Jabil Circuit Earnings Call Nuggets: Restructuring Activities and Operating Margin Guidance

Jabil Circuit (NYSE:JBL) recently reported its third quarter earnings and discussed the following topics in its earnings conference call.

Restructuring Activities

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

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Mark T. Mondello – CEO: Sure. Yeah, I don’t think it’s backtracking on anything recently. As I mentioned in the prepared comments, the last time we’ve, again, really taken a hard formal look at our structural costs and our foundation was six, seven years ago and since then we’ve evolved the Company, added a lot of manufacturing square footage. I feel good about the footprint we have, the foundation we have. I just think it’s really prudent – I don’t want to be having one-off charges and doing this every two years, every three years. Every so often having the appropriate hygiene to go in and optimize our structural costs makes a lot of sense. So as I said, strategically I think this is a good thing for us to be doing. We’ve got good line of sight of ’14 and early parts of FY ’15, and again, none of this has to do with anything that we’ve done in the last two or three years as far as expanding footprint.

Steven Fox – Cross Research: Then just secondly on – just looking at the waterfall chart you’ve provided with regards to Nypro. Is there anymore color you can add when we think about Nypro on a full year basis in terms of what kind of growth you are factoring in to the $0.16 to $0.22 in margins et cetera to get there and any synergies that you are expecting in the first year?

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

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

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

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Operating Margin Guidance

Amitabh Passi – UBS: Forbes, I was just trying to understand the guidance for operating margin. What’s putting the downward pressure sequentially going into the fourth fiscal quarter; because I thought you said E&I would improve presuming HVS is flat? And then I’m wondering is there some downward pressure in the DMS margins?

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

Amitabh Passi – UBS: Just as a follow-up the $0.16 to $0.22 and the $0.11 to $0.15 of EPS benefits you expect from Nypro and restructuring benefits. How should we expect that to flow through fiscal ’14 would it be fairly linear and roughly $0.05, $0.06 a quarter any help you can give in terms of how we should be thinking about the Nypro contribution and the restructuring benefits?

Forbes I. J. Alexander – CFO: Nypro one’s a little bit tougher at this juncture. We’ll have better clarity for you in our September call; it’d be a little bit more granular. But I would weigh it a little bit more towards the back half of the year obviously. Once we have got no opportunity to combine, as Mark said our health care business and the Nypro business. With regards to the restructuring, I think that’s more likely based on our current estimates of timing with discussions again towards Q3 and Q4. There is a bit of heavy lifting to be done there. We are well positioned to do that and we expect a majority of the cash flow associated with that to occur late Q2 I’d say, so yeah, I would say probably Q3, Q4 before we see the full benefit of that restructuring activity.

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Mark T. Mondello – CEO: Just one thing to add to Forbes’ comment. I was a little bit disappointed in the 2.3% margin for E&I in Q3. I thought it would have been closer to being flat quarter-on-quarter, Q2 to Q3 but our leadership team there has been pretty aggressive because they understand that we want that business at three points of margin as we exit the fiscal year and that’s what we’ve been talking about for the last couple of quarters. So lots of moving pieces, moving people around, moving teams around and we’re off by a few million dollars there, but I just endorse that we still feel that exiting the fiscal year will be at three points in going into FY ’14 for E&I.

Amitabh Passi – UBS: Mark, just on that, can you shed some light how you get to the 3 points from the 2.3?

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

A Closer Look: Jabil Circuit Earnings Cheat Sheet>>