Jabil Inc. (JBL) Q3 2013 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Jabil's Third Quarter Fiscal Year 2013 Earnings Conference Call. [Operator Instructions] I would now like to turn today's conference over to Beth Walters, Senior Vice President of Communications and Investor Relations. Please go ahead.

Thank you, Susan. Welcome to our third quarter of 2013 earnings call. Joining me today are CEO, Mark Mondello; and Chief Financial Officer, Forbes Alexander. This call is being recorded and will be posted for audio playback on the Jabil website at jabil.com in the Investor Relations section. Our third quarter press release, slides and webcast link are also available on the website. In these materials, you will find the financial information that we cover during this call. We ask that you follow our presentation with the slides on the website; and beginning with Slide 2, our forward-looking statement. During this conference call, we will be making forward-looking statements including those regarding the anticipated outlook for our business, our currently expected fourth quarter of fiscal 2013 net revenue and earnings results, our long-term outlook for our company, improvements in our operational efficiencies and financial performance and our pending completion of the Nypro acquisition. These statements are based on current expectations, forecasts and assumptions involving risks and uncertainties that could cause actual outcomes and results to differ materially. An extensive list to these risks and uncertainties are identified in our annual report on Form 10-K for the fiscal year ended August 31, 2012, on subsequent reports on Form 10-Q, Form 8-K and our other securities filings. Jabil disclaims any intention or obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. Today's call will begin with our second fiscal quarter results -- excuse me, our third fiscal quarter results and highlights and comments from Forbes Alexander as well as guidance on our fourth fiscal quarter of 2013. Mark Mondello will follow with our macro environment comments and some Jabil-specific comments about our performance. We'll then open it up for questions and calls from call attendees. I will now turn the call over to Forbes.

Thank you, Beth. Good afternoon, everyone. I'd ask you to please refer to Slide 3. Net revenue for the third quarter was approximately $4.5 billion, an increase of 5% on a year-over-year basis. GAAP operating income was $103.7 million, or 2.3% of revenue. This compares to $156.6 million of GAAP operating income and revenues of $4.3 billion or 3.7% for the same period in the prior year. GAAP diluted earnings per share for the quarter was $0.24. Please note that our GAAP operating results were negatively impacted during the quarter by $28 million of restructuring activities aimed at improving our structural costs and a $25 million noncash impairment charge associated with a note receivable and a commercial interest made in 2007. Core operating income, excluding the amortization of intangibles, stock-based compensation, restructuring and impairment charges, was $176.9 million, representing 4% of revenue. This compares to $190.3 million or 4.5% for the same period in the prior year. Core diluted earnings per share for the quarter was $0.56. If you now turn to Slide 4, I'll discuss our segment performance. In the third quarter, our Diversified Manufacturing Services segment declined by 4% on a year-over-year basis driven by lower volumes in our Instrumentation and Clean Tech sectors. These declines were partially offset by a 10% growth in Specialized Services. Revenue for this segment is approximately $1.8 billion, representing 40% of total company revenue. Core operating income for the segment improved on a sequential basis by 20 points to 5.6% revenue. The Enterprise & Infrastructure segment increased 4% on a year-over-year basis. Revenue for this segment was approximately $1.4 billion, representing 31% of total company revenue. Core operating income margin was 2.3% in the quarter. We believe that this segment shall achieve 3% operating margin in our fourth fiscal quarter. And finally, the High Velocity segment increased 23% on a year-over-year basis. Revenue was $1.3 billion, representing approximately 29% of total company revenue. Core operating income for this segment was 3.4% of revenue. In summary, total revenue grew by 5% on a year-over-year basis while core operating income was 4%. If you now turn to Slide 5. We ended the quarter with cash balances of approximately $1.35 billion, at the same time, reducing total debt levels by approximately $60 million. Our sales cycle improved by 8 days and our core EBITDA for the 9 months ended was approximately $825 million, representing 6.1% of revenue. Our year-to-date core return on invested capital was 23%. We're extremely pleased with our operating cash flow generation during the quarter of $504 million. With this performance, cash flows from operations for the 9 months ended were $810 million. We're extremely well positioned to achieve $1 billion of cash flows from operations for the full fiscal year. I'd ask you to turn to Slide 6, where I'll review our capital expenditures and an update on our Nypro acquisition. Net capital expenditures in the third quarter were $80 million. Year-to-date, capital expenditures are approximately $440 million. Our outlook remains consistent with our previous guidance for fiscal 2013, with expenditures expected at $700 million. Now turn to Nypro. We are pleased to advise that we have today received all regulatory and antitrust clearances associated with the acquisition of Nypro and, consequently, we anticipate completing the acquisition on the 1st of July of 2013. We look forward to welcoming Nypro's employees to Jabil. I'd now ask you to turn to Slide 7. On our last earnings call, we discussed the level of structural cost within the company that is not optimal. As a result, we intend to realign our manufacturing capacity and cost base to appropriately size our manufacturing footprint with current market conditions and our customers' geographic needs. We have begun consultation with employees during the third fiscal quarter and out of respect for those employees, we shall not be providing details as to specific sites or locations under consideration at this time. We do, however, currently estimate that the realignment shall result in approximately $188 million of charges, including the $28 million recorded in the third fiscal quarter. It's currently estimated that approximately $60 million to $70 million will be recorded in our fourth fiscal quarter for 2013. The balances of charges shall be incurred during fiscal 2014 and 2015. Cash associated with such actions is currently estimated to be approximately $140 million. The majority of the cash outflow is expected during the course of fiscal 2014. Such realignment of our manufacturing capacity is estimated to provide a range of savings of $30 million to $40 million in fiscal 2014 and an estimated $65 million in fiscal 2015. This is based upon our current estimates of timing of such actions. I'd now ask you to turn to Slide 9 and 10 where I'll discuss our fourth quarter guidance. In the fourth quarter, we expect revenue on a year-over-year basis to increase by approximately 5% to be in the range of $4.45 billion to $4.65 billion. Core operating income is estimated to be in the range of $165 million to $185 million and core operating margin in the range of 3.7% to 4%. Our GAAP diluted earnings per share are estimated to be in the range of $0.04 to $0.12 and core diluted earnings per share estimated to be in the range of $0.50 to $0.58. This is based upon our diluted share count of approximately 209 million shares and an expected tax rate in the upcoming quarter of 21%. This range of guidance includes 2 months of ownership of Nypro and an assumption that Nypro shall provide a modest to neutral contribution to earnings on an operating basis in the fourth fiscal quarter. We do expect to incur transaction costs and purchase accounting adjustments of approximately $10 million associated with this transaction during the fourth fiscal quarter. This sum is excluded from our core operating guidance. And finally, turning to guidance by our segments. The Diversified Manufacturing Services segment is expected to be consistent on a year-over-year basis. This guidance is inclusive of all Nypro revenue estimates. The Enterprise & Infrastructure segment is also expected to be consistent and our High Velocity segment is expected to increase by 15% on a year-over-year basis. I'd now like to hand the call over to Mark Mondello.

Thanks, Forbes. Good afternoon. I appreciate everyone taking time to join us on our call today. Before I get into the business, I'd like to offer thanks to all our people here at Jabil. Thanks for their commitment to the company and thanks for their commitment in taking great care of our customers. As for the business at hand, if you please reference to Slide 12 in the presentation. Forbes mentioned we're planning to close our acquisition of Nypro on July 1. This closing is the culmination of a lot of hard work put forth by many dedicated people. Thank you to everyone who's been involved. As I said during our Q2 call 90 days ago, the employees at Nypro are fabulous and we see great cultural alignment with Jabil. I'm truly excited that on July 1, we'll have the Nypro flag flying firmly on the bow of the Jabil ship. As we discussed previously, the possibilities brought forth by Nypro are significant. The Nypro health care team offers tremendous capabilities that focus on disposables and consumables within the health care arena. This is a wonderful complement to Jabil's business. Our combined health care business is pacing at $1 billion plus and will be headquartered in Clinton, Massachusetts. The Nypro packaging team offers creative solutions across a broad range of consumer goods. This business delivers $250 million to $300 million in revenue and serves outstanding brands. We're excited to combine our capabilities and work hard to gain share within a multibillion-dollar packaging market. Our packaging business will also be headquartered in Clinton, Mass. The third commercial silo within Nypro is the consumer business. This business will be consolidated under the Jabil brand and work in concert with Jabil's DMS and High Velocity businesses. The combined teams will work diligently to provide innovative solutions to a range of customers in end markets such as mobility, printing, point-of-sale, industrial and white goods. Last, but certainly not least, I want to recognize the tremendous capabilities within NyproMold and Radius. NyproMold is a technical leader in the design and manufacturing of complex tools and molds. In addition, their high-quality, high-precision machining capability is quite impressive. Radius is a world-class team that specializes in creativity, product innovation, development and design. Both of these organizations have tremendous value and we'll be able to leverage all of these across the Jabil landscape. As a side note, Beth and I discussed hosting our next Analyst Meeting in Boston sometime this fall. It will be informative and fun to have you visit our Nypro headquarters as part of this agenda. I'll wrap up my comments specific to Nypro with an early welcome to our Nypro team. I now ask that you please turn to Slide 13. During his prepared comments, Forbes provided a summary of our restructuring. To put this in perspective, we are constantly evolving our resources, our assets and our capacity as our business grows and needs change. It's been 7 years since we have formally reset our structural costs. Slide 13 shows the magnitude of change within Jabil from fiscal year 2006 until today, a tribute to the hard work and character of our team. We've added $8 billion in revenue, 100,000 employees and 10 million square feet of manufacturing capacity. Over the next 12 to 18 months, we will optimize our foundation in anticipation of the business ahead. This is a prudent decision tactically, strategically and financially. Please turn to Slide 14. Please note the blue bar to the far left of the waterfall chart. This bar illustrates the $2.24 of core EPS we anticipate to deliver for fiscal year '13 based on the midpoint of our Q4 guidance. Our team works tirelessly to serve our customers and take great care of their respective brands. I believe we do this well. With that said, fiscal year '13 has been a difficult year from an earnings perspective. As we exit the year, management believes that we will deliver solid earnings growth in fiscal year '14, earnings that are consistent with comments I made during our Q2 call. In an effort to add some color and clarification, I'll walk you through the waterfall chart. During the Q2 call, I talked about growing our core EPS from $2.40 in FY '12 to $2.77 in FY '14, which is in line with our before mentioned 5% to 10% EPS growth rate when compounded over a 2-year period. The illustration on Slide 14 assumes that $2.24 is delivered in FY '13. If we work from this FY '13 base, we believe that we'll see $0.16 to $0.22 of core earnings from our Nypro acquisition, add to that another $0.11 to $0.15 as a result of our restructuring activities outlined by Forbes. Finally, we believe our core businesses will improve based on market share gains, new business wins, successful program launches and reasonable improvements to end-market demand. This would result in $0.11 to $0.31 of additional earnings for the fiscal year. The result and outcome would be a core earnings in the neighborhood of $2.77, which I alluded to 90 days ago during our call. We're cautious in offering this illustration based on variables outside of our control, but there's a good reason for optimism. Our optimism is based on a combination of our clear line of sight, our customers, our focus on ROIC, our diversification and our obsession in caring for our people and giving them the freedom to innovate and serve our customers. In addition, I'm blessed with an outstanding leadership team, a team with tons of experience, a team that cares. We will effort to do what we say, run our business effectively and efficiently and be very thoughtful on how we deploy our capital. And with that, I'll turn it back over to Beth for some questions.

Susan, we're ready to begin the question-and-answer session.

Your first question comes from the line of Steven Fox with Cross Research.

Just on the restructuring activities, I understand that you're limited in what you want to talk about. But is there any way we could sort of dive a little bit deeper into sort of some of the strategic rationale either by market or region? And then could you put it -- Mark, could you put it a little bit in context relative to some of the expansion you're doing, whether, I don't know, whether it's related to backtracking on any recent expansion or any shifts in some of the other strategic initiatives we heard about in the last 6 months? That would be appreciated.

Sure. Yes, I don't think it's backtracking on anything recently. As I mentioned in the prepared comments, the last time we've, again, really taken a hard formal look at our structural cost and our foundation was 6, 7 years ago. And since then, we've evolved the company, added a lot of manufacturing square footage. I feel good about the footprint we have, the foundation we have. I just think it's really prudent. I don't want to be having one-off charges and doing this every 2 years, every 3 years. But every so often, having the appropriate hygiene to go in and optimize our structural cost, make a lot of sense. So as I said, strategically, I think this is a good thing for us to be doing. We've got good line of sight of '14 and early parts of FY '15. And again, none of this has to do with anything that we've done in the last 2, 3 years as far as expanding footprint.

Okay. And then just secondly on, just looking at the waterfall chart you provided with regards to Nypro. Is there any more color you can add when we think about Nypro on a full year basis in terms of what kind of growth you're factoring into the $0.16 to $0.22 and margins, et cetera, to get there and any synergies that you're expecting in the first year?

Well, I think that is a full year outlook. The illustrations for FY '14, right? So I think if you make some assumptions around what you think the packaging and health care revenues are going to be and you look at center point of our guidance there or illustration, it's around $0.19. And I think that's a fair -- I think it's a fair range. I'd focus you on the $0.16 to $0.22. And when you think about, we haven't even closed the deal yet, although we've got all approvals. We're excited about getting the deal close July 1. And then upon close, we'll immediately start doing some of the things that need to be done and prepping it for growth synergies. But we've got a lot of work to do with the team and positioning the companies for '14, '15 and beyond.

So just to clarify, I guess, is the $0.16 to $0.22 sort of a base case number based on how the business is operating today or have you factored in some of the synergies into that number? Or is that still to come later down the road?

I think it's -- I think that as we sit today, it's our best estimate of where we think the business is going to be and how it's going to perform for fiscal year '14. So answering that more directly, I suggest it's not just how the business is sitting today. If you remember, we're taking all of our health care business, combining it with Nypro's health care business and then having the packaging business. So it's our best estimate today of giving an illustration on how we think that business will perform.

Your next question comes from the line of Amitabh Passi with UBS.

Forbes, I'm just trying to understand the guidance for operating margin. What's putting the downward pressure sequentially going in the fourth fiscal quarter? Because I thought you said E&I would improve presuming HVS flat. And I'm wondering, is there some downward pressure on the DMS margins?

If -- in my prepared remarks, we've included Nypro revenues in the DMS segment. And in my remarks, I noted that it would be very minimal contribution from that given 2 months in the quarter. So if you make assumptions around that Nypro revenue, back that out, margins should be relatively consistent. We're going to see expansion in the Enterprise & Infrastructure. And if we look at High Velocity, that margin there fluctuates within our typical range of 2.5 to 3.5 points, so towards the high end this past quarter. My sense is as we move into the fourth fiscal quarter, it's probably going to be near that midpoint. And that's really based on the mix of business that we have in there. We're serving multiple industries in there from point-of-sale to printing, handset, set-top boxes. So I'd expect that to come back a little bit more towards the center point, expansion in E&I and relatively consistent margins in the Diversified Manufacturing Services, x the Nypro piece.

And then just as a follow-up, the $0.16 to $0.22 and the $0.11 to $0.15 of EPS benefit you expect from Nypro and restructuring benefits, how should we expect that to flow through fiscal '14? Would it be fairly linear and roughly $0.05, $0.06 a quarter? Any help you can give in terms of how we should be thinking about the Nypro contribution and the restructuring benefits.

Yes, you know what, the Nypro one is a little bit tougher at this juncture. We'll have better clarity for you certainly on our September call, be a little bit more granular. But I would wait a little bit more towards the back half of the year, obviously, once we got an opportunity to combine, as Mark said, our health care business and the Nypro business. With regards to the restructuring, I think that's more likely based on our current estimates of timing of discussions, again, towards Q3 and Q4. There's a bit of heavy lifting to be done there. We're well positioned to do that. And we expect the majority of the cash flow associated with that to occur late Q2, I'd say. So yes, I would say probably Q3, Q4, before we see the full benefit of that restructuring activity.

Amitabh, this is Mark. Just one thing to add to Forbes' comment. I was a little bit disappointed in the 2.3% margin for E&I in Q3. I thought it would've been closer to being flat quarter-on-quarter, Q2 to Q3. But our leadership team there has been pretty aggressive because they understand that we want that business to 3 points of margin as we exit the fiscal year and that's what we've been talking about for the last couple of quarters. And so lots of moving pieces, moving people around, moving teams around. And we're off by a few million dollars there, but I just endorsed that we still feel that exiting the fiscal year we'll be at 3 points and going into FY '14 for E&I.

Mark, can you just -- so just on that, can you shed some light how you get to the 3 points from the 2.3%?

Well, we do a lot more of what we did in Q2 and not so much of what we did in Q3. It's just -- it's a big business. It's a $5.5 billion, $6 billion business and I'm not going to get into all those details because it wouldn't be appropriate. But we feel pretty comfortable about getting that towards 3 points, if not at 3 points as we exit the fiscal year.

Your next question comes from the line of Matt Sheerin with Stifel. Matthew Sheerin - Stifel, Nicolaus & Co., Inc., Research Division: Just to get back, a question on the E&I segment. The revenue was a bit better than your guide for the May quarter, yet the guidance on flat year-over-year growth implies it's going to be down 5% or 6% sequentially, which looks weaker than normal. So could you talk about the drivers there, why that -- it looks like it's seasonally weaker than normal?

It was flat.

I think we guided flat, didn't we? Matthew Sheerin - Stifel, Nicolaus & Co., Inc., Research Division: You were flat year-over-year, but that -- right. And so that implies it's going to be down sequentially a little bit more than seasonal. So I'm trying to figure out what you're seeing from your customers there.

Matt, it's essentially sequentially flat. It's maybe $20 million or $30 million. And again, the range of business is about $1.3 billion to $1.4 billion a quarter. That's not something that we're overly obsessed about. Our relationships there are strong. We were seeing great growth in fiscal '13 over '12 as a result of some really nice wins in the midyear of fiscal '12 in terms of the wireless area and networking relation -- excuse me, and storage relationships. So overall, it's relatively consistent as we move through the summer months here, which is pretty typical of what we see for our customer base. Matthew Sheerin - Stifel, Nicolaus & Co., Inc., Research Division: Okay. So would you characterize that as a more stable environment, which you talked about last quarter?

Absolutely, absolutely. Matthew Sheerin - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And then on the -- on Nypro, could you give us an idea of the revenue contribution in the quarter, 2 months of the quarter? I don't know if it's seasonally back-end loaded, so it's actually less than what it would typically be.

Yes, it's -- our current estimates are somewhere between a 1 50, 1 75 type number, somewhere around there. Matthew Sheerin - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And just lastly on Specialized Services, which looked like that was in line with your guidance. Obviously, there's a big customer that's driving that and ramps seem to change quarter-on-quarter. What's your outlook on the mobile part of that business in Specialized Services for the August quarter and what are you looking at starting in to FY '14?

I guess the only comment we have there is we talked last call about -- I think we had a dozen plus different program ramps and program transitions across the company. And as you guys remind us constantly, we spent or are going to spend $600 million, $700 million in CapEx and we believe we'll utilize that as we move into '14. So I just can't get into any comments around any specific sectors or customers on that.

Your next question comes from the line of Amit Daryanani with RBC Capital Markets.

Couple of questions, one I guess on the DMS side. If I exclude the Nypro numbers that Forbes just gave, I think the implication is that business will be flat to down a little bit sequentially. Could you maybe just talk about why do you see that segment tracking almost down a little bit sequentially again despite a couple of big program ramps in that segment? And if any one of those sub 3 segments is where you're seeing the downtick?

It's pretty much the same story that we've seen really since late '12, Amit. And that's centered around areas of Instrumentation and Clean Tech. As we came into this calendar year, we saw pushouts in terms of metering there, which is pretty significant. And that's really been the impact on a year-over-year basis. Overall, our Specialized Services business is in good shape. And we're seeing some continued healthy growth there on a year-over-year basis.

I think the other area for us, too, which is -- which continues to show some softening is in defense and aerospace as well.

Fair enough. And then I guess the second part was, if I'm looking at $0.14 of restructuring benefits in fiscal '14, that would imply about $40 million of operating income savings roughly. Could you maybe talk about $188 million restructuring plan, why you're only seeing $40 million in savings? And shouldn't that number be much, much bigger, I guess? And is there a potential the benefits continue in fiscal '15?

Yes, I'll take that. Absolutely. You're right. The timing of this -- in my prepared remarks, I talked about $65 million in 2015. And that's ultimately where we see that type of return, a 2- to 3-year return on this restructuring plan. In fiscal '14, that range we provided, yes, it's midpoint of that range is $35 million, as you stated. And it's really to do with the timing of when we can, essentially, start closing sites or releasing employees and transferring business. So our best estimates at this stage is that, that would occur most likely sometime late in our second fiscal quarter, which is obviously February 15, just given the consultation periods we have in front of us and discussions that have commenced. So if by any way we can pull that forward, then we'd expect savings to increase in fiscal '14. But certainly based on where we are, I would suggest the $35 million being appropriate, certainly $65 million in '15. And obviously, we'll update you on a quarterly basis as we move through this process.

Got it. That's helpful. And just finally, if I look at that organic growth number on the, again, on the fiscal '14 road map, I guess, is it fair to assume that at the midpoint of your organic growth number you guys are looking at about a 5% revenue growth for the [indiscernible] business?

Well, we really haven't commented at all on revenue, but I think if you take the midpoint, you're looking at 21 over 2.24, right?

Yes, fair enough.

Your next question comes from the line of Brian Alexander with Raymond James. Brian G. Alexander - Raymond James & Associates, Inc., Research Division: Forbes, I just want to follow up on the Q4 guidance. If I assume 3% operating margins for Enterprise and High Velocity, it implies DMS margins are going to be 5%. And I think you said x Nypro, DMS margins would actually be consistent sequentially at 5.6%. So is Nypro really going to be a 60 basis point drag to the fourth quarter DMS margins at only -- it's going to be $5 million in revenue? So I think you're excluding all the charges from that. I'm just confused. It would almost imply that Nypro would be losing money on a core basis, or maybe I'm just doing my math wrong, but if you could comment on that.

Yes, absolutely. So you're correct, model Enterprise & Infrastructure at 3 percentage points. High Velocity, I think that might be the part you're missing, Brian. I talk to that being more to the midpoint of our overall range of guidance there, so right about at 3 percentage points based on the mix of business that we anticipate in the fourth fiscal quarter. And then based on that midpoint guidance of 1 75, you would see the DMS margins x Nypro to be relatively consistent with what we've just printed. Brian G. Alexander - Raymond James & Associates, Inc., Research Division: Okay. Well, maybe I'll follow up offline because I have 5% for DMS all-in and that would imply a loss for Nypro, but we can follow-up offline. I guess one -- when do you think DMS margins can get back to 6%? It would seem like the issue you had with a major customer is behind you. It's not clear to me what environment would be ideal for generating margins in DMS within your long-term target range or what's the long-term range that's still suitable [indiscernible] a change in the long-term profile of DMS and in particular, Specialized Services. And if so, what's causing that?

Hey, Brian, I don't know if it's your phone or our receiver, but you broke up really bad. I think what you were asking is, is if we get DMS margins back to 6%, is that correct? Brian G. Alexander - Raymond James & Associates, Inc., Research Division: Yes, what would drive that? What kind of environment would allow that to happen?

Yes, I think the best guidance at this point is, is we feel comfortable with DMS margins being in the range that we've outlined, 5.5% to 7% for fiscal year '14. And again, we do need to have a little bit of recovery on -- Instrumentation has been bad for us. Industrial in the early part of this year was very, very soft. We've seen pockets of Industrial start to stabilize. The housing markets helped there. Clean Tech has been very difficult for us, especially in the metering side. Our visibility is, is that the subsidizations and whatnot around metering may start to come back for mid to late fiscal year '14. So it's a little bit of a wildcard. And we've got a lot of interesting activities going on in our defense and aerospace business. And then you have our Specialized Services group. And again, as we've talked about, a portion of our CapEx for this year has went towards Specialized Services and we should see some returns from those assets in '14 as well. Brian G. Alexander - Raymond James & Associates, Inc., Research Division: Okay. Just last one, if you could hear me. Forbes, any early indication for what CapEx might look like in fiscal '14, including Nypro?

Not at this juncture. We will certainly update everybody on our next call.

Your next question comes from the line of Jim Suva with Citi.

Am I correct that, based upon prior press releases and news and stuff, that Nypro should contribute about $1.2 billion in revenues? Or are there some parts of it that maybe you're not folding into Jabil? And if so, if we back in, then, to your EPS waterfall, which, by the way, that's a great slide, then it looks like that the Nypro operating margins, based upon a tax rate of about 20% just ballpark, that the Nypro operating margins are actually closer to the relative range, something like 5% or slightly under 5%. Is that math right, or am I missing a few pieces to the equations?

So Jim, the -- I think the $1.2 billion for fiscal year '14 might be a little bit aggressive. We -- if you think about the business and the slide we showed, the Nypro slide, about 50% of that business is health care, 25% is consumer and 25% is packaging. We're going to roll the consumer business, as I talked about in my prepared remarks, into and fly that under the Jabil flag. And that team will work hand-in-hand with our DMS group as well as some of our High Velocity leadership. So when I think about Nypro for '14, we're really talking about packaging and health care. And that's probably a $750 million, $800 million business, something like that. And we're pretty excited of that platform and where we can take that in fiscal year '15 and beyond.

Okay. Great. That adds a lot of color. And then when we think about your customer mix, do you have one customer over 10%, 2 customers over 10%? And then how will that look post integration of Nypro?

In terms of 10% customers, we'll get full color at the end of the year. But certainly, we've had one 10% customer throughout the year. We expect that to be the case as we exit the year. I don't envisage that changing with the consolidation of Nypro into Jabil. We'll see how that plays out in future years, but certainly not for fiscal '14.

Great. And then my final question, with Nypro, you're doing plastics on stuff. Some of those customers also do electronics inside the box or inside the item. Is there an opportunity there for Jabil to seize and come in and sell more there? Or are those just type of discussions that are pretty unique to themselves? Just trying to figure out how those discussions and how Jabil looks at that strategically?

Well, we certainly hope so. I think that there's nice synergies on the growth side for combining what Nypro does and what Jabil historically has done and what we are doing and time will tell. But we feel pretty good about being able to get after some of that market share, Jim.

Your next question comes from the line of Sherri Scribner with Deutsche Bank.

I just had a couple of clarification questions. First on the guidance, the press release said $4.55 billion to $4.65 billion, but the slides said $4.45 billion to $4.65 billion. Can you just let us know which one it is?

The guidance is $4.45 billion to $4.65 billion.

Okay, because the press release didn't say that. And then for the Nypro revenue, is that primarily going into the DMS segment for next quarter and for fiscal '14? I know you said there's a portion of it that will go on HVS from the consumer piece, but should we assume that the rest of the revenue goes into DMS?

Yes, you should assume it. It's all within the DMS segment, yes.

Your next question comes from the line of Shawn Harrison with Longbow Research.

Just 2 clarifications, just if I missed this on the restructuring savings, the split between COGS and SG&A. And then the second question, just getting back to something Jim was asking in terms of the Nypro EBIT margin. It does look, at least right now for the full year, it's something like a 4% to 5% implied EBIT margin. My guess is you'd like to have it higher than that exiting the year given some prior commentary. But where would you expect the EBIT margin for Nypro to exit '14 at?

It's Forbes. Let me address the COGS versus SG&A on restructuring. At this juncture, I would suggest the majority would be within the cost of goods sold line. Based on current estimates, maybe somewhere between $15 million to $25 million in SG&A. But on the longer term, the majority went to cost of goods sold line. With regards to the Nypro EBIT margins, at this stage, we'll not be providing any more color on that. But certainly, this is a very attractive transaction for us and, certainly, view it as long-term accretive to our earnings.

I think it's fair -- I think it'd be fair to -- as we get through '14, it would be fair to model the Nypro up margins in the range of DMS, so the 5.5% to 7%.

Yes.

Okay. So no change to that target, Mark?

Correct.

Your next question comes from the line of Wamsi Mohan with Bank of America Merrill Lynch.

Mark, DMS x Nypro is going to be down again here in August on a quarter-on-quarter, even on year-on-year basis. And organic growth seems to be sort of a loser here for the segment. When can we see year-on-year growth in DMS? Is it reasonable to assume we would see that in -- starting in the November quarter?

I think that might be reasonable.

Okay. And would you say that your expectations from a -- that growth would primarily be coming from the Specialized Services area given your prior commentary on the other 2 subsegments?

Well, I think time will tell. We certainly are keeping our fingers crossed that in the macro conditions that we're seeing, that's putting pressure on a bunch of the other broad parts of our business that we start to see some relief there. So my hope is it's some contributions across the board.

Okay. Great. And on E&I margins, Mark, seems from your comments it was more of an execution issue as opposed to maybe some pricing changes or mix. If you look at some of the filings from Cisco, it indicates increased pressure from OEMs on all the suppliers, including EMS partners. Can you confirm that it was primarily execution and that's why you're fairly confident it could further worse fairly quickly here in the fiscal fourth quarter?

Yes, Wamsi, I don't think it was execution nor do I think it was pricing. That part of our business has been under intense pricing for 15 years and, certainly, it goes in cycles but the pricing pressure is never off. I think -- and I don't think it was an execution issue. So if I communicated that, that's my mistake. What I was trying to communicate is, is our leadership team are making some very aggressive structural changes, changes to the teams, moving businesses around to different sites. And again, if you think about this being a $5.5 billion, $6 billion business, I think they overshot their budget by $4 million, $5 million in the quarter. And I expected Q3 to be close to being flat to Q2. So I think we were down about 40 basis points Q2 to Q3. But it wasn't as if we had a unintentional execution issue. I think what they did was intentional but overshot their budget. And they did that in continuing to drive that business to an appropriate foundation to generate the margins we need to going forward.

We have reached our allotted time for questions. I would now like to turn the conference back over to management for any closing remarks.

Well, operator, we don't have any closing remarks, so I'll just thank everyone for joining us on the call today. And as usual, we will be available for any follow-up phone calls or questions that you may have. Thank you very much.

Thank you for participating in today's conference. You may now disconnect.