spending and dividends is expected to represent 5.2% of total debt at the end of fiscal 2010 which is consistent with the median for 'B' rated peers.

--Fitch expects Sanmina to use existing cash to fund organic growth, working capital needs and potentially small acquisitions. The company has undertaken small share repurchase programs in recent years which are another potential use of excess cash but Fitch would not expect this to contribute to additional debt. Continued modest debt reduction is another potential use of cash although the company has no near-term maturities.

Rating strengths include:

--Sanmina's position as one of the larger global electronics manufacturing services (EMS) providers with higher than industry average exposure to complex manufacturing services which tend to be more stable and less prone to competitive threats;

--Countercyclical nature of working capital cash flows inherent in the EMS industry which tend to provide a significant source of liquidity during business downturns; and

--Fitch believes that the long-term opportunity for revenue growth in non-traditional markets for Sanmina including industrial, defense and medical supplies, should enable the company to grow revenue in excess of global GDP and continue to improve EBITDA margins.

Rating 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, Sanmina has downsized its business considerably over the past several years through restructuring and divestitures to a point where the remaining business is significantly smaller than leading tier one service providers in a market where scale is of significant importance. However, Sanmina's focus on the low-volume, high-mix market segment at least partially mitigates its disadvantage in scale.

Liquidity as of April 3, 2010 was solid with $673 million in cash, $62 million of availability on a $135 million senior secured revolving credit facility which expires November 2013, and $215 million available under an off-balance sheet accounts receivable sales facility which expires June 2010. Sanmina increased the size of its revolving credit facility in April to $235 million. The reduced availability under the revolver at the end of the most recent quarter reflects the borrowing base calculation rather than borrowings under the facility. The increase in facility size is also expected to increase the borrowing base calculation.

Total debt as of April 3, 2010 is $1.3 billion and consists principally of $257 million of senior unsecured floating rate notes due June 2014; $400 million 6.75% senior subordinated notes due February 2013; and $600 million 8.125% senior subordinated notes due March 2016.

These rating actions reflect the application of Fitch's current criteria which are available at '[ www.fitchratings.com ]' and specifically include the following reports:

--'Corporate Rating Methodology', dated Nov. 24, 2009;

--'Liquidity Considerations for Corporate Issuers', dated June 12, 2007;

--'Cash Flow Measures in Corporate Analysis', dated Oct. 12, 2005.

--'Evaluating Corporate Governance', dated Dec. 12, 2007.

Additional information is available at '[ www.fitchratings.com ]'. The issuer did not participate in the rating process other than through the medium of its public disclosure.

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Fitch Upgrades Sanmina-SCI's IDR to 'B+'; Outlook Stable