“We were pleased with the overall performance of the business in the quarter,” said Chairman, President and Chief Executive Officer Jim Ryan. “Strong volume growth and positive operating leverage in the U.S. business were the primary drivers of our results. We were encouraged by better top line growth in Canada this quarter, but margins remain under pressure due to currency and additional investments. Outside of North America, we were disappointed with the performance of several multichannel businesses and are committed to improving or exiting those operations,” Ryan added.
Performance
Sales in the 2014 third quarter increased 7 percent consisting of 2 percentage points from acquisitions, net of dispositions, and a 1 percentage point reduction from unfavorable foreign exchange. Excluding acquisitions and foreign exchange, organic sales increased 6 percent driven by 6 percentage points from volume and 1 percentage point from price, partially offset by a 1 percentage point decline from lower sales of seasonal products.
The company’s gross profit margin decreased 0.8 percentage point to 43.0 percent versus 43.8 percent in the 2013 third quarter, with more than half the decline due to unfavorable mix from the recently acquired businesses. The remainder of the decline was due to faster growth with lower gross margin customers and lower gross profit margins outside the United States. Operating expenses for the company increased 2 percent including approximately $17 million in incremental growth and infrastructure spending versus the 2013 quarter and incremental expenses from the acquired businesses.
Company operating earnings increased 11 percent to $386 million for the 2014 third quarter versus $347 million in the prior year. The increase was driven by the 7 percent sales increase and positive expense leverage, partially offset by lower gross profit margins.
United States
Sales for the U.S. segment increased 7 percent in the 2014 third quarter versus the prior year. Results for the quarter included 2 percentage points from acquisitions, net of dispositions. Excluding acquisitions, organic sales increased 5 percent driven by 6 percentage points from volume, partially offset by 1 percentage point from lower sales of seasonal products. Sales growth to customers in the Heavy and Light Manufacturing, Commercial, Retail and Natural Resources customer end markets contributed to the sales increase.
Operating earnings for the segment increased 13 percent in the quarter driven by the 7 percent sales growth and positive expense leverage, partially offset by lower gross profit margins. Gross profit margins for the quarter decreased 0.8 percentage point from unfavorable mix due to faster growth with lower margin customers and lower gross margins from the acquired businesses. Operating expenses for the quarter were essentially flat versus the prior year. Operating expenses included $12 million in incremental growth-related spending and incremental expenses from the acquired businesses, which were essentially offset by productivity and controlled spending.
Year-to-Date
For the nine months ended September 30, 2014, sales of $7.5 billion increased 6 percent versus $7.1 billion in the nine months ended September 30, 2013. There were 191 selling days in the first nine months of 2014, the same number of selling days as 2013. Reported net earnings increased 2 percent to $653 million versus $640 million in the first nine months of 2013. Reported earnings per share for the first nine months increased 4 percent to $9.30 versus $8.92 for 2013. The year 2014 includes the $10 million after-tax, or $0.15 per share, charge related to the transition of the employee retirement plan in Europe.
