Kimball Electronics, Inc. (KE) Q1 2022 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen and welcome to Kimball Electronics First Quarter Fiscal 2022 Earnings Conference Call. My name is Sylvia and I will be your facilitator for today’s call. [Operator Instructions] Today’s call, November 4, 2021 is being recorded. A replay of the call will be available on the Investor Relations page of the Kimball Electronics website. At this time, I would like to turn the call over to Andy Regrut, Head of Investor Relations. Mr. Regrut, you may begin.

Thank you, Sylvia and good morning everyone. Welcome to our first quarter conference call. With me here today is Don Charron, our Chairman and CEO; and Jana Croom, Vice President, Chief Financial Officer. We issued a press release yesterday afternoon with our results for the first quarter of fiscal 2022. To accompany today’s call, presentation has been posted to the Investor Relations page on our company website. Before we get started, I’d like to remind you that we will be making forward-looking statements that involve risks and uncertainties and are subject to our safe harbor provisions as stated in our press release and SEC filings and that actual results can differ materially from forward-looking statements. All commentary today is focused on adjusted non-GAAP results. For the first quarter of fiscal 2022, this excludes onetime after-tax income totaling $1.1 million or $0.04 per diluted share associated with non-operating items. Reconciliations of GAAP to non-GAAP amounts are available in our press release. This morning, Don will start the call with a few opening comments. Jana will review the financial results for the quarter and guidance for fiscal 2022, and Don will complete our prepared remarks before taking your questions. I will now turn the call over to Don.

Thanks, Andy and good morning everyone. I am proud of our people, our company and results for Q1, considering the difficult operating environment caused by issues in the global supply chain. Component shortages, which are impacting companies worldwide, continue to make it challenging to keep pace with strong market demand. We were disappointed by the lack of improvement in the overall situation in the September ending quarter when we were actually expecting some level of recovery. In fact, conditions deteriorated during July, August, September period due to increasing infections in Malaysia and the resulting restrictions and the worsening of the backlog in U.S. West Coast ports. In addition, during the last week of the period, we were faced with the challenge of power outages at our China facility. The outages continued into Q2. However, we have identified a solution that will mitigate our risk to further production. As a result of these issues, our lost absorption was more significant than original estimates. It is important to note we are committed to retaining our workforce around the world as we see these disruptions as a short-term issue, and our funnel of new product introductions remains strong. For the past 10 months, our teams have been working tirelessly to navigate these challenges, and we continue to experience a shift in a significant portion of our shippable backlog as customer demand exceeds parts availability. As supply constraints ease, we are well positioned to ramp production on our record backlog and support our strong funnel of new product introduction. In fact, we are preferring to run at maximum capacity on several production lines across the company. We function as a single source for many of our customers who are relying upon us to deliver on our contractual agreements once parts become available. We are reiterating our guidance for fiscal year 2022. Although the bifurcation between the first and second half of the fiscal year will now be more pronounced, longer term, the outlook for our company continues to be strong, and the team we have in place to execute on a variety of growth opportunities is up to the challenge. Pivoting back to the first quarter, net sales were down 12% compared to the same period last year, with declines in 3 of 4 vertical markets. Automotive was the only major vertical market with sales increasing in Q1, up 9%. Based on customer demand and our backlog, this result could have been much stronger if we had the materials needed to fill these orders. But unfortunately, that was not the case. The Q1 growth in automotive resulted from popular vehicle models designated as high priority by our customers and the OEMs, receiving an allocation of components from the limited worldwide supply. When the global supply chain issues subside and industry-wide volumes normalize, we are still bullish on the growth prospects of this vertical market. Electronic content per vehicle continues to increase with advanced technologies and expanded operating systems being added to most vehicles. As I have mentioned in previous calls, the applications and architecture for these systems are largely the same for both electric vehicles and vehicles driven by internal combustion engines, and the stringent production standards in the automotive industry align well with our core competencies, which gives us confidence in the growth potential of this vertical market in the years to come. The medical vertical market was down 33% in Q1. As you will recall, our sales were strong last year with our support of respiratory care products needed to combat COVID-19 during the early months of the pandemic. This combined with raw material shortages and logistical challenges made for a difficult quarter over – a difficult quarter-over-quarter comparable. Elective procedures are still below pre-pandemic levels. And while we’re starting to see improvement as more of the population gets vaccinated and physicians’ offices and hospitals are able to resume these activities, the recovery has been gradual. Longer term, we continue to believe the megatrends in the health care industry with an aging population and increasing access and affordability to care, decreasing device sizes and connected drug delivery systems are an excellent setup for growth. Turning to the industrial vertical market, which was down 9% in the first quarter, the decline resulted from lower sales in our climate control and smart metering products, both again, largely related to parts shortages. And finally, sales in Public Safety were $11.1 million, down 16% from the first quarter of the prior year, again, largely driven by part shortages. I will now turn the call over to Jana to discuss our Q1 results in more detail and review our guidance for fiscal year 2022. Jana?

Thanks, Don and good morning everyone. Net sales in the first quarter were $292.7 million, a 12% decrease compared to $331.7 million in Q1 last year. Foreign exchange rates favorably impacted sales by 1% in the first quarter of fiscal 2022. Our gross margin rate in Q1 was 5.3% a 390 basis point decrease from the first quarter of last year. The decline was driven by a combination of factors. First, certain costs have increased this year, including wage inflation and other labor costs and inbound freight. Second, and more importantly, we were challenged by lower volumes related to the continued global part shortage. This impacted our absorption rate at fixed cost and required labor levels to support the back half of our fiscal year and beyond, created margin pressure. We expect this to abate in the coming quarters and into the future as the part shortage subside, and we are able to return to normal sales volumes based on our funnel of future growth. Adjusted selling and administrative expenses were $12.3 million or 4.2% of net sales in the first quarter. This compares to $12.6 million or 3.8% of net sales in Q1 last year. The increase in the expense rate that is expenses as a percentage of sales is resulting from the lower sales volume in Q1 this year as compared to last. Adjusted operating income for the first quarter was $3.3 million or 1.1% of net sales. This compares to adjusted operating income of $18 million or 5.4% of net sales in the first quarter of fiscal 2021, with the decrease resulting from lower sales volume and the corresponding loss absorption that Don noted in his opening comments. Other income and expense was expense of $1.2 million in the first quarter, which compares to income of $2.1 million in Q1 of fiscal 2021. This change was mainly due to the impact of FX gain loss due to foreign currency remeasurement. The effective tax rate in Q1 was 27.4% compared to an effective tax rate of 15.7% in the first quarter last year. The lower effective tax rate in the prior year quarter was favorably impacted by a discrete tax benefit from a state tax valuation allowance and a favorable mix of earnings within our various tax jurisdictions. Adjusted net income in the first quarter of fiscal 2022 was $1.5 million or $0.06 per diluted share compared to adjusted net income in Q1 last year of $16.6 million or $0.65 per diluted share. Now, turning to the balance sheet, cash and cash equivalents at September 30, 2021, were $89.3 million and cash flow used for operating activities during Q1 was $8.2 million. Cash conversion days for the quarter ended September 30, 2021, were 73 days, representing a 3-day improvement from Q1 2021. However, it is a 9-day increase from last quarter. We saw a significant increase in inventory in the amount of $62 million in the quarter, a result of the current part shortage. In several cases, the majority of parts were available and arrived on time only to be held up from being released to production due to a few critical parts not arriving on time. This has caused the shift in our inventory build specific to the current environment. There is a notable correlation between the inventory build we experienced in the quarter and the absorption rate that Don noted, which resulted in lower OI margin. As the part shortage abates and we worked on the backlog of open orders, we will likely see inventory levels normalize. Capital investments in the first quarter were $12.7 million, largely for expansions at our Thailand and Mexico facilities and to support new business awards. We anticipate higher levels of CapEx over the remainder of FY ‘22 as we continue these expansions and support our strong organic growth opportunities. Borrowings on our credit facilities at September 30, 2021, were $72.6 million, down substantially from $110.5 million at September 30, 2020, and up slightly from $66.2 million at June 30, 2021. Our short-term liquidity available represented as cash and cash equivalents plus the unused amount of our credit facilities, totaled $182.8 million at September 30, 2021. There were no shares repurchased in the first quarter of fiscal year 2022. Since October 2015, under our Board authorized share repurchase program, a total of $79.7 million was returned to our shareowners by purchasing 5.3 million shares of common stock. As Don highlighted, we are reiterating our guidance for the full year of fiscal 2022. As a reminder, we estimate net sales will be in the range of $1.4 billion to $1.5 billion, an 8% to 16% increase over fiscal 2021. Operating income margin is expected to be 4.5% to 5% of net sales, and we expect to invest $60 million to $70 million in capital expenditures in the fiscal year. Finally, I want to call your attention to the Investor Relations section of our corporate website. We have recently refreshed the site to improve the navigation and increase the availability of information and hope you will find these enhancements helpful. I will now turn the call back over to Don.

Thanks, Jana. Before we open the lines for questions, I’d like to share a few thoughts in closing. The operating environment we are facing today is unlike any other I’ve experienced in my 35 plus year career. The impact of the pandemic and the resulting material shortages, coupled with global logistics issues and rising costs is presenting a unique set of challenges for companies in a wide variety of industries around the world. I think that it is important and apparent that we’re realizing our company reported a record fiscal year in 2021 during the height of pandemic only to face this incredibly challenging operating environment when the pandemic appears to be subsiding. There are many imbalances within the global supply chain that need to work themselves out before we can return to some type of normalcy. But as I referenced in my opening comments, we have a long-term perspective when running our business and view these headwinds as short term in nature. Our backlog of open orders is at record levels, and we are prepared for a significant ramp-up in output in the second half of fiscal year 2022. Throughout this period of uncertainty, we have never lost sight of the fact that our number one priority is the health and safety of our people. Our protocols have minimized disruptions to the business and allowed us to maintain excellent customer support. We’re well positioned for the future, and I’m so proud of the team and their efforts to deal with the challenges from this tough operating environment. We are truly focused on creating quality for life. As previously announced, our Annual Meeting of Shareowners will be held at 9:00 a.m. Eastern Time on Tuesday, November 9. This meeting will be an in-person only event at our world headquarters here in Jasper. We appreciate the support of our shareowners and look forward to seeing any that can attend. If you are unable, a copy of the presentation from the meeting will be posted to our corporate website in the Investor Relations section. With that, I would like to open the lines for questions. Sylvia, do we have any analysts with questions in the queue?

[Operator Instructions] Your first question comes from Anja Soderstrom from Sidoti.

Hi, thank you for taking my questions. So first, is there a – can you put any number around the backlog?

Well, yes, last quarter, Anja, we reported at the end of June 30 quarter, we reported that open orders – backlog of open orders rose to $749 million, which was up 78% from the same period the prior year and we will update those numbers when we issue our Q, but up substantially obviously. And I think coincides with what we have been talking about. We have got a lot of orders that we would like to ship that we need to ship to our customers once these parts arrive.

And how – to what extent do you view these orders as non-perishable? Is there any risk that they will – you will lose some revenue?

We haven’t seen signs of the demand going away or diminishing or going away altogether. We have not seen those signs. Our customers are indicating this demand is real. They need it. They want to build it and ship it. And in our case, many of the contracts that we have with those customers, we are the sole source for those products for them. And so yes, we – that’s why we are preparing hard right now to make sure in the second half of the fiscal year, we can run at run-rates that are 30% to 35% higher than what we are running at today, just to keep up with the demand that we are facing. And again, that demand includes catching up to orders that we should have shipped in prior quarters and new product introductions. We have been very successful winning new business and getting material and to support those NPIs in the second half is also very critical to our plan.

So what’s going on? It hasn’t – so what’s going on now in the current environment hasn’t really slowed down your ability to win new programs or caused any concerns among the customers or hesitation?

It has not. We feel very fortunate the success that we have had to grow with existing customers by winning new programs and we have also won new programs from new customers. So we are very pleased with our new business wins during this last period.

Okay. And then in industrial, as you said, it was largely muted due to the component shortages. But – how is the climate controls components there trended in Europe? Do you see the demand coming back there or is it still a bit challenging?

I think overall in climate controls for both North America and Europe, the demand is there. Especially here in the U.S., our climate control customers would take everything we can produce. The one area that’s still sort of in a gradual recovery mode, we would say, smart metering in Europe, which is not part of climate control necessarily. But that is an area that’s still just gradually recovering from the pandemic.

Okay. Thank you. And then how do you work around the inflationary impacts?

Well, we – first and foremost, we want to make sure we are well aware of those inflationary impacts and making sure we are doing our homework to try our best to understand which ones are temporary in nature and which ones really need to be thought about as a new part or an increased part of our cost structure. And so we have teams that are studying that very closely. To the extent it’s a permanent part of our cost structure that we can’t offset by other, let’s say, cost innovation projects, etcetera. Then we will pass those through to our customers. Our customers have been very reasonable during this period. And even in cases where we have had premiums we paid for material or premiums we paid for logistics, our customers have been very reasonable partners with us in reconciling all of that and passing it through when needed.

Okay, that’s comforting. That was all for me for now. I will jump back in the queue. Thank you.

Thank you, Anja.

Your next question comes from Mike Morales from Walthausen.

Hello Mike.

Good morning Mike.

Hi. Good morning. Good morning folks. Thanks for taking the question. So, first of all, Andy, Don and Jana, congratulations on the refreshed IR website, I would like to say with the improvements that you folks have made to the presentation materials over the last few quarters, I really think it’s making the story more accessible, both for existing holders like us and prospective holders. So, keep up the good work there.

Thank you.

Thank you.

So, you touched on this a little bit, Jana. I would like to circle back to kind of some of the moving parts on supply chain in the quarter, because I think it’s kind of meant different things for different companies. And Don, you have mentioned that it sounds like the parts availability issues were much more of a headwind versus port congestion or shipping issues. Is that accurate? And then any way you can maybe quantify that, or just help us think about the different moving – different moving pieces between supply chain, shipping and then maybe some of these facility-specific issues in China that you mentioned?

Yes, I will start, and then I will let Jana build on my comments, Mike. I would start with looking at the inventory growth during the quarter, $62 million, it doesn’t jump off the page as much when you think about production days supply on hand, although it was a significant increase sequentially from where we ended just a quarter ago in days as well as dollars. But I think that would give you sort of an idea of how much we were planning to ship in the quarter and what we actually ship. Because recall last quarter, I talked about trying to align our scheduling with the supply base and our customers with reality of the situation and what material would be available. And so when we have said we were disappointed by the fact that there is a lack of improvement, there was no improvement, it got worse. It got worse because of the infection rate rising in Malaysia, which brought on restrictions. And as you know, in that part of the world, Southeast Asia, in general, many semiconductors rely on that geographic region and their value streams. Especially the back ends of their processes. And so when those restrictions went into place, it was immediate and impacted us in the way of what we thought we would get, which was still restricted supply was not as if we thought we were going to get to full recovery mode. We were expecting it still be restricted supply, but it actually got worse. As we work through not only those restrictions that those suppliers had in Malaysia, government’s reaction to the increase in infection rates what led to those restrictions. But ultimately, we also were impacted by the growing backlog at the U.S. West Coast ports, which I know you are well aware of as well, significant backlog. And whether it’s ships waiting to dock or trucks waiting to pick up the offload, it was a problem all quarter long. The power outage in China is a little more later in the quarter less of an impact. But when you take those other factors I mentioned, developments in the quarter, if things got worse, not better. And again, I would just point to the $62 million increase in inventory. That – we maybe not – we were maybe not expecting to ship all of that in the quarter, some of it might have been part of our Q2 recovery plan, but a significant portion of that, we were expecting to go out the door. And hence, we had the people, the machines, the process is set up to start that recovery. So, it was disappointing to us and we wanted to make that clear to all of you.

Yes. The only thing that I will add to that is we are paying close attention to our working capital needs, and will be over the next 18 months, because it’s the balance of, as Don indicated, inventory sitting waiting on a certain part to come in. So, that we can shoot and ship as well as the inventory build that we need to support the launch of our Thailand facility that’s anticipated in January, and then our Mexico facility that’s happening in June. And so the timing of those, the corresponding inventory builds required for that. All of those new product introductions that are going to be going into those facilities as well as the backlog of orders is going to create a working capital dynamic for probably the next, I would say, 6 months to 12 months. And so we are…

Jana, you read my mind.

Free cash, yes. It’s just – it is the strangest thing and that I can’t give you for the next 12 months clear line of sight into working capital needs. What I can tell you is I have got a balance sheet built for it, which I am very, very grateful for. And we will certainly manage through it. And then in terms of forecasting for the future, it’s really going to be about NPIs expansions, etcetera. But right now, it’s really just out of sorts.

Understood. So maybe directionally, is it fair to say that longer – medium to longer term inventories probably settle somewhere between if I think about the commentary last couple of quarters lower than where you would have liked versus where we are today, somewhere in between those two points considering the higher demand levels and the working capital needs on these new facilities or expansions rather. Is that fair?

You have got it. Yes.

Understood. Great. Maybe switching gears, in the past, you have spoken about high utilization across the footprint and obviously, that informs the decision on the facility expansions you have mentioned, thank you for mentioning the timing as well, Jana, on those again. I would like to dig into a little bit more on how you guys are thinking about the implied ramp in the second quarter there and maybe give you folks the opportunity to speak more to your decision on maintaining staffing levels and how that will support that ramp? And Don, thinking about your experience, is this ramp going to be meaningfully different than the ramps you have seen in the past when there has been tightness like, say, MLCCs a couple of years ago? Just help us understand how you are thinking about that?

Yes, a really good question. I think to answer the last part of that first. It does depend on how fast the supply chain recovers, how fast the suppliers recover. If it’s more of a step function recovery, which I doubt it will be. I believe it will be a gradual steady improvement from the supply base. And I think we are well equipped to handle that. A step function would be much more difficult to handle. But look Mike, I think when you do the math on what we are seeing, what we are saying and what we are seeing in terms of reiterating our full year guidance, we got to be running at $400-plus million quarters to keep up with the demand and work a little of this backlog off. So again, we are expecting gradual, but steady improvement in the quarter we are in. So far, we have seen some bright spots, but it’s gradual. It seems to be better than the September ending quarter. We will see as we get further into it. And obviously, the pandemic subsides and suppliers are able to yes, recover their operations to pre-pandemic levels and beyond. So, I think we do see that strong bifurcation from a $300 million run rate kind of thing to $400 million run rate on a quarterly basis, we can do that. We – as I mentioned, so proud of our teams around the world. We talked to so many customers. We talked to so many suppliers. And many of them have not only material shortages they have worker issues that they are facing. And we feel very fortunate that our workers are engaged. They are committed, we are staffed to handle this ramp up and they are ready for it. If we can get them to parts, they are ready for it. And I think that’s just a strong testimonial of the people we have around the world on our team and their commitment, and it’s a strong testimonial really to our company culture. And so while we don’t have an answer for all the part shortages right now, we expect them to get better. We have focused our energy on our people, making sure we got the capacity to get to these new run rates. And I feel confident we will be able to keep up with the recovery on the supply base side with our operations producing at these higher levels.

So Mike, you have to make a trade-off and a decision point as a leadership team to say, am I going to impact gross margin in the current quarter by retaining my skilled workforce knowing what I have got coming not just for the back half of this year, but for the future, just period. And that’s an easy decision to make, right. You run your company for the long-term. It takes a while to onboard a worker, train them, get them certified enough to speed. And so when you have got that workforce in place, knowing what we are staring down, you keep that workforce. We did not have one part that didn’t ship due to a shortage of workers. And I know not every company can say that, right. Ours was purely parked.

Understood. And all of that’s helpful kind of understanding how you guys are thinking about the long-term and hopefully, continuing strong demand that you are seeing? And maybe my last question on that point, thinking about the new square footage that’s coming up via the facility expansion. The first question is, I guess is any of the demand that’s in backlog right now expected to be served via those facility expansions? And maybe just in a broader sense, in the past, you have spoken about difficulties with high utilization on walking a customer, sort of a potential new customer through the facility, and it’s difficult to sell that if you can’t point to where their line is going to go and you have that available space. So, as the square footage comes online, how do you balance utilizing the new space between existing business versus saving some and earmarking it for new business that maybe you have been trying to win or expecting to win? Thanks.

Good question. We are – when we make those expansions, we are sort of looking at birds. We feel like we have in hand and birds we are still out there hunting. So, it’s a mixture of both. We are talking with our customers who truly are our partners and asking them to make soft commitments, so we can make soft allocations to future capacity needs. And we are out 3 years to 5 years, in many cases, in those conversations with those customers. And so it’s a mixture. How much of our current backlog is pointed at plants that aren’t built, our expansion plans that aren’t finished. The good news is both expansion plants, both expansions themselves, the construction is on schedule, if not a little ahead of schedule. So, we feel good about where we are at in terms of having occupancy available in time to put NPIs in place and those expansions that are targeted for those, those new expansion areas. So, it’s fairly well aligned and tightened up. We are going to be in a better position with more white space to sell into. It is, as I have said in the past, it is a challenge to convince, especially a new customer to award you business when they can’t see where their production lines will go. It’s just as simple as that. And – but once you start those expansions, for example, once the Board approved those expansions in Thailand and Mexico and you can talk more definitively about the breaking ground and the actual timeline for when you expect to get occupancy, it alleviates that – a lot of that pressure. And so we benefited going back a few quarters ago when we actually approved and launched those expansions. And as we ended fiscal year ‘21, without those expansions, we were approaching some of the highest levels of floor space utilization we have ever had in the history of the company, and it was really in all regions; Europe, North America and Asia. And so I think for the short-term and sort of medium-term, we feel like we are in pretty good shape for Asia and North America. Europe is going to be next as we look at sort of available space to support our business development efforts. We have been very successful there in winning new programs. As you know Poland, was practically full to the rafters. That’s why we did Romania, and now 5 years, 6 years into Romania, it’s nearly full as well. And so that’s a good news sort of challenge that we have. But we have to look at our footprint in Europe. And we have also been very successful in China, especially supporting customers that are supporting the electric vehicle market there in China. So, that will be something maybe a few years out, but on our horizon. And so yes, I am not a big fan of average sales per square foot, our average annual sales per square foot, but we kind of look at that and as at least a proxy to how much square footage do we think we will have to have somewhere in the world, somewhere in our footprint to have a pathway to get to $2 billion in annual sales.

Understood. Don and Jana thank you both so much for taking all the questions and all the color. Looking forward to speaking with you soon.

Thank you, Mike.

[Operator Instructions] Your next question comes from Hendi Susanto from Gabelli Funds.

Good morning Don. Good morning Jana.

Hello Hendi.

Don, would you say how you ran the levels of part shortages and expected recovery timing among different verticals? Like in other words, like which verticals have great levels – greater levels of part shortages and which ones may see a recovery sooner than others?

That’s a good question. With the quarter we just finished, it seemed like the part shortages just spread across all verticals and all product categories. It was hard to find an example where there were no part shortages, really, as we exited the September ending quarter, Hendi, it’s really across the board. I think some may take longer to recover. I believe the automotive vertical overall has probably experienced the longest period of shortages as a vertical. And there are some sort of reasons why that is the case. I won’t go into those. But the fact that they have been at it longer means they have been working longer at the real solutions, getting at the real sort of root causes and the real solutions. And so I think that we will see how that vertical recovers. And I think the other part of that story was automotive, because I think those OEMs, those carmakers had to make harder decisions about shutdowns than other verticals. And what I mean by harder decision about shutdown. I mean there is sort of unprecedented consecutive days, in a row of car plants being down. And even amongst the most popular nameplates and brands in the world, they have almost all had to announce some reduction in their production plants and in some sort of shutdown of their car making plants. And I think that they were very careful and thoughtful about how they did that. And so as those car plants are coming back online and running, building cars at the levels they were intended to build that their – with that recovery we will see. That recovery, I think is going to get some more traction here as we go into the January, February timeframe, provided again that the pandemic doesn’t come at us again with a new variant and the new infection rate. I think it seems like that’s structurally ready to happen. Inventory levels are very low. I think carmakers are going to be willing to build up those inventory levels, because the demand is there. And so I expect even after the supply to catch up to demand on the component side, it’s not only just the run rate of the market, it’s replenishing inventory levels there. So, that one for me is looking a little bit different than, let’s say, the medical vertical, which we are also very bullish on. It’s an important part of our growth plans going forward and restricted by components, but also restricted in other areas outside of components side. We mentioned again, elective procedures, elective surgeries and really maybe a better term would be scheduled procedures. I think McKinsey did a study not too long ago, talking about the backlog of these elective procedures that was created by the pandemic. And I think over 1 million, the number they estimated over 1 million surgeries didn’t happen that should have happened, and how do you catch up on that given the capacity of healthcare here in the U.S., for example, doctors, facilities, hospitals, other healthcare workers, how fast can they get back to pre-pandemic levels and how can they get above that to work down that – the number of patients who just simply didn’t get that care during the pandemic. That might be gated on that side of the recovery plan. And in other words, parts could catch up. But our customers, and we are in the value chains of several of those medical customers, the Stryker or J&J or Smith & Nephew. We are in their value chain. So, at least we have got insights into what they are thinking about and how they are planning a recovery of sorts. But that – again, that could be gated on how fast that backlog can be made up along with part shortages. So, just a couple of different examples there, overall, I think though, it’s the whole supply chain, the disruption, the shortages is wide enough. I can’t really speak definitively about one vertical getting better faster than the other.

And then Don, I am sorry if I missed this. You talked about the inflationary impact. Don and Jana, would you be able to quantify the impact of higher component and freight costs on your operating margin and do you plan to introduce price increases?

We can’t give you specifics on what the freight impact increase is due to incoming freight or outgoing freight, Hendi. Because again, our customers have been really good partners to us, and they have been very reasonable and rational in terms of helping us through these higher than normal costs, especially while we are trying to figure out, is it going to be a permanent change in the cost structure, or is it going to go back to where it was. And so we are working with them to pass through a lot of those exceptional situations. And we pass it on to them either in a separate invoice or an increase to the selling price of what we produce. And we are still working through all that with each customer we are in a different – slightly different place, depending on how significant some of those cost overruns could be. So, we can’t give you a specific number as to the impact on the quarter and just really want you to know, we are working with our customers who are our partners on those increases that are going to be here for a while and that need to get passed through the selling price.

Got it. Thank you, Don. Thank you, Jana.

Thanks Hendi.

Thanks Hendi.

And I show no further questions at this time. I would like to turn the call back to Mr. Don Charron for any final remarks.

Thank you, Sylvia. And that brings us to the end of today’s call. We appreciate your interest and look forward to speaking with you on our next call. Thank you and have a great day.

Ladies and gentlemen, this does conclude today’s conference. Thank you again for your participation. You may now all disconnect.