Document

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________________ 
FORM 10-Q
 _________________________________
x
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 1, 2018
o
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to             
Commission File Number: 0-6365
_________________________________ 
APOGEE ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
 _________________________________
Minnesota
 
41-0919654
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
4400 West 78th Street – Suite 520,
Minneapolis, MN
 
55435
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (952) 835-1874
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
_________________________________ 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes    o  No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     x  Yes    o  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
x
  
Accelerated filer
 
o
 
 
 
 
 
 
 
Non-accelerated filer
 
o
  
Smaller reporting company
 
o
 
 
 
 
 
 
 
Emerging growth company
 
o
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
 
o



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    o  Yes    x  No
As of January 9, 2019, 27,175,800 shares of the registrant’s common stock, par value $0.33 1/3 per share, were outstanding.
 


Table of Contents

APOGEE ENTERPRISES, INC. AND SUBSIDIARIES
 
  
 
Page
PART I
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
PART II
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 6.
 
 
 
 

3

Table of Contents

PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements

CONSOLIDATED BALANCE SHEETS
(unaudited)
In thousands, except stock data
 
December 1, 2018
 
March 3, 2018
Assets
 
 
 
 
Current assets
 
 
 
 
Cash and cash equivalents
 
$
15,043

 
$
19,359

Receivables, net of allowance for doubtful accounts
 
201,498

 
211,852

Inventories
 
79,847

 
80,908

Costs and earnings on contracts in excess of billings
 
60,140

 
4,120

Other current assets
 
16,247

 
20,039

Total current assets
 
372,775

 
336,278

Property, plant and equipment, net
 
302,209

 
304,063

Restricted cash
 
26,354

 

Goodwill
 
185,788

 
180,956

Intangible assets
 
153,605

 
167,349

Other non-current assets
 
40,249

 
33,674

Total assets
 
$
1,080,980

 
$
1,022,320

Liabilities and Shareholders’ Equity
 
 
 
 
Current liabilities
 
 
 
 
Accounts payable
 
$
79,072

 
$
68,416

Accrued payroll and related benefits
 
39,323

 
36,646

Accrued self-insurance reserves
 
8,060

 
10,933

Billings on contracts in excess of costs and earnings
 
26,961

 
12,461

Other current liabilities
 
59,230

 
79,696

Total current liabilities
 
212,646

 
208,152

Long-term debt
 
232,726

 
215,860

Long-term self-insurance reserves
 
19,329

 
16,307

Other non-current liabilities
 
85,405

 
70,646

Commitments and contingent liabilities (Note 8)
 

 

Shareholders’ equity
 
 
 
 
Common stock of $0.33-1/3 par value; authorized 50,000,000 shares; issued and outstanding 27,655,804 and 28,158,042 respectively
 
9,219

 
9,386

Additional paid-in capital
 
154,095

 
152,763

Retained earnings
 
400,289

 
373,259

Common stock held in trust
 
(745
)
 
(922
)
Deferred compensation obligations
 
745

 
922

Accumulated other comprehensive loss
 
(32,729
)
 
(24,053
)
Total shareholders’ equity
 
530,874

 
511,355

Total liabilities and shareholders’ equity
 
$
1,080,980

 
$
1,022,320


See accompanying notes to consolidated financial statements.

4

Table of Contents

CONSOLIDATED RESULTS OF OPERATIONS
(unaudited)
 
 
Three Months Ended
 
Nine Months Ended
In thousands, except per share data
 
December 1, 2018
 
December 2, 2017
 
December 1,
2018
 
December 2,
2017
Net sales
 
$
357,718

 
$
356,506

 
$
1,056,382

 
$
972,721

Cost of sales
 
273,628

 
264,947

 
807,096

 
724,868

Gross profit
 
84,090

 
91,559

 
249,286

 
247,853

Selling, general and administrative expenses
 
52,682

 
57,024

 
167,224

 
161,438

Operating income
 
31,408

 
34,535

 
82,062

 
86,415

Interest income
 
809

 
106

 
1,719

 
390

Interest expense
 
2,941

 
1,594

 
7,514

 
3,689

Other (expense) income, net
 
(655
)
 
303

 
(459
)
 
560

Earnings before income taxes
 
28,621

 
33,350

 
75,808

 
83,676

Income tax expense
 
6,730

 
9,704

 
18,030

 
26,517

Net earnings
 
$
21,891

 
$
23,646

 
$
57,778

 
$
57,159

Earnings per share - basic
 
$
0.79

 
$
0.82

 
$
2.06

 
$
1.98

Earnings per share - diluted
 
$
0.78

 
$
0.82

 
$
2.04

 
$
1.98

Weighted average basic shares outstanding
 
27,836

 
28,736

 
28,030

 
28,812

Weighted average diluted shares outstanding
 
28,156

 
28,818

 
28,304

 
28,862


See accompanying notes to consolidated financial statements.

5

Table of Contents

CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(unaudited)
 
 
Three Months Ended
 
Nine Months Ended
In thousands
 
December 1, 2018
 
December 2, 2017
 
December 1,
2018
 
December 2,
2017
Net earnings
 
$
21,891

 
$
23,646

 
$
57,778

 
$
57,159

Other comprehensive (loss) earnings:
 
 
 
 
 
 
 
 
Unrealized loss on marketable securities, net of $16, $78, $25 and $28 of tax benefit, respectively
 
(58
)
 
(143
)
 
(90
)
 
(51
)
Unrealized gain (loss) on foreign currency hedge, net of $10, $-, ($99) and $- of tax expense (benefit), respectively
 
32

 

 
(327
)
 

Foreign currency translation adjustments
 
(3,621
)
 
(3,838
)
 
(7,518
)
 
10,652

Other comprehensive (loss) earnings
 
(3,647
)
 
(3,981
)
 
(7,935
)
 
10,601

Total comprehensive earnings
 
$
18,244

 
$
19,665

 
$
49,843

 
$
67,760



See accompanying notes to consolidated financial statements.

6

Table of Contents

CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 
 
Nine Months Ended
In thousands
 
December 1, 2018
 
December 2, 2017
Operating Activities
 
 
 
 
Net earnings
 
$
57,778

 
$
57,159

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
38,378

 
39,774

Share-based compensation
 
4,724

 
4,645

Deferred income taxes
 
10,600

 
(3,339
)
Gain on disposal of assets
 
(2,499
)
 
(78
)
Proceeds from New Markets Tax Credit transaction, net of deferred costs
 
8,850

 

Other, net
 
(799
)
 
(1,286
)
Changes in operating assets and liabilities:
 
 
 
 
Receivables
 
9,291

 
(16,131
)
Inventories
 
4,398

 
(1,915
)
Costs and earnings on contracts in excess of billings
 
(54,569
)
 
567

Accounts payable and accrued expenses
 
(20,072
)
 
(27,449
)
Billings on contracts in excess of costs and earnings
 
14,558

 
9,869

Refundable and accrued income taxes
 
1,831

 
7,108

Other
 
(1,825
)
 
(2,685
)
Net cash provided by operating activities
 
70,644

 
66,239

Investing Activities
 
 
 
 
Capital expenditures
 
(33,867
)
 
(38,946
)
Proceeds from sales of property, plant and equipment
 
12,332

 
253

Acquisition of business, net of cash acquired
 

 
(184,826
)
Purchases of marketable securities
 
(9,006
)
 
(10,154
)
Sales/maturities of marketable securities
 
5,813

 
9,288

Other
 
(2,209
)
 
941

Net cash used in investing activities
 
(26,937
)
 
(223,444
)
Financing Activities
 
 
 
 
Borrowings on line of credit
 
294,500

 
314,700

Payments on line of credit
 
(278,000
)
 
(150,700
)
Shares withheld for taxes, net of stock issued to employees
 
(1,591
)
 
(1,561
)
Repurchase and retirement of common stock
 
(23,313
)
 
(10,833
)
Dividends paid
 
(13,180
)
 
(11,971
)
Other
 
413

 
2,039

Net cash (used in) provided by financing activities
 
(21,171
)
 
141,674

Increase (decrease) in cash and cash equivalents
 
22,536

 
(15,531
)
Effect of exchange rates on cash
 
(498
)
 
1,079

Cash, cash equivalents and restricted cash at beginning of year
 
19,359

 
27,297

Cash, cash equivalents and restricted cash at end of period
 
$
41,397

 
$
12,845

Noncash Activity
 
 
 
 
Capital expenditures in accounts payable
 
$
5,771

 
$
1,859


See accompanying notes to consolidated financial statements.

7

Table of Contents

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(unaudited)
In thousands
 
Common Shares Outstanding
 
Common Stock
 
Additional Paid-In Capital
 
Retained Earnings
 
Common Stock Held in Trust
 
Deferred Compensation Obligation
 
Accumulated Other Comprehensive (Loss) Income
Balance at March 3, 2018
 
28,158

 
$
9,386

 
$
152,763

 
$
373,259

 
$
(922
)
 
$
922

 
$
(24,053
)
Cumulative effect adjustment (see Note 1)
 

 

 

 
2,999

 

 

 

Reclassification of tax effects (see Note 1)
 

 

 

 
737

 

 

 
(737
)
Net earnings
 

 

 

 
57,778

 

 

 

Unrealized loss on marketable securities, net of $25 tax benefit
 

 

 

 

 

 

 
(90
)
Unrealized loss on foreign currency hedge, net of $99 tax benefit
 

 

 

 

 

 

 
(327
)
Foreign currency translation adjustments
 

 

 

 

 

 

 
(7,522
)
Issuance of stock, net of cancellations
 
125

 
42

 
126

 

 
177

 
(177
)
 

Share-based compensation
 

 

 
4,724

 

 

 

 

Exercise of stock options
 
19

 
6

 
177

 

 

 

 

Share repurchases
 
(600
)
 
(200
)
 
(3,436
)
 
(19,677
)
 

 

 

Other share retirements
 
(46
)
 
(15
)
 
(259
)
 
(1,627
)
 

 

 

Cash dividends
 

 

 

 
(13,180
)
 

 

 

Balance at December 1, 2018
 
27,656

 
$
9,219

 
$
154,095

 
$
400,289

 
$
(745
)
 
$
745

 
$
(32,729
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at March 4, 2017
 
28,680

 
$
9,560

 
$
150,111

 
$
341,996

 
$
(875
)
 
$
875

 
$
(31,090
)
Net earnings
 

 

 

 
57,159

 

 

 

Unrealized loss on marketable securities, net of $28 tax benefit
 

 

 

 

 

 

 
(51
)
Foreign currency translation adjustments
 

 

 

 

 

 

 
10,652

Issuance of stock, net of cancellations
 
106

 
36

 
147

 

 
(33
)
 
33

 

Share-based compensation
 

 

 
4,645

 

 

 

 

Exercise of stock options
 
100

 
33

 
801

 

 

 

 

Share repurchases
 
(200
)
 
(67
)
 
(1,091
)
 
(9,675
)
 

 

 

Other share retirements
 
(45
)
 
(15
)
 
(256
)
 
(2,229
)
 

 

 

Cash dividends
 

 

 

 
(11,971
)
 

 

 

Balance at December 2, 2017
 
28,641

 
$
9,547

 
$
154,357

 
$
375,280

 
$
(908
)
 
$
908

 
$
(20,489
)


See accompanying notes to consolidated financial statements.

8

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1.
Summary of Significant Accounting Policies

Basis of presentation
The consolidated financial statements of Apogee Enterprises, Inc. (we, us, our or the Company) have been prepared in accordance with accounting principles generally accepted in the United States. The information included in this Form 10-Q should be read in conjunction with the Company’s Form 10-K for the year ended March 3, 2018. We use the same accounting policies in preparing quarterly and annual financial statements. All adjustments necessary for a fair presentation of quarterly operating results are reflected herein and are of a normal, recurring nature. The results of operations for the nine-month period ended December 1, 2018 are not necessarily indicative of the results to be expected for the full year.

Certain prior-year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the consolidated results of operations.

Significant accounting policies update
Our significant accounting policies are included in Note 1 "Summary of Significant Accounting Policies and Related Data" of our Annual Report on Form 10-K for the year ended March 3, 2018. On March 4, 2018, we adopted ASC 606, Revenue from Contracts with Customers, and as a result, made updates to our significant accounting policy for revenue recognition.

We generate revenue from the design, engineering and fabrication of architectural glass, curtainwall, window, storefront and entrance systems, and from installing those products on commercial buildings. We also manufacture value-added glass and acrylic products. Due to the diverse nature of our operations and various types of contracts with customers, we have businesses that recognize revenue over time and businesses that recognize revenue at a point in time.

In the current year-to-date period, approximately 46 percent of our total revenue is recognized at the time products are shipped from our manufacturing facilities, which is when control is transferred to our customer, consistent with past practices. These businesses do not generate contract-related assets or liabilities. Variable consideration associated with these contracts and orders, generally related to early pay discounts or volume rebates, is not considered significant.

We also have three businesses which operate under long-term, fixed-price contracts, representing approximately 33 percent of our total revenue in the current year. This includes one business which changed revenue recognition practices due to the adoption of the new guidance, moving from recognizing revenue at shipment to an over-time method of revenue recognition. The contracts for these businesses have a single, bundled performance obligation, as these businesses generally provide interrelated products and services and integrate these products and services into a combined output specified by the customer. The customer obtains control of this combined output, generally integrated window systems or installed window and curtainwall systems, over time. We measure progress on these contracts following an input method, by comparing total costs incurred to-date to the total estimated costs for the contract, and record that proportion of the total contract price as revenue in the period. Contract costs include materials, labor and other direct costs related to contract performance. We believe this method of recognizing revenue is consistent with our progress in satisfying our contract obligations.

Due to the nature of the work required under these long-term contracts, the estimation of total revenue and costs incurred throughout a project is subject to many variables and requires significant judgment. It is common for these contracts to contain potential bonuses or penalties which are generally awarded or charged upon certain project milestones or cost or timing targets, and can be based on customer discretion. We estimate variable consideration at the most likely amount to which we expect to be entitled. We include estimated amounts in the transaction price to the extent that it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Our estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on our assessments of anticipated performance and all information (historical, current and forecasted) that is reasonably available to us.

Long-term contracts are often modified to account for changes in contract specifications and requirements of work to be performed. We consider contract modifications to exist when the modification, generally through a change order, either creates new or changes existing enforceable rights and obligations, and we evaluate these types of modifications to determine whether they may be considered distinct performance obligations. In many cases, these contract modifications are for goods or services that are not distinct from the existing contract, due to the significant integration service provided in the context of the contract. Therefore, these modifications are accounted for as part of the existing contract. The effect of a contract modification on the transaction price and our measure of progress is recognized as an adjustment to revenue, generally on a cumulative catch-up basis.


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Table of Contents

Typically, under these fixed-price contracts, we bill our customers following an agreed-upon schedule based on work performed. Because the progress billings do not generally correspond to our measurement of revenue on a contract, we generate contract assets when we have recognized revenue in excess of the amount billed to the customer. We generate contract liabilities when we have billed the customer in excess of revenue recognized on a contract.

Finally, we have one business, making up approximately 21 percent of our total revenue in the current year, that recognizes revenue following an over-time output method based upon units produced. The customer is considered to have control over the products at the time of production, as the products are highly customized with no alternative use, and we have an enforceable right to payment for performance completed over the production period. We believe this over-time output method of recognizing revenue reasonably depicts the fulfillment of our performance obligations under our contracts. Previously, this business recognized revenue at the time of shipment. Billings still occur upon shipment. Therefore, contract assets are generated for the unbilled amounts on contracts when production is complete. Variable consideration associated with these orders, generally related to early pay discounts, is not considered significant.

As outlined within the new accounting guidance, we elected several practical expedients in our transition to ASC 606:
We have made an accounting policy election to account for shipping and handling activities that occur after control of the related goods transfers to the customer as fulfillment activities, instead of assessing such activities as performance obligations.
We have made an accounting policy election to exclude from the transaction price all sales taxes related to revenue-producing transactions that are collected from the customer for a government authority.
We generally expense incremental costs of obtaining a contract when incurred because the amortization period would be less than one year. These costs primarily relate to sales commissions and are included in selling, general and administrative expenses.
We have not adjusted contract price for a significant financing component, as we expect the period between when our goods and services are transferred to the customer and when the customer pays for those goods and services to be less than a year.

Adoption of new accounting standards
We adopted the new guidance in ASC 606 using the modified retrospective transition method applied to those contracts which were not complete as of March 4, 2018. Prior period amounts were not adjusted and therefore continue to be reported in accordance with the accounting guidance and our accounting policies in effect for those periods.

Representing the cumulative effect of adopting ASC 606, we recorded a $3.0 million increase to the opening balance of retained earnings as of March 4, 2018. For the three- and nine-month periods ending December 1, 2018, the application of the new accounting guidance had the following impact on our consolidated financial statements:
 
 
Three Months Ended December 1, 2018
 
Nine Months Ended December 1, 2018
In thousands
 
As reported
 
Without adoption of ASC 606
 
As reported
 
Without adoption of ASC 606
Net sales
 
$
357,718

 
$
355,765

 
$
1,056,382

 
$
1,042,600

Cost of sales
 
273,628

 
272,087

 
807,096

 
796,802

    Gross profit
 
84,090

 
83,678

 
249,286

 
245,798

Selling, general and administrative expenses
 
52,682

 
52,692

 
167,224

 
166,560

    Operating income
 
$
31,408

 
$
30,986

 
$
82,062

 
$
79,238

 
 
 
 
 
 
 
 
 
Income tax expense
 
$
6,730

 
$
6,627

 
$
18,030

 
$
17,355

Net earnings
 
$
21,891

 
$
21,572

 
$
57,778

 
$
55,628

 
 
 
 
 
 
 
 
 
 
 
 
 
December 1, 2018
 
 
 
 
 
 
As reported
 
Without adoption of ASC 606
Inventories
 
 
 
 
 
$
79,847

 
$
89,250

Costs and earnings on contracts in excess of billings
 
 
 
 
 
60,140

 
30,756

Billings on contracts in excess of costs and earnings
 
 
 
 
 
26,961

 
25,923

Other current liabilities
 
 
 
 
 
59,230

 
57,802

Retained earnings
 
 
 
 
 
400,289

 
398,139


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These changes are primarily a result of the transition of certain of our businesses from recognizing revenue at the time of shipment to over-time methods of revenue recognition.

In the first quarter of fiscal 2019, we elected to early adopt ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This standard permits a company to reclassify the disproportionate income tax effects of the 2017 Tax Cuts and Jobs Act on items within accumulated other comprehensive income ("AOCI") to retained earnings. The FASB refers to these amounts as “stranded tax effects.” As a result of this adoption, we reclassified income tax effects of $0.7 million resulting from tax reform from AOCI to retained earnings following a portfolio approach. These stranded tax effects are derived from the deferred tax balances on our pension obligations as a result of the lower U.S. federal corporate tax rate.

Accounting standards not yet adopted
In February 2016, the FASB issued ASU 2016-02, Leases, which provides for comprehensive changes to lease accounting. The standard requires that a lessee recognize a lease obligation liability and a right-to-use asset for virtually all leases of property, plant and equipment, subsequently amortized over the lease term. The new standard is effective for fiscal years beginning after December 15, 2018, our fiscal year 2020. In July 2018, the FASB issued an additional update which allows an entity the option to adopt the guidance on a modified retrospective basis. Under the modified retrospective approach, which we plan to adopt in implementing the new guidance, an entity would recognize a cumulative effect adjustment of initially applying the guidance to the opening balance of retained earnings in the period of adoption. Prior period amounts will not be adjusted.

We are in the process of analyzing our lease arrangements and evaluating our initial right-to-use asset and lease liability balances, including determining estimates and assumptions used in the calculation of the lease asset and liability. We are also in the process of determining modifications to our business processes, accounting policies and systems and controls that are needed to support measurement, recognition and disclosure under this new standard. We expect that the adoption of this standard will result in reflecting a material right-of-use asset and lease liability on our consolidated balance sheet. In adopting the new standard, we plan to elect the package of practical expedients, as well as the practical expedient to not separate nonlease components from lease components. We plan to adopt the new guidance following the modified retrospective application approach. We do not expect this standard to have a significant impact on our consolidated results of operations or consolidated statements of cash flows.

Subsequent events
We have evaluated subsequent events for potential recognition and disclosure through the date of this filing. Subsequent to the end of the quarter, we purchased 504,004 shares of stock under our authorized share repurchase program, at a total cost of $14.9 million.

2.
Acquisition

On June 12, 2017, we acquired 100 percent of the stock of EFCO Corporation, a privately held U.S. manufacturer of architectural aluminum window, curtainwall, storefront and entrance systems for commercial construction projects, for $192 million in cash, funded through our committed revolving credit facility. EFCO's results of operations have been included in our consolidated financial statements and within the Architectural Framing Systems segment since the date of acquisition.

3.
Revenue, Receivables and Contract Assets and Liabilities

Revenue
The following table disaggregates total revenue by timing of recognition (see Note 13 for disclosure of revenue by segment):
 
 
Three Months Ended
 
Nine Months Ended
In thousands
 
December 1, 2018
 
December 1, 2018
Recognized at shipment
 
$
158,164

 
$
481,565

Recognized over time
 
199,554

 
574,817

Total
 
$
357,718

 
$
1,056,382


Receivables
Trade and construction accounts receivable consist of amounts billed and due from customers. The amounts due are stated at their estimated net realizable value. We maintain an allowance for doubtful accounts to provide for the estimated amount of receivables that will not be collected. This allowance is based on an assessment of customer creditworthiness, historical payment experience and the age of outstanding receivables. Retainage on construction contracts represents amounts withheld by our customers on long-term projects until the project reaches a level of completion where amounts are released.

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In thousands
 
December 1, 2018
 
March 3, 2018
Trade accounts
 
$
155,651

 
$
157,562

Construction contracts
 
14,229

 
26,545

Construction contracts - retainage
 
33,176

 
26,388

Other receivables
 

 
2,887

Total receivables
 
203,056

 
213,382

Less: allowance for doubtful accounts
 
(1,558
)
 
(1,530
)
Net receivables
 
$
201,498

 
$
211,852


Contract assets and liabilities
Contract assets consist of retainage, costs and earnings in excess of billings and other unbilled amounts typically generated when revenue recognized exceeds the amount billed to the customer. Contract liabilities consist of billings in excess of costs and earnings and other deferred revenue on contracts. Retainage is classified within receivables and deferred revenue is classified within other current liabilities on our consolidated balance sheets.

The time period between when performance obligations are complete and when payment is due is not significant. In certain of our businesses that recognize revenue over time, progress billings follow an agreed-upon schedule of values, and retainage is withheld by the customer until the project reaches a level of completion where amounts are released.
In thousands
 
December 1, 2018
 
March 3, 2018
Contract assets
 
$
93,316

 
$
30,508

Contract liabilities
 
30,447

 
20,120


The increase in contract assets was due to additional businesses recognizing revenue in advance of billings, as a result of changing accounting policies for revenue recognition upon adoption of ASC 606 and the timing of costs incurred in advance of billing on a large project. The increase in contract liabilities was due to timing of project activity within our businesses that operate under long-term contracts.

In the first nine months of fiscal 2019, we recognized revenue of $10.4 million related to contract liabilities at March 4, 2018, and revenue of $3.8 million related to performance obligations satisfied in previous periods due to changes in contract estimates. For the third quarter of fiscal 2019, we did not recognize any revenue related to contract liabilities at March 4, 2018, and recognized revenue of $1.5 million related to performance obligations satisfied in previous periods due to changes in contract estimates.

Some of our contracts have an expected duration of longer than a year, with performance obligations extending over that timeframe. Generally these contracts are in our businesses with long-term contracts which recognize revenue over time. As of December 1, 2018, the transaction price associated with unsatisfied performance obligations was approximately $706.3 million. The performance obligations are expected to be satisfied, and the corresponding revenue to be recognized, over the following estimated time periods:
In thousands
 
December 1, 2018
Within one year
 
$
421,778

Within two years
 
236,037

Beyond
 
48,493

Total
 
$
706,308


4.
Supplemental Balance Sheet Information

Inventories
In thousands
 
December 1, 2018
 
March 3, 2018
Raw materials
 
$
43,821

 
$
35,049

Work-in-process
 
16,426

 
17,406

Finished goods
 
19,600

 
28,453

Total inventories
 
$
79,847

 
$
80,908



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Other current liabilities
In thousands
 
December 1, 2018
 
March 3, 2018
Warranties
 
$
12,796

 
$
18,110

Acquired contract liabilities
 
15,541

 
26,422

Deferred revenue
 
4,080

 
7,659

Other
 
26,813

 
27,505

Total other current liabilities
 
$
59,230

 
$
79,696


Other non-current liabilities
In thousands
 
December 1, 2018
 
March 3, 2018
Deferred benefit from New Market Tax Credit transactions
 
$
26,458

 
$
16,708

Retirement plan obligations
 
8,997

 
8,997

Deferred compensation plan
 
10,996

 
10,730

Other
 
38,954

 
34,211

Total other non-current liabilities
 
$
85,405

 
$
70,646


5.
Financial Instruments

Marketable securities
We hold the following available-for-sale marketable securities, made up of municipal and corporate bonds: 
In thousands
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated
Fair Value
December 1, 2018
 
12,534

 
4

 
(249
)
 
12,289

March 3, 2018
 
9,183

 
8

 
(138
)
 
9,053


We have a wholly-owned insurance subsidiary, Prism Assurance, Ltd. (Prism), which holds these municipal and corporate bonds. Prism insures a portion of our general liability, workers’ compensation and automobile liability risks using reinsurance agreements to meet statutory requirements. The reinsurance carrier requires Prism to maintain fixed-maturity investments, which are generally high-quality municipal and corporate bonds, for the purpose of providing collateral for Prism’s obligations under the reinsurance agreements.

The amortized cost and estimated fair values of municipal bonds at December 1, 2018, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities, as borrowers may have the right to call or prepay obligations with or without penalty. 
In thousands
 
Amortized Cost
 
Estimated Fair Value
Due within one year
 
$
447

 
$
441

Due after one year through five years
 
8,781

 
8,598

Due after five years through 10 years
 
2,541

 
2,493

Due after 10 years through 15 years
 

 

Due beyond 15 years
 
765

 
757

Total
 
$
12,534

 
$
12,289


Fair value measurements
Financial assets and liabilities are classified in the fair value hierarchy based on the lowest level input that is significant to the fair value measurement: Level 1 (unadjusted quoted prices in active markets for identical assets or liabilities); Level 2 (observable market inputs, other than quoted prices included in Level 1); and Level 3 (unobservable inputs that cannot be corroborated by observable market data). We do not have any Level 3 financial assets or liabilities.

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In thousands
 
Quoted Prices in
Active Markets
(Level 1)
 
Other Observable Inputs (Level 2)
 
Total Fair Value
December 1, 2018
 
 
 
 
 
 
Cash equivalents
 
 
 
 
 
 
Money market funds
 
$
2,145

 
$

 
$
2,145

Commercial paper
 

 
400

 
400

Total cash equivalents
 
2,145

 
400

 
2,545

Short-term securities
 
 
 
 
 
 
Municipal and corporate bonds
 

 
442

 
442

Long-term securities
 
 
 
 
 
 
Municipal and corporate bonds
 

 
11,847

 
11,847

Total assets at fair value
 
$
2,145

 
$
12,689

 
$
14,834

March 3, 2018
 
 
 
 
 
 
Cash equivalents
 
 
 
 
 
 
Money market funds
 
$
2,901

 
$

 
$
2,901

Commercial paper
 

 
400

 
400

Total cash equivalents
 
2,901

 
400

 
3,301

Short-term securities
 
 
 
 
 
 
Municipal and corporate bonds
 

 
423

 
423

Long-term securities
 
 
 
 
 
 
Municipal and corporate bonds
 

 
8,630

 
8,630

Total assets at fair value
 
$
2,901

 
$
9,453

 
$
12,354


Cash equivalents
Fair value of money market funds was determined based on quoted prices for identical assets in active markets. Commercial paper was measured at fair value using inputs based on quoted prices for similar securities in active markets.

Short- and long-term securities
Mutual funds were measured at fair value based on quoted prices for identical assets in active markets. Municipal and corporate bonds were measured at fair value based on market prices from recent trades of similar securities and are classified as short-term or long-term based on maturity date.

Foreign currency instruments
We periodically enter into forward purchase foreign currency contracts, generally with an original maturity date of less than one year, to hedge foreign currency exchange rate risk. As of December 1, 2018, we held foreign exchange forward contracts with a U.S. dollar notional value of $16.0 million, with the objective of reducing the exposure to fluctuations in the Canadian dollar and the Euro. The fair value of these contracts was a liability of $0.4 million as of December 1, 2018. These forward contracts are measured at fair value using unobservable market inputs, such as quotations on forward foreign exchange points and foreign currency exchange rates, and would be classified as Level 2 within the fair value hierarchy above.


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6.
Goodwill and Other Identifiable Intangible Assets

The carrying amount of goodwill attributable to each reporting segment was:  
In thousands
 
Architectural Framing Systems
 
Architectural Glass
 
Architectural Services
 
Large-Scale
Optical
 
Total
Balance at March 4, 2017
 
$
63,701

 
$
25,956

 
$
1,120

 
$
10,557

 
$
101,334

Goodwill acquired
 
84,162

 

 

 

 
84,162

Goodwill adjustments for purchase accounting

 
(5,859
)
 

 

 

 
(5,859
)
Foreign currency translation
 
1,304

 
15

 

 

 
1,319

Balance at March 3, 2018
 
143,308

 
25,971

 
1,120

 
10,557

 
180,956

Goodwill adjustments for purchase accounting

 
6,267

 

 

 

 
6,267

Foreign currency translation
 
(1,110
)
 
(325
)
 

 

 
(1,435
)
Balance at December 1, 2018
 
$
148,465

 
$
25,646

 
$
1,120

 
$
10,557

 
$
185,788


The gross carrying amount of other intangible assets and related accumulated amortization was:
In thousands
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Foreign
Currency
Translation
 
Net
December 1, 2018
 
 
 
 
 
 
 
 
Definite-lived intangible assets:
 
 
 
 
 
 
 
 
Customer relationships
 
$
122,816

 
$
(24,937
)
 
$
(2,609
)
 
$
95,270

Other intangibles
 
41,697

 
(31,033
)
 
(899
)
 
9,765

Total definite-lived intangible assets
 
164,513

 
(55,970
)
 
(3,508
)
 
105,035

Indefinite-lived intangible assets:
 
 
 
 
 
 
 
 
Trademarks
 
49,077

 

 
(507
)
 
48,570

Total intangible assets
 
$
213,590

 
$
(55,970
)
 
$
(4,015
)
 
$
153,605

March 3, 2018
 
 
 
 
 
 
 
 
Definite-lived intangible assets:
 
 
 
 
 
 
 
 
Customer relationships
 
$
122,816

 
$
(20,277
)
 
$
(56
)
 
$
102,483

Other intangibles
 
41,697

 
(25,879
)
 
(30
)
 
15,788

Total definite-lived intangible assets
 
164,513

 
(46,156
)
 
(86
)
 
118,271

Indefinite-lived intangible assets:
 
 
 
 
 
 
 
 
Trademarks
 
48,461

 

 
617

 
49,078

Total intangible assets
 
$
212,974

 
$
(46,156
)
 
$
531

 
$
167,349


Amortization expense on definite-lived intangible assets was $10.5 million and $12.8 million for the nine-month periods ended December 1, 2018 and December 2, 2017. The amortization expense associated with debt issue costs is included in interest expense while the remainder is in selling, general and administrative expenses in the consolidated results of operations. At December 1, 2018, the estimated future amortization expense for definite-lived intangible assets was:
In thousands
 
Remainder of Fiscal 2019
 
Fiscal 2020
 
Fiscal 2021
 
Fiscal 2022
 
Fiscal 2023
Estimated amortization expense
 
$
2,266

 
$
8,091

 
$
8,084

 
$
7,928

 
$
7,539


7.
Debt

We maintain a committed revolving credit facility with maximum borrowings of up to $335.0 million, maturing in November 2021. Outstanding borrowings under our committed revolving credit facility were $211.5 million, as of December 1, 2018, and $195.0 million, as of March 3, 2018. Under this facility, we are subject to two financial covenants that require us to stay below a maximum debt-to-EBITDA ratio and maintain a minimum ratio of interest expense-to-EBITDA. Both ratios are computed quarterly, with EBITDA calculated on a rolling four-quarter basis. At December 1, 2018, we were in compliance with both financial covenants. Additionally, at December 1, 2018, we had a total of $25.1 million of ongoing letters of credit related to industrial revenue bonds and construction contracts that expire in fiscal 2020 and reduce availability of funds under our committed credit facility.

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At December 1, 2018, our debt also included $20.4 million of industrial revenue bonds that mature in fiscal years 2021 through 2043 and $0.5 million of long-term debt in Canada. The fair value of the industrial revenue bonds approximated carrying value at December 1, 2018, due to the variable interest rates on these instruments. All debt would be classified as Level 2 within the fair value hierarchy described in Note 5.

We also maintain two Canadian demand credit facilities totaling $12.0 million Canadian dollars. As of December 1, 2018, $0.4 million was outstanding under these facilities, and no borrowings were outstanding as of March 3, 2018. Borrowings under these facilities are made available at the sole discretion of the lenders and are payable on demand. The Company classifies any outstanding balances under these demand facilities as long-term debt, as outstanding amounts can be refinanced through our committed revolving credit facility.

Interest payments were $7.2 million and $3.6 million for the nine months ended December 1, 2018 and December 2, 2017, respectively.

8.
Commitments and Contingent Liabilities

Operating lease commitments
As of December 1, 2018, the Company was obligated under non-cancelable operating leases for buildings and equipment. Certain leases provide for increased rental payments based upon increases in real estate taxes or operating costs. Future minimum rental payments under non-cancelable operating leases are: 
In thousands
 
Remainder of Fiscal 2019
 
Fiscal 2020
 
Fiscal 2021
 
Fiscal 2022
 
Fiscal 2023
 
Thereafter
 
Total
Total minimum payments
 
$
3,890

 
$
14,759

 
$
11,522

 
$
9,353

 
$
8,459

 
$
23,308

 
$
71,291


Bond commitments and installation project contingencies
In the ordinary course of business, predominantly in our Architectural Services and Architectural Framing Systems segments, we are required to provide surety or performance bonds that commit payments to our customers for any non-performance. At December 1, 2018, $224.0 million of our backlog was bonded by these types of bonds with a face value of $478.8 million. These bonds do not have stated expiration dates, as we are generally released from the bonds upon completion of the contract. We have not been required to make any payments under these bonds with respect to our existing businesses.

Additionally, we also are subject to project management and installation-related contingencies as a result of our fixed-price material supply and installation service contracts, primarily in our Architectural Services segment and certain of our Architectural Framing Systems businesses, including those taken on with our acquisition of EFCO. We actively manage the risk of these exposures through contract negotiations, proactive project management and insurance coverages.

Warranties
We reserve estimated exposures on known claims, as well as on a portion of anticipated claims, for product warranty and rework cost, based on historical product liability claims as a ratio of sales. Claim costs are deducted from the accrual when paid. Factors that could have an impact on the warranty accrual in any given period include the following: changes in manufacturing quality, changes in product mix and any significant changes in sales volume. A warranty rollforward follows:  
 
 
Nine Months Ended
In thousands
 
December 1, 2018
 
December 2, 2017
Balance at beginning of period
 
$
22,517

 
$
21,933

Additional accruals
 
3,437

 
3,443

Claims paid
 
(8,398
)
 
(8,254
)
Acquired reserves
 

 
5,571

Balance at end of period
 
$
17,556

 
$
22,693


Letters of credit
At December 1, 2018, we had $25.1 million of ongoing letters of credit, all of which have been issued under our committed revolving credit facility, as discussed in Note 7.



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Table of Contents

Purchase obligations
Purchase obligations for raw material commitments and capital expenditures totaled $163.2 million as of December 1, 2018.

New Markets Tax Credit transactions
In September 2018, we entered into a transaction with SunTrust Community Capital (STCC) under a qualified New Markets Tax Credit (NMTC) program related to an investment in plant and equipment within our Architectural Framing Systems segment. STCC contributed $3.2 million to this project, which is included in other non-current liabilities on our consolidated balance sheets. We have completed two NMTC transactions this fiscal year. Under the terms of these arrangements, we are required to hold cash dedicated to fund the related capital projects which is classified as restricted cash on our consolidated balance sheets.

Since fiscal 2014, we have entered into four separate NMTC programs to support our operational expansion. The NMTC arrangements are subject to 100 percent tax credit recapture for a period of seven years from the date of each respective transaction. Therefore, upon the termination of each arrangement at the end of the seven-year period, proceeds received from investors will be recognized in earnings in exchange for the transfer of tax credits. Direct and incremental costs incurred in structuring these arrangements have been deferred and will be recognized in conjunction with the recognition of the related profits.

Variable-interest entities have been created as a result of the transaction structure, which have been included within our consolidated financial statements as investors in the program do not have a material interest in the underlying economics of the respective projects.

Litigation
In November 2018, a purported class action lawsuit was filed claiming the Company and certain named executive officers made materially false and/or misleading statements and failed to disclose material adverse facts about the Company’s business and operations during the period June 28, 2018 to September 17, 2018. In December 2018, a derivative lawsuit was filed against certain of our executive officers and directors claiming breach of fiduciary duty, waste of corporate assets and unjust enrichment. We intend to vigorously defend against these matters. Due to the preliminary nature of these matters, we are unable to estimate any potential loss at this time.

In addition to the foregoing, the Company is a party to various legal proceedings incidental to its normal operating activities. In particular, like others in the construction supply and services industry, the Company is routinely involved in various disputes and claims arising out of construction projects, sometimes involving significant monetary damages or product replacement. The Company is also subject to litigation arising out of areas such as employment practices, workers compensation and general liability matters. Although it is very difficult to accurately predict the outcome of any such proceedings, facts currently available indicate that no matters will result in losses that would have a material adverse effect on the results of operations, cash flows or financial condition of the Company.

9.
Share-Based Compensation

Total share-based compensation expense included in the results of operations was $4.7 million for the nine-month period ended December 1, 2018 and $4.6 million for the nine-month period ended December 2, 2017.

Stock options and SARs
Stock option and SAR activity for the current nine-month period is summarized as follows:
Stock options and SARs
 
Number of Shares
 
Weighted Average Exercise Price
 
Weighted Average Remaining Contractual Life
 
Aggregate Intrinsic Value
Outstanding at March 3, 2018
 
129,901

 
$
11.10

 
 
 
 
Awards exercised
 
(29,560
)
 
20.43

 
 
 
 
Outstanding and exercisable at December 1, 2018
 
100,341

 
8.34

 
2.8 years
 
$
2,820,586


Cash proceeds from the exercise of stock options were $0.2 million and $0.8 million for the nine months ended December 1, 2018 and December 2, 2017, respectively. The aggregate intrinsic value of securities exercised (the amount by which the stock price on the date of exercise exceeded the stock price of the award on the date of grant) was $0.6 million during the nine months ended December 1, 2018 and $4.8 million during the prior-year period.


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Table of Contents

Nonvested shares and share units
Nonvested share activity for the current nine-month period is summarized as follows:
Nonvested shares and units
 
Number of Shares and Units
 
Weighted Average Grant Date Fair Value
Nonvested at March 3, 2018
 
266,180

 
$
49.22

Granted
 
152,487

 
43.50

Vested
 
(116,266
)
 
46.57

Canceled
 
(17,942
)
 
48.65

Nonvested at December 1, 2018
 
284,459

 
47.24


At December 1, 2018, there was $7.9 million of total unrecognized compensation cost related to nonvested share and nonvested share unit awards, which is expected to be recognized over a weighted average period of approximately 20 months. The total fair value of shares vested during the nine months ended December 1, 2018 was $4.9 million.

10.
Employee Benefit Plans

The Company sponsors two frozen defined-benefit pension plans: an unfunded Officers’ Supplemental Executive Retirement Plan and the Tubelite Inc. Hourly Employees’ Pension Plan. Components of net periodic benefit cost were:
 
 
Three Months Ended
 
Nine Months Ended
In thousands
 
December 1, 2018
 
December 2, 2017
 
December 1,
2018
 
December 2,
2017
Interest cost
 
$
127

 
$
133

 
$
381

 
$
399

Expected return on assets
 
(10
)
 
(10
)
 
(30
)
 
(30
)
Amortization of unrecognized net loss
 
57

 
57

 
171

 
171

Net periodic benefit cost
 
$
174

 
$
180

 
$
522

 
$
540


11.
Income Taxes

The Company files income tax returns in the U.S. federal jurisdiction, various U.S. state jurisdictions, Canada, Brazil and other international jurisdictions. The Company is no longer subject to U.S. federal tax examinations for years prior to fiscal 2016, or state and local income tax examinations for years prior to fiscal 2012. The Company is not currently under U.S. federal examination for years subsequent to fiscal year 2015, and there is very limited audit activity of the Company’s income tax returns in U.S. state jurisdictions or international jurisdictions.

The total liability for unrecognized tax benefits was approximately $5.3 million at December 1, 2018 and $5.1 million at March 3, 2018. Penalties and interest related to unrecognized tax benefits are recorded in income tax expense. The total liability for unrecognized tax benefits is expected to decrease by approximately $0.6 million during the next 12 months due to lapsing of statutes.

12.
Earnings per Share

The following table presents a reconciliation of the share amounts used in the computation of basic and diluted earnings per share:
 
 
Three Months Ended
 
Nine Months Ended
In thousands
 
December 1, 2018
 
December 2, 2017
 
December 1,
2018
 
December 2,
2017
Basic earnings per share – weighted average common shares outstanding
 
27,836

 
28,736

 
28,030

 
28,812

Weighted average effect of nonvested share grants and assumed exercise of stock options
 
320

 
82

 
274

 
50

Diluted earnings per share – weighted average common shares and potential common shares outstanding
 
28,156

 
28,818

 
28,304

 
28,862

Stock awards excluded from the calculation of earnings per share because the effect was anti-dilutive (award price greater than average market price of the shares)

 
170

 

 
92

 


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13.
Segment Information

The Company has four reporting segments: Architectural Framing Systems, Architectural Glass, Architectural Services and Large-Scale Optical (LSO).
The Architectural Framing Systems segment designs, engineers, fabricates and finishes the aluminum frames used in customized aluminum and glass window, curtainwall, storefront and entrance systems comprising the outside skin and entrances of commercial, institutional and high-end multi-family residential buildings. The Company has aggregated six operating segments into this reporting segment based on their similar products, customers, distribution methods, production processes and economic characteristics.
The Architectural Glass segment fabricates coated, high-performance glass used in customized window and wall systems comprising the outside skin of commercial, institutional and high-end multi-family residential buildings.
The Architectural Services segment designs, engineers, fabricates and installs the walls of glass, windows and other curtainwall products making up the outside skin of commercial and institutional buildings.
The LSO segment manufactures value-added glass and acrylic products primarily for framing and display applications.
 
 
Three Months Ended
 
Nine Months Ended
In thousands
 
December 1, 2018
 
December 2, 2017
 
December 1, 2018
 
December 2, 2017
Net sales from operations
 
 
 
 
 
 
 
 
Architectural Framing Systems
 
$
181,306

 
$
194,157

 
$
550,193

 
$
493,672

Architectural Glass
 
98,524

 
96,940

 
263,533

 
292,026

Architectural Services
 
72,828

 
49,077

 
220,051

 
146,056

Large-Scale Optical
 
23,377

 
26,003

 
64,522

 
64,897

Intersegment eliminations
 
(18,317
)
 
(9,671
)
 
(41,917
)
 
(23,930
)
Net sales
 
$
357,718

 
$
356,506

 
$
1,056,382

 
$
972,721

Operating income (loss) from operations
 
 
 
 
 
 
 
 
Architectural Framing Systems
 
$
12,903

 
$
18,452

 
$
43,554

 
$
46,958

Architectural Glass
 
5,851

 
9,107

 
9,168

 
28,687

Architectural Services
 
8,659

 
2,547

 
21,435

 
4,102

Large-Scale Optical
 
6,628

 
6,724

 
15,845

 
15,022

Corporate and other
 
(2,633
)
 
(2,295
)
 
(7,940
)
 
(8,354
)
Operating income
 
$
31,408

 
$
34,535

 
$
82,062

 
$
86,415


Due to the varying combinations and integration of individual window, storefront and curtainwall systems, it is impractical to report product revenues generated by class of product, beyond the segment revenues currently reported.

Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 ended March 3, 2018. 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 ended March 3, 2018.


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We 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 ended March 3, 2018 and the consolidated financial statements, including the notes to consolidated financial statements, included therein.

Highlights of Third Quarter and First Nine Months of Fiscal 2019 Compared to Third Quarter and First Nine Months of Fiscal 2018

Net sales
Consolidated net sales increased 0.3 percent, or $1.2 million, for the third quarter ended December 1, 2018, and 8.6 percent, or $83.7 million, for the nine-month period, compared to the same periods in the prior year. In the three-month period, sales growth was driven by the Architectural Services segment, largely offset by volume-related declines in the Architectural Framing and Large Scale Optical segments. In the nine-month period, the increase in sales was primarily driven by the Architectural Services segment, as well as growth from our Architectural Framing segment, partially offset by lower sales in Architectural Glass.
The relationship between various components of operations, as a percentage of net sales, is presented below: 
 
Three Months Ended
 
Nine Months Ended
 
December 1, 2018
 
December 2, 2017
 
December 1,
2018
 
December 2,
2017
Net sales
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
Cost of sales
76.5

 
74.3

 
76.4

 
74.5

Gross profit
23.5

 
25.7

 
23.6

 
25.5

Selling, general and administrative expenses
14.7

 
16.0

 
15.8

 
16.6

Operating income
8.8

 
9.7

 
7.8

 
8.9

Interest and other (expense) income, net
(0.8
)
 
(0.3
)
 
(0.6
)
 
(0.3
)
Earnings before income taxes
8.0

 
9.4

 
7.2

 
8.6

Income tax expense
1.9

 
2.7

 
1.7

 
2.7

Net earnings
6.1
 %
 
6.6
 %
 
5.5
 %
 
5.9
 %
Effective tax rate
23.5
 %
 
29.1
 %
 
23.8
 %
 
31.7
 %

Gross profit
Gross profit as a percent of sales was 23.5 percent and 23.6 percent for the three- and nine-month periods, respectively, ended December 1, 2018, compared to 25.7 percent and 25.5 percent for each of the three- and nine-month periods ended December 2, 2017. Gross profit as a percent of sales declined from the prior-year periods primarily due to higher operating costs in the Architectural Glass segment and negative leverage on reduced volumes in the Architectural Framing segment, somewhat offset by volume leverage and good project performance in the Architectural Services segment.
Selling, general and administrative (SG&A) expenses
SG&A expenses as a percent of sales declined to 14.7 percent and 15.8 percent for the three- and nine-month periods, respectively, ended December 1, 2018, compared to 16.0 percent and 16.6 percent in the three- and nine-month periods, respectively, last year. The decline as a percent of sales in both periods was primarily due to reduced amortization on short-lived intangibles and a gain on the sale of a property. In the year-to-date period, SG&A expense as a percent of sales also decreased due to the acquisition-related costs incurred in the prior year.
Income tax expense
The effective tax rate in the third quarter of fiscal 2019 was 23.5 percent, compared to 29.1 percent in the same period last year, and 23.8 percent for the first nine months of fiscal 2019, compared to 31.7 percent in the prior-year period. The reduction in the effective tax rate in both periods was primarily driven by the provisions of the Tax Cuts and Jobs Act, enacted in December 2017.

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Segment Analysis

Architectural Framing Systems
 
 
Three Months Ended
 
Nine Months Ended
In thousands
 
December 1, 2018
 
December 2, 2017
 
%
Change
 
December 1, 2018
 
December 2, 2017
 
%
Change
Net sales
 
$
181,306

 
$
194,157

 
(6.6
)%
 
$
550,193

 
$
493,672

 
11.4
 %
Operating income
 
12,903

 
18,452

 
(30.1
)%
 
43,554

 
46,958

 
(7.2
)%
Operating margin
 
7.1
%
 
9.5
%
 
 
 
7.9
%
 
9.5
%
 
 
Architectural Framing Systems net sales decreased $12.9 million, or 6.6 percent, for the three-month period ended December 1, 2018, and increased $56.5 million, or 11.4 percent, for the nine-month period this year, compared to the respective prior year periods. The sales decline in the current-year third quarter was primarily due to lower volumes reflecting project timing delays in some of the segment's end markets. For the nine-month period, the sales increase was primarily due to the addition of EFCO (acquired in June 2017) for the full period.
Operating margin decreased 240 and 160 basis points, respectively, for the three- and nine-month periods of the current year, compared to the same periods in the prior year. For the three-month period, the operating margin decline compared to the prior year was primarily driven by negative operating leverage on reduced volume. For the nine-month period, the decline in operating margin was driven by the inclusion in the current year of a full period of EFCO at lower operating margins, partially offset by operating improvements in our businesses existing prior to our acquisitions of Sotawall (in December 2016) and EFCO.
As of December 1, 2018, segment backlog was approximately $392 million, compared to approximately $406 million last quarter.

Architectural Glass
 
 
Three Months Ended
 
Nine Months Ended
In thousands
 
December 1, 2018
 
December 2, 2017
 
%
Change
 
December 1, 2018
 
December 2, 2017
 
%
Change
Net sales
 
$
98,524

 
$
96,940

 
1.6
 %
 
$
263,533

 
$
292,026

 
(9.8
)%
Operating income
 
5,851

 
9,107

 
(35.8
)%
 
9,168

 
28,687

 
(68.0
)%
Operating margin
 
5.9
%
 
9.4
%
 
 
 
3.5
%
 
9.8
%
 
 
Net sales increased $1.6 million, or 1.6 percent, and declined $28.5 million, or 9.8 percent, for the three- and nine-month periods, respectively, ended December 1, 2018, compared to the same periods in the prior year. The decline in the year-to-date period was the result of changes in the timing of customer orders as well as volume declines stemming from operational challenges within the segment (described in the next paragraph).
Operating margin declined 350 and 630 basis points, respectively, for the three- and nine-month periods of the current year, compared to the same periods in the prior year, primarily driven by significantly increased labor costs, continued lower productivity and higher cost of quality, as the segment has been challenged to efficiently ramp-up production in a tight labor market to meet higher than expected order intake and customer demand. In the third quarter of fiscal 2019, we made progress toward overcoming these operational challenges, resulting in operating margin improvement compared to the prior quarter and we expect these improvements to continue into early fiscal 2020.

Architectural Services
 
 
Three Months Ended
 
Nine Months Ended
In thousands
 
December 1,
2018
 
December 2,
2017
 
%
Change
 
December 1,
2018
 
December 2,
2017
 
%
Change
Net sales
 
$
72,828

 
$
49,077

 
48.4
%
 
$
220,051

 
$
146,056

 
50.7
%
Operating income
 
8,659

 
2,547

 
240.0
%
 
21,435

 
4,102

 
422.5
%
Operating margin
 
11.9
%
 
5.2
%
 
 
 
9.7
%
 
2.8
%
 
 
Architectural Services net sales increased $23.8 million, or 48.4 percent, and $74.0 million, or 50.7 percent, for the three- and nine- month periods, respectively, ended December 1, 2018, over the same periods in the prior year, as the business continued to experience strong execution on projects.

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Operating margin increased 670 and 690 basis points, respectively, for the three- and nine-month periods of the current year, compared to the same periods in the prior year, due to volume leverage and strong project execution.
As of December 1, 2018, segment backlog was approximately $419 million, compared to approximately $405 million last quarter.

Large-Scale Optical (LSO)
 
 
Three Months Ended
 
Nine Months Ended
In thousands
 
December 1, 2018
 
December 2, 2017
 
%
Change
 
December 1, 2018
 
December 2, 2017
 
%
Change
Net sales
 
$
23,377

 
$
26,003

 
(10.1
)%
 
$
64,522

 
$
64,897

 
(0.6
)%
Operating income
 
6,628

 
6,724

 
(1.4
)%
 
15,845

 
15,022

 
5.5
 %
Operating margin
 
28.4
%
 
25.9
%
 
 
 
24.6
%
 
23.1
%
 
 
LSO net sales decreased $2.6 million, or 10.1 percent, and $0.4 million, or 0.6 percent, for the three- and nine-month periods ended December 1, 2018, over the same periods in the prior year.
Operating margin increased 250 basis points for the three months ended December 1, 2018, compared to the third quarter of last year and increased 150 basis points for the nine-month period of the current year compared to the same period in the prior year, driven by good operational performance and an insurance recovery.

Liquidity and Capital Resources
Selected cash flow data
 
Nine Months Ended
In thousands
 
December 1, 2018
 
December 2, 2017
Operating Activities
 
 
 
 
Net cash provided by operating activities
 
$
70,644

 
$
66,239

Investing Activities
 
 
 
 
Capital expenditures
 
(33,867
)
 
(38,946
)
Acquisition of business, net of cash acquired
 

 
(184,826
)
Proceeds from sale of property, plant and equipment
 
12,332

 
253

Financing Activities
 
 
 
 
Proceeds from issuance of debt
 
294,500

 
314,700

Payments on debt
 
(278,000
)
 
(150,700
)
Repurchase and retirement of common stock
 
(23,313
)
 
(10,833
)
Dividends paid
 
(13,180
)
 
(11,971
)

Operating Activities. Cash provided by operating activities was $70.6 million for the first nine months of fiscal