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Executives

Beth A. Walters - Senior Vice President of Communications & Investor Relations

Forbes I. J. Alexander - Chief Financial Officer and Principal Accounting Officer

Mark T. Mondello - Chief Executive Officer and Director

Analysts

Wamsi Mohan - BofA Merrill Lynch, Research Division

Steven Bryant Fox - Cross Research LLC

Matthew Sheerin - Stifel, Nicolaus & Co., Inc., Research Division

Amitabh Passi - UBS Investment Bank, Research Division

Brian G. Alexander - Raymond James & Associates, Inc., Research Division

Amit Daryanani - RBC Capital Markets, LLC, Research Division

Shawn M. Harrison - Longbow Research LLC

Sherri Scribner - Deutsche Bank AG, Research Division

Jim Suva - Citigroup Inc, Research Division

Sean K.F. Hannan - Needham & Company, LLC, Research Division

Jabil Circuit (JBL) Q2 2013 Earnings Call March 20, 2013 4:30 PM ET

Operator

Ladies and gentlemen, thank you for standing by and welcome to Jabil Second Quarter Earnings call. [Operator Instructions] Thank you. I would now like to turn today's call over to Beth Walters, Senior Vice President of Communications and Investor Relations. Please go ahead.

Beth A. Walters

Thank you. Welcome to our Second Quarter of 2013 Earnings Call. Joining me today on the call are Chief Executive Officer, Mark Mondello; and Chief Financial Officer, Forbes Alexander.

The call is being recorded and will be posted for audio playback on the Jabil website, jabil.com, in the Investors section. Our first -- second quarter press release and corresponding webcast with slides are also available on our website. In these slides, you will find the financial information that we 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 the call today, we will be making forward-looking statements including those regarding our anticipated financial results for our second quarter of fiscal year 2013, the anticipated closing date of the Nypro acquisition, the expected remaining acquisition-related expenses in connection with the Nypro acquisition, and our currently expected third quarter of fiscal 2013 net revenue, including that of our segments, core operating income, GAAP operating income, core and GAAP earnings per share results and the components thereof. These statements are based on current expectations, forecasts and assumptions involving risks and uncertainties that could cause actual outcomes and results to differ materially. Please see other risks, relevant factors and uncertainties identified in our annual report on Form 10-K for the fiscal year ended August 31, 2012, subsequent reports on Forms 10-Q and 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 or future events.

Today's call will begin with our second fiscal quarter results, highlights and comments from Forbes Alexander, as well as guidance on our third fiscal quarter of 2013. Mark will follow with macro environment and Jabil-specific comments about our performance, and then we'll open it up to questions from call attendees.

I'll now turn the call over to Forbes.

Forbes I. J. Alexander

Thank you, Beth. Hello, everyone. I'd ask you to please refer to Slide 3. Net revenue for the second quarter was $4.4 billion, an increase of 4% on a year-over-year basis. GAAP operating income was $149 million or 3.4% of revenue. This compares to $150 million of GAAP operating income and revenues of $4.2 billion or 3.5% for the same period in the prior year. Diluted earnings per share were $0.43. Core operating income, excluding the amortization of intangibles and stock-based compensation decreased 3% to $170 million, representing 3.9% of revenue. This compares to $176 million or 4.2% for the same period in the prior year. Core diluted earnings per share were $0.53.

During the quarter, our diligence pertaining to the announced acquisition of Nypro, accelerated faster than planned. As such, our core operating income included $5 million of costs above our previous forecast. We anticipate the acquisition to close in our fourth fiscal quarter subject to Nypro, ESOP and shareholder votes and customary regulatory approvals.

If you now please turn to Slide 4, for our discussion of our segment performance. In the second quarter, our Diversified Manufacturing Services segment grew 11% on a year-over-year basis, driven by another strong quarter in Specialized Services while offset by continued weakness in our Industrial & Clean Tech and Instrumentation sectors. Revenue for this segment is approximately $2.07 billion, representing 47% of total company revenue. Core operating income for the segment in the quarter was 5.4% of revenue. Core operating income as a percent of revenue was negatively impacted by 20 to 30 basis points as a result of the aforementioned Nypro-related acquisition costs.

The Enterprise & Infrastructure segment increased 12% on a year-over-year basis. Revenue was approximately $1.36 billion, representing 31% of total company revenue in the quarter. Core operating income in the segment increased by 30 basis points on a sequential basis to 2.7% of revenue. We're pleased with this improvement in operating margin performance, a positive step towards our goal of achieving 3% operating margin by the end of the fiscal year.

And finally, the High Velocity segment decreased 15% on a year-over-year basis, driven primarily by lower handset volumes. Revenue was $988 million, representing approximately 22% of total company revenue. Core operating income for this segment was 2.3% of revenue.

I'd now ask you to refer to Slide 5. We ended the quarter with cash balances of approximately $1.06 billion. For the 6 months ended, cash flows from operations was $306 million.

Turning to the quarter, our sales cycle expanded by 3 days, primarily as a result of inventory growth. During the second half of the fiscal year, inventory levels are expected to decline to those historical levels, thus positioning us to generate $1 billion of cash flow from operations in the fiscal year, as previously indicated. Our core EBITDA for the 6 months ended was approximately $551 million, representing 6.1% of revenue and our GAAP return on invested capital for the 6-month period was 19%.

If you now please turn to Slide 6, and I'll review our updated capital expenditures. Capital expenditures for the first half of fiscal '13 were approximately $360 million as expected. The majority of these investments are being focused towards our Diversified Manufacturing Services segment. Capital expenditures for the full fiscal year were previously expected to be $500 million. We now estimate these expenditures to be approximately $700 million.

I'd like to take a moment to discuss these additional investments. $100 million will be associated with the addition of approximately 1 million square feet of manufacturing footprint and associated infrastructure in China; $50 million of associated IT and infrastructure, and I would like to remind you that last calendar year, we signed an agreement to establish a site in Chengdu, China. Part of these investments relate to bringing the first phase of this capacity online. And finally, $50 million, which will also be invested in ongoing expansion in Taiwan of infrastructure associated with capabilities such as automation, material sciences and research and development. These investments position us extremely well for continued growth and differentiation as we move into our fiscal year 2014.

If you now please turn to Slides 8 and 9, I'll discuss our third quarter's guidance. As a result of continued macro weakness and multiple product transitions underway, we expect revenue and income guidance to be consistent with that of the second fiscal quarter guidance. In the third quarter, we expect revenue on a year-over-year basis to increase approximately 4% to be within the range of $4.3 billion to $4.5 billion. Core operating income is estimated to be in the range of $165 million to $185 million and core operating margin in the range of 3.8% to 4.1%. Our GAAP earnings per share are estimated to be in the range of $0.40 to $0.48 per diluted share and core earnings per share are estimated to be in the range of $0.50 to $0.58 per diluted share. This has been based upon a diluted share count of 208 million shares.

Based on the current estimates of production, our tax rate on core operating income is expected to remain at 22% for the quarter and the fiscal year.

Turning to our segments, and our year-on-year performance, both the Diversified Manufacturing Services segment and the Enterprise & Infrastructure segment are expected to be consistent while our High Velocity segment is expected to increase 13% on a year-over-year basis.

Sequentially, our Diversified Manufacturing Services segment is anticipated to decline 10% as a result of current market conditions and multiple product transitions underway. We expect sequential growth to resume in our fourth fiscal quarter. Sequential growth in our High Velocity segment is being driven from a base of typical seasonal lows in printing and set-top boxes, along with the ramp of the new handset program. We are confident that our Diversified Manufacturing Services and High Velocity segments' core operating margins shall be in the long-term targeted ranges in the upcoming third quarter. As I previously noted, we are pleased with the progress we are making in the Enterprise & Infrastructure segment towards a 3% operating margin by the end of the fiscal year.

I'd now like to hand the call over to Mark Mondello.

Mark T. Mondello

Thanks, Forbes. Good afternoon, everyone. I appreciate you taking time to join our call. I'd like to take a minute and recognize all of our Jabil employees. Each and every day, our employees work hard to take great care of our customers. Customers who represent the fantastic brands we're so fortunate to serve. Thank you to all of our people here at Jabil.

As for the quarter, we continue to experience a difficult economy. Although there are signs of modest recovery, our demand patterns suggest a cautious, slow growth environment. With this backdrop in mind, I'm proud of our performance.

For Q2, we achieved the midrange of our revenue guidance of $4.4 billion, while posting $170 million of core operating income. As Forbes stated in his prepared remarks, the $170 million included $5 million of accelerated deal costs associated with our acquisition of Nypro, an acquisition we announced during the quarter.

Looking at our business segments, our leadership team for Enterprise & Infrastructure continues to execute quite well, as seen by the 100-basis point increase to core operating margins year-on-year and 30-basis point increase sequentially. Our progress offers us great optimism that we will achieve a 3% core operating margin as we exit the fiscal year and do so while taking great care of the customer brands we serve.

Diversified Manufacturing Services continue to exhibit solid growth, growing 11% year-on-year, led by Specialized Services, which grew 31%. In total, our DMS segment represented 47% of our overall business. Our leadership team for DMS continues to work hard in delivering tremendous, innovative and creative solutions to our customers. In our High Velocity segment, business conditions weakened and margins were negatively impacted by lower unit volumes. We do believe our revenue levels will rebound nicely in Q3 as indicated by our segment guidance. Our leadership team in High Velocity continued to take great care of our customers while evolving our processes to assure cost competitiveness and exceptional execution.

Now for a few comments around Nypro. The employees at Nypro are just fabulous and we see great cultural alignment with Jabil. They have so much to teach us with their wonderful capabilities and innovative solutions. The team cares deeply and is dedicated to serving the customers that make up Nypro's business units. These business units are Consumer Electronics, Rigid Packaging and Health Care. The possibilities brought forth by Nypro are significant, especially when you consider the size of the end markets they serve. Consider exploring $100 billion of market opportunities as we combine the broad-based capabilities of our teams as they work together and leverage their unique service offerings. I should also mention that in addition to Nypro, we closed the acquisition of CHAD Industries during the quarter. CHAD is an engineering-intensive company that focuses on motion control and robotics. Their technical talent is a great addition to our automation team. Automation is a keen area of interest for Jabil and an ever advancing capability, a capability which is most impactful to our business. We welcome the CHAD team and look forward to their contributions.

With the first half of the fiscal year in our rearview mirror, we're now focused on the back half of the year and there's much to do. We remain committed to generating strong operational cash flows. We continue to invest in rounding out our low-cost footprint while maintaining a keen focus on structural costs. We are committed to delivering a compound annual growth rate of 5% to 10% for our core EPS, calculated from our FY '12 base of $2.40 for the next 2 to 3 years.

We will further diversify the company so we can apply our ideas and experience to more and more end markets. We are hiring and training a significant number of employees for program ramps in our DMS segment. These programs will leverage much of our CapEx put forth in the first half of the fiscal year.

As we discussed previously, Jabil is in a unique position, a position which affords us the opportunity to serve tremendous brands from a platform of scale, solid cash flows and diversification. Thank you.

Beth A. Walters

Operator, we're ready to begin the Q&A portion of the call.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Wamsi Mohan with Bank of America.

Wamsi Mohan - BofA Merrill Lynch, Research Division

Your DMS margins were down quarter-on-quarter despite revenues coming in slightly higher than guidance. Can you address that in terms of whether that was driven by ongoing ramps or lower capacity utilization or just weakness in the Specialized Services businesses?

Forbes I. J. Alexander

Wamsi, it's Forbes. The majority of that decline, sequential decline is really centered around a lot of the activity around our Nypro acquisition. In the prepared remarks, I noted there was about 20 to 30 basis points of degradation there, really associated with costs around that as we pulled our activity forward there, from our previous guidance but as I say, the majority is Nypro-related. We did have a little bit of headwind in the quarter as I noted, in terms of some of the instrumentation activity but nothing structurally impeding our margin performance there.

Wamsi Mohan - BofA Merrill Lynch, Research Division

Okay. And as a quick follow-up, will you still be ramping up some of the DMS businesses in the August quarter such that we should expect sort of recovery back in DMS margins that can stay about 6% that we're talking about sort of for your next quarter?

Mark T. Mondello

Wamsi, this is Mark. I think some of the program ramps we're alluding to will carry over into, at least, the early part of Q4.

Operator

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

Steven Bryant Fox - Cross Research LLC

Just one other question on DMS and a question on Nypro. Can you just talk about what the outlook is for this quarter? I mean, is it really -- how much is related just to end markets versus some transitions within programs? Is there any way to sort of quantify or qualify that? And then in terms of just sort of an update on new programs looking out in the next couple of quarters, is there anything incremental that we should highlight or keep in mind that's new to the Jabil revenue outlook? And then secondly on Nypro, is there any more update in terms of just your expectations for what type of margin contribution or cash flows or anything along the revenue line, just generally speaking, to start thinking about how much accretion it could possibly have as it closes at the end of the fiscal year?

Mark T. Mondello

Thanks, Steven. So as far as our guidance this quarter for DMS, again, it's due to product ramp and also the balance of our DMS business, which is quite broad. It's -- overall, it's soft and we feel like, as we get to the end of the calendar year, some of that revenue will start to pick up but we feel, for the quarter, we've got roughly $200 million of revenue coming out of DMS, and that's balanced with about a $200 million revenue pickup in High Velocity. So the way we thought about it is, if you figure we've got about $200 million coming out of DMS at 5.5%, 6%, something like that, and in the High Velocity business, we're picking up about $200 million of revenue. If we take a look at leverage on the High Velocity side and you take a look at where we've guided to, we feel like a $4.4 billion midpoint with the $175 million is very consistent with what we had in Q2. As far as the Nypro business, the way things look today, we feel like we're going to close the Nypro deal, if everything goes as planned, in the very early part of Q4. As Forbes alluded to in his prepared comments, we had quite a bit of deal cost in our Q2 and although it impacted our overall earnings results, we viewed it as a bit of a positive because we are accelerating the deal and some of those costs that we thought we'd spend in Q3 around the deal, we actually incurred in Q2. Our overall deal costs in Q3 are in our guidance and we feel good about what those costs are going to be. And as far as overall accretion with Nypro, we still feel strongly that once the deal's closed, the Nypro margins will be in our guided long-term range for DMS of 5.5% to 7% and we believe the deal will still be accretive in our first 12 months.

Operator

Your next question comes from the line of Matt Sheerin with Stifel, Nicolaus.

Matthew Sheerin - Stifel, Nicolaus & Co., Inc., Research Division

I know, Mark, you talked about soft demand trends across your customer base but it looks like though, on the Enterprise & Infrastructure where you're expected to be up sequentially due primarily to some new program wins, that looks like that's going to be down 4% or so, which is less than seasonal. Could you drill down a little bit within those subsectors, what you're seeing and is it mostly demand-related or are there any projects that are rolling off?

Mark T. Mondello

No. First off, I don't know that we provided much guidance in our Enterprise & Infrastructure business for Q3. So I think we feel pretty good about -- sequentially, our E&I business, if you're talking about Q3 guidance, it's relatively flat. We did have a sequential decline in Q2 but as we look at Q3, I think we're relatively flat to Q2 on a revenue basis. And again, in this economy, we feel pretty good about those results and the main rationale for that is we continue to pick up some reasonable market share in that area.

Matthew Sheerin - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then on the capacity expansion and the CapEx expansion, you talked about that big project in China. Is there a pipeline of business to fill that or is there going to be some manufacturing shifts from other programs? And how much of that is related to Specialized Services and the Green Point business versus your other businesses?

Mark T. Mondello

Yes, I think Forbes did a really nice job of speaking to the CapEx slide. What Forbes and I felt was important is over the last couple of months, we've been getting questions around our CapEx guidance of $500 million for the year. And we're going to exceed that, and we felt like it was important to give you some color on how that or why that was being exceeded. And what we wanted to talk about is the CapEx, above and beyond our original $500 million guidance for the year, is actually broad-based CapEx. So early on, let's say the first half of the fiscal, we had a lot of CapEx around production-type equipment. The back half of the CapEx is going to be a blend of some production equipment, some IT infrastructure and then rounding out, as I alluded to in my prepared comments, our overall low-cost footprint. So some of that will go to buildings and infrastructure in China, and that will be infrastructure that will support a broad range of different products and businesses. In addition to that, if we look forward a bit, I do think that we have a bit too much structural cost in the company today. And so some of that is some forward planning as far as our overall footprint structure.

Matthew Sheerin - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And just lastly if I may, just regarding -- you gave a little bit of an outlook for some sequential growth in the August quarter. I know, going back to last September, that the company had guided to EPS growth of 5% to 10% or so. And it looks like perhaps, flattish would be optimistic at this point. And do you think you can get to that sort of flat EPS number off of last year, given the weak guide for the May quarter?

Mark T. Mondello

Yes, Matt. So in my prepared comments, and I think it's a little bit confusing, let me try to clarify what I was trying to say. In fiscal year '12, I think we did $2.40 from an EPS perspective. I would be very cautious in modeling the balance of our year, and I don't think we'll -- I think we'll be marginally down of the $2.40 for this fiscal year. What I was communicating in the prepared comments though, is if we look at the 5% to 10% EPS range, if you take it off of the $2.40 base from FY '12 and you take the midpoint of the 5% to 10%, and you run that out into fiscal year '14 and '15 on a compounded basis, we feel comfortable with that EPS range. So said another way, this has been a tough year and we will not hit the 5% to 10% range this year. But again, if you start with the $2.40 base and you extrapolate that out for '14 and '15 on a compounded basis of 5% to 7% or even 7.5% on the mid-range, we feel pretty good about that for '14 and '15.

Operator

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

Amitabh Passi - UBS Investment Bank, Research Division

Mark, I just wanted to clarify that last point. It looks like the EPS is trending maybe down 6%, 7% year-over-year for fiscal '13. So it basically implies you've got to grow kind of from the mid-teens level for the next couple of years to hit that CAGR of 5% to 10%. Is your comment assuming organic growth or are you factoring in Nypro? I'm just trying to get a sense of what's driving that acceleration to sort of the mid-teens growth as we look at fiscal '14 and '15.

Mark T. Mondello

It would be both. But again, if you took some reasonable numbers for Nypro, if you extrapolated out the math, so if you took the math at again, the FY '12 number of $2.40, if you extrapolate out the compounded growth on that and to get a range for fiscal year '14 and '15, and you make some reasonable assumptions around the Nypro acquisition, I think what you'll find is, for us to achieve that earnings range, it would have to be a combination of both Nypro and organic growth.

Amitabh Passi - UBS Investment Bank, Research Division

Okay. And then just as my follow-up for you, Forbes, I apologize, Forbes, just on the CapEx question again. You talked about the capabilities expansion and manufacturing expansion. I'm really interested in these 2 buckets and just trying to understand. The capability expansion, you did talk about some incremental investment in Taiwan. I'm just trying to understand, is that related to Green Point and do you still feel comfortable getting to your $1 billion cash flow from ops number for this year?

Forbes I. J. Alexander

Okay. Let me take the last one first. In terms of the cash flow, yes. To date, we generated a little bit in excess of $300 million for the first half of the year. That would imply a $600 million to $700 million back half year. So yes, we're sticking to our guns in that regard. We've got some good opportunities there and if we look at the profile of our cash flows year-over-year, in the back half of last fiscal year, we generated somewhere in the region of $600 million, $650 million in cash flows. So certainly, some good opportunity there and we can certainly believe we can drive to the $1 billion of operational cash flow. With regard to the first part of the question and the CapEx. Yes, what we've got going on is we've got about $100 million or so associated with about 1 million square feet of capacity expansion in China. Some of that -- a large part of that is associated with Chengdu, which I think, maybe 3 or 4 quarters ago, we talked about an agreement we had signed with the Chengdu authorities. So those buildings or a portion of those buildings are now up. The $100 million is associated with some of the fit out of those buildings, including dormitories, security, et cetera, et cetera there. So we would expect those to come online towards the end of this fiscal year, the first quarter of our fiscal '14, which I will remind everyone, that's a September timeframe. There's also additional square footage going in to Tianjin and a couple of other sites as well to meet demand. What I would say also to Chengdu, to Mark's earlier remarks, is that this site is not dedicated to any one particular industry segment, so it's a potential to be a large site over the coming years that would obviously be open to serve all customers and all industries that we do serve. In terms of the investments in Taiwan, that is really a hub of excellence for us in terms of research and development, material sciences capabilities in automation, so we are investing about $50 million there, expanding our R&D center there and making some material investments in terms of our automation capability, both in terms of equipment, square footage and engineering staff. That's going to be a very important aspect of our business as we move forward.

Amitabh Passi - UBS Investment Bank, Research Division

But is that related to any specific program ramp or is it just sort of longer...

Forbes I. J. Alexander

No, no. No. The investments around automation and recession, development are not attached to any specific program, no. This is broad-based. Automation could be applied to surface mount technology, it can be applied to material sciences. Engineering continues to move forward and as we continue to expand across broad markets, including those markets served today by Nypro, we do feel it's an important investment and a real opportunity for us as we move forward to remain competitive in terms of our cost base.

Operator

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

Brian G. Alexander - Raymond James & Associates, Inc., Research Division

Forbes, you reiterated the operating cash flow target of $1 billion. But if I look at that, that would be more than 2x your core earnings for the year. And I'm just struggling to understand how you get there. Normally, operating cash flow doesn't grow at 2x or more of core earnings. So how much of that is coming from working capital? I think every day of working capital is like $50 million. So even if you get a couple of days there, it just seems like an awfully big gap to bridge to get from your core earnings guidance to your cash flow guidance. So just looking for help and then I have a couple of follow-ups.

Forbes I. J. Alexander

Yes, absolutely, Brian. You're absolutely correct in terms of the number of days. A day is around about $50 million to us just given the scale we're at. So $305 million in the first half of the year, certainly with the guidance we provided in terms of operating income and EBITDA, certainly opportunity to status quo it as it were, another $300 million in the back half of the year. Where the real pressure point comes is in working capital. We've had an expansion over the last quarter or 2, in our working capital, which is disappointing and we do believe that there is very, very good opportunity to see our inventories come back to what I'd call more normalized levels, so that's 3 to 4 days out of there. This last quarter, we did see inventory expansion during the course of the quarter. So again, we see that drive that back down to 4 2, 4 250, type of level -- 2 4 excuse me 2 2 type level. We should see some really strong cash flows come off the back of that. So yes, you're absolutely right. It's all based around working capital management.

Brian G. Alexander - Raymond James & Associates, Inc., Research Division

Okay. If I can go back to DMS margins and look at it on a year-over-year basis, the operating margins are down, I think, over 50 basis points if I adjust both years for one-time items. I think last year, you had some issues in your Aftermarket business and then you talked about the cost for Nypro this year. So you're basically growing revenue 11%, profits are flat to down and the mix within DMS has been pretty favorable, as Specialized Services continues to grow as a percentage of the total and that's always been the most profitable part of the business. So I'm just trying to understand what specifically within DMS is causing the margin pressure on a year-over-year basis. Which segments are really underperforming and really driving the decline? Is any of this tied to Specialized Services and really, what I'm getting at is how much is volume driven and cyclical versus something that's more structural?

Mark T. Mondello

So Brian, I don't -- my hope is it certainly isn't structural. I think I look at the numbers year-over-year as about a 30 basis point difference. I take what I think was a 5.9% in Q2 '12, against a 5.4% in Q2 '13. But I normalized that 5.4% to a 5.6% based on the deal cost for Nypro, which was applied to the DMS area. So I look at a 30-basis point decline, we're certainly not happy with that. Both Forbes and I alluded to the fact that we've got some program ramps going on. So we're not seeing the typical margins on the mobility side or the MTG side, if you will, Specialized Services. And in Industrial, in Instrumentation and in Health Care, those are lagging at the moment. And again, I don't think those are structural issues. I think those are economic issues. And I would contend that as we get to the back half of the year and into fiscal year '14, we're going to see some relief in those different business units for DMS.

Brian G. Alexander - Raymond James & Associates, Inc., Research Division

So I guess I'm confused. You're raising the CapEx forecast by $100 million for manufacturing expansion while DMS growth overall seems to be stalling, at least temporarily, and margins have been under pressure. I'm just trying to understand what gives you the confidence to move forward with these investments and what gives you the confidence that they're going to deliver acceptable returns and how are we thinking about DMS growth beyond the May quarter? Is this a business that you still feel committed to growing in the mid-teens and you have confidence and visibility in doing so?

Mark T. Mondello

Well, we mentioned earlier, the $100 million, I wouldn't make an assumption that, that's against production-type gear, some of that's structural gear around our low-cost footprint. If you also think about the mathematics we walked through and you think about taking the $2.40 from fiscal year '12, and you extrapolate that out for prior comments, that sets up for a pretty reasonable fiscal year '14 especially relative to '13. And as far as the 15% DMS growth, a couple of comments on that. I think when that was set back some time last year, we talked about that being kind of a long-term growth rate for DMS. And if you look at '11, '12 and '13 combined, I think on average, DMS has grown 20% or 25%. If you just take kind of a weighted average of how all that looks, fiscal year '13 is going to be below that range for sure. We'll see what type of guidance we end up providing as we move into '14. And in general terms, I'd say that we've been awfully successful in DMS and as that DMS business hits a base of $10 billion or greater, we're going to have to take a look at that growth rate, Brian. Again, that starts to become a big base of business and as we move into the end of '13 and move into '14, we'll take a hard look at that.

Operator

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

Amit Daryanani - RBC Capital Markets, LLC, Research Division

Just a couple of questions on the DMS side as well. If I look at the May quarter guide and I realize you guys talked about program transition on the Specialized Services side, I think. Could you maybe talk about -- is that segment then expected to be down much more than 10% and you're actually expecting the Industrial and Health Care segments which have been declining for 3 quarters now, to start being more flattish? Can you maybe just talk about how you can have mix working out from a revenue basis as you go into the May quarter?

Forbes I. J. Alexander

Sure, Amit. Yes, in terms of the May quarter, we are seeing stability slightly up in terms of, well, more stability, I would say, in terms of the Health Care Instrumentation and Industrial and Energy sectors. My sense is that we have hit the bottom there, particularly in Industrial & Clean Tech, where, I think, last quarter I talked about a number of programs and installs in smart metering being pushed to the right.

So we're starting to see some stability there. So a lot of the lion's share is product transitions and as I said in my prepared remarks, we do see this being the bottom in terms of DMS, this 1 quarter event, and we'll start to see growth again in the August quarter.

Amit Daryanani - RBC Capital Markets, LLC, Research Division

Got it. And I guess, Forbes, just to clarify, when you say product transition, that's your customer doing a refresh, not a customer going away from you and you will see the ramp-up in August the way you historically have in these refreshes, right?

Forbes I. J. Alexander

Yes. Our customer relationships are very strong across all our segments, and it's a transition between products. We've got a number of those going on across a number of areas within DMS.

Amit Daryanani - RBC Capital Markets, LLC, Research Division

Perfect. And then if I just follow up on the Nypro side. Could you maybe one, talk about the interaction you've had with the Nypro customers? Is there some level of risk on what's the customer attrition issues you could have? Could you maybe a, address that? And then when you talk about Nypro being that 6% off margin range, let's call it, does that factor in Nypro coming in the way it is or does that factor in fixing some of the consumer segment margin issues which I think are negative for Nypro? Could you maybe just talk about those 2 sides?

Mark T. Mondello

Sure, Amit. This is Mark. So the -- any time you do an acquisition, especially if you're acquiring a business that's not a product company but a service company much like our own, you always worry about customer attrition, shrinkage, loss. So far, all indications are quite positive. A number of folks from our team have already been out meeting with customers. I've done a number of those visits myself and I think although there's the general anxieties around the acquisition, I would characterize any type of potential customer loss or shrink to be very, very modest. And I think that's a great, great tribute to the folks at Nypro. They do a phenomenal job of taking care of their customers. The customers love the Nypro brand. And as we've talked about previously, I think one of the things that the customers are excited about is not only the combination of the 2 companies as far as capabilities and service offerings but in many ways, giving Nypro in the packaging side and the health care side, access to our balance sheet will be superb. There is a number of opportunities. I remind you that Nypro is an ESOP entity and they got a little bit caught in a position where, from a cash perspective, they had to reserve x amount of their cash or capital for ESOP redemptions. And so they haven't always been able to feed some of the business opportunities and I look forward to giving their business leaders, both on the health care side and the packaging side, access to capital. As far as margins, do the margins come over with Nypro as is? We intend to run the Healthcare business and the packaging business out of Clinton, Massachusetts, outside of Boston. We'll continue to fly those businesses strongly under the Nypro flag and the Nypro brand. And on the consumer side, we'll have their Consumer business consolidated with Jabil's Consumer business, that's an area we've competed with them directly. We've got a lot of respect for them in that area. And through that consolidation, there might be some cost savings or some cost synergies, if you will. But the real art around this deal is on the growth synergy side.

Operator

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

Shawn M. Harrison - Longbow Research LLC

Two questions. Just a brief follow-up for Nypro. What are the M&A costs included in the third quarter? And then just a follow-up on the CapEx and some of that commentary. With the incremental spending here in the second half of the year, what does that imply for I guess, fiscal '14 CapEx in terms of how we should think about it? And there was also just a comment in terms of, I think you made it, Mark, that you think you have too much capacity. I guess maybe if you could just explain that a little bit more and what the incremental capacity you're putting in Chengdu has to do with that.

Mark T. Mondello

Yes, I don't think I -- I don't know that I said we have too much capacity. I definitely said that we're always looking at structural cost. So make an interpretation of that I guess, but I do think we have too much cost in the company. I don't know that that's correlated directly to too much capacity but we are always looking at our structural cost. In regards to the Nypro deal cost, the majority of the Nypro deal costs were realized in Q2 and again, that goes back to Forbes' prepared comments around the -- overrun of $5 million we had forecasted, deal cost and had those in our guidance and we overran that by $5 million and that was costs pulled from Q3 into Q2. I'd characterize our deal costs in Q3 as very modest and they're already embedded in our guidance.

Shawn M. Harrison - Longbow Research LLC

I guess just following up on that first answer then, in terms of structural cost, that means you're looking to go, at least to me, to lower-cost locations, which is in Chengdu. Is that something in terms of those costs, if you decided to close a facility, that you'd run through the P&L or would that be kind of a one-time item?

Mark T. Mondello

If we ended up doing any type of big structural changes, it would probably be a one-time item. And again, we would guide you through that and provide plenty of transparency on that if we decided to do that, Shawn.

Operator

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

Sherri Scribner - Deutsche Bank AG, Research Division

I just wanted to know if you had more than 1 greater than 10% customer this quarter?

Forbes I. J. Alexander

No, just one 10% customer.

Sherri Scribner - Deutsche Bank AG, Research Division

And then I wanted to ask a little about the margins in the different segments. You did comment on the Enterprise & Infrastructure segment getting to 3% by the end of the year. Just wanted to get a sense of your expectations for the margins in DMS and High Velocity. If we were somewhere around 5.6% in DMS, would you expect those margins to be down because the volumes are down in the third quarter? And then on High Velocity, that being a bit better, would you expect margins to get back to the 3% range or are we still going to be in the 2s?

Mark T. Mondello

Sherri, I'd answer it this way. I think management has good confidence to have both DMS and High Velocity back into our long-term ranges as we get to the back half of the year and certainly, into fiscal year '14.

Sherri Scribner - Deutsche Bank AG, Research Division

Okay. So on diversified though, do you expect the margins to decline a bit as we move through March and then improve in August?

Mark T. Mondello

No.

Sherri Scribner - Deutsche Bank AG, Research Division

Not decline, you don't expect it to decline?

Mark T. Mondello

That's correct. Not decline.

Operator

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

Jim Suva - Citigroup Inc, Research Division

A question is, you've mentioned that EPS growth is going to be in the neighborhood of $5 to $10, not necessarily this year, but as a CAGR if you include this year and going forward with Nypro. The question I have is, if you exclude Nypro, what is the EPS for Jabil that you see organically if you exclude Nypro?

Mark T. Mondello

Jim, we've looked at that internally. We haven't provided a lot of guidance around Nypro. Again, as we fold Nypro into the company, we'll start to provide a bit more clarity on where the margin range is for that. And again, we've guided that with Nypro that it would be accretive in the first 12 months and then it would certainly fall into the long-term range of DMS 5.5% to 7%. I'd just go back to my prior comment, where, again, if you take the CAGR calculation off of the FY '12 base and you come up with a range for '14 and '15, it will be a combination of contributions from Nypro and organic.

Jim Suva - Citigroup Inc, Research Division

Okay. But doing the math, it seems like the majority of that is simply Nypro and not Jabil organic. Is that fair?

Mark T. Mondello

I don't know that that's fair. I guess it all depends on your assumptions around Nypro.

Jim Suva - Citigroup Inc, Research Division

And then my second question is, is that DMS is a little bit softer than expected and you're also acquiring Nypro, which I assume, brings in some more skill sets and capabilities, maybe not exactly what Jabil needs or whatever. I'm just curious if you can just back up and go over again, why increase CapEx if trends are a little bit softer in DMS? Why is CapEx going higher?

Forbes I. J. Alexander

Okay. So Jim, the CapEx is principally around capacity and the scale of the capacity that we're anticipating need for as we move into fiscal '14. We've got line of sight. I think historically, we're not a corporation that will potentially build infrastructure if we don't have line of sight around some good brands and opportunities. So we're talking about 1 million square feet in China. To get that capacity up, that's somewhere overall between 6 and 9 months to do that. And the CapEx will be phased primarily over the next 6 months to allow us then to have the space available and production running at some point in our November quarter, so our first fiscal quarter of '14. So whilst we're seeing a little bit of transition here in Q3, we do expect a resumption of growth in our fourth fiscal quarter, so starting in June, July and we would expect to continue the expansion as we move through into our November quarter and beyond.

Jim Suva - Citigroup Inc, Research Division

And then capital deployment, I assume with buying Nypro, you still have enough cash flow to keep your dividend going but maybe not increase it and not increase your stock buyback or should we just think about capital deployment as currently you have it now?

Mark T. Mondello

Jim, I think as we sit today, we feel comfortable in being able to fund the Nypro deal, still pay a dividend and then continue to give strong consideration of share buyback. One of the things that we've talked about is on the share buyback, is any type of equity we use for executive comp, et cetera, et cetera, we'd like to retire an equivalent amount of shares through continued buybacks. So as we sit today, cash flows appear strong enough to do both.

Operator

Your next question comes from the line of Sean Hannan with Needham.

Sean K.F. Hannan - Needham & Company, LLC, Research Division

Just a question as we drill down a little bit into Specialized Services. The Materials Technology business today, is there any way to give us a sense of where the utilization is within that business and how much that's really been affected by the customer demand changes with the transitions versus how you were also kind of in step adding capacity?

Mark T. Mondello

Yes, Sean, I'd rather not get into asset utilization, if you will, but I'd frame it out this way. I really, really like the continued diversification we have in the company. And that has to do with what we're doing in High Velocity, what we're doing with a big base of our customers in E&I and then all of the different businesses we characterize as DMS. With that, we'd still have portions of our business that are a bit cyclical. And so, especially in the MTG area, asset utilization can ebb and flow but I can tell you that we've got awfully detailed processes and we obsess about that because it's got such an impact to margins. But any type of CapEx or any type of plans we have now as far as overall fixed assets are preparing for production as we get into late FY '13 or early FY '14.

Sean K.F. Hannan - Needham & Company, LLC, Research Division

Okay. And then the second question, from a very general standpoint around program ramps, '13 I think, was really looked at as a year where we were going to begin to harvest a lot of what had felt to be a surge in a lot of program wins, I think in -- particularly, through 2012. So just looking to see if you can perhaps elaborate for us on how the challenging macro conditions are perhaps having an impact on ramps for truly new programs and any degree you're seeing push outs or concerns or delays at some customers?

Mark T. Mondello

I'd say in general, the mobility market in general, remains strong and I chuckle when I say that. Strong on a relative basis to the macro conditions. We also have some ramps in our E&I business that are still good for us even though they're facing some headwinds. And then again, there's a vast majority of businesses in general that again, are a bit muted. And based on our analysis and speaking with customers as we get to the tail end of 2012 and move into calendar '14, hopefully we'll get a little wind at our back.

Operator

We have reached our allotted time for questions. At this time, I would like to turn the call back over to Beth Walters for any closing remarks.

Beth A. Walters

Well, thank you, everyone, for joining us on the call today. And as usual, we will be available for any follow-up questions that investors might have and we'll make ourselves available to you. Thanks again for joining us.

Operator

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

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