3rd Quarter, 2010

We are pleased to report that the rise in the stock prices of most of your companies since September 1 surpassed or equalled the 15% increase recorded by the S&P over the period. The resumption of bond purchases by The Federal Reserve with an oft repeated intent to lift asset prices, including those for publicly traded stocks, has spurred the rally. Nonetheless, a rise in the prices of our stocks is welcome and fully justified for most because the managers of these companies during the downturn reinforced cost control practices that will sustain higher levels of profitability. We have sought to comment in this letter on specific measures instituted by several of your companies which are intended to inspire confidence.

C.H. Robinson Worldwide Inc.

Robinson reported total revenues of $2.4 billion, up 24%, and net revenues after the cost of hired third party transportation of $382.6 million, up 8.5%. Earnings of 62¢ per share rose 9% from the same quarter a year ago. Robinson’s truckload and less than truckload volume growth was up 14% and 17% respectively during the quarter from the same period a year ago. Robinson continues to make progress in passing along higher third party transportation costs to its customers as truck net revenues rose 6% during the quarter versus declines during the previous three quarters. Management sees this recovery resembling past recoveries. This means that Robinson should succeed in expanding margins and earnings growth in the quarters immediately ahead as higher transportation costs are fully passed through to its customers. Sourcing of fresh fruits and vegetables increased just 3% overall and declined 11% excluding the benefit of the Rosemont acquisition last year. WalMart, the company’s largest sourcing customer, has begun self managing certain commodities, like apples. This hurt sourcing volumes during the quarter and will remain a modest drag until Robinson secures more global forwarding and trucking business from WalMart. Robinson’s freight forwarding services net revenues rose 30%. Average headcount increased 3% during the quarter.

We met with Robinson’s CEO John Wiehoff in Minneapolis mid-September. During our conversation John emphasized how Robinson’s employees helped themselves, their colleagues and their customers by more frequent and smarter use of its data system to improve service for shippers and truckers. They learned the importance of close collaboration with one another within the branch and with customers. Robinson’s close interaction with customers improves their financial performance through lower costs and lessened inventory. This experience is leading the company to invest more in its new data center and to work to ensure that all of its customers access its network information system so Robinson can deliver ever improving service. It has also led Robinson to begin the task of converting its four disparate global forwarding operating systems onto its robust North American system to further improve its service capabilities and enable it to significantly expand its global forwarding business profitability. Robinson’s operating system is a key to its past success and provides a durable competitive advantage. Robinson has invested $750 million in its operating system in the past 10 years. Robinson shares are up 18% since September 1.

Donaldson Inc.

Donaldson continues to deliver excellent results after making difficult but important decisions during the downturn. Among the tasks undertaken to reduce fixed costs and permanently lower its operating cost structure was to close a high cost manufacturing facility in Germany. It continued investing, however, to expand its manufacturing capacity and improve its customer focus in lower cost and faster growing regions. Donaldson has emerged from the downturn stronger and more profitable than at any time in its history. Sales during its fiscal first quarter rose 25% to $537 million while earnings of 68¢ per share rose 55%! This marks the sixth consecutive quarter of sales growth while earnings reached a new record high. Operating expenses during the quarter rose just 18%, leading to a record high operating margin of 13.9%. Since September 1, Donaldson’s stock price has risen 36%.

Sales of Donaldson’s engine filters, which generate 62% of company sales, rose by one-third during the quarter driven by strong sales to OEM customers of both on-road trucks and off-road construction, mining and agricultural equipment. Replacement filter sales also remained at record levels as a result of market share gains and higher equipment utilization which drives the need for replacement filters. Replacement sales are also benefitting from Donaldson’s successful rollout of its Power Core proprietary filters and the expansion of its distribution network in emerging economies, notably China. The company’s industrial filters, comprising 38% of revenues, rose 15% as disk drive filters and dust collector filter sales remained strong. Eighty-two percent of Donaldson’s sales are from air filters while the rest are liquid filters. During the quarter, Donaldson’s liquid filter sales reached $100 million, up 28%. These filters focus on liquids used in engines and off-road equipment such as fuel, lube, coolant and hydraulic filters. Donaldson has targeted annual liquid filter sales of $660 million in five years and $1.25 billion in ten.

SGS Group

At its September analyst meeting, SGS management detailed their plan to accelerate capital expenditures and continue to make tuck-in acquisitions in order to double operating income in the next five years. Depending upon the pace of investment, management indicated that operating margins next year could fall before recovering and rising to new highs during the five year period. The growing proliferation of new regulations, non-tariff trade barriers and supply chain complexity leads to abundant opportunities for SGS to apply its testing, certification and inspection expertise. Management’s execution remains disciplined and crisp. SGS ADR’s are up 11% since September 1.

Mettler-Toledo International Inc.

Mettler-Toledo reported strong third quarter results with sales of $490 million, an increase of 14% in local currencies. Foreign currency reduced sales growth in U.S. dollars by 1%. Earnings per share excluding non-recurring items were $1.68, up 25% over the third quarter of 2009. Revenues rose 25% in Asia, 14% in the Americas and 5% in Europe during the quarter. The Laboratory and Industrial businesses each reported revenue increases of 16%. Olivier Filliol and Bill Donnelly, the company’s CEO and CFO, spend four weeks every October meeting with each of the 70 country operating units around the world. They spend several hours in face-to-face meetings analyzing local markets and their competitive position and set growth targets for the next year. Almost all of the country managers are recruited locally. They have profit and loss responsibility for their businesses and oversee managers of business units such as Product Inspection or Laboratory Instruments. Their recent meetings confirmed that Mettler-Toledo gained share during the recent downturn and that the entrepreneurial country managers support the company’s global growth initiatives.

Mettler-Toledo manages 25 business units within the Lab, Industrial and Food Retailing divisions. The company uses its Spinnaker program to identify best sales and marketing practices among the business units in each local market. The team that develops a best practice codifies it and creates tool kits and materials to assure its quick adoption. This bottoms-up business system gives all Mettler-Toledo employees a stake in improving operations and helps them develop products and programs tailored to their local markets. This system has created a strong business culture that helps the company recruit and retain its country and business unit executives. Mettler-Toledo’s stock price is up 37% since September 1 and 50% since the beginning of the year.

CME Group Inc.

CME’s stock is up 26% since September 1. The company’s revenues during the third quarter rose 13% to $733 million while earnings of $3.66 per share increased 20%. Average daily volume of 11.6 million contracts was up 14% driven by a 41% surge in Treasury contracts and a combined 32% increase in foreign exchange, agricultural commodities and metal contracts from the same period a year ago. Increases of 6% and 12% in equities and energy contracts restrained overall volume growth somewhat. Futures and options contract volumes traded during non-U.S. hours rose 37% and now comprise 15% of total volume. Average daily contract volume in October and November of 11.4 million and 14.2 million are up 6% and 31% respectively from the same periods last year.

On October 18, CME launched its cleared OTC (over-the-counter as opposed to exchange traded) interest rate swaps service and has begun clearing trades for its buy-side participants including BlackRock, Citadel, Fannie Mae and Freddie Mac as well as its sell-side participants including JP Morgan, Goldman Sachs, Deutche Bank and Barclays Capital. Interest rate swaps with a notional value of $321 trillion trade annually between counter-parties.

Express Scripts Inc.

Express Scripts’s stock price has risen 24% since September 1. Gross profit rose 32% over the third quarter of 2009 to $807.7 million. Earnings per share rose 62% to 60¢ from 37¢ reported in the third quarter of 2009. Operating income per prescription was $3.30 during the quarter, up from $3.10 a year ago. The company has moved 90% of the NextRx membership to its IT systems and expects to complete the integration, which includes the retirement of the NextRx IT systems, during the first quarter of 2011.

On November 18 Express Scripts announced the formation of Express Scripts Specialty Benefits Service which combines pharmacy benefit management, specialty pharmacy and distribution and medical benefit management. Patients with serious chronic illnesses such as cancer, multiple sclerosis or rheumatoid arthritis take specialty medications. The cost of these drugs and the medical costs associated with their administration are expected to increase from 24% of the nation’s spending on drugs in 2009 to 40% in 2014. Express Scripts Specialty Benefits Services helps health plans manage these costs by using the preauthorization process to better track medications. Express Scripts has convinced doctors that administer these drugs in their offices to work with their specialty pharmacy to obtain drugs at lower cost than from other sources. Steven Miller, the company’s Chief Medical Officer, believes that the company will achieve mid-single digit savings for many specialty drugs with these programs.

Varian Medical Systems Inc.

Varian Medical Systems’ new products launched this year extended the company’s technology lead over its competitors in both radiation oncology and in digital radiography. Earnings per share for the fourth quarter and the full year rose 12% to 78¢ and $2.96 respectively over the same periods last year. Revenues for the quarter rose 2% to $652 million and 6% to $2.4 billion for the year. Customers placed orders for 60 TrueBeam systems during the fourth quarter bringing total orders to 125 since its launch in April. TrueBeam’s speed and patient positioning accuracy reduced a one hour radiosurgery treatment for a brain tumor to fifteen minutes with an actual treatment time of 61.8 seconds! In addition to increasing patient comfort with vastly shorter treatment times, the 15 minute total treatment time allows technicians to fit these complex cases into the daily schedule of standard radiotherapy treatments which TrueBeam also performs. The speed, ease-of-use and 12 to 18 month payback for these $5 million systems have stimulated interest in replacing old machines in the North American market.

Varian’s flat panel x-ray image detectors also place the company at the forefront of the conversion of x-ray imaging from film to digital images. The company recently introduced a new family of x-ray tubes based on technology developed for high speed CT imaging where weight and lower radiation doses are very important. These tubes for diagnostic imaging deliver a lower radiation dose and are designed for use with Varian’s flat-panel displays. Fiscal year 2010 revenues for X-Ray Products rose 22% to $403 million. Increased sales of flat-panel displays and record total volumes increased the division’s gross margin two percentage points to 41%. Varian’s stock price is up 24% since September 1 and 44% since the beginning of the year.

Gen-Probe Incorporated

Gen-Probe’s stock price has risen 22% since September 1 because the company beat its year-end goals of filing a pre-manufacturing agreement with the FDA for its human papilloma virus (HPV) test and of launching its new instrument for low to medium volume clinical labs in Europe. The HPV molecular test targets persistent infections that are associated with cervical cancer rather than simply detecting the presence of the virus. The company expects its test will reduce biopsies and other medical interventions associated with false positive test results. This filing represents the culmination of Gen-Probe’s largest and most complex R&D program for a new diagnostic test. The clinical trial involved more than 13,000 women undergoing routine PAP smears in 19 U.S. clinics. Two hundred clinics in the U.S. will be able to run this test on their TIGRIS instruments on the same samples they run Gen-Probe’s other diagnostic tests.

On November 30 Gen-Probe announced the European launch of PANTHER, an instrument designed for clinical labs that run 100 to 150 molecular diagnostic tests per day. A single operator can run 275 tests in eight hours with one hour of hands-on preparation. Larger labs can process 500 tests daily by letting the instrument run unattended for twelve hours. The operator loads the samples in any order and can access the samples, reagents and consumables at any time. PANTHER is equipped to run quantitative assays to measure HIV and Hepatitis viral loads once these tests are approved. Gen-Probe reported third quarter revenues of $132.6 million, and earnings per share of 52¢, increases of 8% and 13% over the same period last year.

Techne Corp.

Techne reported first fiscal quarter sales of $67.9 million, an increase of 2.1% over the same period a year ago. Unfavorable foreign currency rates reduced revenue growth by 1.9%. Earnings per share were 71¢ compared to 72¢ a year ago. Foreign currency and low interest rates decreased the quarter’s earnings by 2¢ and 1¢ per share respectively. Increased purchases of Techne’s proteins, antibodies and assays lifted Biotechnology sales 6% to $44.0 million. Sales to pharmaceutical and biotech companies rose 3.1%, while sales to academic labs in North America rose 9.9%. Sales to the small Pacific Rim and Chinese divisions rose 9.0% and 13.5% respectively. European sales of $6.4 million declined 8.1% over the same period last year with unfavorable foreign exchange rates accounting for 5.9% of this decline.

Techne produces 97% of its products in Minneapolis and exports them to R&D Systems Europe, its European subsidiary in Abingdon, England, and to distributors around the world. Exchange rate fluctuations, especially those of the euro and the British pound, obscure the strong operational performance of the company. The new database of the company’s 15,000 products contains price, data sheets, warehouse location and other information that increases customer use of the web site. Customers obtain datasheets from the web site instead of calling customer service. The database also improved inventory management and reduced shipment error rates below 1%. These improvements have increased product sales without adding marketing or shipping personnel. Techne reported a net margin of 39%. Stringent management of receivables and inventories increased the quarter’s cash flow from operations 9.5% to $30.7 million.

IDEXX Laboratories Corp.

IDEXX Laboratories reported third quarter revenues of $269.6 million, an increase of 4% over the third quarter of 2009. Unfavorable foreign exchange rates reduced revenues by 1% during the quarter. Earnings per share rose 13% to 59¢. The company’s quarterly survey of vets that use Cornerstone, its practice management software, showed that the number of patient visits remain unchanged from the same period a year ago while practice revenues are up about 1%. Vets that use IDEXX Lab’s products, however, may run more productive practices than many of their colleagues, where reported pet visits are down 4% for the quarter.

The company sold 154 ProCyte Dx instruments, its high-throughput hematology analyzer, during the quarter. The instrument’s field reliability exceeded expectations and allowed the company to move to full launch in North America in September. They expect to sell 500 instruments this year. Revenues for the reference lab business rose 8% to $82.5 million with roughly 90% of the growth coming from higher test volumes. IDEXX Labs continues to offer an expanding menu of specialty tests and has built day labs in the U.S. and U.K. to improve coverage. In addition, vets that use the VetLab Station to manage in-clinic testing can order tests from the reference lab and the in-clinic instruments on the same computer screen. The system determines which tests are done in house and generates the requisition for the reference lab automatically.

Gross margin rose 2.4 percentage points to 52.7% from 50.3% in the third quarter of 2009. This margin expansion resulted from programs to decrease manufacturing costs and improve the field reliability of the in-clinic instruments and from lower service costs in the reference labs. Increased volumes, global purchasing and management’s focus on improving and standardizing laboratory processes have improved the margins of this business. IDEXX Lab’s stock price is up 23% since September 1.

Stryker Corp.

Stryker’s third quarter earnings per share grew 15.9% over the prior year to 80¢. Revenues of $1.8 billion increased 7.0% in constant currency. MedSurg sales of $739 million grew 16% with the 2009 Ascent acquisition contributing 6% of the growth. This marks the third consecutive quarter of 10% sales growth for MedSurg led by 13% growth for instruments and 8% growth for both the endoscopy and medical businesses. MedSurg continues to offset the anticipated slower growth of Orthopaedic Implant products, which had sales growth of 1.3%. Trauma continues to lead this segment with growth of 4%. On October 28, Stryker announced the $1.5 billion acquisition of Boston Scientifics’ neurovascular business. This business has the broadest offering of neurovascular products which are used to prevent strokes from brain aneurysms. The business has benefitted from Boston Scientifics’ world class quality system and is about to launch a new generation of its core product. Mark Paul, the current head of the business, will stay on to manage the business and the development of Stryker’s businesses that serve neurosurgeons. Stryker recently announced an agreement to sell its money losing OP-1 Biologics business for $60 million. On December 8th, Stryker announced that it is increasing its quarterly dividend 20% to 18¢ per share. Stryker’s stock price has risen 19% since September 1st.

Patterson Companies Inc.

Patterson’s fiscal second quarter sales and earnings rose 5% and 7% respectively above the comparable year ago quarterly results. Management for the fourth successive quarter improved the company’s overall operating margin which requires diligent cost control when sales growth is modest. Patient traffic for Patterson’s dental and veterinary customers is gradually improving enough for management to state that the slight upturn is sustainable. Patterson’s most encouraging achievement in the quarter was a 30% year to year increase in sales of CEREC dental restorative equipment which was propelled by a 50% increase in placements with new customers. Only 11,000 dental practices use the CEREC system, which is just over a third of Patterson’s 30,000 customers who are proficient users of technology. Robust sales of digital sensors and cone beam and panoramic imaging equipment complement the CEREC success and served to offset a slight decline in sales of chairs, cabinetry and lights. The ability to write off for tax purposes the full cost of equipment in the year it is purchased helps sales. Dental consumable sales were only 1% higher than a year ago, while a smaller gain in veterinary consumable sales was obscured by revocation of the distribution agreements by the two largest pharmaceutical providers of flea and tick medicines. The Merial division of Sanofi-Aventis changed to commission payments to distributors. Pfizer elected to sell direct to vets and consumers. Patterson’s medical rehabilitation distribution business is absorbing an acquisition and contending with a National Health Service budgetary clampdown on its U.K. customers. They account for over 10% of sales. Nonetheless, Patterson Medical managed to avoid a sales decline and remarkably held its margin erosion from the year earlier period to less than ½%. Patterson’s management has expressed renewed confidence in the ability of this division to produce good revenue and profit gains. Patterson’s stock price is up 15% since the beginning of September.


Intel’s third quarter revenues and earnings of $11.1 billion and $2.9 billion, or 52¢ per share, were 18% and 58% respectively higher than the year ago results. Microprocessor revenues surpassed last year’s by 25% with revenues for servers and storage up 30% and 29% respectively, confirming the strong demand from businesses and governments. Intel’s microprocessor shipments currently exceed one million units a day! Retention of cash flow from operations increased Intel’s cash and equivalents to $20.7 billion at the end of the quarter. On November 12 Intel announced a 15% increase in its quarterly dividend to 22¢ per share and thereafter announced a resumption of stock repurchases. In response to a question earlier this fall, Paul stated that he thought Intel’s revenues probably would “increase 12% or 15% or 18% next year but … it’s not going to be 5% or 10%.”

At the beginning of 2011, Intel will begin shipping its new 32 nanometer Sandy Bridge micro-architecture which Intel executives repeatedly have stated offers the largest sequential increase in computing performance in Intel’s history. The last iteration in Intel’s micro-architecture resulted in a 25% increase in performance. In explaining the breakthrough provided by Sandy Bridge, Intel’s senior engineers have spoken about the capability of this four core microprocessor to share the power and memory interface between the processor core and the graphics core. We infer from Intel’s statements that it contains the capacity to include a security interface that, likewise, will not diminish processing speed, nor dissipate energy. Intel’s stock price has risen 19% since September.

EnCana Corporation

Low natural gas prices after an upward spike at the beginning of the year kept EnCana from building upon its profitable natural gas hedge positions. Its realized gas price during the third quarter, including hedging gains, was only $5.27 per mcf (thousand cubic feet). It earned only 13¢ per share in the quarter compared to 50¢ in the year-ago quarter when its after-tax hedging gains were three times higher on contracts as high as $9.13 per mcf secured in more widely fluctuating markets. Over 45% of EnCana’s scheduled natural gas production of 3.2 billion cubic feet per day for the rest of 2010 is hedged at $6.19 per mcf. Low natural gas prices result from a gas glut created by shale gas operators, like EnCana, who must drill to secure the acreage they leased.

EnCana’s response to low gas prices is to accelerate implementation of its gas factory methodology which drives down costs in every aspect of gas production. It requires drilling of many more horizontal wells in different directions and drilling depths from a single pad. It has resulted in continuous twenty-four hour fracing, which pumps pressurized water and sand to crack the shale formation along an increasing number of locations around horizontal pipes, stretching as far as two miles from the well head. EnCana now has the technical capability to produce gas from a formation underlying six square miles from a single centralized production location. This raises reuse to 80% of the brackish water produced from the well. The number of fracs per well is up from 14 to 28 which helps cut costs by 10%. EnCana expects to drop the cost by another 15% when it begins using fit-for-purpose completion equipment from its existing contractors. That will initiate cost reductions similar to the 15% obtained when it began using fit-for-purpose, semi-automated drilling rigs. Experience now has resulted in savings greater than 25%. EnCana’s current average production cost is down to $2.62 per mcf. The absence of any price concessions while negotiating contracts for existing completion services encouraged EnCana to cut its drilling budget for this year by $200 million. Further curtailments may occur now that EnCana obtained agreements from landowners in Texas and Louisiana allowing it to defer drilling required to retain leaseholds in the Haynesville Shale. The company’s negotiations to enable China National Petroleum Corp. to earn a percentage interest in the production from acreage EnCana owns in the Horn River Basin in British Columbia have stalled. That, along with low natural gas prices, has crimped the rise in EnCana’s stock price. It is up only 2% since September 1.

Cenovus Energy Inc.

Cenovus’ third quarter earnings of 21¢ per share were disappointing. The stock price however rose 6% during the first five days after the report because none of the occurrences for the earnings shortfall are of lasting consequence. Its stock price is up 10% since September 1. Investor attention focused on the progress Cenovus made in developing its vast Athabasca bitumen reserves. The company’s proven ability to expand through small manageable segments which add 30,000 to 40,000 barrels a day of productive capacity is working better than ever. The company continues to try small scale technical improvements that promise increased recovery of bitumen in place, or an increase in water reuse, which cuts water use by 15%. Another innovation improves efficiency by reducing the natural gas expended to produce steam, thereby bringing the steam oil ratio down near 2:1; an achievement accomplished by no other company. The company also reduces operating costs and emissions by reusing 20% of the steam generated by running it through blowdown boilers. Cenovus’ operation of a cogeneration plant at Foster Creek, allows it to use electric powered drilling rigs which cut emissions.
The company’s record of successfully applying technology to reduce the environmental impact of its development of reserves, results in it regularly receiving approvals for its applications to expand production. During the quarter, the Alberta Energy Resources Conservation Board approved a three-phase expansion of Cenovus’ production at Foster Creek which will add 90,000 barrels a day to the current production of 120,000. The first 30,000 increment will start producing in 2014. Before that, the first of two approved 40,000 barrels a day expansions at Christina Lake will start producing next year, increasing production from the structure by 200%.

Exxon Mobil Corp.

Exxon’s third quarter earnings of $1.44 per share are 44% higher than the 98¢ earned in the year ago quarter when fewer shares were outstanding. Although Exxon bought 54 million shares during the quarter at an average price of $61 per share, the purchase retired less than 15% of the shares issued at the end of June to acquire XTO Energy. In announcing its earnings, Exxon stated that it will raise the amount allocated for stock repurchases to $5 billion. During the quarter, the XTO acquisition tripled Exxon’s U.S. natural gas production to 3.7 billion cubic feet per day. The earnings contribution from high U.S. natural gas production however constituted slightly more than a third of the profit increase obtained from Exxon’s U.S. production and that amounted to only 25% of the total production profit realized in the quarter. Low prices for U.S. natural gas kept the profit realized from the acquired XTO production to less than that added from a volume increase two thirds the size in Qatar. The price realized for U.S. natural gas was $4.13 per mcf compared to $6.26 for the LNG shipped from Qatar. Since the beginning of September, Exxon’s stock price is up 19%, rising along with the price of oil which is up 13%.

Automatic Data Processing

ADP’s fiscal first quarter earnings per share of 56¢ were unchanged from the prior year. Revenues of $2.2 billion grew 4% on a constant currency basis. Employer Services revenues grew 5% to $1.6 billion with U.S. Payroll and tax filing revenue growth of 2%, marking the second consecutive quarter of growth. U.S. beyond payroll revenues grew 9% with the recent acquisition of Workscape contributing 2% of the growth. Workscape provides internet based software to manage employee performance, compensation and benefits for mid-sized and large customers worldwide. The number of employees on each client’s payroll increased 1.7%. Client retention also increased 1.7%, the largest increase in five years. PEO revenues grew 15% to $341.3 million led by a 9.5% increase in the average number of employees paid to 214,000, nearly double the growth rate of the prior quarter. Contributing to the growth were higher healthcare benefit costs for their clients that led to increased pass-through revenues. ADP’s stock price has risen 18% since September 1st.

Global Payment Inc.

Global Payments’ fiscal first quarter revenues of $440 million rose 7% from the same period a year ago. Earnings of 61¢ per share declined from 68¢ during the prior year and included 6¢ of costs related to the launch of the global service center in Manila. The company has deferred until its fiscal third quarter the full conversion of its U.S. merchant business onto G2, its new front-end authorization system after encountering potential problems processing transactions for certain merchants. Global intends to make up for the $2 million in added costs to operate both systems during the important holiday season through other cost cutting initiatives, especially in Canada. During the quarter, Global’s U.S. revenues rose 15% on 19% transaction growth. Canadian revenues were flat on a reported basis and down 6% in local currency. It recently signed three new merchants each of whom have annual volumes exceeding one billion. Revenues from Europe declined 8% during the quarter and rose 16% in Asia-Pacific. The company discontinued providing services to certain European-based internet merchants. On November 18, Global announced its agreement to acquire 51% majority ownership of la Caixa’s merchant processing business in Spain for 125 million euros. la Caixa is Spain’s largest retail bank with 5,000 bank branches and the largest merchant processor with 150,000 merchant outlets. This transaction appears similar to the successful transactions Global has done with HSBC in the UK and Asia-Pacific. Global’s stock price is up 13% since September 1.

Verisk Analytics Inc.

Verisk reported strong 11% revenue growth to $287.4 million and adjusted earnings of 36¢ per share, up 20%. Verisk is carefully controlling its costs. During the quarter cost of revenues were unchanged from the same period a year ago while selling, general and administrative rose 6.4%. Revenues from the company’s Decision Analytics business rose 18% to $151.1 million including 10% growth from insurance company customers. Revenues from mortgage solutions rose more than 10% as fraud identification and detection analytics are more widely adopted to improve mortgage underwriting results.

In November, Verisk announced that its ISO Claim Search all-claims database had surpassed 700 million claims after 58 million new claims were added during the past year. This contributory database is used by 93% of the property and casualty industry as measured by premium volume. The advanced analytics provided by Verisk help claims adjusters and investigators identify fraudulent claims. Industry-wide premium growth rose during the second quarter of 2010 for the first time in 13 quarters. This augers well for Verisk’s Risk Assessment revenues where about 60% of its $136 million of revenues are affected by P&C premium payments. Verisk has repurchased 12.4 million shares of stock this year representing 6.5% of the shares outstanding at an average price of $27.56 per share. Verisk stock price is up 17% from September 1.

PepsiCo Inc.

We sold PepsiCo because of the reduction in return on invested capital caused by the $19 billion acquisition of its North American bottlers. PepsiCo added over $16 billion of debt, more than twice the 2009 level, to purchase these less profitable businesses. As a result of this decision to increase its investment in its least profitable business, U.S. carbonated beverages, PepsiCo increased the capital invested in the business by 75% to obtain a return that is one-third less. That destroys value.

Client portfolio holdings may change, and stocks of companies noted may or may not be held by one or more client portfolios from time to time. Investors should not consider references to individual securities as an endorsement or recommendation to purchase or sell such securities. Transactions in such securities may be made which seemingly contradict the references to them for a variety of reasons, including but not limited to, liquidity to meet redemptions or overall client portfolio rebalancing. Investing in the stock market involves gains and losses and may not be suitable for all investors. Investment return and principal value of an investment will fluctuate.