捷普科技 (JBL) 2014 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Jabil's second-quarter 2014 fiscal year 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. Welcome to our second-quarter of fiscal 2014 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, Jabil.com, in the investor section. Our second-quarter press release, slides and corresponding webcast links are also available on the website.

In these materials you will find the financial information that we will cover during this conference call. We ask that you follow our presentation with the slides on the website 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 third quarter of fiscal 2014 net revenue and earning results, the financial performance for the Company, and our long-term outlook for the Company. 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 of these risks and uncertainties are identified in our annual report on Form 10-K for the fiscal year ended August 31, 2013, on subsequent reports on Form 10-Q, and Form 8-K, and our other securities filings. Jabil disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise.

Today's call will begin with opening remarks from Mark. We will then move on to our second-fiscal-quarter results and guidance on our third fiscal quarter of 2014 from Forbes Alexander. We will then open it up to question from call attendees. Now, I'll turn the call over to Mark.

Thanks, Beth. Good afternoon. I appreciate everyone taking time to join our call today.

Before I begin, I'd like to take a minute and recognize all of our people here at Jabil. Thank you for your continued commitment and tireless dedication in serving our customers.

I want to begin today by addressing three material events we discussed during our December call. These events are the temporary shift in demand within our DMS business, the pending sale of our AMS business and our disengagement with BlackBerry.

As we sat together roughly 90 days ago coming off of a solid Q1, we delivered tough news around volume declines within our DMS segment. Upon delivering this news, top of mind for management was to reallocate assets and resources to new strategic revenue streams as swiftly and thoughtfully as possible, the goal being to return our core operating income within our DMS segment to more normalized levels in fiscal year 2015.

As we sit today the effort put forth by the team are paying dividends, as we accelerate program ramps during the back half of this fiscal year. We will incur additional up-front production expenses in Q3 and Q4 relative to our plans set back in December. As I look across the various development activities, I'm confident that we'll deliver a return on investment net of our development costs in excess of our hurdle rates for the collective portfolio of these new programs.

An illustration of the type of activities currently taking place are: implementing automation for production processes, various advanced engineering activities, hiring and training teams of direct labor, prototyping, and repositioning manufacturing assets across the Company. As much as I'd like to see better financial results for this quarter, I'm comfortable spending money on our development activities to secure new revenue streams for fiscal year 2015 and beyond.

Let me move on to our second material event, the sale of our AMS business. The team has executed the plan and the transaction will close on or about April 1. I couldn't be more pleased.

Thank you to our M&A team and our functional support teams for a job well done. A special thanks to our AMS employees. I wish them all the very best as they prepare for life under the iQor flag.

Lastly, a brief update on the wind-down of our BlackBerry relationship. Over the past six months, our team has done a masterful job of working with their counterparts at BlackBerry to assure the customer is well served, all while mitigating what was significant potential financial liability.

I'm pleased to report that the wind-down should be complete by the end of this quarter and our overall financial risk is squarely in the range previously communicated. Thanks to all of those involved for your focus and effort in delivering an outstanding result.

Moving on to our core business. Striving for perfect quality and excellent customer service is at the heart of all we do.

Our most recent net promoter scores continue to trend in a positive direction. So much so that our scores are at all times highs across a large percentage of our business.

This is significant as it directly correlates to overall customer satisfaction and our ability to realize market share gains. Thanks to the entire team for making this happen.

The leadership team for our enterprise and infrastructure segment continued to execute well. We are well-positioned in this space as we look ahead to fiscal year 2015. Our service levels are best-in-class across much of this business.

The current macro environment is challenging in the area of enterprise spending for corporations and the federal government. We are seeing positive demand signals in the area of 4G and LTE. Market share gains are consistent but anticipated net revenue growth is modest based on the offset of the current end-market headwinds.

Our High Velocity segment has a team that continues to bring forward innovative solutions while maintaining tight controls around cost. We continue to enjoy strong customer relationships in the areas of printing, point of sale, digital home appliances and automotive.

In combination with running their business with great efficiency, the High Velocity team is also celebrating 15 new customer wins. These wins position this segment for another year of solid performance as we exit fiscal year 2014.

Our industrial business remains stable and is very well diversified. The team serves many of the world's largest industrial brands and global conglomerates.

We provide progressive manufacturing and supply chain solutions that positively impact end markets. Markets such as farming and heavy machinery, smart metering and monitoring, energy, power generation and home comfort and security.

Our Nypro healthcare team continues to advance our service offering and broaden our overall value proposition. What they're doing illustrates creativity, as they look to expand into new areas of healthcare along with big pharma.

The leadership team for our Nypro packaging sector has realized several new and exciting program wins. These wins are with marquis customers in the areas of food and beverage as well as consumer packaging.

All told, our team in Clinton, Massachusetts continue to carry the Nypro brand with pride. The integration has gone well, but not without lots of hard work and collaboration.

We are in the process of launching two new factories within our Nypro division. These factories will support growth in both our healthcare sector and our packaging sector.

So what does all this mean if we fast forward five short months? Forbes and I believe that we will deliver core earnings per share in the range of $1.65 to $1.95 in fiscal year 2015.

Let me walk you through our assumptions. We assume we will deliver roughly $300 million to $320 million of core operating income in fiscal year 2014. These results are adjusted for the removal of our AMS business and our disengagement with our BlackBerry business.

We assume $65 million of benefit from our corporate restructuring efforts in fiscal year 2015 as previously communicated. We assume revenue growth from our E&I and High Velocity businesses to be GDP-like.

We also believe these two segments will deliver more normalized margins in fiscal year 2015 relative to fiscal year 2014. This would result in incremental earnings year on year of roughly $25 million to $45 million for these two segments combined.

We assume our industrial, healthcare, instrumentation, packaging, and defense and aerospace sectors will have combined revenue growth of roughly 5% to 7% year on year FY14 to FY15. We assume strong double-digit revenue growth for our intelligent lifestyle and wearable computing business. This growth is reflective of the development activities currently under way within Jabil.

We assume solid recovery for the balance of our DMS business. The key aspect of this recovery is the leverage we obtain.

We obtain leverage applied to the existing fixed cost base, leverage applied to the absorption of SG&A, and leverage applied to our tax structure, which Forbes will address in his prepared remarks. I ask that you think about the impact of this leverage in a manner somewhat similar to the deleveraging we experienced last quarter.

Our last assumption is that we complete our $200 million share buyback in fiscal year 2014. All of these assumptions most certainly have a degree of risk, but on a relative scale we believe our assumption set is well grounded and sound.

The summation of this assumption set is what guides us in our belief that we'll deliver the core EPS in the range of $1.65 to $1.95 in fiscal year 2015. We've proven time and time again that Jabil is resilient and our long-term execution is dependable.

It's my belief that Jabil's long term earnings power remains strong. At a time when the typical build to print legacy EMS business is showing flat to modest growth, we are most fortunate to have the unique combination of scale and technical capabilities which allow us to embrace specific business opportunities that offer good growth year on year.

We have incredibly strong relationships with many of the most valuable and innovative brands in the world. In closing, I truly believe we are making commercial and strategic decisions today which will deliver improved valuation over the long term. I'll now turn the call over to Forbes.

Thank you, Mark. Before reviewing the second fiscal quarter, I'd like to remind everyone that all results associated with our aftermarket services business are reflected as discontinued operations. And as such, our results for the second fiscal quarter of 2014 and all comparative periods in discussion reflect this treatment.

I would note that slide 11 of the second-quarter earnings presentation posted on our website reflects operating results for continuing operations for each quarter of fiscal 2013 and the first quarter of fiscal 2014. I'd now ask you to refer to slide 3 while I will review the second fiscal quarter.

Net revenue for the quarter was $3.6 billion, a decline of 14% on a year-over-year basis. GAAP operating income was $4 million or 0.1% of revenues. This compares to $133 million of GAAP operating income from revenues of $4.2 billion or 3.2% for the same period in the prior year, with a GAAP net diluted loss per share of $0.19 during the quarter.

GAAP earnings in the quarter included $36 million of restructuring and associated charges, $6 million associated with the amortization of intangibles and $15 million of stock-based compensation expense. Core operating income, excluding the amortization of intangibles, stock based compensation, restructuring and related charges, was $60 million and represents 1.7% of revenue. Core diluted earnings per share was $0.10.

Please now refer to slide 4. In the second quarter our diversified manufacturing services segment declined in line with guidance by 16% on a year-over-year basis, after adjusting for our aftermarket services business as discontinued operations. This decline is primarily associated with a lack of revenue demand we discussed within our materials technology unit on our December call.

Revenue for the segment was approximately $1.5 billion, representing 43% of total Company revenue. As a result, core operating income was 1.8% of revenue.

The Enterprise and Infrastructure segment decreased 9% on a year-over-year basis, reflecting declines in enterprise spending seen late in our quarter. Revenue was approximately $1.2 billion, representing 34% of total Company revenue. And core operating income for this segment was 2.5%.

The High Velocity segment decreased 18% on a year-over-year basis, primarily as a result of our BlackBerry disengagement. Revenue was $0.8 billion, representing approximately 23% of total Company revenue. Core operating income was 0.3% of revenue.

I'd now like to review our cash return metrics and capital expenditures. We ended the quarter with cash balances of $675 million. Debt levels were consistent at $2.2 billion.

Cash flow from operations in the quarter were $17 million or $135 million in the first half of the fiscal year. Core EBITDA for the quarter was approximately $174 million, representing 4.9% of revenue, while our core return on invested capital declined to 4%.

In December we announced the approval to purchase up to $200 million of our outstanding shares. During the second fiscal quarter we purchased approximately 3.6 million shares at a total cost of $64 million.

Our net capital expenditures during the quarter were approximately $76 million or $273 million on a year-to-date basis. Last quarter we discussed our expenditures being towards the low end of a $250 million to $350 million range.

Given recent years, business wins and product ramps, expenditures are now expected to remain in the range towards the higher end. A portion of these investments will bring online our first tranche of capacity in our Chengdu, China campus and additional business awards within our Nypro business unit.

Please now refer to slide 5, where I'd like to update you on our restructuring activity. During the second quarter we recognized restructuring-related charges of $36 million, $28 million attributable with the wind-down of the BlackBerry relationship.

These charges reflect further reductions in force and asset write-downs. Total costs to date associated with this activity are approximately $42 million, of which $13 million is cash related.

Our broader capacity alignment plan announced in the third quarter of fiscal 2013, remains on track to deliver $65 million of benefit in fiscal 2015. As a reminder, our plan outlined $188 million of costs to be recognized over a seven-quarter period.

Since its inception, we have recognized $100 million of those costs with cash outlays to date of $38 million. The balance of $88 million of charges and $100 million of cash is anticipated to occur over the next three quarters. Finally for the third quarter, our total restructuring charges are estimated to be in the range of $15 million to $35 million.

I'll now ask that you refer to slides 6 & 7 while I discuss our third-quarter 2014 guidance. But before providing details around this guidance, I would like to take a few moments to discuss the impact of taxes and the effect they'll have on our second half of fiscal 2014 earnings. The core effective tax rate for the first half of our fiscal 2014 has been in the mid 20% range, but as we look out into the second half of fiscal 2014 we do anticipate that rates will increase substantially based upon the current forecast for the country mix of earnings.

At this time, we are forecasting our annual core effective tax rate to run in the mid 50% range. As a result, this will of course mean higher rates on a stand-alone basis in the third and fourth fiscal quarters. Core tax dollars remain as we had forecast at the beginning of the fiscal year, in the range of about $100 million to $110 million, despite the lower levels of revenue and pre-tax core income that we are experiencing.

The tax percentage increase is driven by two events. One, operations in lower and zero tax rate countries will no longer generate near-term profits at previously forecasted levels, while some are incurring losses. And two, Jabil will continue to have profitable operations in countries like China and India, so taxes will continue to be incurred regardless of the profitability of our global operations.

These events, even in isolation, would increase the corporate tax rate. But when they do occur during a relatively short reporting period, such as the second half of fiscal 2014 with lower global earnings, the tax rate becomes much higher than normal.

In essence, tax dollars remain relatively fixed in each of our third and fourth quarters and are estimated to be in the range of $30 million to $33 million each quarter. In fiscal 2015 we expect our global tax rate to return to historic levels that have averaged near 20% plus or minus a percentage point or two.

Now turning to the specific guidance for the balance of the year. We expect revenue in the third quarter on a year-over-year basis to decline approximately 14% and to be in the range of $3.5 billion to $3.7 billion, or at its mid point, consistent sequentially.

The core operating income is estimated to be in the range of $20 million to $60 million, and core operating margin in the range of 0.6% to 1.6%. Interest expense is estimated to be $32 million and as noted, tax dollars in the range of $30 million to $33 million. Thus we estimate the core earnings per share will be in the range of zero to negative $0.20 per diluted share.

We also estimate the net GAAP earnings per share to be in the range of $0.74 to $1.04 per diluted share, based upon a diluted share count of 202 million shares. This reflecting the gain on sale of our aftermarket services business.

We believe that the third fiscal quarter shall be the turning point for operating income levels. The fourth fiscal quarter is currently estimated to have operating income levels similar to those of the second quarter. Interest expense and tax dollars shall remain relatively consistent with those of the third-quarter guidance.

Turning to our segments and year-on-year performance, the Diversified Manufacturing Services segment is expected to be consistent on a year-over-year basis. The Enterprise and Infrastructure segment is expected to decline 5% on a year-over-year basis.

And finally our High Velocity segment is expected to decline 40% on a year-over-year basis, reflecting the wind-down of our BlackBerry relationship. Excluding this relationship, this segment is expected to increase 10% as a result of broad-based growth across automotive, printing, set top boxes, and point of sale.

As a result of the revised operating income guidance and capital expenditure guidance, for the balance of fiscal 2014, we now expect operating cash flows, less capital expenditures to be in the range of $150 million to $250 million. I'd now like to hand the call back to Beth.

Great, thank you, Forbes. Before we begin our question-and-answer session, I'd like to remind our call participants that in customary fashion, out of respect to our customers, we are not able to and we will not address any customer-specific or product-specific questions. So we thank you in advance for your cooperation. Operator, we would now like to begin the Q&A session with our sell-side analysts. Thank you.

(Operator Instructions)

Your first question comes from the line of Mark Delaney with Goldman Sachs.

Thanks very much for taking the question. Mark, I was hoping first you could elaborate a little bit more on your comment about having a good pipeline, and what's giving you the confidence to give EPS guidance for FY15 at this point of the year?

Yes, sure, Mark. It's what we're looking at right in front of us, Mark. As I said in my prepared comments, there's certainly risk to it. But we felt like, with the softness in the back half of FY14, and Forbes and I debated long and hard about giving clarity and some color around FY15, we have so much going on that we felt it was appropriate to offer up some color on 2015.

I would tell you that in some of our high-velocity business, in automotive, what I'm looking at with our wearables and lifestyle business, and then certainly the other parts of our MTG business and when I see what we got going on in development, that gave us the comfort to go ahead and give some color around FY15.

I think that, along with everything we're looking at in the development phase, when I look at the stability we're seeing in our core business, whether it be in the industrial sector, our E&I sector, our high-velocity sector, the business is running well. I think that things have been so tough for us in FY14 because of the dramatic drop in a significant program, as well as peeling off BlackBerry and AMS, that the weight of all of that on the Business, it's been hard for people to get their arms around the fact that we've got a heck of a good Business that we're executing and running. Q3 and Q4 may not feel like that or reflect that, but we feel pretty good about where we're headed in FY15.

Thank you for that color.

For my follow-up question, I was hoping you could clarify some of the assumptions in the FY15 EPS guidance. I know you talked about planning to execute upon the $200-million repurchase.

Beyond that $200-million repurchase, is there anything incremental from capital allocations that's assumed in that $1.65 to $1.95 EPS guidance, either further buybacks or M&A or debt reduction? Is it just that $200 million that's baked in? Or is there additional capital allocation that you're assuming to get there?

In the assumption set described today, there's no other additional capital allocation. It's just the $200 million.

Thank you and good luck.

Thank you.

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

Thanks a lot. Good afternoon, guys. Two questions.

One, when you talked about your FY15 guidance, I think one of the assumptions you made was you expect a solid recovery in the DMS business. Does that imply you think that business gets back to a $2-billion run rate starting the November quarter? That's where I think it was, this year at least.

And if so, maybe talk about what gives you comfort? Is that new programs -- the wearable stuff that's ramping? Or do you think some of the headwinds you had last quarter -- those headwinds will be resolved, and that's how you get back to that $2-billion run rate?

Yes, Amit, Forbes. Let me take a swing at that. We're not giving specific guidance. You mentioned the November quarter, so we're not giving specific guidance by quarter.

Certainly, we were hit with dramatic demand declines in the December time frame. As we've been consistent in our messaging, I think, over the last 90 days, we'd expect to bring revenue back in to cover that capacity that we have in place. Without dialing in specific, I think you mentioned $2 billion a quarter, certainly that's the goal here as we move forward into 2015, but don't really want to dial into specific numbers.

What is encouraging is we are seeing robust growth in terms of product award wins broadly across DMS, be that in healthcare, be that in wearables, be that more directly in the materials technology group. I think, as noted in my prepared remarks, pleased to note that we're laying down and launching a first program in our Chengdu, China, site. It's pretty broad-based, and the goal here is that we do get our revenue back to previous levels, and fill that capacity that is in place.

Got it. If I just field the FY15 guide, you guys have tried to provide long-term guidance in the past few years. The final numbers have been a bit off the initial expectations, right? What gives you conviction? Or what do you think today that's so different than what you saw the last two, three years when the initial guides you guys gave on an 18-month basis did not pan out to be the way you guys thought it would be?

I don't know exactly what guidance you're referring to, but I think you're being kind if you're referring to about a year ago where we talked about what we thought FY14 would be, around the $2.77 range. One of the things that I gave a lot of thought to before putting together my prepared remarks was: Okay, we'll say this, and it will fall on deaf ears because when we did this about a year ago, it wasn't a small miss, it was a huge miss.

As I look at the Business today -- and we could have a repeat of what happened last year. I just can't imagine that -- first off, we're not going to sell any other parts of our Company in the next 18 months, so there's not going to be another AMS. I can't believe that we would have a drastic disengagement with our second-biggest customer in the next 9 to 12 months. And I can't contemplate a massive product snafu that we experienced -- that we talked about in our December call.

If those things don't happen, I think that the $2.77 holds up pretty darn close. Again, as we look at the Business today, I would caution everybody: There's definitely risks in the assumptions. I'd ask you to play through the assumption set that we talked about, but it is illustrative of where I think the Business is headed. Again, we've got an awful lot of good things going on right now, both in production and ramping towards production.

Thanks a lot.

You're welcome.

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

Yes, thank you. Mark, can you help us think through a little bit of the 2015 guidance range, particularly in context of the $2.77 that you mentioned here. If you ex out the BlackBerry and the AMS business, I still get, based on the prior level of businesses, north of $2 number.

Given what you're implying in 2015, does it mean that your largest customer is not back to full run rate? Or are you assuming some lower level of ongoing revenue from that business? And I have a follow-up.

Thanks, Wamsi, great question. I don't want to characterize our illustration or our guidance as conservative. I think it's very realistic.

Let's remember that we are coming off a year where we really took a hit hard on the decline of our DMS business. In addition to that, we sold the AMS business, which, again, I'll repeat, I think ends up being a great transaction for shareholders. Then we end up with the disengagement of BlackBerry.

So, if you think about the fact that it's only been 90 days, and then maybe 120 days since a lot of this activity took place, we are running fast, running hard. The team has done a fabulous job of -- I will not want to have conversation with anybody inside of our Organization that's just running around frantically trying to fill up assets with suboptimal business. The business that we're seeing come back to load up different assets, whether it be the assets used for BlackBerry or some of the other DMS assets, is very well-thought, strategic business. Some of that is also business that we anticipated over the long term based on certain product road maps.

When I think about all that, when I think about what we've been through, when I think about the fact that we went into FY14 with the revenue plan of about $19 billion to $19.2 billion, and as we go into FY15, our revenue level is going to be somewhat less. I would characterize our revenue, as we sit today, being in the $16-billion to $16.5-billion, $16.6-billion range, something like that. We have infrastructure in our Company in anticipation of the $19 billion of business.

When we disengaged with BlackBerry, when we realized we were going to sell AMS, and when we got the news around the DMS business, we certainly had been working diligently to remove some of the structural costs. But fundamentally, I'm choosing to run the Company with a little higher degree of structural cost, because I think that's the best to do longer term for the Business. And that's providing a decent amount of the disconnect, per your question. So, we'll see what happens over the next couple quarters, and we hope in the June call, and potentially the September call, to give you some better clarity on the outlook for 2015.

Thanks, Mark, that's helpful.

As a follow-up, you mentioned incremental expenses, including automation for production process, some direct labor, and prototyping engineering, et cetera. I'm here in Taiwan right now, and I'm talking to some of your competitors who are adding CNC capacity at a pretty frantic pace.

What are your assumptions around the utilization rates as you go through these ramps and more sustained longer term? Because it seems like the industry is adding a lot of capacity on the automation side right now. Thanks.

I'm not going to comment on that, Wamsi. I appreciate you being over in Taiwan and seeing some of this first hand. I don't know what you're looking at or where you're at, but it certainly will give you a first-hand appreciation of the scale and the complexity. I do think that that's one thing working in our favor.

This stuff is really, really hard, and it requires a decent amount of CapEx. It requires a lot of scale from an infrastructure and an engineering perspective. From a barrier to entry, this stuff is difficult.

Again, I don't know what products you're looking at or what production. I wish our competitors the best of luck. This stuff's really hard, and we're keeping our head down. We know the road map and the volume that we have to provide over the next couple quarters. We'll continue to focus on what we need to do, and hopefully we can do it really, really well.

Specific to your question, Wamsi, as far as yield rates and ramp rates and all that stuff, it's highly, highly dependent on programs and product sets. It varies greatly.

Okay, thanks a lot, Mark.

Sure.

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

Thanks, good afternoon. I was wondering if you could just talk a little bit about the cash flows going forward. If we were to look out to FY15, would you expect the original 2014 target of $650 million to $750 million of cash flow from operations to be achievable?

And secondly, any further thoughts on use of proceeds from the sale of AMS? And any thoughts on CapEx for next year? Thanks.

Thanks, Steve. I'll take the AMS proceeds question, and then turn the cash flow and CapEx question over to Forbes. Although I think that's going to be pretty opaque because we have no intention at this point to give any discrete or finite information around cash flows or CapEx.

The reason is not to be evasive, but we go through our budgeting process. This is a rarity for us to be giving this level of transparency in a March call for the next fiscal year. We don't do our budgeting for FY15 on a cash-flow CapEx basis until the July time frame.

I think it would be a little bit irresponsible for us to try to guess through that. We have enough visibility in the Business going forward that we can give a pretty good indication on earnings and revenue, and how that's going to look. But on the balance of it, we've got a lot of work we'll have to do.

On the proceeds from AMS -- we'll make a decision. The good thing is: We're about a week away from closing that deal. I think the vast majority of that capital will be kept on our balance sheet for a period of time. Over the long term, I'd envision those proceeds being used for CapEx in the Business, strategic CapEx. Then we can decide if we're going to give a portion of that, be a relatively modest portion, for additional share buybacks.

I'd characterize it this way: If we have the capital sitting on the balance sheet and there's an opportunistic play for us to buy back additional shares where we think the shares are well below the intrinsic value of the Company, we may execute on that. Otherwise, I'd like to stand pat on that, and keep that capital as we move into FY15.

I do think that you can expect, and again, we'll have conversations with our Board and whatnot in an appropriate fashion, but every year we tend to do another tranche of buybacks. Those buybacks tend to be in line with shares that we released around executive comp, and you could expect that in FY15. Anything above and beyond that, we'll have to wait and see.

Thanks, Mark. If I could just sneak in a quick follow-up, in terms of the cash flow. I guess what I'm trying to get at is: How much -- whether you have a level of confidence that the cash flow from this Business can return to where it has been in the past. Especially since we're having trouble understanding -- I'm having trouble understanding how much of a cash-flow hit is associated with some of these start-ups, and when that's going to level out, and you can look at a normalized crash flow. Thanks.

Yes, I think it's fair to say that we can return to previous cash-flow levels. There's multiple ramps occurring essentially between now and certainly into our first fiscal quarter, which is our November calendar time frame of this year.

Certainly, if one looks at that midpoint of the guidance range that Mark gave, which I think, that would certainly suggest that our EBITDA levels are returning north of $1 billion. As a proxy for cash, I think that's reasonable as we look into 2015.

Maybe I could complement that with one comment, too. As we're looking to find what we think are intelligent pockets of reasonable growth, a lot of those businesses, they're just different than our historical businesses. I can tell you we don't always get it right; we certainly make plenty of mistakes.

But one of the things we pay very close attention to is: We're not going to be out doing big pockets of development investments for returns that are commensurate with legacy 2% EMS returns. As I said in my prepared comments, and again, there will be some ebbs and flows to this, but any programs where we're doing some upfront investment has to pass our hurdle rate inclusive of those upfront development costs.

As you know from past conversations, our weighted average cost of capital is 10%, 11%. And we're continuing to drive the Company on an ROIC basis something north of 20%. All of these programs, if you will, fit squarely in that model.

Great, thanks for the help.

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

Great, thank you very much. A question or two for Mark, and then followed by Forbes for different questions.

Mark, if I do my math right and roll up fiscal sales, am I right that sales for FY15 look in the neighborhood of, say, [$16 billion to $16.5 billion]? And if so, the big thing is -- your largest customer gave you a lot of challenges recently. It seems like that's a long ways away to actually get firm orders from a customer like that.

The question is: What gives you the confidence or do you actually have firm orders for FY15 from a customer like that? Or are we potentially looking at hopes and desires, and we could see some risk associated with that?

And then for Forbes, a couple questions. One is: Customers above 10% -- how many and what percent are segments?

And what about debt covenants? Now that Jabil is not making money next quarter, anything to be concerned about for debt covenants? Or can you include the sale from the gain in your debt covenants? Or is it like a trailing 12 or 24 months for debt covenants? Or should we be mindful of anything there? Thank you.

All right, Jim, I'll go first and hand it over to Forbes. I can assure you that we absolutely would not be providing clarity and color around FY15 based on hopes and desires. It is about road maps.

I don't think we have a single customer today that, across any of our portfolio, which gives us firm demand. We certainly work off of road map and forecasts. And with all of our customers, that ebbs and flows, but that's the process.

If we take all of the information we have today, whether it be in DMS or E&I and high velocity, we aggregate that up, we risk-adjust it, and then we look at the activity that's going on in the Company today. Combining that with the assumption set that I outlined in my prepared comments, that's how we frame out our outlook for FY15.

And, Jim, we had one 10% customer in the quarter, and that was within our DMS segment.

With regards to your question around bank covenants or debt covenants, yes, we do have some. That's on a trailing 12 months debt-to-EBITDA covenant. So, the Company is in good shape.

I think we exited on the trailing at a little tick over 2 times. That covenant is at 3.5 times.

Even though we're guiding to suppress core operating income levels in the back half of this fiscal year, we still expect to generate $160 million, $170 million of EBITDA in each of the next two quarters. As we exit the fiscal year, we'll be around about 2.5 to 2.7 times, is my estimate. Plenty of coverage there, plenty of room as we move forward.

Great. And was my math right that total fiscal sales, [$16 billion to $16.5 billion], is where you roll everything up and then risk-adjust it to?

That's correct.

Great, thanks.

Thank you.

Thanks, Jim.

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

Hi, thank you. Mark, my first question was on the E&I segment. This segment continues to remain somewhat challenged. I was wondering what your expectations and outlook are?

Are there any plans to further right-size or restructure that segment? Because it looks like operating income again dipped below 3% this quarter. Would love to get your thoughts around that.

Sure. That segment of our Business is really, really well optimized. The cost structure is what I'd say is tight and right. The team is incredibly efficient.

The issue around margins there is, is very little to do. If you think about Jabil, we've got about 13 different operating units that operate pretty much independently. We roll them up into the three sectors that we report. We keep an eye on the cost structures and the independent overhead in each of those sectors.

What E&I is suffering from right now is the additional absorption of the corporate cost. If you can imagine in the back half of the year, including Q2, we've got BlackBerry coming out, we've got AMS coming out, the combination of both of those. And then with the drastic fall in our DMS space, it's just corporate absorption. The Business itself is running great, and the team is superb.

Okay, that's helpful.

Then, I guess we've had a lot of moving parts. I'm just wondering, as we look over the next two, three, four quarters, how should we be thinking about seasonality? Should we expect the same seasonal patterns we've seen in the past where you start to ramp in August, and November tends to see a nice sequential uptick? Or could it even be better, given the fact that DMS is so depressed right now? Any help you can give in terms of the seasonal ebbs and flows.

We're not going to talk about quarters, but I would say that based on the fact that we're coming out of a trough, as we go Q3, Q4 and into Q1, the upswing there will be bigger than usual, would be my guess. Then as we get into FY15, I would see a pattern of similar seasonality that you've seen in the past, although we continue to work hard to try to dampen that with continued diversification.

The one thing that made me a little bit sad on your comment initially is: I've recognized the gyrations we've put you guys through in the last year, year and a half, and I wish we hadn't. I think we've made some great decisions for the long term of the Business. I think we've made some good decisions both in the sale of AMS and in some of the other decisions we've made with BlackBerry and others. I do understand that we've made it complicated and hard to understand. Our goal is, going forward, to do our best to try to simplify that for you.

I appreciate that.

And then one final one for me. Your largest customer last year was about 19% of sales. As you look at FY15, do you expect your Business to be slightly more diversified with maybe slightly less concentration? Or are you quite conformable even with those levels of concentration?

Hang on. Yes, I think we'll talk more about that as we get closer to the fiscal year.

Okay, I appreciate it.

Thank you.

Your next question comes from the line of Brian Alexander with Raymond James.

Thanks. Most of the questions have been answered. Maybe a clarification: Did you say that the core operating income for FY14 would be $300 million to $320 million? I just wanted to clarify that.

Because if so, it implies the Q4 op income would actually be flat to down versus Q3, assuming you come in at the midpoint of what you guided to for Q3. But I think you also said that it would be flat versus Q3.

Yes, Brian, I think the math on that is, just illustratively, I think what I said is: An assumption Forbes and I made for FY15 is we would deliver $300 million to $320 million of core op for FY14. But that was adjusted for removal of AMS and BlackBerry. So, if you take AMS and BlackBerry out of what we're actually going to do in FY14, as we sit today, I think Q4 will be flat or up from fiscal Q3.

Okay. I think you also said it would be equal to Q2. I just want to make sure I heard that right.

You heard that right.

Okay, got it.

You have given a lot of detail on the outlook for FY15 in terms of revenue $16 billion-plus. Just wanted to clarify that you're also suggesting the operating margins in each of your business segments -- will they get to the, at least the low end of your long-term targeted range? Is that implied in your guidance?

With respect to the restructuring benefit of $65 million, are you assuming all of that flows to the bottom line?

I would say that in our long-term margin ranges, I don't know that we'll get to the bottom end of all of the ranges early in the year. We'll see. It has nothing to do with the health of the Business whatsoever.

It has to do with what I talked about a little bit earlier, Brian, which is: We've got an executive structure and a corporate structure that was going to support $19 billion. We've peeled a lot of that cost out, and that's independent of the restructuring that we're doing. So, we've reduced that.

I don't want to, again, get draconian and start cutting too hard because we have other areas of our Business and other opportunities. If we don't get to the low end of the ranges, and again, we'll give more color on this as we get closer to the fiscal year, it won't be -- as I sit today, it's not expected to be because the Business isn't healthy. It's expected because there might be 10, 20, 30 basis points based on additional overhead. If that turns out to be the case, you can expect and hold Forbes and I accountable for walking through and explaining that.

And we do expect the full $65 million, Brian, of restructuring benefit to hit flows directly through the bottom line in 2015.

Okay, and then final one. I think the answer is no, but are there any changes in your thought process about the long-term profit model and return on capital of DMS? And more specifically, the materials technology group, given the volatility you've seen in the business, the capital intensity, the competitive landscape changes that I think somebody alluded to earlier on the call. Any changes at all to the long-term outlook? And is this still a business that you plan to focus on growing longer term?

It's a business that we're focused on for sure, Brian. I would say that in the analyst meeting in Boston, we took the margin range for that down by 50 basis points, I think, to 5% to 7%. I still feel good about that as a range. It's still a business that we're spending a lot of time focused on. As we sit today, it's a business that continues to be encouraging to us.

Okay, thanks a lot, Mark.

Operator, we have time for just one more call today.

Okay. Your last question comes from the line of Matt Sheerin with Stifel.

Yes, thanks for getting me in. So, a question, Mark, on those incremental investments. I wanted to clarify: Is that primarily targeted at your largest customer in that segment? And is that largely related to cost of goods that will pressure gross margin versus SG&A?

I won't talk about who it's for. We've got about 12 different things going on. Certainly, our biggest customer's playing in that.

Actually, I would think about it the reciprocal of what you stated, which is: There's different terms we have for all kinds of different programs. To the extent, if you think about my prepared comments, which were talking about costs all-in, exceeding our hurdle rate or at least meeting our hurdle rate. If I have a certain program where the terms are, I don't need to worry about the cost or the customer covers those costs, then maybe that ends up dampening my margin a bit. And maybe that ends up having an impact in the production longer term, as far as either COGS or pricing.

If I have a program that's complicated, and we decide to make the investments, then there needs to be an appropriate margin and return on that through the production life for the program to make sense. We have all different models going off at the moment. Again, I would think of it as the more risk and/or development that we're either participating in and/or paying for upfront, probably has better returns over the long term in production, and the opposite of that holds as well.

Okay, great. Lastly, again on the E&I segment, a little surprising at the miss, considering that management sounded fairly optimistic during the quarter on that business. Could you give us more color on exactly what you saw? You're guiding up sequentially, so are you seeing some recovery in that business?

Yes, Matt. No, you're right. We were surprised late in the quarter with some declines in demand levels that came through mid to late February. Remember, our quarter ends February.

Again, that was in my prepared remarks. I talked about that about really around enterprise spending. We're continuing to see strength in terms of LTE and 4G. And we do have some customer base there also.

We are guiding up sequentially -- you're absolutely correct. I think, $50 million to $100 million, but I think the majority of that is certainly based around the strength in LTE that we're seeing.

Okay, thanks a lot.

Okay.

Thank you all for joining us on the call today. Our apologies to Deutsche Bank and Longbow Research. Promise you'll get at the top of the list on our next earnings call.

But thank you all for joining us today. We are available here throughout the rest of the evening and week for any follow-up calls that you may have. Thank you again for joining us.

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