Good afternoon and welcome to the Benchmark Electronics Incorporated First Quarter Earnings Conference Call. All participants will be in listen-only mode. Instructions will be provided after today's presentation for an opportunity to ask questions. This event is being recorded. I would now like to turn the conference over to Paul Mansky, Benchmark Investor Relations. Please go ahead.

Thank you, Anthony, and thanks everyone for joining us today for Benchmark's first quarter fiscal year 2022 earnings call. Joining me this afternoon are Jeff Benck, CEO and President; and Roop Lakkaraju, CFO. After the market closed today, we issued an earnings release highlighting our financial performance for the first quarter of 2022, and we prepared a presentation that we will reference on this call. The press release and presentation are available online under the Investor Relations section of our website. This call is being webcast live, and a replay will be available online following the call. The company has provided a reconciliation of our GAAP to non-GAAP measures in the earnings release as well as in the appendix of the presentation. Please take a moment to review the forward-looking statements advice on Slide 2 in the presentation. During our call, we will be discussing forward-looking information. As a reminder, any of today's remarks that are not statements of historical facts are forward-looking statements, which involve risks and uncertainties, as described in our press releases and SEC filings. Actual results may differ materially from these statements, most notably due to the ongoing impact of global supply chain constraints and COVID. Benchmark undertakes no obligation to update any forward-looking statements. For today's call, Jeff will begin by covering a summary of our first quarter results and new program wins. Roop will then discuss our detailed financial results including a cash and balance sheet summary and our second quarter 2022 guidance. Jeff will then return to discuss our sector outlook, provide a progress report on our strategic objectives, and then close with directional commentary on how we're viewing the year relative to our mid-term model before opening for questions. If you please turn to Slide 3, I will now turn the call over to our CEO, Jeff Benck.

Thank you, Paul. Good afternoon and thanks to everyone for joining our call today. Hopefully by now you've seen our press release and the strong results we delivered for the first quarter. We've made tremendous progress towards the strategic objectives and the midterm model we set out to achieve back in October 2020. I'm pleased to report the March quarter was a continuation of this trend. As you no doubt heard repeatedly from companies across various industries, significant global supply chain challenges persist and COVID disruptions continue, particularly in Asia. Despite this, Benchmark once again delivered revenue and non-GAAP EPS above the high-end of our guidance range in the first quarter. Revenue of $636 million was $51 million above the midpoint of our guidance and up 26% year-over-year. This was the largest revenue quarter we've had since the fourth quarter of 2018, well before the pandemic. The revenue outperformance in the period was primarily driven by strength in our semi-cap and industrial sectors. Our non-GAAP gross margin in the quarter was 9.1%, in line with guidance. Amid the backdrop of supply constraints and tight labor, we’ve been absorbing some costs in partnership with our customers. We're working on recoveries as appropriate, which will be reflected in the second half. We've also been strategically acquiring inventory to help meet our growing demand. These are conscious investment decisions we're making today in order to drive greater opportunities tomorrow. In the near-term, this will have a temporary dampening effect on our gross margin expansion. We expect that by the second half of 2022, our gross margin expansion will resume. Turning to operating margin. With the high revenue base, we're able to leverage our operating expenses, translating to a non-GAAP operating margin of 3.4%. Excluding stock-based compensation expenses, our non-GAAP operating margin in the March quarter would have been greater than 4%. Non-GAAP earnings per share was $0.44 as compared to $0.21 in the year-ago period, representing 110% year-over-year growth. As mentioned previously, the March quarter results were achieved with a backdrop of supply chain challenges, further COVID-related disruptions, and some of our facilities in Asia. If those challenges weren't enough, we even had tornado damage at our Austin site, which disrupted production for a week. Yet we overcame. I want to thank our teams across the globe for their incredible perseverance, enabling these results, but there is room for further improvement. In the first quarter, we estimate that we were unable to fulfill over $200 million of demand requested by our customers. Unfortunately, our backlog of unfulfilled demand continues to increase as component supply is still severely restricting our output. Thanks to the diligent efforts of our supply chain and operations teams, we were able to fulfill a meaningful amount of the demand in the period and even outperformed against our initial customer forecast for the quarter, which enabled our strong first quarter 2022 performance. However, demand is continuing to increase and we don't see a broad improvement in supply constraints throughout 2022, given the disconnect between current demand and our ability to fulfill it coupled with the expected continued strength in new bookings. Our operations teams have been strategically building inventory as it becomes available. This will enable us to maximize throughput in our operations when longer lead-time components arrive. Please turn to Slide 4. Our go-to-market organization, working closely with our functional teams, continues to secure new wins, both from our existing customers and our new accounts across our targeted sectors. Let me highlight a few of those exciting wins for Q1. In medical, we awarded new design and manufacturing programs for an ophthalmic therapy device as well as manufacturing for an image-guided radiation platform. We also ordered a design program for a neurological monitoring system. In semi-cap, we continue to win design awards for wafer handling and processing in support of next-generation semi-cap tools. This past quarter, we secured new engineering wins for lithography submodules and metrology systems and a manufacturing program for planarization modules. Benchmark is proud to enable our customers to provide some of the most complex process technology on the planet. In the A&D sector, we were awarded the manufacturing of a ruggedized RF SATCOM device, as well as an encryption and secure communications platform. We were also awarded the design and engineering of an RF module used in a lower orbit space application. During the quarter, we were pleased to announce a key new partnership with Dynetics, a division of Leidos whereby Benchmark will be manufacturing the electronics for the enduring shield defense system. Dynetics selected Benchmark due to our deep experience and reputation in the A&D market, where we are known for our full product lifecycle support from design to new product introduction to aftermarket services. In industrials, we were awarded the manufacturing program for smart climate control devices, which is nicely aligned with our commitment to sustainability. Elsewhere, we secured a new logo for manufacturing robotic subassemblies to be used in warehouse automation. We were also awarded a design and engineering program for the redesign of controllers going into construction and agricultural equipment from a well-known market leader in the space. In computing and telco, we won new manufacturing programs for a high-end computer power subsystem, representing a new logo for us, as well as a broadband network power assembly, which is another in a growing portfolio of next-generation broadband wins for Benchmark. We were also awarded the design responsibility for a specialized high-end computing platform to be used in crypto applications. We continue to see a mix shift within computing and telco from legacy applications to leading-edge technologies and are pleased with the quality of new complex wins in this sector. Further bolstering this shift and creating new opportunities for Benchmark has been a renewed focus on restoring the manufacturing of these systems and platforms to the U.S. We look forward to incrementally participating in this emerging trend. Our new business pipeline continues to grow across our targeted sectors and we remain very encouraged about the prospects for continued wins, as more OEMs are looking for strategic outsourcing partners that could take on both manufacturing and engineering projects to help them get to market faster and scale efficiently. I will discuss our momentum in various sectors later in the call and provide an update on our progress against our key initiatives. But first, I'd like to turn the call over to Roop to go into the details of our first quarter performance and our guidance for the second quarter. Roop, over to you.

Thank you, Jeff, and good afternoon. Please turn to Slide 6 for our revenue by market sector. Total Benchmark revenue was $636 million in Q1, which is flat sequentially and 26% higher year-over-year. Medical revenues for the first quarter decreased 8% sequentially and increased 8% year-over-year. We expect medical sector growth through the rest of 2022 from new programs ramping and improving demand with existing customers. Semi-Cap revenues were up 12% sequentially and 62% year-over-year. Demand levels throughout 2022 remain high for our complex precision machining and large electromechanical assembly services, which are primarily related to front-end wafer fab equipment. A&D revenues for the first quarter decreased 14% sequentially and 9% year-over-year from program transitions. Industrial revenue for the first quarter was up 10% sequentially and 44% year-over-year from demand improvements from oil and gas, building infrastructure, and lidar applications. Overall, the higher value markets represented 82% of our first quarter revenue. In our traditional markets, computing was down 8% sequentially, but up 26% year-over-year from the planned ramp of high-performance computing programs. These programs will continue to ramp through the remainder of 2022. In the telco sector, revenues were down 2% sequentially but up 12% year-over-year, primarily from demand improvement for satellite programs and new broadband ramps. In the first quarter, our traditional markets represented 18% of revenues, and our top 10 customers represented 51% of sales. Please turn to Slide 7. Our GAAP earnings per share for the quarter was $0.31. Our GAAP results included restructuring and other one-time costs totaling $4.3 million, including $2.3 million related to the closure of previously announced sites in California and other small restructuring activities throughout our global network aligned to future business focus, as well as a $2 million loss on the sale of assets held-for-sale related to certain manufacturing capabilities that we exited in 2021. For Q1, our non-GAAP gross margin was 9.1%, consistent with the midpoint of our first quarter guidance. Sequentially, gross margin is lower through the mix of our revenue in Q1 and operational inefficiencies caused by the continued supply chain challenges and COVID disruptions. On a year-over-year basis, we are higher by 80 basis points through the revenue level and mix. Our SG&A was $36.3 million, down 4% sequentially due primarily to lower variable compensation. Non-GAAP operating margin was 3.4%, which included 70 basis points of stock-based compensation expenses. In Q1 2022, our non-GAAP effective tax rate was 19.3%, reflecting the mix of profits between the U.S. and foreign jurisdictions. Non-GAAP EPS was $0.44 for the quarter, $0.09 higher than the midpoint of our Q1 guidance based on higher revenue. Non-GAAP ROIC was 9.3%, a 70 basis point increase sequentially and a 290 basis point improvement year-over-year. The improvement in our non-GAAP ROIC results from the continued profit growth from revenue strength and gross margin improvements. Please turn to Slide 8 to review our cash conversion cycle performance. Cash conversion cycle days were 82 in the first quarter, compared to 69 days in Q4, with the increase primarily due to our investment in inventory to support the strong customer demand across our market sectors. Please turn to Slide 9 for an update on liquidity and capital resources. We used $68 million of cash in operations and invested $18 million in CapEx. The CapEx investments added capacity throughout our network, especially in our Mexico and precision technology sites. We expect to use cash to support inventory and capacity expansion in the first half of 2022 and are still targeting cash flow from operations to be between $40 million and $60 million for the full year. We expect our CapEx spending in 2022 to be between $50 million and $60 million. Our cash balance was $245 million at March 31, with $94 million available in the U.S. Our cash balances decreased $27 million sequentially, primarily due to investment in inventory. As of March 31, we had $131 million outstanding on our term loan, $73 million outstanding borrowings against our revolver, and our cash net of debt is a positive $42 million. Our strong balance sheet and borrowing capacity will enable us to support our growing revenue and increasing customer demand. Turning to Slide 10 to review our capital allocation activity. In Q1, we paid cash dividends of $5.8 million, representing a dividend yield of approximately 2.8%. Total share repurchases in Q1 were $5.5 million, representing approximately 214,000 shares. As of March 31, we had approximately $159 million remaining in our existing share repurchase authorization. At a minimum, we will continue to repurchase shares to offset our annual equity dilution. Beyond that, we will evaluate share repurchases opportunistically while considering market conditions. Please turn to Slide 11 for a review of our second quarter 2022 guidance. We expect revenue to range from $615 million to $655 million, which at the midpoint represents a 17% year-over-year growth. For the second quarter, we expect the medical sector to grow sequentially based on increasing demand with existing customers and new program ramps. We also expect sequential growth in A&D, although still challenged; we are beginning to see some improvement in aerospace and expect defense to gain momentum later in the year. Supply chain constraints are affecting our Semi-Cap, industrials, compute and telco sectors in Q2, more significantly than in Q1. Notably in Semi-Cap, third-party constraints are expected to have a near-term impact on this sector's performance. After a particularly strong March quarter, we expect Semi-Cap revenues to be modestly down sequentially in June. Meanwhile, our industrials, computing and telco sectors are expected to be roughly consistent quarter-over-quarter. We expect the timing of material availability will improve for each of these sectors through the year. The demand environment remains strong, and in each sector demand outpaces supply. We have over $200 million in unfulfilled demand; with our investment in inventory and capacity, as this demand moves into future quarters, we will be able to fulfill it. We expect our gross margins to be between 8.7% to 8.9% for Q2, and SG&A will range between $34 million and $36 million, implying a 3.2% to 3.4% non-GAAP operating margin range for modeling purposes. The guidance provided does exclude the impact of amortization of intangible assets and estimated restructuring and other costs. We expect to incur restructuring and other non-recurring costs in Q2, approximately $800,000 to $1.2 million. Our non-GAAP diluted earnings per share is expected to be in the range of $0.39 to $0.45 with a midpoint of $0.42. Other expenses net is expected to be $2.6 million, primarily interest expense related to our outstanding debt. We expect for Q2 our non-GAAP effective tax rate will be between 18% and 20%. The expected weighted average shares for Q2 2022 were approximately $35.5 million. In summary, our guidance takes into consideration all known constraints for the quarter and assumes no further significant interruptions to our supply base, operations, or customers. Guidance also assumes no material changes to end market conditions and our operations due to COVID. And with that, I'll turn the call back over to you, Jeff.

Thanks, Roop, for that update. I will start by providing some additional color on our view of demand by sector and the anticipated contribution to our growth this year on Slide 13. In Semi-Cap, revenues have grown double-digit year-on-year for 10 consecutive quarters through Q1 2022, and we expect Q2 to be number 11. On a sequential basis, the strong March quarter, coupled with incremental constraints from outside service providers, will affect sequential performance. We believe this is going to be temporary and expect sequential growth again in the back half of 2022. More broadly, we believe we are in the midst of a semiconductor super cycle, which will last into 2023 and possibly beyond, driven by increased silicon content in nearly every corner of the market. The growth in new domestic semiconductor fabs and post-COVID demand recovery position us well in this sector to support the breakthrough technologies developed by our customers with our design, precision machining, and electronics manufacturing capabilities. For the full year, we continue to expect revenues to grow 10% to 15% in this sector over 2021 levels. In our medical sector, we were down sequentially in Q1, and it was entirely materials-related. Medical is our most acutely affected sector relative to supply chain issues. We expect these constraints to start to ease in the second quarter and predict the medical sector to be our fastest-growing sector for the year, underpinned by higher demand from existing programs and a large number of new program ramps in ultrasound imaging, cardiac care, and diagnostic devices. In industrials, we expect revenue in the June quarter to remain roughly consistent with the higher levels from Q1. Sequential growth at this level is expected to resume in the back half as new program ramps and advanced lidar applications, energy management systems, and IoT-enabled smart devices begin volume ramps. For the full year, we expect the industrial sector will grow above the corporate average. Moving to the A&D sector outlook, we have seen some improvement in demand from both the aerospace and defense sectors. Within defense, we continue to see strengthening bolstered by budget increases, while aerospace is showing early signs of recovery. Sequentially, we expect growth in June, largely as a function of delays in March coming through in June. However, with many of our recent design wins not expected to materially ramp for several quarters, we continue to anticipate growth prospects within A&D to be muted in the current year. Within telco, we expect June to be roughly consistent with March but remain optimistic for growth prospects in 2022 driven by broadband infrastructure wins ramping aggressively throughout the year. The world is becoming more connected and government programs aim to enable broadband from anywhere while increased SATCOM adoption provides an excellent backdrop for further growth. Finally, in computing, we plan on ramping some new high-performance computing programs in the second half of 2022, but program development timing may shift some of this demand into 2023. For the second quarter, we expect revenue to remain flat to the March quarter as ongoing supply chain constraints will limit sequential growth. On a year-over-year basis, however, the midpoint of our guidance represents 17% growth. Looking deeper into the year, we are confident in our ability to continue to grow as our fundamental demand and growing backlog outpace our ability to fulfill it in the near-term. We are positioning ourselves to meet this demand over a multi-quarter basis. For all the reasons we've articulated, predictability in the out quarters remains below levels we would prefer. However, we believe we are positioned to deliver at least modest sequential growth for each quarter in the back half. Turning now to our strategic objectives on Slide 14. Headed into 2021, we laid out three strategic imperatives: grow revenue faster than the EMS market, invest in infrastructure and talent for sustainability, and grow earnings faster than revenue, taking advantage of the leverage in our model. These objectives remain applicable today. Not only do they remain central to how we manage the business, but they are also core tenets to achieving or overachieving the mid-term financial targets we set by the end of 2022. As such, we intend to continue reporting our progress on each of these objectives throughout the year. First, we said we would grow revenue even in this constrained environment. The investments we have made, both human and capital coupled with new program wins based on our strong differentiated value proposition began to deliver a return on that investment in 2021. This growth was supported by renewed program win momentum at existing customers and an acceleration in bookings amid new customer logos. As programs can take years to fully ramp, the second half of 2021 and early 2022 are beginning to show the fruits of that labor. Revenue in the March quarter grew 26% year-over-year, representing the fourth quarter in a row of year-on-year growth. Part of our differentiation and why we win is our superior engineering services. These services are key in any market conditions as they’re a value-added gateway to deeper partnerships and greater opportunities. However, in times of labor tightness, they take on increased significance as they represent the source of flex capacity for our customers who might otherwise have the ability to quickly add resources to support a new program. This high-value engineering work is opening doors to incremental manufacturing opportunities for Benchmark. Our objective was to achieve a 70% attach rate of engineering services to manufacturing bookings. We are pleased to report that in the first quarter, we achieved that goal. Second, we said we would invest in sustainable infrastructure and talent. Over the past year, we’ve continued to make investments in shared services, such as human resource systems, employee development, and cybersecurity, to ensure that our shared infrastructure can scale. We are also investing to add capabilities in engineering and manufacturing as requested by our customers, while effectively managing our SG&A expenses. To meet customer demands, we continue to invest in physical capacity, particularly in our precision technology sites in support of continued growth in our semi-cap sector. Concurrently, we’ve made meaningful progress on our ESG and sustainability initiatives, culminating last month with the publication of Benchmark’s first annual sustainability report, which lays out our current state, plans, and progress on our ESG efforts. I encourage you to download a copy from our website to learn more about our progress in this important area. Lastly, we said we would grow earnings faster than revenue. Building upon our commitment to return to revenue growth, we set the objective to deliver leverage to the bottom line in both growth and operating expense lines. Supply chain headwinds notwithstanding, our increased volumes, manufacturing efficiencies, and a mix shift to higher-margin products combined with operating expense controls on the higher revenue levels has improved operating margin leverage. In the first quarter 2022, non-GAAP earnings grew 110% year-over-year and grew four times faster than the already impressive rate of revenue growth. Suffice to say, I’m proud of the way we continue to execute the plan and am confident that with our backlog of demand and strong bookings momentum, we are well positioned to continue to deliver on our objectives throughout the rest of 2022. Let’s now turn to Slide 15. Back in the fall of 2020, we laid out the midterm model for the company, which we committed to achieve by the time we exit 2022. In 2021, we made steady progress against these goals, laying a foundation to build on in 2022. I’m pleased to report that in Q1 2022, we achieved three of these four targets. Revenue growth of 26% is at multiples of the EMS market growth rate and represents significant share gain in the high-value markets we participate in. With quarterly revenue now above the 2019 levels, this demonstrates that we not only overcame the COVID revenue impact of the last two years, but we also overcame the revenue loss of a major low-margin customer program that we decided not to renew. With the higher revenue and continued operating expense discipline, we also achieved our non-GAAP operating expense ratio target coming in at 5.7% in Q1, which was better than our target of less than 6%. Finally, we delivered a non-GAAP operating margin in March of 3.4%, which was at the bottom end of our target range. Clearly, we have room for further improvement, but while others have been cutting their forecast due to supply chain issues, our team has overcome these external challenges and stayed focused on continuing to improve our business model while building a foundation for sustainable growth. In summary, if you will turn to Slide 16, Benchmark is encouraged by the demand trends among our target sectors. We’re confident we have the team, know-how, and differentiation to go after it. With this backdrop and in consideration of our March quarter performance and our June quarter outlook, we expect 2022 revenue growth to be above our midterm model at 10% or better, depending on our ability to close supply. With our current revenue level, we expect non-GAAP operating expenses for the year to come in on track to our midterm model of less than 6%. Finally, we anticipate some operational detractors to gross margin we’re facing in Q2 to improve in the second half of 2022, which will translate to a stronger operating margin. The improvements in the second half will enable us to achieve the midterm model and grow earnings faster than revenue. I look forward to updating you on our continued progress in the coming months as we successfully navigate these interesting times. With that, I’ll now turn to the Operator to help us conduct our Q&A session. Operator, over to you.

Thank you. Our first question will come from Jim Ricchiuti with Needham and Company. You may now go ahead.

Thank you. Good afternoon. Congrats on the quarter. I wanted to go back to the two segments that clearly outperformed: industrial and semi-cap. Obviously, those areas were stronger than I believe you were expecting back in early February. So, I’d be interested if you could talk about both of those market verticals. Was this a case of you being able to procure components that allowed you to ship? Or was it just some other dynamics within these two market verticals? Thanks.

Yes. Well, maybe I’ll start and then let Roop add in here. This is Jeff. Thanks, Jim, for the question. In semi-cap, we do quite a bit of assembly work, but we also do a lot of precision machining, which is quite a bit different. It's not as dependent on electrical components or board builds or the likes. So that’s just sophisticated high precision machining work. We’ve continued to work on our operational efficiency to be able to increase output. We’ve also invested in capital to continue to increase capacity and brought more online. So it’s an area we’ve been pursuing for a while. The demand has been strong, and we know we’re in a bit of a super cycle there. We do believe that’s going to extend into 2023. It gets cloudier as you go further out. But there are certainly a lot of people indicating this is a very unique semi-cap cycle. The frontend wafer equipment providers are relying on us to produce many parts across several customers in that segment. While we’ve had demand, it’s also up to us to ensure that we can procure the components or even raw materials that we need. We did a bit better in the first quarter. On the industrial side, if you remember, it was a few short years ago that we weren’t satisfied with our performance there. We made some changes, won a bunch of new programs, and frankly are seeing several things ramp. The timing is always a little tough. This is a challenging environment to ramp new programs as you’re seeking parts. We’ve been working closely with a number of customers to free things up. In this environment, many of the components may arrive late in the quarter. Success really depends on how well the team can execute to ship to our customers. The demand has been there, but the output can be a little more unpredictable due to the timing of materials coming in. The team executed well, even in the face of continued disruptions from COVID. As mentioned in the script, we had tornado damage at our Austin facility which disrupted production for a week. The team has done a nice job of staying focused on delivering results. Roop, do you want to add anything on those points?

You covered it really well. Just one thing regarding semi-cap: the strengthening is across our customer set. That’s an improving trend across all those customers. On the industrial side, we’ve got a lot of new program ramps, and our operations teams are ramping effectively. We proactively put capacity in place to support this and, as we mentioned, especially in Mexico for the industrials. That’s helping support the performance as well.

That’s helpful color. I just wanted to follow-up with a question on the build of inventory. Can you say whether this inventory build is specific to customers or verticals, or is there still a large component of commodity components that are associated with this buildup in inventory?

Yes, Jim. I’ll start. This is Roop. The inventory build is purposeful in light of the strong demand we have and the significant unfilled demand that we mentioned. There’s strong demand across the board in all of our sectors. The other aspect is that the supply chain environment continues to present challenges, cutting across various component categories. Additionally, we’re seeing late decommits and reschedules. Our operations teams have done a great job collaborating with our customers to manage the forecast, prioritize it, and identify the necessary parts to support our builds. The primary build-up is in raw materials and is across all sectors to ensure we can fulfill upcoming demand as these parts come in.

I would like to add to that, Jim. We’re not chasing broad commodity categories. It’s linked specifically to the demand of a particular customer and their program. We aggregate demand when customers have the same components across multiple customers or programs, but it’s very much related to the forecast committed by customers. So, it's not about cornering the market on resistors or other semiconductors. It’s very much specific to the build materials required by our customers and their forecasts. I wanted to clarify that.

Got it, Jeff, thanks for that. And maybe just tying into your comments about medical being the fastest-growing segment for all of 2022. I assume you have some confidence based on how you are procuring specific parts for these needs?

Yes. As we mentioned, I can’t remember if it was Roop or I who pointed out that medical was impacted because of supply chain challenges. The demand for our customer set is recovering, but it came back later than expected, which extended lead times. That’s taken longer for us to get clear build instructions for the medical sector. It’s not a demand problem, and although Q1 was lower than initially anticipated, we know the demand is there. We’re starting to see recovery, and that will continue through the year, which is why we maintain our confidence in the medical segment being a fast-growing area. We didn’t reflect that accurately in the first quarter.

Our next question will come from Jason Schmidt with Lake Street. You may now go ahead.

Hi, guys. Thanks for taking my questions. I just want to circle back to the upside in Q1. Was that driven by a handful of programs? Or was it pretty broad-based?

I would say it's, as we mentioned in answering Jim's question, right, semi-cap and industrials were the primary drivers of strength. There were several customers across both of these market sectors within the Q1 period, Jaeson. Several of the sectors were up year-over-year, but those two led the charge, which is why we highlighted them.

And Jaeson, as we mentioned earlier, in the industrial sector we have many new programs ramping, which is also helping support that performance.

Okay, got it. And then I know you alluded to it in your prepared remarks, but how are you thinking about potential COVID restrictions in China? Relatedly, given your footprint over there is much smaller than some others in the space, have you started to see increased interest from customers?

We’re monitoring the situation closely. Obviously, Asia is experiencing some challenges with Omicron and COVID cases, similar to what the U.S. went through early in the year. Our facility in Suzhou has not been affected, but we are keeping an eye on developments closely. Other regions in Asia, like Malaysia and Thailand, had disruptions, but things seem to be stabilizing, which is encouraging. In terms of demand, we do have one facility in China where we produce products for the local market, and that’s working well for us. We’ve started to see increased interest from customers looking to shift to low-cost regions but near shore to the U.S. We are seeing a lot of interest in our Mexico facilities. It’s not a new trend but we’ve secured a number of competitive wins in Mexico from clients aiming to build closer to their consumption markets.

Okay, that's very helpful. Just the last one from me and I’ll jump back into queue. You did allude to some decommits, which I think is consistent with what you said last quarter. It may be too difficult to provide an exact number, and certainly not looking for that, but how should we think about the stickiness of that $200 million in unfulfilled demand? What are your thoughts on potential decommits within that pipeline?

We’re always cautious in evaluating unmet demand. There is a risk that it can be decommitted or that it’s perishable. While we haven't seen that happen specifically, we have seen growth in overall demand. Evaluating that pipeline of unfulfilled demand, we notice it transitions into subsequent periods with customers committed to their demands. Although we had hoped for a better environment in Q2 than what we experienced, unfortunately, it’s been similarly challenging since late last year. There’s still opportunity for unmet demand to roll forward, and if we can secure the necessary supply, we’re confident in addressing that demand.

Okay, perfect. Appreciate the insight, guys. Thanks.

Thanks, Jaeson.

Our next question will come from Anja Soderstrom with Sidoti. You may now go ahead.

Thank you for taking my questions and congratulations on the great quarter despite the challenging environment.

Thanks, Anja.

I have a couple of follow-ups. First in the medical sector, you said this first quarter performance was mainly due to supply chain challenges, but the demand is there. So would you say the demand has returned to pre-COVID levels, or is it still building up? How is that trending?

I think it’s fair to say that it has returned to pre-COVID levels. Some customers may have optimism and can do more. However, many paused on elective services, so it might even be above pre-COVID levels depending on the customer. There has been a high demand, although it may not stay steady over time. We’ve also had strong bookings for two years in a row, which can take a while to come to market, so we have a fair number of new customers affecting that too. This contributes to our confidence in the growth of medical.

Thank you. In terms of China, you mentioned you haven't seen any direct impacts yet, but are you seeing any indirect effects in terms of difficulty obtaining components because other players are being affected?

Yes, let's clarify a couple of things. We do have electronic suppliers in China, and we see effects from that. However, our teams have managed the situation effectively to support ongoing growth and commitments with our customers. Our Suzhou factory has been dealing with COVID effectively and hasn't had stoppages to date.

Right, they’re implementing strict measures, with multiple COVID tests a day. Operating under these conditions is complex. We're fortunate our region hasn't experienced formal shutdowns. Shenzhen going down was a concern, but we managed to maintain operations. Many companies rely heavily on a consistent supply from that region. While we monitor the risks, we don't face unique challenges compared to others in the industry.

Okay, thank you. Regarding inventory levels, you mentioned these are meant to prepare for incoming components, but do you expect that to remain steady throughout the year, just like in Q1?

It’s interesting, Anja. The supply chain market will remain challenging throughout the year, but we see the inventory peak in Q2. After this, we expect a gradual decline as we fulfill the demand we have.

Okay, thank you. That was all for me.

Thanks, Anja.

Thanks.

This concludes our question-and-answer session. I would like to turn the conference back over to the management team for any closing remarks.

Thank you for joining our call today. If you have any follow-up questions, as always, we encourage you to reach out to the Investor Relations department and we'll be happy to get those addressed. Outside of that, we wish everyone a happy afternoon or evening, depending on your location, and look forward to sharing our second quarter results in July during the earnings call. Thank you very much.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.