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Thank you for standing by, and welcome to the Daktronics, Inc. third quarter fiscal year 2026 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 11 on your telephone. If your question has been answered and you would like to remove yourself from the queue, simply press star 11 again. As a reminder, today's program is being recorded. I would now like to introduce your host for today's program, Lindsey Vetter. Please go ahead.

Thank you, Jonathan. Good morning, everyone, and thank you for participating in our third quarter earnings conference call. During today's presentation, we will make forward-looking statements reflecting our expectations and plans about our future financial performance and future business opportunities. These forward-looking statements reflect the company's expectations or beliefs about future events based on information currently available to us. Of course, actual results could differ. Please refer to slide two of the presentation that accompanies today's call, our press release, and our SEC filings for information on risk factors, uncertainties, and expectations that could cause actual results to differ materially from these expectations. During this presentation, we will also refer to non-GAAP financial measures. You can find the reconciliation of each non-GAAP measure to the most directly comparable GAAP measure in the appendix to the accompanying presentation slides, which may be found on the Investor Relations page of our website at www.daktronics.com. Our earnings release for the 2026 third quarter, which was furnished to the SEC on Form 8-K this morning, also contains certain non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures, as well as a discussion of certain limitations when using non-GAAP financial measures, are included in the earnings release, which has been posted separately to the Investor Relations page of our website. I will now turn the call over to Brad Wiemann, Interim President and CEO through the third quarter, for his review.

Well, good morning, everyone. Welcome to our call. Thank you for joining our third quarter fiscal 2026 call. I am joined on the call by Howard Atkins, board member and Acting Chief Financial Officer, along with Ramesh Jayaraman, CEO and President, who is officially in the role as of February 1. We will review our fiscal 2026 third quarter, which ended on 01/31/2026, along with the results and accomplishments, and then take your questions. Turning to our slide presentation on slide three, here are the key messages for the third quarter. The team delivered another quarter of solid results, driving revenue growth of 21.6% year over year, despite the effectively shorter work period due to the three major holidays as well as adverse weather conditions throughout the quarter. Our manufacturing team did a superb job in efficiently converting the order book we have built over the past few quarters. During the quarter, we progressed with several large-scale installations, including five Major League Baseball stadiums, such as the Seattle Mariners, as well as the University of Illinois football's video scoring system. Orders in the quarter were once again over $200,000,000. Our sales and marketing team secured large orders in our Live Events segment. Our Transportation segment had a record order quarter with a good uptake in airports and in intelligent transportation systems. With new order growth in the quarter at 7.6%, our product and services backlog grew to $342,000,000 coming into Q4 and is 25% higher than it was this time last year. In December, we announced our acquisition of the intellectual property and the absorption of associated engineering teams from ex display companies, or XCC, expanding our micro LED and micro integrated circuit capabilities. XTC advances our high-resolution, narrow pixel niche product offerings and provides us a cost-effective pathway to service small volume display opportunities with medium-sized display solutions. While the Supreme Court decision on reciprocal tariffs is now known, the market outcome with respect to refunds is likely to be highly uncertain for the foreseeable future. Turning to slide four. In our Live Events business, as I mentioned, we won another Major League Baseball project in the quarter, making us six for six in large Major League Baseball projects in fiscal 2026. Additionally, we won several other stadium and arena display enhancements, as customers continue to expand their digital display footprint throughout their venues. We continue to enhance our product and service offerings to align with customer needs, such as our narrow pixel pitch product line, advanced control system capabilities to engage fans, and improved seamless control and management of displays from anywhere, giving venue operators greater flexibility and control over their digital assets. Pictured here is the Seattle Mariners slide deck. In our Commercial business, on-premise advertising remained strong. Customers continue the successful transition to next-generation fuel-type products, which was supported by a large order from a national customer. In our Out of Home business, we added several new customers this quarter, but were down overall due to purchase delays from a key account, which we expect to recover in the fourth quarter. Our pipeline of opportunities continues to expand with independent billboard operators, as more and more customers recognize our value proposition based on brand strength, image quality, reliability, service responsiveness, and reputation for innovation with the release of our new billboard products. In our Outdoor Spectacular segment, we booked a large order in Times Square, and we grew our pipeline of projects. We also expanded our indoor business sold through audiovisual integrator channels through our offerings of narrow pixel pitch chip-on-board products. Pictured here is the Miami Beach Convention Center. In Transportation, orders for both intelligent transportation systems and aviation were up a record 130% from last year. We secured a very significant project with one of the top five airports in the U.S., along with new orders from Caltrans in California. Pictured here is a rendering of that top five airport win. In International, after a great order year in 2025, our international business was down from last year. However, we have secured sizable orders from two stadium customers in Spain and Australia as they are expanding their systems. We also see a strong uptake in indoor solutions across multiple markets, especially government entities, through growing our audiovisual integrator channel partners. Pictured here is an indoor video display at the United Arab Emirates University. High school parks and recreation continues to have a solid year with third quarter order growth of 13.4% over the last year. We have expanded our presence among the 30-some thousand high schools in the U.S. and continue to win projects by leveraging our position in the communities we serve and enhancing our differentiating financial service offerings through Daktronics Sports Marketing. We expect continued strong uptake in our leading solutions and adoption of professional services, particularly in high school curriculum development and in-classroom service offerings. Pictured here is Marathon High School in Florida. Turning to slide five. Key product releases. Our commitment to innovation continues to differentiate us as a value provider among our customers. In the third quarter, we introduced our next-generation indoor video solution for high school arenas, as well as a next-generation digital audio facade for outdoor audio solutions. For the remainder of fiscal 2026, we have two additional product launches planned: our next-generation LED street furniture, as well as specialized large-digit fuel price system offerings, which expand our product line for high-rise signage for long-distance viewing. The photos here show an example of our indoor narrow pixel pitch at Eldon High School in Eldon, Iowa, and our new digital audio facade installed at Dallas Independent School in Dallas, Texas. Turning to slide six. Our plan to achieve sustainably higher profit growth for the company remains on track. In the third quarter, here is an update on initiatives and progress. The strategic price adjustments we have implemented align with our value-selling approach. The development of our software-as-a-service initiative augments how we serve the market, developing recurring revenue subscription models and simplifying our customer engagement. We are digitizing most aspects of our business to make it easier and faster for customers to do business with us and to improve internal operating efficiency, and we are actively applying artificial intelligence to improve productivity throughout the company. I will now turn it over to Howard Atkins, our Acting Chief Financial Officer, to review our financials.

Howard?

Thank you, Brad, and good day, everyone. Thank you for your interest in Daktronics, Inc. The Daktronics team produced another solid quarter in the third quarter. We anticipated the usual seasonal pattern with fewer days to complete order bookings and to fulfill revenue, and also typical adverse weather conditions that did prevail in the quarter. But because this was anticipated, we took steps in the field and in our manufacturing to continue the year-over-year growth that we have now produced over each of the last four quarters. As Brad mentioned, orders grew about 8%. Remember, last year in the third quarter we booked a $30,000,000 stadium order. This year in quarter three, we also had a number of larger orders, including one stadium order on the last day of the quarter, but the single largest deal in the third quarter of this year was $13,000,000. Importantly, our orders have now been relatively broad-based at or over $200,000,000 in each of the last five quarters, including a record Transportation order in the third quarter. As orders have grown, so has revenue. We had $182,000,000 in the quarter, which grew more than 20% year over year, mostly due to efficient order conversion by our manufacturing teams during the quarter, which included working more than one shift at times to fulfill the extra order flow around the holidays. Gross profit margin in the quarter was essentially flat to the year-ago quarter at 24%, reflecting a variety of factors: one, the benefit of operating leverage as revenue rose year over year relative to fixed costs in our cost of goods sold; secondly, the efficiencies we have achieved up and down the supply chain as a result of the business transformation initiatives that have been undertaken in the last year; and thirdly, mix on new business was a little bit better in the third quarter than previously. These margin benefits were offset by the fact that backlog fulfillment in the quarter was largely from the lower-margin Live Events business line. More importantly, last year did not contain any reciprocal tariffs or any other of the newer tariffs that were only introduced late in 2025. We had an extra $6,000,000, for example, of total tariff expense in the third quarter of this year. The sequential gross profit margin declined from 27% to 24%. The main factor there was fixed-cost operating leverage which, as previously described, when revenue is going up, it typically goes up faster than our fixed costs in COGS, and on the way down, it just has the opposite effect. So our revenue declines a little faster than the fixed-cost side of cost of goods sold. Daktronics third quarter 2026 net income after tax was $3,000,000, or $0.06 per fully diluted share. This quarter included nonrecurring expenses related to management transition and acquisition expenses of $1,600,000, or adjusted net income of $4,600,000. Last year's third quarter net loss of $17,200,000 included a $14,000,000 fair value adjustment on the convertible note that has since been converted and also contained $3,600,000 of consultant-related expenses associated with the business transformation initiatives and corporate governance matters that pertained last year. Adjusted net income a year ago, therefore, was about $500,000, so we are up quite substantially from there. After removing the nonrecurring expenses and noncash benefit, our third quarter 2026 net income rose significantly on an adjusted basis. Since we have solid earnings, we are able, starting this year, to take advantage of the new tax laws permitting accelerated depreciation for R&D and other expenses. On a pretax basis, operating income for the quarter was $1,900,000 compared with an operating loss of $3,600,000 in 2025. In addition to the nonrecurring items, the company incurred a $400,000 expense for the first time as it absorbed the expert developers that Brad mentioned before from XPC. The impact of the intellectual property adjustments on the Daktronics balance sheet is negligible. We had a small gain offset by a write-down of the remaining loan that we had to XDC from Daktronics. So negligible balance sheet impact and about a $400,000 impact on operating expenses for the one month that we absorbed so far the new team. Let me now turn to segment revenue. This table, if you remember, shows at the business-line level, over a period of time last year and then sequential quarters as well, the percentage of our revenue coming from each of our business lines and the margin most commonly we are earning on each of those businesses. It also shows the gross profit margin earned in the third quarter. This gives you some sense of how business mix is impacting our revenue. As indicated a couple of times, most of our revenue growth this past year has derived from the fulfillment of Live Events projects, typically lower-margin projects. So that is what is coming through on the revenue line. We did have a small amount of revenue in the quarter coming through the orders, but as Brad alluded to before, this quarter in particular we had a little bit of a skewing towards the back end of the quarter in terms of the new order growth, and as a result, the revenue contribution from that will land in the fourth quarter as opposed to the third quarter. So, again, most of the revenue coming through in the third quarter was from backlog. I should mention that in Live Events, the fulfillment that we have is heavily engineered with high dependence on indirect installation costs. The next slide shows you our segment product backlog, and last quarter we highlighted for you again that most of the revenue coming through from the backlog was Live Events. The product backlog stood at $342,000,000 at the end of the third quarter, continuing to be up—up 25% from a year ago. Particularly with the recent major wins, our backlog remains high and remains weighted towards Live Events. We are now starting to convert the major projects that we have talked about over the past couple of quarters, which will be a feature of our revenue growth in the fourth quarter and into the early part of 2027. This gives us, as you would imagine, a multi-quarter runway on our revenue and a more predictable growth pattern and stronger revenue recurrence over the next couple of quarters. The combination of a high backlog, as I have just alluded to, coming into the fourth quarter with what we are seeing as a good pipeline already in the fourth quarter—good order momentum—sets us up well for a good top- and bottom-line finish to the year. Let me now move to the next slide and talk about our balance sheet, which, as you may remember, has been substantially strengthened over the last three or four quarters. This slide shows you how we are managing working capital and capital allocation. First, our inventory levels have moderated relative to revenue over the past several quarters. Our manufacturing team has done a really good job efficiently managing inventory. This is one of the initiatives that we undertook in the business transformation projects over last year, and this reflects again better alignment and improving efficiency in our working capital management. During the first nine months of the year, we repurchased approximately 1,300,000 shares of common stock at a volume-weighted average price of $17.60. That leaves us with about $17,000,000 worth of open share repurchase authorization. Since the company reinstituted its share repurchase program in late 2024, the company has repurchased 3,360,000 shares of stock at a VWAP of about $15.15. We ended the quarter with a cash balance of $144,000,000, an increase of 13% from 2025. So we continue to run a relatively strong cash balance, even with the share repurchase activity. We essentially are keeping a very strong balance sheet to give us the resiliency and adaptability to continue to generate strong returns for our shareholders going forward as we use cash and capital of the company for shareholder benefit. We have converted our commercial bank backup credit line from an asset-based facility to a cash-flow facility, reducing its cost and providing the company with additional financing flexibility if necessary. We, of course, have no borrowings under the company's bank line of credit, and none are contemplated at this point in time. We now turn the floor over to Ramesh.

Thank you, Howard, and good morning, everyone. It is an exciting time to officially join and serve as the Daktronics, Inc. CEO. I am honored to lead a great company at this pivotal time and to work with the talented team that has accomplished a great deal in strengthening a resilient platform for sustainable and profitable growth. As we move to the next slide, I want to start by thanking Brad Wiemann, who presented earlier today and who has served very capably as the Interim President and CEO. Brad has been instrumental in my onboarding, and we have completed a smooth transition and handover of the CEO role. Brad will stay with Daktronics, Inc. as Executive Vice President and adviser, and I will continue to rely on his knowledge and judgment as we move forward. Thank you again, Brad. Moving to the next slide. My first priority, as I joined February 1 officially, was to come up to speed quickly, and I have been on a learning journey—what I call a look, listen, learn tour—as I settled into Brookings, South Dakota, to be closer to the team and to our business. It has been an absolute warm welcome by the past management, the team, and the community as a whole. I have had a chance to travel both domestically and internationally, visiting sites in bidding as well as completed stage to understand our offerings, meet our customers and suppliers, including at a global trade show. In addition, I have spent time in some of our factories and repair centers to look at the operational excellence work that is in progress, and with our frontline—our sales and field service technicians. In addition, I have spent time reviewing plans for our talent as we look at the growth that we are planning ahead. This journey continues to teach me as we continue defining our strategies, all with an intent of being a market-led, technology-driven, and customer-focused difference maker in the AV market space. Turning to the next slide. I have to say, as I get around the company, I have been personally able to witness firsthand the dedication, the focus, and the drive of our team members, and the results they can produce as you just saw in Q3 results. We are entering into the final quarter of the year with very strong momentum, strong end-market demand, and a strong backlog tailwind. We are driving towards a strong finish of fiscal 2026 through efficient revenue conversion, and expense and productivity management, to deliver strong results and continued cash flow generation. We are, in parallel, also formulating our next strategic steps from a customer-led and market-first perspective with the lens on growth—developing products, services, and solutions that extend our competitive lead and building a lens on operational excellence to optimize the profitability and cash generation we deliver. I would like to personally invite you all to our Investor Day on April 9 at the Nasdaq MarketSite, where the leadership team and I will present our joint plans to drive the next phase of Daktronics, Inc. growth. We will offer updates in our vertical market growth opportunities, execution initiatives, innovation priorities, as well as our capital allocation and financial frameworks. We look forward to having you join us. With that, we will turn the call over for your questions. Operator?

Certainly. And as a reminder, ladies and gentlemen, if you do have a question at this time, please press 11 on your telephone. Our first question comes from the line of Aaron Spychalla from Craig-Hallum Capital Group. Your question, please.

Yeah. Hi, Ramesh, Brad, and Howard. Thanks for taking the questions. Maybe first for me on the win rates. You know, they have been really impressive on the large-scale side of Live Events. You know, you talked about six for six. Can you just talk about how that pipeline is shaping up here as seasons, you know, kind of wrap up in the next few months? And then just maybe how would you characterize win rates across the overall business versus historical?

Hey. Good morning, Aaron. This is Brad. Yeah. We won another Major League Baseball project, which is excellent. Our pipeline continues to be robust, strong going into this next year, so we are happy about that. Of course, you have seen our backlog, so we have a nice backlog in the business. And then we have the college and university side, and we have talked about that in the past, and some of the headwinds that are in that market, but are being worked out, and that is really around the NIL money that is being spent on coaches and players. We think that all gets worked out. But as you saw, we have the University of Illinois project that we worked out—the largest football stadium build that we had—and there are others in the pipeline, so we are excited that that opportunity still exists. So pipeline overall looks good. And win rate, of course, as you mentioned, we were six of six this last year. So we are excited about that, and that is partly to play with one of our competitors taking a little bit of a backseat in the marketplace this last year, which we have talked about before. Is that helpful, Craig?

I am also able to add to it from my perspective. Yeah. I mean, I think we have got strong wins in Live Events as Brad just mentioned, but our high school market and our Transportation market also continue to be strong. And I think it is important to have the fact that as we look at our growth, we are looking with a balanced portfolio—the appropriate portfolio management—as we kind of move ahead to gain market share. As Brad earlier mentioned, we had a massive win in Transportation that we just announced. And, really, as you look at our high school markets, they continue to be strong, driven by this change from scoreboards to video. And I think we see that trend continuing to be strong in the marketplace. So I would say it is balanced overall as we try and look at our growth story, just going through the quarters as they do in terms of how high schools spend and the college, you know, and the football or the NFL or NBA each kind of spend. So that is what we are going with.

Thanks. I appreciate the color on that. And then maybe, you know, on the Commercial market, I know you have been making inroads, you know, expanding the reseller and integrator channel. Just maybe, you know, an update there. And it seems like demand trends are pretty good in that market as well.

Yeah. They continue to remain strong.

I talked about our on-premise as well as our public spectaculars and Out of Home market. Those are still looking promising. The overall buying position of Out of Home customers—that is the advertising segment—is strong. I did mention one customer that pulled back a little bit in the third quarter. That is one of our national customers, and we believe that recovers this next quarter. So nothing concerning there. Our products that we are bringing to the marketplace for the on-premise segment continue to help us to win projects there, so we are seeing growth on that side of it. But on the spectacular side, we had a nice win in Times Square, as I mentioned, but the exciting part for me is the audiovisual integrator space that we continue to see growth in, and that is on our indoor product lines, which is really a big part of our overall growth strategy.

And just, I mean, on that reseller and integrator channel, I mean, maybe an update on just efforts there—where you are in that journey?

Yeah. On the reseller side, we have been in that business for some time, and we, you know, continue—we have salespeople all across the U.S.—to work and develop sales channel partners and to promote more of our products through that channel. So that is going well. The AV integrator is a newer area for us, and we are seeing continued growth. I think this is our—I cannot quite go back through the numbers because I do not have them top of mind—but we are seeing continued growth and expansion in that space in both the number of integrators, number of orders, and the number of quotes. So the pipeline continues to grow. That is really aligning around our indoor product lines and this chip-on-board offering that is really doing quite well for us. That is helping us both in the AV space as well as some of these large projects, which we mentioned, across transportation, airports, and other things. So, yeah, overall, we are going to continue to invest in that area to expand our presence in that particular market space or through that channel partner of AV integrators.

Thanks for the color there. And then maybe one last question on margins. I know you highlighted the tariff impact. So excluding that, another good quarter. Maybe just talk what inning you think you are in from these operations initiatives and just trying to understand where margins can go from here, and then any thoughts more broadly on any oil impact and just what is going on macro-wise—what that could mean for the supply chain, if anything.

On the first issue, Aaron, in terms of where we are, you know, we have either started or we are on the way on kind of the vast bulk of the initiatives that came out of the project we did last year. And all of what we have either started or are in the process of completing has either been built into or is about to be built into our regular strategic planning process. So that is how we are embracing everything and tracking to make sure that everything gets completed going forward. So I would say, from a starting and along-the-way point of view, we are well into the game. In terms of the realization of the benefit, I would also say we are a year into the effort at this point, and, you know, again, we are more than a third to a half into the actual realization of the benefit. But, again, the important thing is, you know, we are taking what we have done and now building it into a more comprehensive strategic plan because if the world changes—and there are more things that we are thinking of doing for sure about strategically and operational efficiency things as well—and we will continue to talk about that, and we will have some detail around that at the Investor Day. As far as the geopolitical situation in the world, we are monitoring it. You know, there is risk out there, and a lot of uncertainty. Obviously, the uncertainty level has gone up. But as we have described in the past, you know, we intentionally keep things in the company reasonably adaptable, and as the world changes, we will adapt to the world. We have a great manufacturing network that allows us to do that. We have a team that works well together to make sure that it happens effectively. And so being adaptable and resilient here is really important, and also having cash is really important. So that is how we are trying to deal with the answer.

Great. Thanks for taking the questions, and looking forward to the Investor Day. I will turn it over.

Thank you. And as a reminder, ladies and gentlemen, if you do have a question at this time, please press 11. Our next question comes from the line of Anja Soderstrom from Sidoti. Your question, please.

Hi, and thank you for taking my questions. I have some follow-ups and then I have some other questions. So on your gross margin, you also mentioned it was due to revenue mix and the Live Events being softer, and given Live Events is a big part of your backlog, how should we think about the impact of that going forward?

Anja, there is a table in the presentation which shows you, as of the end of the quarter, the mix of revenue in the backlog. So you see actually the number, and we try to give you what might be left of the revenue after the fourth quarter is finished. So we have, you know, somewhat of a hint, if you will, if not a calculation of what you might expect coming through from the backlog and how Live Events might impact that. The point that we would make about the GP margin declining sequentially again has to do with the fact that our gross profit margin—the cost of goods sold side of the margin—does have some fixed cost in it. So when revenue is going up, you get the benefit of that on the gross profit margin. When revenue is going down, as it did seasonally in the third quarter, the opposite effect happens. So that is, and we will have more to say about that as well to help you understand that at the Investor Day.

Okay. Thank you. And then in terms of the facility, is that on track, and would that have any sort of impact on the margins?

I am sorry, Anja, say again, please.

Mexico facility. Is that on track to be up and running in April, and would that potentially have an impact on the gross margin as well?

Yeah. Not a significant impact on the gross margin overall. You know, capital expenses are to be capitalized, and we are leasing the facility there. But your question about being on track—yes, it is. We expect to be up and operating in the first quarter of FY '27, so this coming next fiscal year. That is all progressing well, and we expect to be fully operational certainly by the second quarter.

Okay. Thank you. And then you mentioned the delay from a key account in Commercial. What gives you the confidence that that is temporary, and do you expect maybe that shortfall in the third quarter to be made up in the fourth quarter?

Yeah. What I am referencing there, without naming the account itself, is that there was an acquisition made in this past year, so they are going through that acquisition phase, and we expect that to fully be in place and orders to continue to come in in the fourth quarter. So nothing new there. We will certainly keep you apprised if something changes, but we do not expect that to be the case.

Okay. Great. Thank you. And then just as we have entered 2026, with everything that is going on and uncertainty, have you felt that the sentiment among your customers has changed at all?

Yeah. We work in big projects—large projects that are well capitalized and have been moving along. So the opportunities that are out there, we are not foreseeing any reduction. Now speaking of the U.S. market, which is the majority of our business. As we get to the international side of it, and we do some business throughout the Middle East and Australia, of course, and Europe—we will see how that plays out. But, overall, I think the sentiment is projects are moving forward. They are funded. We are part of a larger overall project, and we are typically on the back end of the project. So those are usually well funded and moving forward. So we are not expecting anything to be delayed at this point.

Okay. Thank you. And then in terms of M&A, what can we expect there? What are you looking at there? And how is the market for M&A?

As we have said in the past, Anja, we continue to believe there are opportunities to do tuck-ins and fill-ins in each of our businesses. We are obviously looking at that, but the other message I would give you on that is just our flexibility. Again, we have a strong cash position. We, as you know from everything that we do, are return-focused. We are not going to do anything that does not make sense strategically, that does not have industrial logic to it, and it has got to meet our financial return criteria, and we have to be able to integrate properly. So those are important characteristics. But, along the strategic path, there inevitably will be some opportunities for us.

I think to add to Howard, this is part of our strategic consideration. Clearly, as Howard mentioned, the industrial logic has to make sense. And as we look at it through all phases—whether it be product, verticals, or geographies—this is something we are considering actively on a daily basis just given our cash position. But, at this stage, we do not have anyone that we could go and say we are right behind. But it is clear that, once one of these comes to fruition, we will be able to talk about our history.

Okay. Great. Thank you. That was all for me.

Alright. Thanks, Anja. Thank you. And this does conclude the question-and-answer session of today's program. I would like to hand the program back to Ramesh for any further remarks.

Thank you. Again, thank you, everyone, for participating. Thank you for joining our call today. We will be appearing, as I mentioned, at the Investor Day on April 9, but also at the Roth Conference in March. We look forward to seeing you there, and we clearly look forward to speaking with you all on our fourth quarter call. So thank you again, and have a great day. Thank you.

Thank you. And thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.

Good day, and thank you for standing by. Welcome to the Daktronics Second Quarter FY '26 Financial Results Conference Call. At this time, all After the speakers' presentation, there will be a question and answer session. To ask a question during this session, you will need to press 11 on your telephone. You will then hear an automated message advising you your hand is raised. To withdraw your question, please press 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Lindsey Vetter. Please go ahead, ma'am.

Thank you, Michelle. Good morning, everyone. Thank you for participating in our second quarter earnings conference call. During today's presentation, we will make forward-looking statements reflecting our expectations and plans about future financial performance and future business opportunities. These forward-looking statements reflect the company's expectations or beliefs about future events based on information currently available to us. Of course, actual results could differ. Please refer to Slide 2 of the presentation that accompanies today's call, our press release and our SEC filings for information on risk factors, uncertainties and expectations that could cause actual results to differ materially from these expectations. During this presentation, we will also refer to non-GAAP financial measures. You can find the reconciliation of each non-GAAP measure to the most directly comparable GAAP measure in the appendix to the company presentation slides, which can be found on the Investor Relations page of our website at www.daktronics.com. Our earnings release for the 2026 second quarter, which was furnished to the SEC on a Form 8-K this morning, also contain certain non-GAAP financial measures. Reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures as well a discussion of certain limitations when using non-GAAP financial measures are included in the earnings release, which has been posted separately to the Investor Relations page of our website. I'll turn the call over to Brad Wiemann, Daktronics Interim President and CEO.

Well, thank you, Lindsey. And good morning, everyone. Thank you for joining our second quarter fiscal 2026 call. I'm joined on the call by Howard Atkins, Board member and acting Chief Financial Officer. We will review our fiscal 2026 second quarter results and accomplishments and then take your questions.

Turning to our slide presentation on Slide 3. Here are the key messages from the second quarter. We delivered another quarter of solid results, driving revenue and profit expansion through exemplary execution through the first half of the year. The second quarter of each year is typically marked by a heavy slate of project completions and our team's performance with respect to manufacturing, installation and service execution was excellent, with overall efficient project production and delivery supporting our progressively strong results. During the quarter, we completed a number of large-scale installations, including Miami Freedom Park in Major League Soccer; Baltimore Orioles, Major League Baseball; Aramco Stadium in Saudi Arabia; Zayed Sports City, Abu Dhabi; Philly Airport; San Antonio Spurs; University of Buffalo Football; and a nice digital signage project in Cincinnati Convention Center. Our sales and marketing team secured large orders in our Live Events segment related to 3 Major League baseball stadiums and 3 Major League soccer arenas for recent project wins. We are 5 for 5 on large-scale Major League baseball project for fiscal year 2026. We also captured strong growth in our Transportation segment with good uptake of airport and intelligent transportation system projects domestically; and our International segment also drove double-digit growth. These efforts together produced 12% fiscal second quarter order growth from last year's across all business segments. Through our efforts, we delivered our third consecutive quarter of top line growth. We continue to improve our profitability in the quarter through both value-based pricing bounded by guardrails and a sharp focus on operational and cost efficiencies. These efforts produced our second quarter of driving operating income over $20 million. While tariff expenses continue to be dynamic and impactful, we are maintaining flexibility on being responsive to this changing environment. We ended the quarter with product backlog of $321 million, which grew 36% year-over-year, giving us a multi-quarter revenue runway for revenue growth.

Turning to Slide 4. In our Live Events business, as I mentioned, we won 6 Major League sports projects this past quarter, 3 Major League baseball and 3 Major League soccer, driving 26.5% order growth from last year. As I mentioned, we are 5 for 5 on large Major League baseball projects in fiscal year '26. Additionally, we won several other stadium and arena display enhancements, as customers continue to expand their digital display footprint throughout the venue. We continue to enhance our product and service offerings to align with customer needs and desires such as our narrow pixel pitch product lines, advanced control system capabilities to engage fans and improved seamless control and management of display content from anywhere, giving venue operators greater flexibility and control over their digital assets. Pictured here is CHI Health in Omaha, Nebraska. .

In our Commercial business, growth in our on-premise advertising business remained strong and up double digit year-over-year. After a strong performance in the first quarter, as customers continue to successfully transition to next-generation fuel price products, which are short term in nature and offer quick deliveries and feature-rich enhancements. In our out-of-home business, our pipeline of opportunities is expanding as optimism and sentiment continue to rise with independent billboard operators, as we further develop our perception -- their perception of our value proposition through recognition of our brand strength, image quality, reliability, service responsiveness and reputation for innovation with the release of our new billboard product offerings. The outdoor spectaculars projects in city centers continues to be highly competitive and variable in available projects. However, our indoor spectacular projects sold through AV integrator channels are growing through narrow pixel pitch product line introductions with streamlined tools and services. We are seeing growth in the government and military space as well as out-of-home advertising in transportation centers. Orders in this segment decreased 5% year-over-year, primarily driven by fewer large projects awarded in the outdoor spectacular business during the quarter. Pictured here is Park Outdoors. This is their 50th install of a Daktronics digital billboard in Syracuse, New York. .

Transportation business orders grew 15% from last year, driven by increased demand in our Intelligent Transportation Systems and aviation, along with strong demand for whole matrix parking solutions. We were awarded a 5-year procurement contract from the Utah Department of Transportation for intelligent transportation message displays. Through focused marketing and partner network growth, we have also improved our brand position for indoor solutions, leading to quarter-over-quarter opportunity growth. Pictured here is Spokane International Airport parking application display. This is a nice combination of our strengths in roadways display -- roadway displays, airports and parking solutions. .

Our International business, which serves all the end markets of our domestic segments served outside of North America, is developing well as our efforts to realign our focus on key geographies over the past several quarters is paying off. Second quarter orders in this segment increased 23.6% from last year, with strong demand in the Middle East and European regions from advertising, stadium and transportation customers. We are also seeing strong uptake of our indoor solutions across multiple markets, especially government entities through growing AV integrator channel partners. Pictured here is a large digital billboard installed at the Metropolitan in Dubai, in partnership with Media247. .

In our High School Park & Recreation business, after a record first quarter, our second quarter orders were comparable with orders in the second quarter of last year. We have expanded our presence among the 30,000-some high schools in the U.S. and continue to win projects by leveraging our strong value propositions and market differentiators. We expect continued strong uptake of our leading solutions and adoption of professional services, particularly in curriculum development and sports marketing going forward. In the picture here, we have Dak Prescott being recognized for his generous contributions to his high school alma mater, Haughton High, Haughton, Louisiana, part of which included a Daktronics video system. .

Turning to Slide 5. We announced this morning that we are enhancing our global manufacturing footprint with the opening of a facility in Saltillo, Mexico, with a target for production operation in late April 2026. This location is strategic in that it offers a broadened network increasing the agility of our global production capacity, provides opportunity for growth in line with our growth projections, favorable trading relationship with the United States and trading relationships with key supplier countries. Overall, the new facility will complement our existing footprint and offer optionality as we optimize production going forward.

Moving to Slide 6. Our commitment to innovation continues to drive market differentiation and value for our customers. In the second quarter, we've made significant progress in the following areas: delivering solutions that address evolving market demands. First, we expanded our narrow pixel pitch offering in the U.S. market with an additional 2.5 millimeter chip-on-board model. This new model is more robust and lighter weight than previous product offerings and delivers superior image quality at low skewing distances, making them ideal for high-end retail, corporate environments and venue applications where visual excellence is nonnegotiable. Second. We introduced our new billboard product series, a next-generation entry-level digital billboard designed and cost optimized for the out-of-home advertising market. This product brings enhanced performance and operational efficiency to outdoor applications, expanding our competitive positioning in the billboard space. Third. Sports venues are demanding easy-to-use integrated and mobile technology solutions, our new All Sport Lite mobile scoring app delivers a modern approach to entry-level scoreboard control. Designed for youth sports, practices and community events, it makes scoring simple and intuitive for everyone from coaches to volunteers. Last. We launched our Venus Control Suite Live, our cloud-hosted content management system, purpose-built for live event venues. This platform enables seamless control and management of display content from anywhere, giving venue operators greater flexibility and control over their digital assets.

For the remainder of fiscal 2026, we have 3 significant product launches planned: A next-generation LED street furniture featuring our enhanced LED technology that targets the premium out-of-home advertising market and delivers improved visual performance and operational capabilities for urban environments. We are also developing a next-generation advanced indoor video display that incorporates customer and market feedback to offer improved visual experience, improved robustness and greater cost efficiency. We are also preparing for the launch of our specialized large-digit fuel price system, which expands our product line offering for high-rise signage for long-distance viewability. The photos shown here are an example of our indoor pixel pitch at a Major League soccer stadium, Sporting Kansas City's Children's Mercy Park, an 18,000-seat stadium designed specifically for soccer; and below that, a shot of our All Sport Lite mobile scoring app, which makes it easy and intuitive to run a Daktronics scoreboard with just a mobile device. . Our progress down the innovation road map is on schedule.

Turning to Slide 7. The implementation of our transformation plan remains on track and continues to deliver tangible benefits to the business and our reported results. Here is an update for the second quarter on initiatives and progress. The strategic price adjustments we have implemented align with our value selling approach allowing us to maintain our premium positioning while protecting margin in the current challenging environment. This initiative is on track, and results to date continue to show customer acceptance of our value propositions. The Software-as-a-Service product trial was launched successfully. This initiative was designed to help identify priority areas for a broader subscription management strategy that we continue to expand upon and will further develop over the next several quarters. The Software-as-a-Service initiative augments how we serve the market, developing recurring revenue subscription models and simplify customer engagement. Our disciplined approach of prioritizing high-growth international geographies and market segments as concentrating our resources where we see the strongest demand and best returns. Our digital transformation projects are improving our process efficiency, modernizing our technologies, driving data insights that improve decision-making and create value for our customers. We are overhauling our quoting platform to make it easier and more efficient for our customers to do business with us. Additionally, as part of our digital transformation, we are building out our AI experimentation road map and governance, upgrading our ERP system and making service platform enhancements. And as part of our strategic planning process, we are proactively aligning our operations and product designs with the evolution we anticipate in the underlying technologies that drive customer experience and demand. Actions that we have completed include the following drivers of cost benefits and customer experience: Achieving faster inventory turnover and improved inventory efficiency, enhancing our customer experience with our modernized service system launched in May, deploying AI-guided troubleshooting tools with our technical services team to speed resolution of customer issues, improving our input costs through leverage of our purchasing power, reducing product complexity and time to market and aggressively renegotiation of key supply contracts to secure better terms and pricing.

Thank you, Brad, and good day, everyone. Thank you for your interest in Daktronics. The Daktronics team produced another solid quarter in the second quarter with double-digit order revenue and income growth, while maintaining strong levels of operating profitability. This slide compares the second quarter with both last year's second quarter for the year-over-year comparison and also the first quarter of fiscal '26 for the sequential quarter results. Let's start with the bottom line net income. Daktronics second quarter '26 net income after tax was $17.5 million or $0.35 per fully diluted share. Last year's second quarter net income of $21.4 million included a $10.3 million fair value adjustment on the convertible note that has since been converted and also contained $2.8 million of consulting-related expenses associated with the business transformation initiatives. Adjusted net income a year ago, therefore, was $13.9 million after removing these nonrecurring expenses and noncash benefit. So our second quarter 2026 net income rose 25.4% on a fully adjusted basis. Our effective tax rate in the second quarter was 20% compared to an average statutory tax rate of 25%. Since we've had solid earnings so far this year, we're able, starting this year, to take advantage of the new tax laws that permit accelerated depreciation of R&D and other expenses. On a pretax basis, operating income for the quarter was $21.6 million compared with $15.8 million earned in the second quarter of 2025, which, if you remember, included $3.3 million of transformation-related consulting expenses. Our bottom line results were driven by revenue growth at the top end of our 7% to 10% target range, and our capture of the pricing benefit and structural cost savings from the implementation of our business transformation initiatives. Our gross profit margin was 27% in the second quarter and operating margin was 9.4%, both improved from last year and operating margin within striking distance of our target 10% to 12.5% range.

These key margins are being driven by several factors. First, the impact of strong order growth, the backlog revenue tailwind we have generated off of 3 consecutive quarters and our efficient order to revenue conversion. Second. The benefit of fixed cost operating leverage as total revenue grows relative to fixed costs. Third. Of course, we've talked about value-based pricing initiatives, which are now built into our product and project pricing across the board. And finally, operating efficiencies, as Brad mentioned previously, up and down the supply chain from the business transformation work started late last year and other initiatives to reduce structural costs. These benefits, of course, were offset in part by the tariff expense we have this year that we didn't have last year. This year, we incurred $8.8 million of tariff expense gross in the second quarter compared with $1.5 million of tariff expense in the second quarter of fiscal '25.

Let me now turn to Slide 9, which shows you our business segment revenue. One of our key objectives has been to diversify our revenue sources, making us less dependent on any one business segment and generating more organically recurring total income. This table shows you the contributions to our revenue growth from each of our business segments in the second quarter of this year and last year and sequentially from the first quarter of fiscal '26. . It also shows you, all the way on the right, the gross profit margin earned by each business segment in the second quarter. There are a number of factors, of course, which drive revenue in each of the business segments in various ways, including, among other things, order growth, which, as you know, has been very strong; our value-based pricing initiatives; increases in the size and breadth of our sales and marketing teams; our ongoing focus on control systems, servicing and customer experience efforts; and of course, as Brad mentioned earlier, our leading edge in product innovation. We've had solid growth in either or both of the year-over-year and sequential revenue, as you can see in this table. The table also shows you as our mix has changed from the first quarter to the second quarter, if you remember, we had a higher concentration of HSPR revenue in the first quarter and a higher margin. As we go forward, as you'll see in a second, we're going to have a little bit greater concentration in Live Events.

Let me now turn to the segment product backlog experience. In terms of order to revenue conversion, our product backlog stood at $321 million at midyear, up nearly 36% from a year ago. Now our product order to revenue conversion is a factor of a number of variables, including, for example, mix. As our mix changes, the product backlog can even take longer or shorter to come through. I just reported that our order mix in the second quarter, for example, was -- Live Events was about 35%, 36% of our order mix. But as you can see on this chart, Live Events will be currently -- is currently about half of our backlog mix. What that means is that as it's weighted towards Live Events, some of the major products will be -- that we've announced and Brad talked about earlier, will be expected to start converting through next spring. And converting that full backlog will take some time but also results in more predictable growth and better revenue recurrence, giving us a multi-quarter revenue runway. Another factor here is timing. As we've previously disclosed, the Tennessee Titans order, for example, that we took -- booked in the late last year, will only start up and -- won't start up until after the third quarter that we're in right now. So time when the orders start actually has an impact on this revenue conversion. And the third factor I'd point out would be holidays. As a technical matter, in the third quarter, as you may remember, our third quarter revenue and income patterns typically are seasonally low. We have, as you know, in the third quarter, the Thanksgiving holiday, the Christmas holiday and New Year's, all of which reduce the time in which orders actually do get converted to revenue. So that's the principal reason why we have this typically slower third quarter.

Now I'll move to Slide 11, which discusses our inventory efficiency. One of the key initiatives undertaken as a result of our business transformation analysis late last calendar year has been a program of increasing the efficiency of our inventory management. This was an early win idea and the results have been very successful. This chart shows you our inventory to sales ratio over the past 5 quarters and indicates that as revenue has grown, we have successfully operated the company with leaner inventories. . This has in turn improved our overall balance sheet strength, giving us a higher investable cash position and has also helped contain tariff costs on excess inventory.

Let me now turn to our balance sheet. Balance sheet strength has been a hallmark of the company and will remain a hallmark of the company going forward. At the end of the second quarter with a net cash balance of $138.3 million, an increase of about 20% from the comparable quarter -- comparable year-end position of $115.5 million. The increase in our cash position, of course, is a consequence of our strong earnings as well as our working capital management, as I previously disclosed. As of today, the company can repurchase up to $25.7 million worth of shares, including $5.7 million of previously authorized unused share repurchase capacity plus an additional $20 million of share repurchase capacity just authorized by the Board. We also announced in an 8-K that in late November, we have converted our commercial bank back-up credit line from an asset-based facility to a cash flow facility, which reduces its cost and provides the company with additional financing flexibility if necessary. So all in all, as our cash balance has increased, the company is in a terrific position to optimize its capital position and invest for higher returns for our stakeholders and particularly for our shareholders. We have no borrowings, by the way, under our company's bank line of credit and none are contemplated.

Let me now summarize our financial position and give you some ideas about the outlook. Again, we delivered a solid quarter of double-digit order revenue and income growth, while maintaining strong levels of operating profitability. With the help of improved sales tools and processes and having more sales boots on the ground, we've built a strong backlog entering Q3 that gives us a good tailwind with a lot of capacity and potential revenue runway for the next few quarters and smoothing out our revenue generation over time. Our strengthened balance sheet offers us increased flexibility for capital optimization. Looking ahead, the third quarter of our fiscal years, as I mentioned earlier, are typically seasonally slower largely due to the fact, as I mentioned before, on the holidays, but we continue to target year-over-year revenue growth. We continue to invest in innovative products and services to extend our technology leadership. And our focus on increasing the contribution that our services suite makes to consolidated revenue creates more recurring and less capital-intensive revenue streams, which is additive to our return on invested capital. Finally, we've, again, strengthened the balance sheet and have increased our share repurchase capacity to minimize the dilution in shares and contribute to investor returns. We are planning an Investor Day in early April, and we'll provide you with more specifics as they become available. Now I'll turn the call back to Brad.

All right. Thank you, Howard. Moving to Slide 14. The forward-looking plan that we created 3 quarters ago was designed to materially improve our sustainable growth, market penetration, overall profitability and return on invested capital that our business model delivers. To date, our efforts are successfully accruing margin benefits, and we are tracking overall toward our objectives of operating margins of 10% to 12%, operating it in the top quartile return on invested capital target of 17% to 20% and achieving a compound annual growth rate of 7% to 10% by fiscal year 2028. Our plan is in place. We are executing on it. We have work to do, and our team is committed to its success. Going forward, we will continue to implement improved financial planning protocols and incentive compensation plans that better align compensation with shareholder value and with annual operating performance, enhancing our ability to drive business results and compensate accordingly.

Turning to Slide 15. As we look forward to the second half, our product backlog, as Howard mentioned, is $321 million, up 36% year-over-year, capturing demand and driving multi-quarter revenue tailwind. We have demonstrated our increased efficiency and revenue conversion and successful inventory, supply chain, manufacturing and cost management. Our pipeline of market opportunities is supporting our growth objectives. We are adding manufacturing capacity in Mexico and in Ireland to increase our flexibility and complement the 80% of product fulfillment currently completed in the U.S. We are staying responsive and flexible in a dynamic environment. We are focused on differentiated industry-leading product introductions and supporting growth through high-return product research and development, and we are executing our transformation plan with its benefits demonstrated in our results. We are on track with our road map and our 3-year growth, profitability and return targets. I want to thank the entire Daktronics team for their continued focus, strong performance, ingenuity and dedication. I'll now turn the call over to Andrew Siegel, Chairman of the Board, for some further remarks.

Brad, thank you, and thanks to you and Howard for leading the team to another strong quarter as we'll execute on our plan to drive growth and shareholder returns. Both of you talked about the outlook. So it's an appropriate time for me to introduce Ramesh Jayaraman, who officially starts work at Daktronics today and will assume the President and CEO role as of the start of the fourth quarter in February. The Board's most important job is to make sure the person running the company has the energy, ambition, skills, experience, character and talent to lead the team to achieving the company's potential. Clearly, the steps that Board has taken over the past 2 years demonstrate how much your Directors believe in and are committed to that potential. You saw last week's announcement, so I don't need to repeat any of that except to summarize that the Board selected Ramesh from among many highly qualified and interested candidates for this position because he is a transformational leader. He's a proven operator, he's a business grower, he's built distribution channels all over the world, he's a high-energy guy who sets the sights high and build teams that deliver. He knows our industry well through his time at Harman and at Bosch. He's managed P&Ls, our size and bigger, and he's driven growth organically and through M&A at higher than market growth rates. So although he just started today and isn't in a place to start answering questions just yet, we wanted to use this opportunity to have him begin to introduce himself to all of you with more to come over the next few months, including at the Investor Day. Welcome, Ramesh.

Thank you, Andrew. Good morning, everyone. I just want to take this opportunity to introduce myself and say how honored and energized I'm to join Daktronics. I have known Daktronics for the past nearly 10 years of association in the AV industry. I'm excited to join Daktronics at this pivotal time as we continue the journey of transformation for sustainable and profitable growth. I'm looking forward to working with the very talented Daktronics team and serving the team as their CEO. I'll be officially starting in the CEO role from February 1. And my time between now and then will be to be on a look less and learn more, so I can hit the ground running in the fourth quarter. Thank you again for your interest in Daktronics, and I look forward to meeting you at the upcoming Investor Day in April. Brad, back to you.

Okay. Thank you, Ramesh, and thank you, Andrew. I'll now turn the call back over to the operator for questions.

[Operator Instructions] Our first question will come from the line of Aaron Spychalla with Craig-Hallum.

First, I appreciate the continued disclosures in the presentation this quarter, especially on the backlog by segment. Can you just maybe talk about how you expect that to convert to revenue over the fiscal year and just kind of the margin profile in there? I know it can kind of vary by segment. And then just you talked a little bit about order conversion, just how does kind of book to ship how does that look if we kind of think about backlog plus that?

Well, a lot of factors go into order to revenue conversion. The one that we try to highlight on this particular call is the idea, and we've talked about this before, that a higher percentage of our backlog is now in the Live Events segment. I mentioned statistically, our orders -- Live Events orders in the second quarter were 36% of our total orders, but in terms of the backlog, it's about 50%. So that gives you some idea of how the backlog is skewed a little bit more towards Live Events. And Live Events orders, as you may remember, are -- they typically don't start right away, so they're not standard orders. They're customized orders and they have different starting dates. We mentioned that the Titans order doesn't even start until after the third quarter, so that's not going to be revenue in the third quarter yet. And that the stadium orders that Brad has talked about, which are fantastic and give us a good -- great runway, those will be spread out over -- through the spring, actually. So it takes a while to get to orders sometimes, but the good news is that, that gives us more recurring revenue over a longer period of time and more predictable revenue over a period of time. So that's one big factor. I mentioned the seasonally slow third quarter. We'll have that again this year because we always have those holidays and same holidays occur every third quarter, and so that will be a factor. And then, of course, the remaining factor is our potential order growth. So on top of the chart, I want to make sure we're not misleading you by showing you that chart. That chart just speaks to the backlog conversion. Of course, we're going to get new orders every quarter, and that is also going to be converted to -- adding to revenue growth and revenue occurrence. So lots of factors, Aaron, go into this. The one that we try to highlight for you here is the distinction, if you will, between orders and when they will start occurring as it pertains to Live Events in particular.

Yes. Maybe just to add on to that, Aaron. Our standard order business typically turns in weeks 4, 6, 8 weeks and our large project business has all those variables that Howard mentioned. So we have room in our third quarter yet to bring in orders and convert it to revenue in our standard order business.

Understood. And then maybe can you just touch on the margins that you've been adding to backlog? And maybe just looking at like year-over-year the kind of margin improvements, any way to just, at a high level, roughly quantify the breakdown between some of the value-added pricing or operating efficiencies just kind of to get a better idea and really good performance, especially considering the tariff impact as well?

Well, that is the story. Value-add pricing and the operating efficiencies coming off of the work that we've already done on structural cost savings have positively contributed to -- mostly to the operating margin. I focus your attention to that because our gross profit margin has a number of other factors connected to it that change from quarter-to-quarter. But the storyline here is that we got pretty close again to a 10% operating margin and that really is a value-based pricing, order growth, structural cost efficiencies coming off of the work that we did already last year, offset in part by the extra tariff. So -- and that's a big item because our extra tariff expense this year is almost another $8 million on the tariff expense that we had in the quarter of this year that we didn't have a year ago, and we -- our margin is still up from where it was a year ago.

Yes. Understood. Yes, I was just trying to understand if you did kind of ex the tariff impact, it's almost 13% operating margin, up 400 basis points year-over-year. I was just trying to understand any kind of breakdown of what that split could be between value-added pricing and just maybe some breakdown of the operating initiatives. But maybe third on the Mexico plant, can you just talk about how much that expands capacity by maybe in percentage terms or dollar terms? Are there any kind of segments this is focused on, in particular, and it seems like there's some benefits to the business from a tariff perspective. Just how much investment might be needed for that plant?

Yes. It's a small investment. We're leasing the facility in Mexico. We're putting some equipment in there. What we build and how we go about it is going to be determined over time, but this was complementary to our plants here in the U.S. as well. So we're able to bring product in, have it assembled, manufactured and brought into the States. It's a small operation at this time. We have room for growth if we need to do that, and that leads into that comment I made about optionality earlier today, optionality into the future about our overall production capacity and where it's at and how it plays into tariffs and all the other things that come our way. So it's a small operation at this time.

No, I appreciate that. And then just maybe one last quick one. I appreciate again the slide on inventory management and just good to see the working capital management over the last year getting the cash conversion cycle down to kind of pre-COVID levels. Just how do you see that trending moving forward? How much more room for improvement do you see from those types of initiatives on working capital?

I'd say it's going to remain a focus of the company, but we're pretty much where we try to get to as a result of the analysis that we did last year and basically pairing off excess inventory and putting in place the processes to keep it managed efficiently. So it'd be misleading to say it's going to improve a lot more from where it is right now. But as revenue grows, that's going to have a positive impact.

[Operator Instructions] Our next question comes from the line of Anja Soderstrom with Sidoti.

Congrats on the nice performance here, and welcome on board Ramesh. I'm curious, given the strong backlog growth that we saw, how should we think about the third quarter softening?

Well, you mentioned it. We have a great backlog coming in. The softening, Howard talked about it as far as the holidays, we have fewer days, fewer available work days to convert inventory or convert our backlog over into revenue. So that's the primary thing. But we are sitting in a nice backlog, and we'll use the factories to the extent that we can and plan to have employees take some time off during the holidays.

Okay. And then in terms of the capacity, I know you are adding the Mexico plant, how should we think about the capacity utilization in the U.S. and in the other facilities? Are you continue some production from there to Mexico or are you seeing the growth going into Mexico?

No, this is really fitting into our growth objectives. So we -- that's the overall plan, the 7% to 10% that we talked about over the next 3 years. This is complementary to that. So we don't plan to move any work from the U.S. factories over to Mexico, and so this is part of our expansion plans.

And how far is this expansion is going to bring in terms of revenue before you need to expand further? Or is there other way you could expand in terms of -- no, how much revenue can this footprint facilitate before you need to expand further?

Yes. This is a small footprint that we're bringing in over there and about 80% of what we manufacture for our customers worldwide comes out of our U.S. factories. And that hasn't -- this isn't changing with that. So this is a part of our overall expansion plans of revenue, and it's a small footprint, like I mentioned. So I would still foresee us being around that 80% here in the U.S. So just making up part of that growth expansion.

And I am showing no further questions at this time. And I would like to hand the conference back over to Brad Wiemann for closing remarks.

Well, thank you, everyone, for joining the call today. And we will be appearing at the Sidoti conference in January. Have a wonderful holiday season, as we want our employees to do as well. And we look forward to speaking with you on our third conference call, our third quarter call. Have a great day.

This concludes today's conference call. Thank you for participating, and you may now disconnect.