Forward-looking statements This discussion contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements reflect our current views with respect to future events and financial performance. The words "believe," "expect," "anticipate," "intend," "estimate," "forecast," "project," "should" and similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. All forecasts and projections in this document are "forward-looking statements," and are based on management's current expectations or beliefs of the Company's near-term results, based on current information available pertaining to the Company, including the risk factors noted under Item 1A of the Company's Annual Report on Form 10-K for the fiscal year endedMarch 2, 2019 . From time to time, we may also provide oral and written forward-looking statements in other materials we release to the public, such as press releases, presentations to securities analysts or investors, or other communications by the Company. Any or all of our forward-looking statements in this report and in any public statements we make could be materially different from actual results. Accordingly, we wish to caution investors that any forward-looking statements made by or on behalf of the Company are subject to uncertainties and other factors that could cause actual results to differ materially from such statements. These uncertainties and other risk factors include, but are not limited to, the risks and uncertainties set forth under Item 1A of the Company's Annual Report on Form 10-K for the fiscal year endedMarch 2, 2019 . We also wish to caution investors that other factors might in the future prove to be important in affecting the Company's results of operations. New factors emerge from time to time; it is not possible for management to predict all such factors, nor can it assess the impact of each such factor on the business or the extent to which any factor, or a combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. We undertake no obligation to update publicly or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Overview
We are a world leader in certain technologies involving the design and development of value-added glass and metal products and services for enclosing commercial buildings and framing and displays. Our four reporting segments are: Architectural Framing Systems, Architectural Glass, Architectural Services and Large-Scale Optical (LSO). The following selected financial data should be read in conjunction with the Company's Form 10-K for the year endedMarch 2, 2019 and the consolidated financial statements, including the notes to consolidated financial statements, included therein.
Highlights of Third Quarter and First Nine Months of Fiscal 2020 Compared to Third Quarter and First Nine Months of Fiscal 2019
Net sales Consolidated net sales decreased 5.5 percent, or$19.8 million , for the third quarter endedNovember 30, 2019 , and decreased 0.6 percent, or$6.0 million , for the nine-month period, compared to the same periods in the prior year. In the quarter, the decrease in sales was driven by three of our four segments, primarily a result of lower volumes in the Architectural Framing Systems segment, due to customer-driven schedule delays, and in the Architectural Glass segment, resulting from increased foreign competition. The Architectural Services segment also contributed to the decline in sales, as a result of timing of project activity, as expected. For the nine-month period, the decrease in sales was driven by expected project timing-related declines within the Architectural Services segment and by lower volumes as a result of customer-driven schedule delays within the Architectural Framing Systems segment, partially offset by improved volume in the Architectural Glass segment. 20
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The relationship between various components of operations, as a percentage of net sales, is presented below:
Three Months Ended Nine Months Ended November 30, 2019 December 1, 2018 November 30, 2019 December 1, 2018 Net sales 100.0 % 100.0 % 100.0 % 100.0 % Cost of sales 78.0 76.5 77.0 76.4 Gross profit 22.0 23.5 23.0 23.6 Selling, general and administrative expenses 15.6 14.7 16.1 15.8 Operating income 6.4 8.8 6.9 7.8 Interest and other expense, net 0.5 0.8 0.6 0.6 Earnings before income taxes 5.9 8.0 6.3 7.2 Income tax expense 1.4 1.9 1.5 1.7 Net earnings 4.5 % 6.1 % 4.8 % 5.5 % Effective tax rate 23.2 % 23.5 % 23.9 % 23.8 % Gross profit Gross profit as a percent of sales was 22.0 percent and 23.0 percent for the three- and nine-month periods endedNovember 30, 2019 , respectively, compared to 23.5 percent and 23.6 percent for the three- and nine-month periods endedDecember 1, 2018 , respectively. The decrease in the current quarter was largely driven by higher manufacturing costs and operational difficulties that we are addressing in some of the businesses in the Architectural Framing Systems segment, as well as reduced operating leverage on lower volumes in the Architectural Services segment. In the nine-month period, gross profit improvements in Architectural Glass were offset by the operational difficulties in the Architectural Framing Systems segment, as well as reduced operating leverage in the Architectural Services segment. Additionally, in the current fiscal year, start-up costs related to the new manufacturing facility for the small projects initiative within the Architectural Glass segment negatively impacted margin by 40 basis points in the quarter and 20 basis points in the year-to-date period. Selling, general and administrative (SG&A) expenses SG&A expenses as a percent of sales were 15.6 percent and 16.1 percent for the three- and nine-month periods endedNovember 30, 2019 , respectively, compared to 14.7 percent and 15.8 percent in the prior year three- and nine-month periods, respectively. In both current year periods, SG&A increased as a percent of sales compared to the same period in the prior year, primarily due to costs for outside advisors and legal fees, some of which were offset by net recoveries related to acquired project matters. These matters are included within the Corporate and other category within Note 13, Segment Information. Income tax expense The effective tax rate in the third quarter of fiscal 2020 was 23.2 percent, compared to 23.5 percent in the same period last year, and 23.9 percent for the first nine months of fiscal 2020, compared to 23.8 percent in the prior-year period. The small changes in tax rate were driven by the mix of foreign income and the impact of state taxes for both the three- and nine-month periods of the current year, compared to the same periods of the prior year.
Segment Analysis
Architectural Framing Systems
Three Months Ended Nine Months Ended % In thousands November 30, 2019 December 1, 2018 % Change November 30, 2019 December 1, 2018 Change Net sales $ 165,517$ 181,306 (8.7 )% $ 533,432$ 550,193 (3.0 )% Operating income 6,345 12,903 (50.8 )% 34,141 43,554 (21.6 )% Operating margin 3.8 % 7.1 % 6.4 % 7.9 % Architectural Framing Systems net sales declined$15.8 million , or 8.7 percent, and$16.8 million , or 3.0 percent, for the three- and nine-month periods endedNovember 30, 2019 , respectively, compared to the prior-year periods. In both periods, the declines are due to lower volumes as a result of customer-driven schedule delays and operational difficulties. 21
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Operating margin decreased 330 and 150 basis points for the three- and nine-month periods of the current year, respectively, compared to the same periods in the prior year, reflecting the lower volumes due to customer-driven schedule delays, as well as higher manufacturing costs and operational difficulties in two of the segment's businesses, which have been identified and are being addressed. Last year's third quarter and year-to-date periods also included$0.7 million and$4.7 million , respectively, of expense for the amortization of short-lived acquired intangible assets. As ofNovember 30, 2019 , segment backlog was approximately$375 million , compared to approximately$385 million last quarter. Backlog represents the dollar amount of signed contracts or firm orders, generally as a result of a competitive bidding process, which is expected to be recognized as revenue. Backlog is not a term defined underU.S. GAAP and is not a measure of contract profitability. Backlog should not be used as the sole indicator of future segment revenue because we have a substantial amount of projects with short lead times that book-and-bill within the same reporting period and are not included in backlog. We have strong visibility beyond backlog, as projects awarded, verbal commitments and bidding activities are monitored separately and not included in backlog. We use backlog as one of the metrics to evaluate sales trends in our long lead-time segments. Architectural Glass Three Months Ended Nine Months Ended % In thousands November 30, 2019 December 1, 2018 % Change November 30, 2019 December 1, 2018 Change Net sales $ 89,433$ 98,524 (9.2 )% $ 288,862$ 263,533 9.6 % Operating income 4,092 5,851 (30.1 )% 16,951 9,168 84.9 % Operating margin 4.6 % 5.9 % 5.9 % 3.5 % Net sales decreased$9.1 million , or 9.2 percent, and increased$25.3 million , or 9.6 percent, for the three- and nine-month periods endedNovember 30, 2019 , respectively, compared to the same periods in the prior year. The decrease in the third quarter of fiscal 2020 compared to the third quarter of fiscal 2019 is primarily due to lower volumes as a result of increased foreign competition leveraging the strength of theU.S. dollar. For the nine-month period, the increase in sales compared to the same period last year is due to improved volume and mix on strong customer demand in the first half of our current fiscal year. Operating margin decreased 130 basis points for the three-month period of the current year and increased 240 basis points for the nine-month period of the current year, respectively, compared to the same periods in the prior year. The decrease in the current quarter was due to start-up costs related to the new small projects initiative, as well as decreased volumes, somewhat offset by improved factory productivity. The margin increase in the nine-month of the current year period relates to operating leverage on higher volume and improved price and mix. Start-up costs related to the small projects initiative had a negative impact on margin of approximately 160 basis points and 100 basis points for the three- and nine-month periods of the current year, respectively.
Architectural Services
Three Months Ended Nine Months Ended November 30, December 1, % In thousands November 30, 2019 December 1, 2018 % Change 2019 2018 Change Net sales $ 69,043$ 72,828 (5.2 )%$ 195,787 $ 220,051 (11.0 )% Operating income 6,533 8,659 (24.6 )% 15,082 21,435 (29.6 )% Operating margin 9.5 % 11.9 % 7.7 % 9.7 % As expected, Architectural Services net sales declined$3.8 million , or 5.2 percent, and$24.3 million , or 11.0 percent, for the three- and nine-month periods endedNovember 30, 2019 , over the same periods in the prior year on lower volume due to timing of project activity. Operating margin decreased 240 and 200 basis points for the three- and nine-month periods of the current year, compared to the same periods in the prior year, due to reduced leverage on the lower project volume. As ofNovember 30, 2019 , segment backlog was approximately$607 million , compared to approximately$502 million last quarter. Backlog is defined within the Architectural Framing Systems discussion above. 22
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Large-Scale Optical (LSO)
Three Months Ended Nine Months Ended % In thousands November 30, 2019 December 1, 2018 % Change November 30, 2019 December 1, 2018 Change Net sales $ 24,405$ 23,377 4.4 % $ 66,449$ 64,522 3.0 % Operating income 6,754 6,628 1.9 % 15,561 15,845 (1.8 )% Operating margin 27.7 % 28.4 % 23.4 % 24.6 % LSO net sales increased 4.4 percent and 3.0 percent for the three- and nine-month periods endedNovember 30, 2019 , over the same periods in the prior year due to improved sales mix. Operating margin decreased 70 and 120 basis points for the three- and nine-month periods endedNovember 30, 2019 , compared to the same periods in the prior year, driven by reduced operating leverage.
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