Fitch Ratings Affirms Sanmina-SCI at 'B+'; Outlook Stable.

NEW YORK -- Fitch Ratings has affirmed Sanmina-SCI Corporation (Sanmina) as follows:

-- Subordinated debt 'B+';

-- First-lien senior secured bank credit facility 'BB+';

-- Second-lien secured notes 'BB'.

The Rating Outlook is Stable. Approximately $1.9 billion of debt is affected by Fitch's action.

The ratings reflect Sanmina's relatively high debt levels, less than optimal capacity utilization rates, and customer concentration. Additionally, the contract-pricing environment remains pressured, particularly for traditional electronics manufacturing services (EMS), which continue to represent the majority of industry revenues despite efforts to expand service offerings.

Positively, the ratings are supported by strengthened operating performance, improving credit protection measures, and consistent operating cash flow and free cash flow. Also considered is Sanmina's top-tier position within the EMS industry with significant scope and global footprint of operations, along with long-term trends favoring continued manufacturing outsourcing. Despite Fitch's expectations of lowered industry demand in 2005, Sanmina's vertical integration model is expected to drive some, albeit limited, operating margin expansion, and Fitch expects the company will continue to generate modest levels of quarterly free cash flow.

Revenue trends for the fourth quarter ended Oct. 2, 2004 continued to be positive and were highlighted by double-digit growth in the company's largest end markets, communications infrastructure, and personal and business computing, which represent almost two-thirds of total revenues. While demand strength existed in all of the company's segments except multimedia, primary revenue drivers included stronger-than-expected spending by telecommunications carriers and networking equipment-makers. Demand is expected to be modest for 2005, and capacity utilization for the tier-one EMS providers may have stalled at current levels, potentially resulting in more industry restructuring, albeit at much lower levels than the previous three years.

Sanmina continues to win new customer business and, in the process, reduce its significant customer and end market concentration. IBM (rated 'AA-', Rating Outlook Stable by Fitch) represents almost 30% of Sanmina's total revenue. IBM recently divested its desktop and notebook business to Lenovo Group Limited, with an expected closing date in the second calendar quarter of 2005. While the transaction is not expected to adversely affect Sanmina through the remaining life of the contract with IBM, which expires in 2006, the long-term impact of this transaction is less clear. The impact of Flextronics' (the world's largest EMS provider, senior subordinated debt rated 'BB+', Stable Outlook) transaction with Nortel, a key customer for Sanmina, is unknown, but it is expected that Sanmina will lose some of its Nortel business to Flextronics.

Although improved in each of the past seven quarters, Sanmina's operating margins remain relatively weak in comparison with its peer group and historical levels. Improvements have been driven by higher volumes, benefits from past restructuring programs, and operating leverage from being vertically integrated. Operating margins in fiscal 2004 were 2.0%, up from 1.3% in 2003 and 2002, but below long-term target levels in the mid-single digits. As a result, credit protection measures have improved over the past year, despite flat debt levels from one year ago. Total leverage was 4.4 times(x) for 2004, versus 5.4x in 2003, and 6.2x in 2002, and interest coverage increased to approximately 4.0x in 2004, compared with 3.4x in 2003.

Liquidity was sufficient as of Oct. 2, 2004 and consisted primarily of unrestricted cash of approximately $1.1 billion. On Oct. 26, 2004, Sanmina augmented its liquidity by entering into a $500 million first-lien senior secured revolving credit facility expiring October 2007, $250 million of which is currently available. The Company will have access to the full $500 million revolving credit facility if, by the end of January 2005, Sanmina raises a specified amount (currently $300 million) of additional debt or equity capital and uses or sets aside these proceeds to repay approximately $630 million accreted value of zero-coupon convertible subordinated debentures that will be putable to the Company in Sept. 2005; otherwise, the credit facility will be reduced to $100 million. Total debt was $1.9 billion as of Oct. 2, 2004 and consisted of the following:

-- Approximately $608 million accreted value of zero-coupon convertible subordinated debentures due 2020 but putable in September 2005;

-- Approximately $520 million 3% convertible subordinated notes due 2007;

-- $750 million 10.375% senior secured notes due January 2010.