捷普科技 (JBL) 2002 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your Jabil Circuit's third quarter earnings 2002 conference call with Beth Walters, Vice President of Investor Relations. My name is

, and I'll be your conference coordinator.

Throughout the conference, you will be in listen-only. If you need assistance at any time, please key star, followed by zero on a touch-tone phone and a conference coordinator will be happy to assist you.

I'd like to remind everyone that today's conference is being recorded for replay purposes. And now, I'd like to turn the program over to Ms. Walters. Please go ahead, ma'am.

Thank you and welcome to our third quarter of fiscal '02 conference call.

With me today are Tim Main, our President and CEO; Chris Lewis, our Chief Financial Officer; and Forbes Alexander, our Treasurer.

During the course of the conference call, we will be making projections or other forward-looking statements regarding future events and the future financial performance of the company. We remind you that such statements are just predictions and that actual events or results may differ materially. We refer you to the documents that the company files with the SEC, specifically our most recent 10-K filed November 28, 2001. These documents contain and identify important factors that could cause the actual results to differ materially from those contained in our projections and forward-looking statements.

So our results for Q3 '02 on revenue of $851 million operating earnings, excluding amortization of intangibles and nonrecurring charges for the quarter, were $32.4 million. Cash earnings per share were 12 cents. Revenues for the quarter increased by 3.5 percent from the prior quarter.

Production levels in the automotive sector were up 14 percent above the prior quarter due to a rebound in production

the seasonally lower levels.

The computing and storage sector increased by four percent from the second quarter, reflecting a stable demand environment along with increases of production in the storage area as well as new production assemblies.

The consumer products sector decreased by eight percent in the quarter, reflecting seasonally lower demand principally in the set-top box production.

The instrumentation and medical sector increased 20 percent sequentially due to new program ramps with existing customers.

The networking sector increased by two percent in the current quarter, attributable to new program production in a relatively flat demand environment.

Operator, we seem to have some interference on the line.

The

sector increased by 14 percent in the current quarter as customer inventory levels normalized and production rates more closely approximated sell-through rates.

The telecommunications sector decreased by four percent sequentially, reflecting continuing decline in demand for the products.

And finally, in our other sector, which consists of newer, smaller customers, prototype assemblies and repair services, increased sequentially by 30 percent.

Gross margin was 9.9 percent of revenue, compared to 8.9 in the second quarter. SG&A decreased to 5.8 percent of sales, compared to 6.0 in Q2. In absolute dollars, SG&A was down $300,000 to 49.4 million.

R&D was slightly higher, to 2.1 million, compared to the prior quarter of 1.9. Intangible amortization for the quarter was 3.5 million. Our cash-operating income increased from 21.9 million, which was 2.7 percent of revenue in Q2, to 32.4 million, or 3.8 percent of revenue, excluding non-recurring charges. We recorded one million in integration costs during the quarter.

Interest expense for the quarter was $700,000, compared to 1.5 million expense in the second quarter. Income taxes were 23 percent of income, excluding non-recurring charges. On a gap basis, net income after taxes was $20.8 million. This resulted in an EPS of 10 cents on a average of 2,997,000 shares during the period fully diluted. Excluding the non-recurring charges and amortization of intangibles, our net income was 24.4 million, or 12 cents earnings per share on a cash basis.

We are pleased by our operating performance this quarter. Executing to the mid and the high range of our EPS and revenue guidance respectively during the quarter. We're also pleased to have improved our sales cycle by 11 days, to 31 days in the quarter, generating approximately $140 million in positive cash flow from operations during the quarter. I'll turn it over to Forbes to revenue our balance sheet performance.

Thank you

Times foreseeable decreased by $51 million to 349 million in the third quarter, as compared to 400 million in the second quarter. Calculate the days

still standing is 37 days, while collection experience was 34 days. This compares to 44 days still standing in the previous quarter, and collection experience was 39 days. Inventory decreased by 23 million in quarter to 325 million, compared to 348 million at the end of February. Days in inventory improved from 42 to 38 days, or 10 turns compared to nine in the previous quarter. Fixed assets decreased by $28 million to 692 million, deflecting 14 million in capital expenditures offset by 42 million in depreciation. Cash and cash equivalent balances were 759 million, compared to 643 million as of the end of the second quarter.

We are pleased to have increased our operating profits by 48 percent sequentially, while reducing the capital deployed to run our business by almost nine percent. We're also pleased to see very good incremental returns on our business, as we begin to move to high production levels. The quarter, our return on invested capital, improved by -- improved to approximately nine percent and 5.5 percent in the previous quarter, a 64 percent improvement. Our commit to credit facilities and cash balances are approximately 1.5 billion dollars. The plan to use these facilities to take advantage of opportunities that are available if acquisitions and OEM plant divestitures. The company's debt-to-capitalization ratio was 19 percent at the end of the quarter. And for the quarter, our average return on assets was four percent with an average return on equity of seven percent; a 60 percent improvement over the previous quarter.

During the past four quarters we've generated approximately $600 million in positive cash flow from operations. We look forward to re-deploying this capital as we're beginning to move to higher production levels in our fourth fiscal quarter, including funding three acquisitions.

Our cash and existing credit facilities there is ample capital to fund our recently announced acquisitions and the increasing levels of production on an organic basis.

I'd now like to have over -- you over to Tim Main who will review our acquisition activity.

Thank you, Forbes.

We completed the acquisition of the Compaq server operation in

, Scotland, during the month of June. The transition process has been smooth and we are leveraging our nearby

, Scotland, talent base to facilitate the integration process.

Our combined Scotland operations will continue to focus on high-mix, high-complexity products in the storage, high-end computing, data communications, and instrumentation industry segments. Our competence level is high. The combined operations will have sustainable levels of production and profitable results serving these targeted industry segments.

We anticipate completing the Alcatel and Valeo transactions late in our fourth fiscal quarter with revenue contribution limited to the month of August. However, our transition and integration plan for each site is well advanced and Jabil personnel are on site engaged in preparation for the execution phase.

The Alcatel operations are currently well loaded and focused on high-end communication server new product introduction, assembly, system integration and fulfillment activities. The site has outstanding competencies and the transaction is an important extension of our overall relationship with Alcatel.

Our new relationship and transaction with Valeo will include an excellent automotive electronics manufacturing operation in France as well as significant levels of business for existing low-cost facilities over the term of the agreement.

We believe the $40 billion automotive electronics industry represents a significant long-term opportunity for the EMS industry. This

transaction is a representative example of the mutual benefit to be derived by forward-thinking OEMs and capable EMS providers in the automotive segment.

On May 23rd we announced an agreement to acquire Lucent joint venture manufacturing operation in Shanghai, China. This transaction will likely close in September. Clearly, the telecommunications market has eroded significantly in the past year. However, we had a pre-existing business plan to expand into central China, and Shanghai is the communications and technology business hub for China.

In this transaction we will assume the manufacture of optical and other communications products at the site and will absorb the staff of highly capable research and development engineering talent into JTS. Our position as a key global EMS provider to Lucent will also be solidified in the process.

In summary, this transaction expands an existing relationship with Lucent, accomplishes geographic footprint expansion in a key growth market, and brings a new product development competency to Jabil. All attributes clearly in alignment with our articulated acquisition criteria.

Although this transaction will not close until September, we have already

Jabil personnel to the site and are presently developing very detailed transition integration plans for the execution phase of our ownership. In the aggregate we estimate these acquisitions will contribute from $50 to $75 million in revenue and will have a positive impact on operating earnings in our fourth quarter.

The Compaq, Valeo and Alcatel transactions will be funded from existing cash balances with required outlays estimated to be $150 to $200 million. The Lucent transaction is anticipated to close in September and will be funded in fiscal Q1 of 2003.

Integration costs for these acquisitions are estimated to be from $2 to $4 million for our fiscal Q4. Integration costs in our third quarter were lower than anticipated in part due to timing and relatively lower cost to implement than originally estimated.

Chris?

Thanks, Tim.

Regarding our business update, our current forecasts indicate increasing production levels in our August quarter by an estimated eight to 12 percent. This increase in production levels is due to growth in most segments, including automotive, computing and storage, instrument -- instrumentation, networking, and peripheral sectors. Offsetting some of this growth is lower levels of production in our telecom sector. We expect increases in our operating income sequentially by 10 to 20 percent in the quarter, reflecting continuing incremental profits from our organic business along with near-term contributions of our recently announced acquisitions.

We are guiding to an overall revenue range of 920 million to 960 million for our fourth quarter. Our cash operating income is expected to be approximately 3.8 to 4.2 percent, depending on levels of production. We expect gross margin will be 9.5 to 9.8 percent, reflecting our current mix of business while taking into account impact from our acquisitions. We plan to see leverage of our SG&A costs by approximately 30 to 40 basis points as we ramp to higher levels of business on lower incremental investment and cost.

Again, we estimate further sequential improvement in our operating income -- 10 to 20 percent sequentially, and we continue to see good performance from our cost reduction activities and are continually exploring ways to improve our performance on relatively modest revenue growth. We are also pleased to be in position for immediate contribution from our acquistions.

We estimate interest expense for Q4 to be 1.5 million and a slightly lower tax rate to 20 percent compared to 23 percent in the previous quarter.

Regarding our cost reduction activities, we've continued at our cost reduction activity throughout the last two quarters, reducing our manufacturing costs along with making some reductions in our SG&A costs. This activity has resulted in quarterly savings in excess of $6 million a quarter or two pennies per share a quarter for our May quarter. We are continuing to review new areas to enhance our profitability in, again, a relatively

market environment.

We have been in negotiation with

regarding lowering their overall cost structure and have agreed in principal to consolidate our Liverpool plant into the Coventry plant along with overall headcount reductions to be made to match current production levels. While final plans are still in process and subject to final approval by both Jabil and

, the cost is currently estimated to be $25 million to $28 million.

has agreed to reimburse this cost in full per our four-year supply agreement.

Accounting literature requires that Jabil record this cost-reduction activity as a non-cash charge as these plants have been acquired from

. We expect this charge will principally occur in our fourth fiscal quarter. Because this reimbursement of cost from

relates to our overall supply agreement, it must be amortized as revenue over the remaining life of the contract.

This action, again, will be cash-neutral to the company, lower our overall capacity with

plants to three to four percent of overall company capacity, and will allow for a more efficient supply chain solution for

.

Regarding integration costs in our fourth quarter, we expect $2 million to $4 million of integration and acquisition charges relating to the

,

, and Alcatel acquisitions. And as Tim mentioned, we expect to close on our

Shanghai operation in the beginning of our first fiscal quarter or sometime in September.

Excluding estimated non-recurring charges, we estimate cash earnings per share to be $0.14 to $0.16 in our August quarter.

Again, our overall production levels are anticipated to grow by 8 to 12 percent, or approximately 920 to 960 million revenue. Reviewing sectors, the automotive sector is estimated to be up 15 to 20 percent in our fourth quarter, principally as a result of initial production from

acquisition. We are also pleased to be adding some incremental assemblies in Hungary for our existing automotive customers.

The computing and storage sector is up -- is expected to have a 50 to 60 percent increase in production in our fourth fiscal quarter due to stable organic demand, new initial production of server assemblies, including our recently closed Compaq transaction, and continuing growth in storage business.

The consumer sector is expected to be flat in our fourth quarter, reflecting level organic demands. The instrumentation and medical sector is estimated to grow 12 to 14 percent sequentially, as we are adding new programs in this area. The peripheral sector is estimated to increase 12 to 14 percent in our fourth quarter as we begin to see less inventory corrections in this area, along with a more stable demand environment. We are also beginning to add new assemblies in this area as well, further enhancing our ability to grow in the next quarter.

Networking products are expected to have sequentially higher levels of production in our fourth quarter, by approximately 10 percent, as we have experienced stable to increasing demand, along with continuing to increase assemblies in this area. This estimate includes some initial production of our Alcatel acquisition in the fourth quarter.

And the telecom sector is estimated to decline by 9 to 10 percent in our fourth quarter, representing a continuing difficult end market demand in this portion of our business.

In summary, we estimate our overall revenue for the year to be approximately $3.5

, with an earnings per share estimate of $0.45 to $0.47. We are limiting our guidance at this time to our final quarter of our fiscal year, and we plan to update our business in our fiscal '03, with our September conference call. Tim?

Thanks, Chris. The fiscal Q3 results were sound, generating significantly higher operating income across the lower level of invested capital, while there is always room for improvement, our inventory turns, sales cycle, and operating cash flow are providing us a strong foundation as we resume our experience as a growth company and a growth industry. The transition and integration activities associated with our recently announced acquisitions are well underway. We treat these new outsourcing arrangements much like we do

expansions and running our current business.

Focus on the details, emphasize the fundamentals, install the systems and know-how necessary to do the job, and make money in the process. We have the bandwidth and capability to successfully accomplish what is on our plate without any significant disruption to our existing business relationships or operations. While technology end markets remain relatively weak, overall business trends are net positive.

We will have sequential growth in revenue and earnings in our fiscal Q4. The telecommunications segment for our business will decline to under 20 percent in our fiscal Q4, and we will not have a 10 percent customer in the sector. Virtually all other business segments will exhibit sequential growth as we continue to win new business with existing and new customers committed to a fully outsourced model.

Our focus on the core EMS market, and on our operational performance, has resulted in a balance sheet poised for business expansion. The most powerful trend in our favor is the decades-long movement from a vertical to a virtual manufacturing model. As the Internet

expansion of the late '90s matures as the primary growth driver, we are successfully developing new business in the medical, computing and storage, automotive, and consumer electronics segments. These industries alone represent over $200 billion of incremental growth opportunity for the select few EMS providers with the financial capacity and operational competency to take it on.

As an additional impetus to our near-term growth consolidation of existing business to the top-tier EMS players continues, as does steady expansion of activities and services we provide our customers.

In summary, while end markets are not robust they are slowly recovering and we anticipate a resumption of growth in the near term against the backdrop of outstanding long-term industry fundamentals.

Operator, we're ready to take questions and we will take about 40 minutes worth of questions here today.

Thank you.

Ladies and gentlemen, your question-and-answer session is about to begin. If you wish to ask a question please key star, followed by one, on your touch-tone telephone. If you wish to withdraw your question please key star, followed by two. All questions will be taken in the order in which they are received and you will be advised

asking your question.

Our first question comes from

of JP Morgan.

Good afternoon. Nice numbers.

Thanks,

.

Could you just give me a little guidance on acquisition contribution that went into the 850 for Q3?

There wasn't any,

.

OK. So that was all organic?

Right.

OK. And when I look ...

Only thing that really related to that was smaller than anticipated integration costs. I think, again, they were about a million dollars and we just had a lot more efficient integration with the Compaq transaction in particular. So we just -- our spend was lower. But there was no revenue associated with the acquisitions in our third quarter.

OK. And of the plant that you're acquiring in Q4, are all of them most likely to end up being multi-customer plants or do some of them look like they're going to have to be designated single-customer sites for quite some time?

Well, we would always intend when we acquire operations like this that they be diversified into multi-customer sites and competitive EMS sites based on the requisite competencies and capabilities that plant has within the context of the cost structure it has and the region it operates in. You know, when you -- in a higher-cost area it's a little bit more complex, takes a little bit more runway to diversify the site. But, yeah,

, our plan is to have significant diversification for all the sites that we've acquired.

And just a final question I'll move it on, exposure on the cost side if the dollar continues to weaken further, any significant exposure there that you'd be worried about?

I don't think so,

. I mean, we've looked at it and, you know, the biggest impact for our business obviously is just growing our business and working on real efficient business plans to try to produce incremental operating income. And the actual currency impacts we don't see as -- that as being a significant impact on our business.

OK. Thanks very much, guys.

Thank you.

Our next question comes from

of

.

Hi. That's a pretty good quarter, Tim. You talked of this -- the end markets and your demand levels are stable to rising in everything but telecom, and that's going to be less than 20 percent of your total in the fourth quarter. So more than 80 percent of your business is stable or increasing, not including new programs that are coming on. Given that, why aren't you giving any guidance beyond the fourth quarter?

Well, it's still a fairly squishy demand environment. Yes, over 80 percent of our business is stable or improving. And I mean that does include,

, some new business and new customer wins. I mean the organic ...

Right.

... side of the business is improving. And we roll into that, you know, new program wins and customer consolidation moves and that type of thing.

So, some of our growth comes from that, not purely from ...

Of course.

... improvements in the end market.

Right.

And at this point, we just think it's more prudent for us to safely see our way through the beginnings of this recovery before we project what our fiscal 2003 is. I think we'll see sequential growth into 2003, and we'll probably see some sequential growth into our first quarter. But we think it would be a little reckless for us to take a swing at what fiscal 2003 looks like at this point. We'd like to get the terra firma a little -- a little better under our feet.

OK. And could you give us some idea of how big so-called pipeline of new business that you're working on -- how much that is -- give us some guidance on that?

I mean it looks -- it looks pretty good.

I mean when you had you know Lucent transactions in the pipeline and some other things, there were -- maybe there were more bigger transactions. But overall, the new business development activity from a straight free market standpoint in some interesting targeted new segments,

, looks pretty good. And, you know -- and there are -- there are more, you know, asset divestiture deals out there and that type of thing. And in spite of what appearances may lead you to believe, we maintain a very selective -- a very selective

over what type of transaction we'll enter into.

But there's a number of deals out there in the asset divestiture side, and actually, the new business development activity has picked up in the last few months. So, it feels pretty good.

You seem to be saying that it was in some of these new areas you've targeted -- auto, consumer, medical. Is that the case?

Yes, I guess if you wanted to be cute about it, you'd say it's anything but telecom.

OK. All right. Thank you.

Thank you. Our next question comes from Ellen Chae of Prudential Securities.

Hi. Good quarter, guys.

I just wanted to ask a couple questions around your capacity. Do you feel like you're right size now or do you anticipate that there might be any

in the future?

No, Ellen, I mean we talked about some of the reduction we're making with

, but the rest of the company, we think we're in good shape. And I've talked about it before that Europe, Asia, Mexico, we're in a range of 60 to 70 percent capacity. Probably the toughest spot we have right now is United States, which is probably closer to 50 percent. So that's the more difficult of our four regions.

But we think we've sized the company appropriately and, you know, fortunately we're now in a position where we're seeing our company grow in aggregate. And we think we're in pretty good shape.

And do you think your visibility into the second half of the calendar year has improved any more? Are you getting some better or more

forecasts from customers at this point?

The one thing I'd say about our forecasts, and this goes back to January -- February -- they've stayed -- they've stayed pretty firm. And again, what we're talking about is the organics for a large portion of our business seemed to be flat. And in that kind of environment, for a

or an EMS provider with new assemblies, new wins, that does allow for growth. So we have seen a number of months, now, if I went back to February, March, April, a series of months where the numbers are holding.

They're not -- again, there's -- I don't want to infer that there's some tremendous growth occurring, but at least in this environment, we're seeing flat, and in some cases, some of the programs increasing slightly.

OK, great, thank you.

Sure.

Thank you, our next question is from

of Lehman Brothers.

OK, thank you. Good gross margins, I guess if I could ask where you think those might go? I mean, going back to I guess some of the ones that you saw in 2000, even '99, do you think we could get back over 10 percent sometime in fiscal '03?

Well, again, we're not guiding to fiscal '03. I think our opportunity, and you're seeing a little bit in our fourth quarter guidance, is leveraging our SG&A costs. Our guidance for the fourth quarter is to leverage SG&A by 30 or 40 basis points. And I think you know, we don't really have a set gross margin target, it's more about taking on good business and growing our operating profits sequentially, so I really can't give you a percentage on that other than I think the opportunity for us near-term in the next couple of quarters is more from an SG&A standpoint.

OK, great. Just recently had a chance to visit your Scotland facility and looked like things were going pretty well over there. And was just curious as to -- heard some business, one of your big datacom customers, was shipping up and moving over to Hungary, just how things are going out there?

Yes, if you look at our plan forward looking, Hungary will be utilized a lot more in '03, I mean, so directionally there's the automotive business that's going into Hungary, and some other businesses that are going into Hungary, and that will be good for that particular plan as we move forward.

OK, great. And could you just extrapolate a little bit more I guess on your comment on the 40 billion auto electronics industry? How much would you say that had been penetrated so far? And what would you say would be your share, let's say comparably to the other -- within let's say the top 10 EMS providers?

Well, I guess,

, against a 40 billion dollar cogs, you know, we really haven't even registered yet. Automotive's about -- what is it, 7 percent at this point?

It's pretty small, though, I mean, it's a few percentage points as far as the penetration. And I think

is big up with

as big an automotive group or piece of business as anybody in the industry.

So the penetration point is extremely low, and it's an industry in high need of substantial cost reduction and access to low cost capacity, so it isn't going to be a nice linear transition from their vertical orientation to an outsourced model. But I think over the next five years, you'll see a steadily increasing penetration rate.

OK, great, thank you.

Thank you. Our next question comes from

of

.

Good afternoon. Chris, maybe first you can identify the cash in escrow on the balance sheet. If that's just what is reserved for acquisitions in the fourth quarter.

Right, that relates to some of our acquisitions, and that's part of the funding. The actual cash will go in June and July, and the overall proceeds, that's part of our estimate of 150 to 200 million for Q4.

So that's maybe ...

That's part of that, yes.

That's the cash contractually required to be set aside, or something?

Yes.

OK. And then secondly, just telco as a percent of revenue. You mentioned it'll be less than 20 in the fourth quarter, but once you bring Lucent on can you give us a

as to what it'll be as you begin next year?

We're not going through the '03 guidance but I think what we are saying, you know, Lucent will add to the telecom space but we're seeing most of our growth as a company in the other segments. So, you know, I wouldn't expect telecom to increase from this point.

And I guess how do you reconcile the fact that it seems as though you're targeting everything but telecom but then you bring in a Lucent acquisition? I understand China is strategically and geographically important, but there must be many other assets for sale out there that aren't in the telecom space?

Yeah, I mean, I think the question kind of infers that maybe there's unlimited population of opportunity and we ought to go somewhere else. But keep in mind that Lucent is an existing customer. We want to be a part of their supply chain. Central China, in particular the Shanghai area, was a pre-existing business plan.

And, you know, really the one very substantial growth market in the telecom space from wireline, wireless, optical, is China. And to have that skill set in that market we think is extremely attractive to anybody in this space. So we kind of like -- we kind of like that deal, you know, in and of itself.

OK. And then ...

If that factory were in, you know, Texas or someplace we would come to a different conclusion.

OK. And then final question, Chris, I apologize if I missed it, the cap ex number for the quarter?

14 million.

Thank you.

Sure.

Thank you.

Our next question comes from

of

.

Yes, great quarter. You indicated that the deals are -- you're seeing more deals now. Could you hypothesize on is this a realization by OEMs that they really have to be more

on price and, therefore, more deals are available? Or is it that some of the deals that you had in the pipeline are starting to really get to the point where they're ready to be -- to be picked? Maybe you could talk a little bit about the deal situation?

Yeah, I don't want you to think that there's a substantially larger population of deals in the pipeline than there were six months ago. You know, there continues to be a large number of transactions in the pipeline. I think everybody in the EMS space is still generally -- I mean, you can argue about this back and forth, but generally speaking the top EMS providers are being fairly selective on what they'll go after. And, you know, it really has to fit with the -- with the stated set of acquisition criteria that each of us have.

So, you know, in some respects more OEMs --

, I think the basic premise you have is that, you know, given this environment and the fact that it's become more and more difficult if not impossible for an OEM to provide predicted levels of loading to their own capacity makes them virtually impossible for them to get -- to realize standard costs in their products and to manage their fixed cost base. And outsourcing is looking more and more attractive. That's absolutely true.

You know, the other comment I made earlier was that the basic new business development activities also picking up a little bit as well for basic pre-market business and OEMs who aren't going to bother with, you know, with trying to divest their high-cost plants. They just go ahead and outsource it.

And could you -- could you comment on the potential of

beyond this initial $275, $300 million deal?

Well, this is -- essentially, we will be responsible for the -- for all of

printed circuit board assembly electronics. So their prospects are very good in terms of their overall growth, as an automotive supplier, and as automotive electronics gain higher and higher content in the vehicles, but we'll essentially be producing all of their printed circuit board assemblies.

OK, thank you.

OK.

Thank you. Our next question is from

of

.

Thank you. I'm wondering, you said that your capacity utilization in the United States was 50 percent. Assuming that this region is not going to double next year, why not cut capacity another 20 to 30 percent?

, that's not in our business plans. We expect to grow all our segments from this base, and one of the things we all need to see through to a degree, and it's been a long one, but the overall tech dropoff, or the recession. You know, we want to be in a position to see when business stabilizes, and booking businesses in what I would call higher mix type of industry segments such as medical, we want to be in a position to grow our business in the United States. We're not in a position where we want to retrench by any stretch.

So, well, help me out here. I mean, what would happen if you did cut -- you know, cut your capacity, you know, why would it be that difficult to bring it back online?

We just, you know, we don't plan to do that. I guess if you look at what Jabil's business plans are, forward looking, we're comfortable with the capacity we have in the United States. We have great operations, fantastic plants, there's business activity everywhere, and we don't plan to do that. You know, this is not -- I think you might be mixing yourself up with how we look at the company. We have plants that have been around 10, 15, 20 years that are tremendous, great plants, and we just have no plans to make a change on that with the profile we see right now. It's just not that easy to take capacity out and then reinstall it.

As far as the consumer market goes, what other areas are you targeting besides set-top box?

Well, virtually all consumer electronics. The interesting thing about consumer electronics is digitalization. Digitalization of video equipment in particular, TV sets, audio equipment, DVD players, and the convergence of digital computing, like hard drive storage and that type of thing with entertainment. And, you know, we'll be carrying terabit and gigabit, you know, multi-gigabit disk drives around in our pockets with mp3 players and digital cameras and all that kind of stuff. So it's a very interesting market that -- that is looking at some of this outsourcing partly as a cost reduction opportunity to gain flexibility and that type of thing, the standard -- you know, the standard things all OEM's have moved to an outsource model for.

The other issue that they have is that given the fact that the projects are digitizing, they have an investment decision to make, so it's a crucial time for them. They'll have to go refit their factories to produce digital electronics, and it requires a different equipment set, and different processes, and it takes fewer people. And it takes smaller, you know, smaller factories and that type of thing, so it's a good time for consumer electronics companies to take a look at our industry.

And, and, do you feel that this will necessitate a larger footprint in China for you to capitalize on those?

Yes, it kind of comes with the business. As we get more business, we'll add capacity, and I think it goes -- well, maybe it doesn't go without saying. I'll say that a vast majority of high volume, low mix, you know, competitive, repetitive process consumer electronics are going to be produced in the lowest cost regions of the world. I don't think every consumer device is going to get produced in China. I don't go to that church.

There's kind of a little bit of a mentality that everything electronic is going to get exported out of China and I'm not -- I don't think that's true, but a significant amount will, and we think we have adequate low-cost capacity to get ourselves started in consumer electronics, and, you know, if opportunities come up to significantly expand our participation in that segment that might include additional capacity and business, we'll probably take a serious look at it.

Great, thank you.

Thank you. Our next question comes from

of

.

All right, I actually have a couple of questions. First, congratulations, particularly on the working capital performance on the quarter. And I guess the follow up to that is, do you have any particular goals as to where you want that to go and what you think you can do in terms of a cash cycle?

What we look at is, what we want to do is be in a position to, obviously from this level, improve our return on invested capital, and we're starting to see that in the third quarter, and I think we'll see that in the fourth quarter, that to stay at 31 days I don't think is a realistic goal for our fourth quarter.

Near term,

, I think we'll probably be more along the lines of where we were in the second quarter, which is in the 40 days to 45 days. What we'll need to do as a company, then, is obviously ramp our overall operating income and profits to continue to produce incremental returns on that capital we deploy, and with the acquisitions, do what we need to do to earn a return, and that is, improve the inventory turns from four, five, six turns to eight to 10 turns over a period of time.

OK.

We don't really have a set cash operating goal. It still relates back to our goal is to grow operating income 30 percent a year, and then still have appropriate returns on the business that we take on.

OK. In terms of the -- you've talked about what you expect the acquisition contributions to be in Q4. Can you give us some idea of what you expect those contributions to be in Q1, or should we just extrapolate two-thirds of the -- of the -- that you only did one-third of the quarter for two of the three acquisitions.

Yes, you can extrapolate.

So then...

The acquisitions, from a timing standpoint, you know, having moved into one month instead of two months, I mean we could have been in position for $100 million or so for acquisitions. So, you know, that's just really a timing thing. The overall business plan for all three of those acquisitions have not changed. It's just a matter of timing where our range I think was at one point was 50 to 100, and we're now 50 to 75. Most of that relates to one month production instead of two.

And so if we're looking at three months production then we're probably looking at somewhere north of 150 for the November quarter?

Yeah, I think the overall estimates out there I wouldn't disagree.

And one other question, you've in the past talked about new programs that you've won with Hewlett-Packard and with IBM. With Hewlett-Packard with the changes in the structure and -- do you still anticipate that that server business is going to come in as scheduled this summer?

I think our business relationship with Hewlett-Packard is in pretty decent shape, you know. I -- and I absolutely can't comment on their individual product integration plans, but I think we'll continue to have a pretty -- a substantial and vibrant relationship with HP and participate in different product segments with them.

And would you anticipate then that November quarter with both HP and also with IBM that you would be seeing higher revenues than you're going to see in the summer quarter?

I sure hope so.

Well, that's pretty definitive.

I know, you want to get us into a Q1 box ...

No, no. I'm just trying to get -- I'm trying to put it together for myself, you know. That's -- not at all trying to get you to say anything that will give us real clear guidance the way you do on Q4. But ...

Yeah. It's a very, very sensitive time with the integration of Compaq and HP. And I'm not trying to be coy with you just I don't want to comment on their product plans. I think we'll have a great relationship with the combined entity and I think that'll include servers. And, you know, we've already said that as a company and as a business we expect to see growth into 2003. And in August -- I'm sorry, in September we'll give you a pretty clear picture on what that looks like.

OK, thank you, Tim.

OK.

Thank you.

Our next question comes from David

of RBC Capital Markets.

Yeah, good evening, nice quarter. Chris, could you maybe just give us a sense as to how much operating margins will be held back in the August quarter due to costs associated with new program ramps as well as some acquisition integration?

The acquisition integration costs are estimated to be two to four million. As far as new program ramps and costs that we incur on that, we incur costs with new program ramps all the time and that's part of our business. It's all contemplated in our overall guidance.

OK.

I don't have a dollar amount for you.

OK. Looking beyond the August quarter should we expect to see any incremental cost savings associated with the restructuring or is that essentially behind us now?

The restructuring is essentially behind us but the point we made is we're always looking to add more efficient business plans with not only our acquisitions but also at the organic side. And so we'll continue on that. I mean, we've made some improvements and we're real pleased with where we're at right now but we don't want to stop there. And we're always looking to try to create and produce more efficient business plans with all our businesses.

Yeah. I'm just trying to get a sense as to, you know, where operating margins might shake out in the November quarter. It sounds like, you know, they might be pressured a little bit here near terms because it seems like there's a lot of new programs in the ramp up ...

Yeah, were going to update everybody ...

... not to mention the acquisitions.

Right. We're going to update everybody in September. And I think that what we're saying is that, you know, we're real pleased with our May quarter, we're excited to be able to execute to what appears to be a very good August quarter, and we're in a position as a company as we move into the beginning of '03 to continue to grow. But beyond that we're going to update people and we'll give people clarity in September.

OK.. And then, just a follow up, can you just kind of comment on the pricing environment, and whether you're seeing I guess a more aggressive posture by a lot of the OEM's, and is that negatively impacting, you know, operating margins here at any measurable extent?

I think there's certainly a lot of competition out there, but you know, our business has always been very competitive. I don't see a lot of irrational activity. You know, in any game that you play, you'll find pockets of difficulties, and we'll step into a particular program or a particular account where the incumbent, or on a particular program someone's being very aggressive because they want to fill a certain factory, or that type of thing, and you know, we see that from time to time, but you know what? We've always seen that.

I think we're able to win business with our pricing models that we have today. Our pricing models are designed to deliver return on invested capital, you know, that's, you know, commensurate with historical returns. And we're able to win new business. So I don't think it's an impossible environment for us to work in.

OK, great, thank you. Nice job.

Thank you. Our next question comes from

of

.

Hi, just wanted to clarify one thing on the last question. When you say the $2 to $4 million on acquisitions, you're saying that's what's running through the income statement, not charges for the quarter.

That's in our integration costs, yes.

But not being -- so, 20 to 40 basis points of drag, so to speak, in terms of operating margin from the current integration activities.

That's for the integration costs.

Right, OK. Other question, is it fair to conclude from everything you've said that of the X acquisitions, the growth you're seeing sequentially this quarter is almost all coming from new programs and transferred programs in, or is there any material organic improvement in any parts of your business?

We -- there's a lot of new programs, and most of our guidance relates to what we're seeing outside of telecom, it is stable demand environment, and we made some comment on the networking side is stable to increasing demand. But again, we're in a position with new programs to increase our business in an overall pretty flat organic environment. So I'd say it's pretty fair to say we are in a position where our organics are growing, but a lot of it is with new programs and new customers.

OK. And then, to follow up on that a little bit, if you looked at sort of the source of that and how you said that forecasts are sort of holding firm ...

Yes.

So you'd say, relative to people's plans to bring new products to market, or if you looked at it in terms of people's plans to consolidate their supplier base, those plans that people had given you that fall into that category that they really are holding according to schedule, or is anything ...

They definitely are.

Yes, they definitely are. If you look at all of the segments we've guided to, I mean, there's some nice incremental growth in our segments, excluding the acquisitions.

OK. I think that's it, thanks.

Thank you. Our next question is from

of

.

for

. I believe, Beth, you mentioned earlier on in the call, the news segment, you guys were breaking out

I believe and repair, but you said it was up sequentially 30 percent?

Yes, that was our other category. I was just telling you what was included in that ...

Oh, I see, OK.

... smaller customers, prototype, and the repairs, which has always been in there, I was just defining it for you.

OK, no problem. In terms of the medical, Tim you've mentioned medical here again today. What are your plans in terms of penetrating the medical market? Are you guys looking, obviously, to go after organic programs there, or is there -- are you looking maybe for a strategic acquisition in that area to kind of expand your presence in that market?

Well, we plan to grow that sector primarily through organic methodologies. To be honest with you, our -- we have factories today that have the necessary capabilities and process controls and disciplines to effectively manufacture medical electronics, and I think we'll choose to grow that primarily organically. We don't see a lot of OEMs looking to divest big parts of their business. I suppose that could be a possibility, I'm just -- I think that would get very complicated in that industry, and we don't have a lot of interest in doing -- acquiring people in our business.

Right.

In our business, because it generally is redundant to our own capabilities.

Right. In terms of the industrial and test segment, you guys have -- can we get an update on how -- the program, I believe, was

that you spoke about last call. How that's progressing as well as the program with -- the program

?

Yes, that segment is growing. We really resist drilling down into individual customer relationships and

plans unless it's material to our business. That particular case is not really material to the business. The

relationship's growing and doing very well, and, you know, we're happy to be one of their primary suppliers.

OK. In terms of when you mentioned that the funding would be $150 to $200 million that would be required, does that include Lucent or does that not include Lucent?

Does not include Lucent.

OK. That's it, thank you.

Thank you. Our next question is from

of

.

, Deutsche Bank. Good afternoon. A couple of questions. Wanted to touch on China and the progress of the new

plant there. Can you talk about how that's progressing and when you expect that plant to come online?

We would expect that plant to come online,

, sometime in the -- probably the fourth quarter of this calendar year. And, you know, it's going fine.

And you mentioned that you're going to ramp the China capacity with business demand. Can you talk about that a little bit? What do you plan to ramp in that site? Are you planning to ship some other business into China? Can you give us a little color around that, please?

Well, we've had some business shipped to China already from higher-cost locations, although that's been planned for a while. And China, for export, will be, you know, really high volume, lower complexity, commodity, primarily consumer products, you know, you'll see office peripherals and that type of thing produced there for us. I think -- I don't think we'll be a heck of a lot different than what you might find in EM -- other EMS factories within China, in terms of the export content. And then, domestic consumption, probably primarily communications-centric types of products. And we just try not to race out too far ahead. You know, a factory is something you do have to build ahead of all the demand, but the primary expense category in our business, what can kill you if you guess wrong, is what goes inside the building. The

and the people that you have to hire and that type of thing, so we're going to set up the foot print in the

area. Our business in China is growing so we feel very comfortable with the installation of capacity out of the gate and then we'll pour up -- pour up what goes inside the factory both in

and Shanghai as actual purchase order roll in.

But if we include the Lucent capacity plus the new Greenfield capacity how many -- as a percentage of your total square footage how much incremental floor space are you adding for that future growth or installation of the equipment?

, I really don't have that metric for you. I would guess that it would be less than 10 percent. Yeah,

, it's probably four or five percent, something like that, as far as overall capacity. In Asia we've got about 20 percent of our capacity so maybe with that it's in the mid 20s.

OK. And as this capital comes on in the business and we continue -- assuming we operate in a kind of a flattish market environment should we expect there to be somewhat of a drag on the -- on the earnings profile going forward?

No.

, what we're talking about is a building. And the -- we depreciate that building over a 30-40-year period. So it's going to have a pretty minimal impact to our overall operating cost. What Tim talked about is we will not install the gear set or what we call the work-sell staff, the indirect costs, until we have the business. And, you know, with that will come revenue and profits.

OK.

But we won't see the building itself having any kind of drag on our operating profits for China.

OK. And ...

We will have incremental cost but it's pretty small relative to the rest of the business plan.

So is it safe to assume cap ex kind of continues at these low levels until we see the actual pick up in the organic business?

Yes, excluding acquisitions I would agree.

OK, thanks a lot.

Sure.

Thank you.

Our next question comes from

of Credit Suisse First Boston.

Actually it's

, thanks.

Everything's been asked except I don't think I've heard anyone ask if you had a 10-percent customer in the quarter?

We are -- our 10-percent customers are -- have been or are expected to be for fiscal '02 Cisco and Marconi. And we don't break out the specific 10-percent customers but, again, from an overall standpoint for our fiscal year we expect Cisco and Marconi to be 10-percent customers ...

And ...

... and ...

Sorry. My other question is kind of related to a previous one. Do you by any chance have working capital, long-term working capital metrics that you're trying to sort of guide the business to or are you just kind of working it by ear at this point?

No, we have internal company goal sets. And, you know, from -- and, you know, we're continuous improve culture and, you know, ultimately we would like to improve our operating metric substantially. But it isn't something that we publish because we want to walk, you know -- because things could happen in our business that might cause an eruption in that -- in that progression and we'd rather give you very concrete guidance in the near term about where our metrics are moving.

OK, great. Thanks.

OK. Operator, that's all the time we have for questions today. Thank you all for joining us. For your information, Chris Lewis will be on

tomorrow morning at 9:15. Thanks very much.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the session. You may now disconnect. Good day.