Thank you, Jim, and good morning, everyone. I will cover our third quarter financial results first, noting where results differed from our expectations and highlighting year-over-year and sequential quarter comparisons. And then I will talk about our balance sheet and cash flow before getting into our order patterns and outlook for the fourth quarter.
As Jim said, we reported another quarter of strong double-digit growth in revenue and earnings. The $901 million of revenue in the quarter was in line with the estimates we provided in September, and represented the highest quarterly revenue we’ve reported in the last 10 years. The $0.36 of adjusted earnings exceeded the top-end of our guidance for the quarter and represented a 64% increase over the prior year.
Before I get into the detailed results, I want to share a few additional highlights, some of which Jim just referenced.
First, we posted strong organic order growth again this quarter, driven by double-digit growth in the Americas, Asia Pacific and Designtex. And while EMEA and PolyVision orders declined moderately in the quarter, we saw improvement in their order patterns during November and into early December. I will share more details about our order patterns in a few moments, but I wanted to start with referencing this continued strength, as it helped drive the strong revenue growth in the quarter, as well as the relatively high levels of order backlog at the end of the quarter, which contributed to the strength of our outlook for the fourth quarter.
Second, the $0.36 of adjusted earnings included a $3.6 million favorable tax adjustment related to foreign tax credits, which had the effect of increasing earnings by approximately $0.02, after consideration of variable compensation effects. Even without the tax benefit, the growth of adjusted earnings was still very strong again this quarter, exceeding 50% compared to the prior year.
Third, the Americas operating margin of 8.1% was reduced by 130 basis points due to the net impact of the pension charge, which Jim just covered, plus another 20 basis points related to the variable compensation associated with the favorable tax adjustment. Adjusted for these items, the segment achieved a strong 9.7% operating margin, despite pricing benefits being largely offset by increased commodity freight and labor costs, which dampened the Americas operating margin by approximately 60 basis points. In the fourth quarter, we expect benefits from our April and June pricing actions to begin exceeding the significant inflation we have been experiencing since the start of our fiscal year.
Lastly, the $2.6 million improvement in EMEA operating results compared to the prior year included a $4.2 million improvement in our recurring operations and a $1.6 million operating loss associated with the acquisition of Orangebox, which was driven by the initial effects of purchase accounting related to acquired inventory and backlog. And the improvement in EMEA was achieved despite some unfavorable shifts in business mix and some operational challenges associated with the revenue growth, which I will cover in more detail in a moment.
As it relates to our third quarter results relative to our expectations, revenue in total was largely in line with our estimates, but it included some pluses and minuses worth mentioning. In the Americas, revenue benefited from stronger than expected order growth, plus some favorable adjustments to our incentive accruals, but these benefits were reduced by the impact of project delays.
Our customers often request extended delivery dates and/or make adjustments to installation schedules, as projects near completion. But the length of extensions and the amount of adjustments were more significant than a typical quarter in the Americas, and we experienced similar impacts in EMEA and the other category. From an earnings perspective, the $0.36 of adjusted earnings were higher than our estimated range of $0.28 to $0.33 per share.
Beyond the $0.02 from the tax adjustment I mentioned a moment ago, we experienced better than expected performance in the Americas, offset in part by shortfalls in EMEA and the other category, as well as higher corporate costs.
Within the Americas, the favorable adjustments to incentive accruals contributed $3.1 million and were driven by contractual changes with a few of our largest customers, plus our business mix between quote types and across our product offering was better than expected in the third quarter, albeit still unfavorable when compared to the second quarter or the prior year. Elsewhere, the project delays were the largest driver of the shortfalls, plus we experienced some unfavorable shifts in business mix and some operational inefficiencies in EMEA and at PolyVision. PolyVision also experienced softness in revenue from premium whiteboards in the European market, and corporate costs were higher than expected due to COLI losses, driven by a decline in the equity markets, offset in part by reductions in deferred compensation costs linked to participant investment elections. Otherwise, spending across the corporate functions remains tightly controlled. Switching to year-over-year comparisons, operating income increased by $8.9 million in the third quarter, or $16.4 million adjusted for the impact of the pension charge. The increase was driven by improvements in the Americas, EMEA and the other category, offset in part by higher corporate costs, which were driven by the same factors I just mentioned. In the Americas, operating income increased by $15.1 million, excluding the pension impact and was driven by organic revenue growth, which totaled $68 million, or 12% in the quarter. The strong operating leverage was achieved in the quarter even though revenue from our recent pricing actions was largely offset by higher commodity, labor and freight costs, which totaled – which approximated a $13 million increase compared to the prior year. There is still a relatively significant effect on our gross margin, but we feel good about our pricing actions in the pace at which our sales teams are driving customer agreements to more current list prices.
We also experienced some unfavorable shifts in business mix, which negatively impacted our gross margin in the third quarter, but we held our operating expenses, excluding acquisitions and variable compensation relatively flat at the same time, so the contribution margin associated with the volume growth was still quite strong. In EMEA, we reported an operating loss of $700,000, which included a $1.6 million loss at Orangebox, driven by the initial effects of purchase accounting and a $0.6 million reduction in variable compensation expense associated with the pension charge recorded in the Americas. Adjusted for these items, the slightly better than break-even results represented a $3.6 million improvement, compared to the $3.3 million operating loss in the prior year. This improvement was driven by $19 million of organic revenue growth in the quarter, while holding our operating expenses relatively flat. In connection with the higher volume, we incurred increased outsourcing costs and higher overhead spending, plus we experienced higher logistics cost in France and unfavorable currency impacts associated with some of our cross-border sourcing.
Some of our global operations leadership is in Europe this week and plan to return after the first of the year to help address some of these issues and strengthen our momentum around continuous cost reduction.
We also experienced some unfavorable shifts in business mix across EMEA. In the other category, the operating leverage associated with the organic revenue growth was impacted by a higher mix of large projects that were more heavily discounted and increased operating expenses to support our longer-term growth strategies in Asia Pacific. Sequentially, the comparison of third quarter operating income to the second quarter was impacted by a number of factors, including the favorable non-recurring items recorded in the second quarter, which included the property gain and lower warranty, product liability and workers’ compensation costs; the pension charge, partially offset by the favorable adjustments to incentive accruals recorded in the third quarter; the strength – the seasonal strength of Smith System in the second quarter and other unfavorable shifts in business mix in the third quarter; and higher sequential operating expenses related to product development, the national sales conference in the Americas and other initiatives.
Moving to the balance sheet and cash flow. We used $79 million of borrowings under our global credit facility to fund the acquisition of Orangebox in September. But we were able to pay down our borrowings to $27.5 million by the end of the quarter from the generation of strong cash flow in the quarter, which totaled $84 million.
In addition, we received approximately $12 million of proceeds in connection with the sale of a corporate aircraft. Working capital growth in the quarter was driven by a $14 million increase in inventories, excluding acquisition impacts. The increase was linked to the project delays I mentioned previously, as well as the overall growth in our business. Capital expenditures totaled $15 million in the third quarter, and we continue to expect fiscal 2019 to fall within a range of $80 million to $90 million, driven by our growth strategies and related investments to broaden our industrial capabilities, enhance our information technology systems and strengthen our customer-facing facilities. We returned approximately $16 million to shareholders in the third quarter through the payment of a cash dividend of $0.135 per share, and yesterday, the Board of Directors approved the same level of dividend to be paid in January. We did not repurchase any shares during the quarter, except for those used to settle income tax obligations related to the vesting of equity awards.
Turning to order patterns. I will start with the America segment, where our orders in the third quarter increased 14%, compared to the prior year. Across the month, we posted double-digit order growth in September and October, followed by mid single-digit growth in November. Customer order backlog at the end of the quarter was approximately 16% higher compared to the prior year. And through the first three weeks of the fourth quarter, order growth has been tracking at a strong double-digit percentage. Orders from our largest customer showed improvement again in the quarter, growing by a strong double-digit percentage compared to the prior year. Across quote types, orders for project business grew at a double-digit percentage and orders associated with continuing agreements in our marketing programs grew by a mid single-digit percentage.
Turning to vertical markets. We saw order growth in five of the 10 vertical markets we track, including strength in the insurance services, energy, financial services and healthcare sectors.
In addition, the group of untracked vertical markets grew at a strong rate again this quarter. Areas of weakness included information technology, technical professional and manufacturing. Overall, we feel very good about the third quarter order patterns in the Americas, as they outpaced our expectations from the beginning of the quarter and have remained strong through the first three weeks of the fourth quarter.
In addition, based on the most recent information from BIFMA, our order growth over the trailing six months ended in October has outpaced the industry.
Looking forward, our win rates have remained strong, and we’re continuing to see solid year-over-year growth in our pipeline of project opportunities projected to ship in the fourth quarter and fiscal 2020, which is consistent with the general level of optimism we are feeling from our dealers about their near and mid-term outlooks.
For EMEA, the 6% order decline in the quarter was driven by weakness in the UK and France, which may have been driven by some of the recent political and economic unrest in these countries. Elsewhere, Germany and Iberia posted order growth again this quarter and the rest of EMEA as a group continued to post declines. Across the months, order declines in total moderated from a 9% decline in September to a 1% decline in November. And through the first three weeks of the fourth quarter, order patterns reflect double-digit growth across most markets, including the UK and France. Customer order backlog in EMEA ended the quarter, up approximately a 11% compared to the prior year.
For the other category, orders in total grew by 12%, driven by strength in Asia Pacific, which posted order growth of 16%. Orders at Designtex also grew by a double-digit percentage, while PolyVision declined by a low single-digit percentage compared to a strong prior year.
Turning to the fourth quarter of fiscal 2019, we expect to report revenue in the range of $860 million to $885 million, which includes revenue from the acquisitions of AMQ, Smith System and Orangebox, net of the few small divestitures and approximately $14 million of estimated unfavorable currency translation effects. The projected revenue range translates to expected organic growth of 9% to 12% compared to the prior year. Taking into consideration the projected revenue growth, we expect to report diluted earnings per share between $0.24 to $0.28 for the fourth quarter of fiscal 2019. This estimate projects that yield from our recent pricing actions will begin to exceed commodity, labor and freight costs, and unfavorable business mix will continue in the fourth quarter.
In addition, the estimate includes a modest sequential decrease in operating expenses compared to the third quarter and a 27% effective tax rate.
As it relates to the acquisitions of Smith System and Orangebox, we anticipate modest earnings dilution in the fourth quarter, in part, due to the seasonality of Smith System, which generates approximately two-thirds of its revenue in the summer months of June, July and August.
In addition, the operating results from these acquisitions will include $3 million of ongoing amortization expense in the fourth quarter.
As it relates to our acquisition of AMQ, which we completed a year ago, we are very pleased with how this acquisition has been contributing to our organic revenue growth and earnings expansion, and we expect similar positive contributions from Smith System and Orangebox in fiscal 2020, as we more fully implement the related value creation plans. Taking into consideration the outlook for the fourth quarter, our fiscal 2019 results are on track to represent one of our strongest years in more than a decade. And we are targeting to grow revenue and earnings again in fiscal 2020, consistent with the midterm targets we shared at our Investor Day in October. From there, we will turn it over for questions.