2nd Quarter, 2012

Nouriel Roubini greeted the September 13th announcement of QE3 by promptly stating that “not only has good—or better-than-expected—economic news boosted the markets, but even bad news has been good news, because it increases the probability that central-banking firefighters like U.S. Federal Reserve Chairman Ben Bernanke … will douse the markets with buckets of cash. But markets that rise on both good and bad news are not stable markets.” We cite Mr. Roubini’s statement because it is a succinct reminder of the obvious. The proximate cause for our summer stock market rally is the oft-announced determination of the Fed to buy more bonds and thereby stimulate our economy enough to bring the unemployment rate down. The market as measured by the S&P 500 is up 15% since June 1. Mr. Bernanke, in a preparatory justification for QE3, said in a speech in Jackson Hole on August 31, that the Fed’s purchases of $2.3 trillion of longer term Treasury and mortgage backed agency securities over the past four years lowered the yield on 10-year Treasury securities by between .8% and 1.2% points from where they might have been. The current rate on a 30-year fixed mortgage for those who qualify is 3.5%. We wonder if anyone on the open market committee thinks a financial institution could offer lower fixed mortgage rates without peril. Neither Fed economists nor those who opine elsewhere, and definitely not us, know if the planned monthly purchases of $85 billion of longer dated treasuries and mortgage backed securities will ignite an economic upturn. It will put an additional trillion dollars of long-term direct and guaranteed U.S. Government debt on the Fed’s balance sheet making its financial leverage over 70:1! That, as Mr. Roubini might say, does not augur well for stability.

We nonetheless are optimistic. The companies that we own are financially strong, well-managed and growing. As you read further, we hope you will see that we understand why they have done well during the recent past and will prosper through the uncertain times ahead. We anticipate that apprehensions about the effectiveness of central bank efforts to centralize the management of economic activity within their jurisdictions or destabilizing political or economic developments may give us an opportunity to buy at our price two or more stocks of companies meeting our criteria. Those we are considering share a characteristic in common with our best investments over the past decade. That is management’s unrelenting concentration upon executing their business plans. This results in an emphasis upon improving operating skills throughout their organizations. Their concentration causes them to recognize and reward work habits that steadily produce incremental quality improvements and greater efficiencies. The resulting improved execution provides operating leverage as management works to expand the business through internal growth or acquisition. Often acquisitions provide opportunities to reward merit by promoting the company’s best performing managers to run the acquisitions and thereby raise operating margins quickly. Division managers in these companies relish the opportunity to tell us how they operate, so we have learned to recognize this crucial factor when we see it.

Donaldson Inc.

Donaldson’s fiscal fourth quarter and full year sales of $657 million and $2.5 billion each rose 11% in local currency. Foreign currency translation reduced reported sales growth by 5.8% in the fourth quarter and 1.7% for the year. Earnings of 47¢ and $1.73 for the quarter and year respectively rose 12% and 21%. Industrial filter sales growth accelerated from last quarter, rising 20% in local currencies from the same period a year ago to $258 million. Donaldson experienced strong customer demand for its Torit PowerCore dust collection equipment and replacement filters for systems already installed. Its gas turbine filter products used in power generation systems recorded a 51% increase to $57 million in the quarter. Engine filters sales to original equipment manufacturers of on-road and off-road equipment slowed to 11% and 6% growth respectively during the quarter. Engine replacement filter sales of $235 million rose 6%, up from 4% growth during the previous quarter as a result of utilization, more proprietary equipment in the field and expanded distribution. During the past year, Donaldson repurchased 2.9% of its shares outstanding for $130.2 million or just under $29 per share. Its long-term debt of $203 million is less than its cash of $318 million at the end of July, but 80% of that is held oversees.

Donaldson management’s commitment to continuous improvement delivers cost savings each quarter which produces tangible operating leverage and generates shareholder value. The impact of these incremental improvements compounds over time. During the past five years, which includes the downturn during the financial crisis, Donaldson generated compound annual growth in revenues, earnings per share and total return to shareholders of 5%, 13% and 13% respectively. The total return of the S&P 500 is down slightly over the same period. Donaldson’s stock price is up 6% since June 1.

Mettler-Toledo International Inc.

Mettler-Toledo reported solid second quarter results despite a slow-down in Europe. Sales of $570.3 million rose 6% in local currencies over the second quarter of 2011. Unfavorable exchange rates reduced sales growth in dollars by 4%. Earnings rose 12% to $2.10 per share and exclude 13¢ per share of restructuring costs. Laboratory and Industrial revenues rose 8%. Sales in Europe were down 2%, but this decline was more than offset by 6% sales growth in the Americas and 14% sales growth in Asia. Mettler-Toledo’s management expects market conditions in Europe to remain weak, and thus, initiated a cost reduction program. The company will spend $20 to $25 million over the next two years to reduce headcount, streamline product categories and move activities to lower cost countries. They recognized $8 million in restructuring costs this quarter. Mettler-Toledo will realize $40 million in annual cost savings starting in 2014 as a result of this program. The successful implementation of Blue Ocean, the company’s enterprise planning system, enables them to move activities to lower cost countries. In addition to lowering costs by manufacturing products in China, Mettler-Toledo has an in-house development team of 50 engineers in India who develop software for all products. Last year they added an international market support group. This team does final-real time testing of new products and responds to complex customer questions. Mettler-Toledo’s stock price has risen 16% since June 1.


SGS posted strong first half results with revenues of CHF 2.7 billion up 15% in constant currency and adjusted operating income of CHF 413 million, up 12% from the same period a year ago. Flat reported earnings per share resulted from CHF 26 million in restructuring costs and an increase in interest expense, taxes and acquisition related costs. During the first half, SGS completed seven acquisitions for CHF 100 million which added CHF 146 million in annualized revenues. During the first half, acquired companies added 4% to the 11% organic revenue growth rate. The company achieved double-digit organic revenue growth in the Americas, Asia Pacific and Europe/Africa & Middle East. The strong revenue growth was led by Mineral Services which delivered 20% organic revenue growth and combined growth of 31% including the January acquisition of CIMM T&S in Chile. The key drivers remain minerals exploration and metallurgical services. Double-digit organic revenue growth was also achieved by the company’s Consumer Testing, Oil, Gas and Chemicals, Government and Institutions and Agriculture business units. The strong organic revenue growth is being driven in part by capital investments of CHF 176 million which are 31% above the same period a year ago. SGS’ ADRs are up 19% since June 1.

Express Scripts

Express Scripts’ stock price is up 24% since June 1 and is at an all-time high. Execution of the integration of Medco has been superb. Express Scripts’ second quarter net income rose 25% to $415 million. Earnings per share fell from 66¢ to 51¢ because shares outstanding increased from 505 million to 824 million after the acquisition. Improved operating performance, including an increase in generic utilization from 74% to 77.8% resulted in a 7% increase in operating earnings per claim to $3.69 and a 0.7 percentage point rise in gross margin to 7.8%. The company successfully moved the first group of clients to the new information platform and is on track to move the second group in a few weeks. The selling season has gone very well. Express Scripts’ retained 95% of its customers and Medco’s as well as winning 125 new accounts. While all of the existing clients signed new contracts that exclude Walgreens from their retail pharmacy networks, the two companies came to an agreement that will allow Walgreens to participate in Express Scripts’ broadest pharmacy network. Clients will have the choice to include Walgreens’ retail pharmacies in their networks.

On July 9, we met with Tim Wentworth and Glen Stettin, two senior Medco managers who have joined Express Scripts’ executive team as Senior Vice President, President – Sales & Account Management and Senior Vice President – Clinical, Research and New Solutions respectively. Wentworth expressed the experienced salesman’s optimism about the quality of the team he assembled from the best sales and account managers from each company and how well they will serve their clients. Stettin, who managed Medco’s therapeutic pharmacy centers for diabetes, cardiovascular disease and cancer, is working to improve member satisfaction and drug adherence by combining the patient by patient interventions of Medco’s specialized pharmacists with Express Scripts’ understanding of consumer behavior.

Varian Medical Systems Inc.

Varian Medical Systems had a good fiscal third quarter with earnings of 96¢ per share, an increase of 16% over the same period a year ago. Revenues rose 9% to $705 million. Oncology Systems revenues were $546 million, up 7% with service revenues rising 13% to $174 million. This source of recurring revenue now accounts for 32% of Oncology Systems’ sales. International sales were 59% of the total with revenue increases coming from higher sales of TrueBeams and other high energy radiation systems along with high-margin software.

The Asian market for radiation systems has grown at a compound annual rate of 18% from $419 million in fiscal year 2006 to just over $1 billion last year. Almost one-third of the clinics in Japan and China purchase fully-equipped TrueBeams while the remaining two-thirds acquire lower cost radiation therapy systems. China is the biggest emerging market with 2.2 million new cases of cancer diagnosed each year and less than 10 systems per million people over 65. On September 11, Varian announced the clearance for sale of the UNIQUE radiotherapy system in China. The UNIQUE is designed to fit into small existing treatment rooms and has the accessories and software needed to perform RapidArc treatments for head and neck, breast, cervical, lung and prostate tumors. Clinics in emerging markets can invest $2 million to replace old Cobalt 60-based radiation systems with state-of-the-art RapidArc treatments.

We met with Dow Wilson, Varian’s new CEO, and Elisha Finney, the company’s CFO on September 5. Wilson joined Varian in 2005 as President of Oncology Systems when Tim Guertin became CEO. Before joining Varian, he served as CEO of General Electric’s Healthcare Information Technology business and managed several of GE’s imaging businesses in the U.S. Europe and Asia during his 19-year career at the company. We discussed a number of on-going initiatives to reduce product, installation and warranty costs. The company has an 18 to 24 month roadmap to reduce the cost of producing TrueBeams with a goal of a 10 – 12% cost reduction. Wilson also sees opportunities to improve inventory management so that it is managed as well as the company’s receivables.

Varian’s stock price is up 7% since June 1. Investors fear that a 20% cut in proposed reimbursement rates for free-standing clinics in the U.S. will remain in place and impair Varian’s U.S. business. The company, based on its discussions with knowledgeable sources, expects these cuts to be reversed when the final rates are set in late October. Revenues from free-standing clinics account for 20% of Oncology Systems’ U.S. revenues and 10% of its global revenues.

IDEXX Laboratories Corp.

IDEXX Laboratories continues to win new reference lab accounts and instrument placements from its competitors because of its successful marketing programs and innovative services. The company targets new reference lab customers with its MatchPlus marketing program. A clinic that commits to a set volume of reference lab testing at the current competitor’s price receives rebates that pay the leasing fees for the company’s in-clinic instruments. The increased reference lab volumes and the placements of instruments in competitive accounts demonstrate the success of this program. Reference test volumes have been growing about 7.5% per year and 40% of the Catalyst Dx and ProCyte Dx placements went to new accounts during the second quarter. As IDEXX Laboratories increases its reference lab test volumes, it sells more in-clinic instruments and the associated consumables.

The recent launch of VetConnect Plus offers vets the first fully integrated in-clinic and reference lab service. VetConnect delivers reference lab results to a clinic’s practice management system and is separate from the IDEXX VetLab Station which captures test results from the in-clinic instruments. VetConnect Plus is a cloud-based service that captures test results from both the reference lab and the in-house instruments. It also stores ten years of diagnostic test results at the company’s data center. Test results have been integrated into one database, a major technological breakthrough, and are available in a single report on a PC, laptop or iPad. Vets can click on the test summary to see historical trends and whether the test was performed in-house or at the reference lab. This product has been very well received with 1,000 of the 11,000 VetConnect subscribers using VetConnect Plus four weeks after its launch. Alex Petersen, the manager who oversees the development of IDEXX Laboratories’ innovative information services, commented that the company is taking many of the best programmers from the Route 128 companies outside of Boston.

IDEXX Laboratories continues to improve its reference lab offering. It recently partnered with GREER, a leading supplier of allergy testing and immunotherapy for cats, dogs and horses. Of the 20 million itchy dogs brought to vets, 4 million have allergies but only 100,000 go to an animal dermatologist for testing. The reference labs will collect and test the blood samples and deliver results in two to four days. The pet owner receives immunotherapy tailored to its pet’s allergies a week later. IDEXX Laboratories’ second quarter revenues were $336 million, up 7% organically over the same period a year ago. Earnings rose 10% to 91¢ per share. Investors continue to pay for the company’s successful execution of its business plan. IDEXX Laboratories’ stock price has risen 22% since June 1.

C.H. Robinson Worldwide Inc.

Robinson’s second quarter total revenues, net revenues and earnings of $2.5 billion, $396 million and 71¢ per share rose 9.2%, 0.3% and 6.0% respectively from the same period a year ago. Robinson’s truckload volumes from new and existing customers rose 10% during the quarter. LTL (less-than-truckload) net revenues increased 12% on a 17% increase in shipments. Overall truckload pricing passed through to its customers rose just 1% while costs rose 3%. Truckers are raising prices because of higher costs. New regulatory burdens, which include new limitations on driver hours issued by the U.S. Department of Transportation and new emissions standards issued by the U.S. Environmental Protection Agency, raise the cost of operating trucks. This forces Robinson’s small truckers (fewer than 100 tractors) who transport 82% of the company’s shipments to raise prices, crimping Robinson’s net revenue margin which at 14.9% fell to a ten-year low.

The 10% increase in shipping volumes during the quarter reflects management’s focus on driving organic growth and increasing market share with its top 500 customers despite only a slight increase in shipping activity across the U.S. Robinson is absorbing price increases demanded by its trucking suppliers because it believes it is securing longer term strategic relationships with its largest customers. It expects to get improved pricing from its customers as market conditions change and result in more variable shipping patterns. More than 80 of its top customers have signed transportation management contracts, which outsource to Robinson the execution of the company’s transportation management. Robinson receives an incremental fee per shipment booked using its technology platform. These transportation management fees rose 27% during the quarter and exceeded $18 million. The ability to automate routine shipments lowers Robinson’s cost per load and drives operating leverage. This unique capability comes from Robinson’s $50 million annual spending on its software and hardware platform. Navisphere, its new transportation management system now in use by selective customers, is being officially launched at the end of the month. Robinson’s stock price is up just 1% since June.

Automatic Data Processing

ADP’s solid fiscal fourth quarter results capped a good year for the company despite weak U.S. jobs growth and the Fed’s zero interest rate policy. Revenues of $2.6 billion and $10.7 billion for the quarter and the full year rose 5% and 8% respectively, after a negative 1% foreign exchange impact on sales growth during the quarter. Excluding an 8¢ one-time gain recorded during its second fiscal quarter, earnings of 53¢ and $2.74 per share rose 10% and 9% for the quarter and the full year respectively. These good results were generated while the interest ADP earns on funds held for clients declined 9% during the year to $493 million. Despite tepid overall jobs growth, ADP’s customers increased the number of employees on each payroll run by 3.0% during the past twelve months. This reflects the quality of ADP’s customer base. ADP generated a 13% increase in new business sales during this period and added 11% more payees to its PEO (professional employer organization) platform during the year. Revenues from PEO services which include the full suite of ADP HR services, including the provision of health and dental through third-party providers rose 15% for the year to $1.8 billion. The strong new sales activity across the company’s customer segments is driven by good execution and strong acceptance of new cloud-based products which are easier to use and reduce customer human resources administration and compliance costs while providing employees with improved information access and reporting. ADP shares have risen 15% since June 1.

Teradata Corp.

Teradata had another strong quarter as enterprise data warehouse products and services and data analytics remain high priorities in corporate IT budgets. Second quarter revenues of $665 million rose 14% on a reported basis and 18% in constant currency from the same period a year ago. Operating earnings of 69¢ per share, which excludes transaction and integration expenses of 4¢, rose 33% from the same period a year ago. Software and hardware product revenue rose 23% to $321 million while consulting and maintenance services rose 14% and 13% respectively to $193 million and $151 million. Teradata controlled its costs and executed well. Its product gross margin rose 380 basis points to 69.2% as higher margin enterprise data warehouses grew faster than data appliances. Services gross margin rose 160 basis points to 57.4%. The strong revenue growth, along with an increase in SG&A expenses of only 8%, proves Teradata is obtaining improved productivity from its sales and service workforce expansion during the past four years along with tight administrative expense control. The company is on track to add 45 new sales territories this year bringing its total to 550. It takes up to five years for each territory to reach its $5 million average sales quota.

During the quarter, revenues from the Americas which generated 60% of total revenues rose 18%, Europe, Middle East & Africa comprising one-quarter of revenues rose 27% and Asia/Pacific Japan chipping in 15% of revenues was up just 4%. Teradata did experience a longer sales cycle and contract signing delays in China. In Europe, the lengthening sales cycle was more than offset by the increased size of its sales pipeline. In June, Teradata strengthened its integrated marketing management solution with the $200 million acquisition of eCircle, the leading digital marketing company in Europe. Teradata’s stock price is up 16% since June 1.


Intel’s second quarter total revenues of $13.5 billion were slightly higher than revenues in the year ago quarter while fully diluted earnings per share on 4.4% fewer shares outstanding were 54¢ for both the current and last year’s second quarter. In announcing the earnings, Intel’s management reduced its revenue forecast for the remainder of the year while still keeping the low end of the previous forecast for the quarter at $13.8 billion. On September 7, Intel further reduced its forecast down to $13.2 billion with the low end at $12.9 billion. The decline in the stock was cushioned by Intel’s ample dividend which after a July 26 increase in the quarterly payment to 22.5¢ per share provides a yield of 3.8%. The revised forecast reflects a worldwide slowdown in PC sales, notably in China, which had become Intel’s fastest growing market. It also reflects disappointing sales of high-performance, energy-efficient, sleek, lightweight Ultrabook computers. Few of these were introduced by customers and the prices of those available were not compelling. The delayed release of Microsoft’s new Windows 8 software also adversely affected PC sales. Intel has yet to achieve scale for any of its mobile phones or tablet offerings. Its microprocessors which benefit from the advantages derived from the recent breakthroughs in miniaturization are not yet on these devices.

Intel’s server business remains the source of the company’s financial strength. During the quarter, it grew its revenues and operating income 15% year over year. It provided 36% of the company’s operating income. The business also provides competitive strength. Approximately 94% of the servers operating today run on Intel architecture! The 25% growth rate in the build out of cloud computing capacity depends upon deploying Intel’s latest energy-efficient high-compute servers. The big four providers of cloud computing, Amazon, Google, Microsoft and Facebook which three years ago possessed 76% of the infrastructure, now account for less than one-third of the available capacity. The build out of cloud computing capacity in China continues a pace with Alibaba, Baidu and others reliant on Intel servers. In many instances, cloud computing facilities, especially those dedicated to mining massive amounts of unstructured data with Teradata software, now install Intel’s latest Xeon servers to run the data storage application stack. Intel’s stock price is down 7% since the beginning of June.

Cenovus Energy Inc.

Cenovus Energy’s accelerated start-up of the 40,000 barrel per day Phase C at Christina Lake brought gross production to more than 57,000 barrels per day during the quarter and increased the company’s 50% share of the bitumen produced by Foster Creek and Christina Lake by 38% to 80,317 barrels per day. Christina Lake set a new production record during the quarter of 64,000 barrels per day which exceeds the nameplate capacity of 58,000 barrels per day by 11% and demonstrates the high quality of this reservoir. On September 4, Cenovus announced that Phase D began producing bitumen, three months early and on budget. By applying the accelerated start-up process, the company expects Christina Lake to be producing close to its capacity of 98,000 barrels per day in six to nine months. With the addition of these phases that are in the heart of the reservoir, the ratio of steam required to produce a barrel of bitumen dropped below two in July, giving Christina Lake the lowest steam-to-oil ratio of all producing steam assisted gravity drainage projects. Cenovus’ stock price jumped 10% on the news of the successful start-up of Phase D and is up 23% since June 1.

The refining business had an excellent second quarter with operating cash flow of CAD 351 million. The Wood River and Borger refineries processed 213,000 barrels per day of Canadian heavy crudes, including 22,000 per day from Christina Lake which demonstrates refineries’ acceptance of oil from this reservoir. The refineries ran at full capacity, processing 451,000 barrels of crude per day and produced 473,000 barrels per day of gasoline, diesel and other refined products, 11% and 12% increases over the same period a year ago respectively. The U.S. Midwest market crack spread during the quarter was CAD 28 and rose to CAD 35 in August. The company now forecasts that operating cash flow generated by its refineries will be at the high end of the CAD 900 million to CAD 1.2 billion range.

Cenovus’ second quarter cash flow per share of CAD 1.22 was down slightly from CAD 1.24 reported in the second quarter of 2011. Increased bitumen volumes offset a 19% decline in the price for Canadian heavy crude and a 23% decline in the cash generated per barrel of oil after royalties, transportation costs and operating costs. Cenovus’ successful hedging program increased the cash flow by $1.64 to per barrel versus a $6.44 per barrel loss last year resulting in a 12% decline in operating cash flow per barrel of crude oil from the same period a year ago. Operating earnings of 37¢ per share includes 7¢ per share of exploration expense associated with a small piece of land outside the company’s core Bakken area. They decided not to continue exploration for conventional oil on this asset after drilling six wells.

National Oilwell Varco

National Oilwell Varco’s first quarter revenues and earnings of $4.7 billion and $1.46 per share are 35% and 28% higher than the results for the comparable year ago quarter. Rig Technology continued to build its backlog which is up 10% at $11.3 billion as its book-to-bill ratio reached 1.5 times. International customers accounted for 92% of the backlog and 86% of the orders were for equipping offshore rigs. During the quarter, NOV received orders for eleven offshore rigs – 6 floaters and 5 jackups. Petrobras has yet to ask for bids on any of the 28 offshore drill ships it has indicated it may order soon. The Brazilian government has major say in who gets the contracts. NOV is supposedly favored to get a large part of the order since it has successfully bid on equipping the seven rigs already ordered and has manufacturing facilities in Brazil that more than match those of any competitor. NOV has continued its consolidation of the drilling equipment business through the acquisition of six businesses during the quarter for $2,014 million which were funded equally from cash flow and short-term borrowing. Every one of the businesses acquired augmented the product line or geographical reach of NOV’s existing businesses. All of the businesses have customers who also are NOV customers and therefore NOV managers know their strengths and weaknesses. In coordinating the acquisitions, NOV draws on its experience in making 300 acquisitions over the past 15 years which means as they point out “300 integrations”. They are skilled at controlling costs by improving material sourcing, realizing economies of scale, standardizing processes and reducing complexity and therefore risk. Among the companies acquired is a Canadian fabricator and manufacturer of pressure pumping, frac blending and cementing equipment used to frac and complete wells. In early August, NOV announced the $2.5 billion cash offer for Robbins and Myers, a Canadian manufacturer of high pressure valves and gears used in horizontal drilling. The low price of natural gas has lessened demand for pressure pumping and horizontal drilling equipment to produce shale gas which made the companies’ managements amenable to a sale. Acquisitions in Canada enable NOV to invest its non-US cash which constitutes 88% of the total. Since the beginning of June, NOV’s stock is up 31%.


Wabtec’s strong second quarter revenues and earnings per share of $610 million and $1.33 per share, up 27% and 41% respectively, encouraged its management to raise their forecast revenue growth for the year from 15% to 20%. They also increased their earnings forecast for the year from $4.80 to $5.10-$5.15. The higher forecast helped lift the stock price 18% since the beginning of June. Although the pace of revenue and profit growth will slow, Wabtec is not vulnerable to a sudden contraction in its business. Its order backlog at the end of June was $1.6 billion. Over half the company’s sales are needed to keep the trains going because they replace or rebuild crucial parts or systems such as brake shoes or the whole 400 pound brake which must comply with rigorous safety standards. These recurring sales to rail customers, including transit systems, provide stability during downturns. In 2009, Wabtec’s sales and earnings declined only 11%. Currently, the company is benefiting from strong orders for freight cars, 83% of which are tank cars purchased to transport oil. Just before the quarter’s end, Wabtec announced a $25 million contract with Denver Transit to provide Positive Train Control equipment for 50 new transit cars built by Hyundai-Rotem. That order followed an earlier $63 million contract for dispatching, operations control, signaling and communications systems which are components of Wabtec’s Positive Train Control System that will enable the Denver train control system to meet the requirements of the U.S. Rail Safety Improvement Act of 2008. Revenues for these systems are projected to reach $200 million this year which amount to almost 10% of Wabtec’s revenues. It has become the company’s fastest growing business.

Sigma Aldrich Corp.

Strong sales in Sigma-Aldrich’s fine chemicals division offset weaker than expected sales in the Research division to deliver second quarter sales of $664 million. Revenues grew 3% organically over the same period a year ago with acquisitions adding 6% to revenue growth while changes in foreign exchange rates reduced growth by 5%. Earnings rose 4% to 97¢ per share. Revenues in North America and Europe rose slightly while sales in Asia and Latin American grew 6%. Sigma Aldrich Fine Chemicals’ sales increased 8% organically to $223 million with strong sales of custom manufactured products to Sigma’s pharma customers. Sales of high potency active ingredients that are manufactured at two recently FDA certified plants in Wisconsin rose 40%. The pipeline remains strong for these compounds which are hard to make and to handle because of their toxicity. Research business revenues of $452 million rose only 1% organically. Laboratory closures at Sigma’s large pharmaceutical customers led to a decline in demand for its chemistry products. The analytical chemistry business remains strong with sales to clinical, forensic and environmental testing labs growing more than 10% during the quarter. The company plans to offset the impact of lower Research sales by closing some sales offices and consolidating some sales positions in Europe. Sigma Aldrich’s stock price is up 9% since June 1.

Techne Corp.

Techne reported fourth quarter and fiscal year 2012 sales of $78.7 million and $314.6 million, increases of 0.8% and 8.5% respectively over the same periods a year ago. Earnings for the quarter declined 6% to 77¢ per share while full year earnings rose 2% to $3.14 per share. All earnings results exclude one-time charges. Organic sales rose 0.6% during the quarter and 1.8% during the year as uncertainties about government funding of academic research in the U.S and Europe, which accounts for 26% of total sales, reduced demand for Techne’s products. Techne’s revenues in China grew 21.6% to $12 million as global pharmaceutical companies perform more of their basic research in laboratories there. This growth offsets some of the slower sales growth to U.S. pharmaceutical and biotech companies that continue to consolidate their research facilities. Full year organic sales to U.S. corporate customers increased 3.2% to $88 million and accounted for 28% of total sales. The European sovereign debt crisis, austerity measures and selective reductions in research funding finally caught up with Techne. Fourth quarter sales to its European customers were 3.7% lower in constant currency than last year. Fiscal 2012 sales fell 1.5% after being down slightly during the first nine months of the year.

The company invested $27.1 million in research and development, an increase of 7.4% over 2011, to introduce 1,800 new proteins, antibodies and assay kits up from 1,646 products in 2011. Techne is extending Tocris’ interactive on-line product catalogue to its much larger product offering. The interactive catalogue makes it easier for scientists to find products they need and perhaps find products they also should have by grouping them by biological process. The company currently receives 60% of its orders on-line and did not print a product catalogue for the first time, saving $600,000. The company generated free cash flow of $121 million and returned $65 million to shareholders through dividends and share repurchases. Techne’s stock price is up 9% since June 1.

CME Group Inc.

On July 20, CME Group split its common stock 5 for 1. Second quarter revenues of $796 million and earnings of 89¢ per share adjusted for non-operating income and one-time expenses declined 5% and rose 1% respectively from the same period a year ago. Relative to the first quarter, revenues rose 3% while adjusted expenses declined 5%. Its second quarter results were hurt by a 9% decline in average daily volume from a year ago to 12.4 million contracts. Excluding the 20% year-over-year decline in interest rate volumes, average daily volume rose 2% during the quarter. The decline in interest rate volumes, especially in the front 8 quarterly Eurodollar futures contracts which fell 41% is attributable to low short-term interest rate volatility caused by the Fed’s stated intention of maintaining near-zero interest rates until 2015. The longer dated Eurodollar futures contract volumes rose 11% from the same period a year ago. Equity index and agricultural commodity contract volume rose 3% and 11% respectively, while energy contracts declined 1% and foreign exchange contracts were unchanged.

CME is launching a significant upgrade to its Globex trading platform which provides advanced order entry, improved processing speeds and greater capacity. In June, the company launched CME Direct, a technology platform that enables side-by-side trading of exchange listed and OTC (over-the-counter) energy products. Consistent investment in information technology at CME has resulted in improving operating efficiency and has reduced technology related expenses as a percentage of total expenses from 35% four years ago to 27% today. The resulting improved level of profitability positions the company to continue to return excess cash to shareholders in the form of special dividends in addition to its regular quarterly dividend. CME’s stock price is up 15% since June 1.

Exxon Mobil Corp.

Exxon’s reported second quarter earnings of $3.41 per share were $1.23 per share higher than earnings in the year ago quarter because they included a net after tax gain from asset sales, principally a majority of its ownership of refining and chemical operations in Japan. After the sale, it still owns 22%. The gain of $7.5 billion is equal to $1.60 per share. In justifying its decision not to report the gain as a special or non-recurring gain, Exxon’s management pointed out that over the past four years the company has realized proceeds of $26 billion and gains exceeding $11 billion from asset sales. These sales when they occur are, therefore, an ongoing part of Exxon’s business and in conformance with SEC accounting guidelines should not be excluded in the company’s reported operating earnings. If the earnings nonetheless were excluded, Exxon’s earnings from operations during the quarter would have been $1.81 per share, 17% below the $2.18 per share earned during last year’s second quarter. Exxon’s worldwide oil and gas production declined 5.5% during the quarter. Asset sales, notably the North Sea production sold to Apache last year, and ever increasing production sharing in Nigeria accounted for most of the decline. The company has increased its production from the Bakken shale in Montana and North Dakota to 32,000 barrels a day and plans to continue its rate of developing its 400,000 net acres leased there. Through its majority-owned affiliate Imperial Oil, Exxon also plans to begin production in December in Alberta’s Kearl oil sands with a goal of producing 110,000 barrels of bitumen per day by the end of next year. Exxon’s continuing investment in the U.S. includes its recent successful high bid for 22 acreage blocks in the central U.S. Gulf of Mexico, near where the company has three discovery wells. During the quarter Exxon’s earnings from its U.S. production dropped 53% below its earnings in last year’s quarter largely because the price realized on its natural gas production was 48% less than a year ago. Exxon’s quarterly dividend of 57¢ per share provides a current yield of almost 2.5%. It is not in jeopardy. As of June 30, the company held cash and equivalents if $18 billion; debt amounted to $15.6 billion. Since June 1, Exxon’s stock price has gone up 19%.

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.