Operator
Hello, everyone. Thank you for joining us, and welcome to the InSteel Industries third quarter 2026 earnings call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. I will now hand the conference over to H. Woltz, Presidents and Chief Executive Officer. H, please go ahead.
Thank you. Good morning. Thank you for your interest in Innsfield and welcome to our third quarter 2026 conference call, which will be conducted by Scott Gifruti, our Vice President, CFO, and Treasurer. Before we begin, let me remind you that some of the comments made in our presentation are considered to be forward-looking statements that are subject to various risks and uncertainties which could cause actual results to differ materially from those projected. These risk factors are described in our periodic filings with the SEC. Despite falling short of our expected financial performance in Q3, we believe the upturn in business activity we reported previously is still intact. I'll turn the call over to Scott to comment on our financial results, and following his comments, I'll pick the call back up to discuss our business outlook.
Thank you, H. And good morning to everyone joining us on the call. As reported in our earnings release this morning, third quarter results benefited from higher average selling prices and improved shipment activity. However, those benefits were more than offset by higher costs, resulting in net earnings of $9 million, or $0.46 per share, compared with $15.2 million, or $0.78 per share in the prior quarter. Despite the decline in earnings, underlying demand trends remain generally favorable. Third quarter shipments increased 1.7% from the prior year quarter, supported by healthy infrastructure activity, although conditions across much of the broader private non-residential construction market remain soft. Wet weather in certain regions together with scheduling and delivery delays on several customer projects including data center related projects moderated pace of shipments during the quarter we continue to view these project delays as timing related rather than indications of weakening underlying demand overall customer sentiment remains positive and activity across our key markets continue to support our outlook turning to pricing average selling prices increase 8.1% from the prior quarter and 2.3% sequentially from the second quarter, reflecting the continued benefit of pricing actions implemented over the past year in response to higher steel wire rod, freight, and other operating costs. Gross profit for the quarter declined $20.1 million from $30.8 million in the prior year period, and gross margin contracted by 690 basis points to 10.2% from 17.1%. The year-over-year decline was driven primarily by narrow spread between selling prices and raw material costs, as well as higher freight and manufacturing costs. In addition, lower production volume resulted in higher unit conversion costs, which further pressured margins. On a sequential basis gross profit increased by 3.6 million from the second quarter and gross margin improved by 60 basis points reflecting higher shipment volumes and improved spreads looking ahead to the fourth quarter we expect gross margins to remain near current levels with the potential for modest improvement our outlook is supported by steady demand and improved manufacturing efficiency from higher production volumes and operating rates however significant margin expansion will depend and our ability to realize additional pricing increases sufficient to offset ongoing inflationary pressures in raw material, freight, and other operating expenses. SG&A expense for the quarter declined to $8.5 million, or 4.3% in net sales, compared with $10.6 million, or 5.9% in net sales in the prior year period. This decrease was driven primarily by a $2.1 million reduction and compensation expense associated with our return on capital base incentive plan reflecting lower financial performance relative to the prior year. Our effective tax rate for the quarter fell to 22.8% from 23.3% a year ago. Looking ahead to the balance of the year, we expect our effective rate to run close to 23% subject to the level of pre-tax earnings, both tax differences, and the other assumptions and estimates that compose our tax provision calculation. Turning to the cash flow statement and balance sheet, operating activities generated $13.7 million of cash during the quarter, driven primarily by net earnings. Changes in net working capital had a minimal impact on cash flow, providing a half a million dollars during the quarter. A $7.9 million increase in inventories reflecting continued wire rod purchasing activity and higher average raw material costs was mostly offset by a $7.8 million increase in accounts payable and accrued expenses related to those purchases our inventory position at the quarter end represented approximately 3.5 months of shipments on forward-looking bases calculated off of our fourth quarter forecast up slightly from 3.4 months at the end of the second quarter as discussed on prior calls inventory levels have remained elevated in fiscal 2026 as we supplemented domestic wire rod purchases with offshore material to support customer demand and mitigate supply risk. Looking ahead, we expect inventories to decline monthly during the fourth quarter as shipment activity progresses through the seasonal busy period. Finally, inventories at the end of the third quarter were valued at an average unit cost that was generally consistent with both the cost reflected in the third quarter cost of sales and current replacement costs. We invested $3.2 million in capital expenditures during the quarter, bringing total capital spending to $9.1 billion for the first nine months of fiscal 2026. Based on our updated forecast for the remainder of the fiscal year, we now expect full-year capital expenditures to total approximately $15 million, down from our previous estimate of $20 million. The revised outlook reflects the timing of certain projects rather than any changes in our underlying investment plans, with a portion of the related spending now expected to shift into fiscal 2027. Our strong balance sheet continues to provide significant financial flexibility. We ended the quarter with $22.9 million of cash and no borrowings outstanding on our $100 million revolving credit facility. During the quarter, we increased share repurchase activity under our existing authorization, repurchasing 75,000 shares for $1.9 million. We continue to believe our shares represent an attractive long-term investment and view share repurchases as an effective means of creating shareholder value when valuation levels are appropriate. Our capital allocation priorities remain unchanged. We will continue to invest in the business to support growth initiatives and improve operating efficiency, maintain a strong balance sheet, and return excess capital to shareholders through a balanced approach of dividends and disciplined share repurchases. Turns to macro indicators for construction and markets. Recent data suggests conditions remain uneven. In May, the architectural Billing Index declined to 44.5, its lowest reading since January, and remained well below the 50 threshold that separates expansion from contraction. According to the AIA, the decline reflected the continued uncertainty related to geopolitical tensions in the Middle East and higher energy costs, together with elevated interest rates, rising material prices, and persistent labor shortages. The Dodge Amendment Index was measures non-residential projects of entering the planning stage also pointed to some moderation in June. The index declined 1.9% for May, with the commercial component down 6.8%. While data center planning continues to be a key source of activity, Dodge noted that the pace moderated from the elevated levels seen in recent months. Construction spending data from the U.S. Department of Commerce also reflected mixed conditions. In May, total construction spending on exceedingly adjusted annual basis increased just 0.1% from April into 1.5% from last May. Total non-residential construction spending was essentially unchanged from April and was 328% below the prior year level. However, highway and street construction, a key end market for our products, increased 3% from May of last year, reflecting continued strength of publicly funded infrastructure activity. Taking together, these indicators support our view that the near-term environment remains mixed, but the underlying drivers of demand across our key end markets remain supportive. Looking ahead, shipment levels have improved from the weather-impacted second quarter, and customer activity remains favorable across many of the non-residential markets we serve. Although certain projects continue to move through the system more slowly than originally expected, we believe these delays are primarily timing-related and do not reflect weakening underlying demand. At the same time, we continue to navigate uncertainty related to raw material costs, freight expense, and trade policy. While we are monitoring these developments closely, we believe the company remains well positioned as we move to the remainder of fiscal 2026. Our debt-free balance sheet and strong liquidity provide the financial flexibility to invest in the business, pursue growth opportunities, and continue returning capital to shareholders. This concludes my prepared remarks. I'll now turn the call back over to H. Thank you, Scott.
Despite our relatively weak financial performance in Q3, I'm glad to report that we believe market conditions are holding up reasonably well and certainly well enough to support better financial performance from our company. In a nutshell, I would characterize infrastructure markets as reasonably strong and private non-residential construction absent data centers as quite weak. As reported last quarter, we've experienced schedule delays with respect to data center projects that are unavoidable under prevailing circumstances. These delays are related to later-than-anticipated start time that necessarily back up delivery Reiterate comments from last quarter, expect shipments to private non-res markets, including our data center projects, to accelerate during the current quarter and to remain strong through the end of the calendar year. Another obstacle adversely affecting our financial performance has been the impact of inflation on nearly every product or service we acquire to operate our plant. To get in front of costs that are rising substantially in every aspect, with that in mind, we announced a price increase that was recently effective to recover these. Turning to another subject, the steel industry may have been more affected by the administration's tariff policy than any other industry. The Section in 232 tariff of 50% on imports of steel has caused market prices in the U.S. for hot rolled wire rod, or primary raw material, to rise to a level that is 50 to 100% over the global market price. Realizing that foreign companies were circumventing the 232 tariff by downstreaming hot rolled steel into finished products to which 232 did not apply, in 2025, the administration applied the Section 232 tariff to downstream products derived 32 tariff. While we initially questioned the effectiveness of the derivative products tariff strategy implemented by the administration, we're glad to report a significant decline in the volume of imported PCStrand that has entered the U.S. and derivative products, including PCStrand, were covered. For the first four months of calendar 2026, the most recent data available, PCStrand imports fell 30% from the prior year. Although the average unit values continue to reflect the availability of world markets, despite low AUVs of imports, prices in the most import effective market have begun to recover as import volumes have declined, and uncertainty and insurance and trade point out to trade policymakers the reality that U.S. operating to the raw material environment, it appears that domestic producers will wire on our primary raw, but continues to be a deficit in domestic production and the domestic competition to be restored to the market. Planned downtime is an unusual occurrence. Finally, turning to CapEx, as mentioned in the release, and by Scott, our investments will support the growth of our engineered structural mesh business, reduce our cash production costs, and enhance the robust nature of our information systems. Consistent with past practice, we'll provide quarterly updates on our investment activities and expectations as the year progresses. Looking ahead, we are aware of the substantial risk related to the state of the economy and the administration's tariff and trade policies. Regardless of developments in these areas, we are well positioned to pursue growth-related activities, both organic and through acquisition, and actions to optimize our costs. This concludes our prepared remarks and will now take your questions. Jen, would you please explain one more time the procedure for asking questions?
Operator
Absolutely. Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Julio Romero with Sidoti. Julio, your line is open. Please go ahead.
Great, thanks. Hey, good morning, H and Scott. The data center related delays that were cited on the April call, It sounds like none of those volumes were realized as of the June quarter in. Can you confirm that's correct? And if so, based on your visibility into the project, can you speak to the confidence about the acceleration in those projects occurring here in the current fourth quarter?
Well, we can confirm the delay for sure. But anything we would say about expectations going forward is as of today and subject to change. But, as I said in the prepared remarks, expect those shipments to pick up during the current quarter and to remain strong through the end of the calendar year. But it's a day-to-day matter, and we're learning a lot as we go through this process.
Got it. Thank you for that. That is helpful, and that makes sense. just once once deliveries begin for this this one project or this current batch of projects you're supplying um you know how far do you expect that to extend i think you said as you said uh through the end of the calendar calendar year but i think in the past you've said it would extend into fiscal 27 so just trying to get any finer point on the duration if possible well yeah and that's hard for me to answer julio because i don't recall the details i've been more i've been more focused on when we start shipping than how far it goes.
And we're involved in multiple projects. It's not just one. And the nature of this is that once we begin shipping, we will ship on a regular basis until the project is complete. But the material is not needed at the job site until the contractor is ready for it. That's sort of where we are.
Okay. No, that makes sense. So once this project or the group of projects is complete, can you talk about maybe the prospects for repeat business with the developer, the contractor, or the end user of that data center? You know, how you had that conversation with them? Just, you know, speak to that if you could.
Well, where we're going with this and the way we think about it is that there's 9 or 10 million tons of rebar used in this market on an annual basis. And based on the capacity additions that you're seeing in that market, certainly producers of rebar expect that number to rise substantially in the coming years. Our needs and our aspirations are a really very small part of the rebar market, but we have a valid value proposition that is important to customers, and we intend to exploit that. So this is a new undertaking for our company relatively. And as I said a few minutes ago, we're learning a lot, but we expect this to ramp up to be a substantial contributor to N-Steel's revenue base over time. Data centers notwithstanding, if it doesn't go to data centers, it goes somewhere else. We're beginning to see some signs of life in other private non-residential applications, but that'll be a 2027 or 2028 recovery, in my view. perfect and thank you for going into that and and excuse me for trying to get ahead of myself and thinking about that that part of the story but just the the valid value proposition beyond data centers um would that apply to like large reshore or on-shoring facilities other mega projects where the benefit of accelerating construction speed would also apply well yeah and i think i think what we're learning is that we need to target applications where the speed of construction is important to the owner and the contractor, which would imply maybe not so much speculative building as strategic building. And in those applications, we have a distinct advantage And as I said, intend to exploit it. We need repetition.
We don't need small cut up structures because it's harder for us to be or it's harder for our value proposition to be realized in that kind of structure. so so we're looking at at larger at larger buildings okay perfect um one more for me and i'll turn it over if i could just last quarter you cited an expectation to kind of not not book any sort of receivable with regards to the ipa tariffs just just curious if there's any change on that stance and where do vendor conversations kind of stand on on recovery and passing through any of those uh those ipa tariffs you paid last year we're going to record them when we receive
them um and it's limited as far as the tariffs that we were the importer of record on um a vast majority of the tariffs that we paid someone else was importer of records so we're waiting for them to file all the paperwork and and the other the other reality is that this repayment scheme was mandated by the court of international trade and at the end of june the trump administration appealed that ruling.
So the adjudication of the legality of the IEPA tariffs has a long way to run. I would say that this is not something that we or any other company should hold our breaths to receive.
Great. Thanks again for all the color, guys.
Operator
Your next question comes from the line of Tyson Bauer with KC Capital. Tyson, your line is open. Please go ahead.
Good morning, gentlemen. On the SG&A, the $2.1 million that you highlighted, Scott, the recognition of incentive comp because of your current run rate or as part of the function plus a clawback from what you recognized in the first two quarters?
The pace of that expense was at a lower level due to the reduced financial results.
Would that indicate that your anticipation for this final fiscal quarter were pretty much on this run rate that we're currently seeing?
Yes, and how Q4 plays out, but yes.
Was there any other impact due to the surrender value of life insurance because of the share price?
Yeah, there was a $300,000 pickup in the cash surrender value of life insurance policies based on the market returns.
Okay. You talked about price increases. Is that a one-time price increase that you're pushing through and what was the effective date or are you looking at this at multiple increases through this current quarter?
this week. You probably don't have the early returns. I was going to ask if how you character. It seems like freight is a fairly universal, nobody has an advantage on those costs everyone must be absorbing or having to push those and that's only one of the core types and I don't like the environment and that kind of leads into the next topic of demand concentration and are your results can be more variable or volatile because of larger product or projects are included in your geography that kind of concentration that we're seeing more of a backfilling function as opposed to incremental, but if you're truly not shipping and they're delayed and we're not recognizing data center revenue currently to what you think you will be, it really can't be much of a backfill operation. It must be incremental as we go forward. If you give us 2021-22 the distribution center boom that went through and then kind of waned off, this It's just the next iteration of a different, picked up that.
Say again, there's a rebar used in the U.S. every year, and that must be going to 11 or 12.
When you see the headlines on data center moratoriums and all the angst, do you, politics, and once we get beyond that season, we'll start to get into a more regular flow, and that doesn't make the headlines like it currently is in New York or other places?
Permitted and finalized were opposition.
And the last one, I guess in the same vein as it happens on tariff-free funds, activity, a turn in that industry. When it happens, we'll believe it as opposed to trying to forecast it.
Operator
There are no further questions at this time. I will now turn the call back to H. Woltz for closing remarks.
We appreciate your interest and are glad to hear from you if you want to give us a call.
Operator
This concludes today's call. Thank you for attending. You may now disconnect.
