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," "will," "continue" 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. 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. Information about factors that could materially affect our results can be found in the "Risk Factors" section of our Annual Report on Form 10-K for the year endedFebruary 29, 2020 and in subsequent filings with theU.S. Securities and Exchange Commission , including this Quarterly Report on Form 10-Q. 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 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 ongoing COVID-19 pandemic continues to cause volatility and uncertainty in global and domestic markets impacting worldwide economic activity. We have experienced some delays in commercial construction projects and orders as a result of COVID-19. In our Architectural Glass and Architectural Framing segments, orders have been delayed or have slowed, as
21 -------------------------------------------------------------------------------- Table of Contents customers and end markets face some uncertainty and delays in timing of work. In our Architectural Services segment, some construction site closures or project delays have occurred, and job sites have had to adjust to increased physical distancing and health-related precautions. Within our Large-Scale Optical (LSO) segment, most customers reopened and the segment's two manufacturing locations resumed normal operations during our second fiscal quarter, after being shutdown for most of our first and second quarters due to governmental orders. We have also been impacted by quarantine-related absenteeism among our workforce, resulting in labor and capacity constraints at some of our facilities. The extent to which COVID-19 will continue to impact our business will depend on future developments and public health advancements, which have been buoyed recently by the commencement of vaccine production and distribution. In response to COVID-19, we have implemented a variety of countermeasures to promote the health and safety of our employees during this pandemic, including health screening, physical distancing practices, enhanced cleaning, use of personal protective equipment, business travel restrictions, and remote work capabilities, in addition to quarantine-related paid leave and other employee assistance programs. The following selected financial data should be read in conjunction with the Company's Form 10-K for the year endedFebruary 29, 2020 and the consolidated financial statements, including the notes to consolidated financial statements, included therein.
Highlights of Third Quarter of Fiscal 2021 Compared to Third Quarter of Fiscal 2020
Net sales Consolidated net sales decreased 7.2 percent, or$24.3 million , and decreased 12.2 percent, or$128.2 million , for the three- and nine-month periods endedNovember 28, 2020 , respectively, compared to the same periods in the prior year, primarily reflecting end market and COVID-19-related volume declines in the Architectural Framing Systems and Architectural Glass segments.
The relationship between various components of operations, as a percentage of net sales, is presented below:
Three Months Ended Nine Months Ended November 28, 2020 November 30, 2019 November 28, 2020 November 30, 2019 Net sales 100.0 % 100.0 % 100.0 % 100.0 % Cost of sales 77.8 78.0 77.7 77.0 Gross profit 22.2 22.0 22.3 23.0 Selling, general and administrative expenses 6.3 15.6 13.7 16.1 Operating income 15.9 6.4 8.6 6.9 Interest expense, net 0.5 0.6 0.5 0.7 Other income, net 0.2 0.1 0.1 0.1 Earnings before income taxes 15.5 5.9 8.2 6.3 Income tax expense 3.7 1.4 2.0 1.5 Net earnings 11.9 % 4.5 % 6.2 % 4.8 % Effective tax rate 23.5 % 23.2 % 23.8 % 23.9 % Gross profit Gross profit as a percent of sales was 22.2 percent and 22.3 percent for the three- and nine-month periods endedNovember 28, 2020 , compared to 22.0 percent and 23.0 percent for the three- and nine-month periods endedNovember 30, 2019 . The increase in the third quarter of fiscal 2021 compared to the same period in fiscal 2020 was driven by strong project execution in the Architectural Services segment. The decrease in the nine-month period of fiscal 2021 compared to fiscal 2020 was largely driven by lower volumes due to market-related and COVID-19 project delays. Selling, general and administrative (SG&A) expenses SG&A expenses as a percent of sales were 6.3 percent and 13.7 percent for the three- and nine-month periods endedNovember 28, 2020 , compared to 15.6 percent and 16.1 percent for the prior year three- and nine-month periods. SG&A decreased as a percent of sales compared to the same periods in the prior year primarily due to a$19.3 million gain on the sale-leaseback of a building and$7.4 million of income related to a New Markets Tax Credit transaction, both of which were recognized in the third quarter of fiscal 2021. In addition, we received a benefit of$4.2 million during the third quarter of fiscal 2021, and$5.5 million year-to-date in fiscal 2021, from a Canadian wage subsidy program offered to support Canadian businesses due to the widespread impacts of the COVID-19 pandemic. In total, these items had a favorable impact on SG&A as a percentage of sales 22 -------------------------------------------------------------------------------- Table of Contents of 9.9 percentage points and 3.5 percentage points for the three- and nine-month periods endedNovember 28, 2020 , respectively. Income tax expense The effective tax rate in the third quarter of fiscal 2021 was 23.5 percent, compared to 23.2 percent in the same period last year, and 23.8 percent for the first nine months of fiscal 2021, compared to 23.9 percent in the prior year period. Segment Analysis
Architectural Framing Systems
Three Months Ended Nine Months Ended November 28, November 30, November 28, November 30, (In thousands) 2020 2019 % Change 2020 2019 % Change Net sales$ 136,688 $ 165,517 (17.4) %$ 439,779 $ 533,432 (17.6) % Operating income 7,218 6,345 13.8 % 26,211 34,141 (23.2) % Operating margin 5.3 % 3.8 % 6.0 % 6.4 % Architectural Framing Systems net sales declined$28.8 million , or 17.4 percent, and$93.7 million , or 17.6 percent, for the three- and nine-month periods endedNovember 28, 2020 , compared to the prior-year periods, primarily reflecting market-related and COVID-19 project delays and lower order volume for short lead-time products. Operating margin increased 150 basis points for the three-month period of the current year and decreased 40 basis points for the nine-month period of the current year, compared to the same periods in the prior year. The increase in the third quarter of fiscal 2021 compared to the third quarter of fiscal 2020 was due to cost actions and improved productivity that served to offset the impact of volume declines from end market softness and COVID-19. The decrease in the nine-month period in the current year compared to the same period in the prior year reflects leverage on the lower revenue, partially offset by cost reduction actions and improved productivity. In addition, this segment benefited from a Canadian wage subsidy of$4.2 million in the third quarter of fiscal 2021 and$5.5 million for the nine-month period of fiscal 2021, as a result of a Canadian program offered to support Canadian businesses due to the widespread impacts of the COVID-19 pandemic. As ofNovember 28, 2020 , segment backlog was approximately$408 million , compared to approximately$404 million at the end of the prior quarter, and$375 million at the end of the third quarter of the prior year. Backlog represents the dollar amount of signed contracts or firm orders, generally as a result of a competitive bidding process, which may be expected to be recognized as revenue in the future. Backlog is not a term defined underU.S. GAAP and is not a measure of contract profitability. We view backlog as one indicator of future revenues, particularly in our longer-lead time businesses. In addition to backlog, we have a substantial amount of projects with short lead times that book-and-bill within the same reporting period and are not included in backlog. We have strong visibility beyond backlog, as projects awarded, verbal commitments and bidding activities are not included in backlog.
Architectural Glass
Three Months Ended Nine Months Ended November 28, November 30, November 28, November 30, (In thousands) 2020 2019 % Change 2020 2019 % Change Net sales$ 84,779 $ 89,433 (5.2) %$ 248,274 $ 288,862 (14.1) % Operating income 10,825 4,092 164.5 % 15,306 16,951 (9.7) % Operating margin 12.8 % 4.6 % 6.2 % 5.9 % Net sales decreased$4.7 million , or 5.2 percent, and$40.6 million , or 14.1 percent, for the three- and nine-month periods endedNovember 28, 2020 , compared to the same periods in the prior year. The decreases reflect lower volumes primarily due to market-related and COVID-19 project delays. Operating margin increased 820 and 30 basis points for the three- and nine-month periods of the current year, compared to the same periods in the prior year. Fiscal 2021 third quarter results included$7.4 million of operating income related to a New Markets Tax Credit transaction. In addition, operating margins in both periods of the current year were impacted by volume declines due to end market softness and COVID-19. 23 -------------------------------------------------------------------------------- Table of Contents Architectural Services Three Months Ended Nine Months Ended November 28, November 30, November 28, November 30, (In thousands) 2020 2019 % Change 2020 2019 % Change Net sales$ 76,690 $ 69,043 11.1 %$ 213,911 $ 195,787 9.3 % Operating income 8,558 6,533 31.0 % 20,470 15,082 35.7 % Operating margin 11.2 % 9.5 % 9.6 % 7.7 % Architectural Services net sales increased$7.6 million , or 11.1 percent, and$18.1 million , or 9.3 percent, for the three- and nine-month periods endedNovember 28, 2020 , compared to the same periods in the prior year, driven by increased volume from executing projects in backlog. Operating margin increased 170 and 190 basis points for the three- and nine-month periods of the current year, compared to the same periods in the prior year, primarily driven by strong project execution. As ofNovember 28, 2020 , segment backlog was approximately$597 million , compared to approximately$665 million as of the end of the prior quarter, and$607 million at the end of the third quarter of the prior year. Backlog is described within the Architectural Framing Systems discussion above.
Large-Scale Optical (LSO)
Three Months Ended Nine Months Ended November 28, November 30, November 28, November 30, (In thousands) 2020 2019 % Change 2020 2019 % Change Net sales$ 25,267 $ 24,405 3.5 %$ 48,438 $ 66,449 (27.1) % Operating income 26,114 6,754 286.6 % 25,131 15,561 61.5 % Operating margin 103.4 % 27.7 % 51.9 % 23.4 % LSO net sales increased$0.9 million or 3.5 percent, and decreased$18.0 million , or 27.1 percent, for the three- and nine-month periods endedNovember 28, 2020 , compared to the same periods in the prior year. In the third quarter, customer demand increased significantly following the segment's COVID-related shutdown earlier in the year. The decrease in sales for the current year nine-month period compared to the same period in the prior year reflects the required COVID-related closure of most of the segment's customers and the segment's manufacturing locations for most of the first and second quarters of fiscal 2021. The segment had operating income of$26.1 million and$25.1 million and operating margin of 103.4 percent and 51.9 percent for the three- and nine-month periods endedNovember 28, 2020 , respectively, compared to operating income of$6.8 million and$15.6 million and operating margin of 27.7 percent and 23.4 percent in the same periods in the prior year. The increases for the fiscal 2021 periods are primarily related to a$19.3 million gain on the sale-leaseback of a segment building during the current year third quarter. Additionally, operating margin in the nine-month period reflects the impact of the segment's temporary shutdown and the related impact from lower volume.
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