3rd Quarter, 2012

The widely varied quarterly results reported by your companies reflect the differing effect that changing business conditions in their markets throughout the world have on the profitability of their operations. No region in the world was particularly bad or notably good. Half our companies, remarkably, achieved double digit earnings growth, but few expressed confidence that this achievement is sustainable. All intend to strive to keep profits growing. Any opinion voiced is guarded enough to reassure us that they are wary of the danger of overcommitment. We enclose a note about the recurrence of a confluence of low rates, low growth and high debt and the characteristics of the investments that in periods of financial stress offer good returns. So far this year the S&P is up 12.8%.

Donaldson Inc.

Conditions at many of Donaldson’s customers across several markets began to suddenly decelerate in early September and through October. Caterpillar, Donaldson’s largest customer, announced production cuts to levels below end market demand in order to reduce company and dealer inventory levels by year end. Donaldson’s fiscal first quarter sales of $589 million were unchanged from the prior year after taking into account the negative 3% foreign currency translation adjustment. Earnings of 36¢ per share declined 20% from the same period a year ago as cost containment actions implemented during the quarter only partially offset higher pension expense, information technology expenses and a higher tax rate. Cash flow from operations rose 11% to $64 million during the quarter.

Off-road OEM (original equipment manufacturer) sales were unchanged from a year ago at $91 million because agricultural equipment growth was offset by mining equipment declines. On-highway truck OEM filter sales dropped 16% to $35 million. Replacement filter sales were down just 1%, to $218 million as utilization rates of off-road and on-highway equipment have slowed, causing distributors to order new inventory more cautiously. Industrial filter sales of $128 million declined 3% while gas turbine filter product sales rose 30% to $47 million on continued strength from large turbine power generation and the oil and gas drillers. The increase in sales of membranes and integrated venting products was offset by the decline in filters used in disk drives. Management expects to achieve growth in revenues and earnings for the full year as gas turbine, liquid filters and replacement filter growth more than off-sets weakness from engine OEM and disk drive filters. Latin America, South America and Australia experienced the strongest sales growth globally. Donaldson stock price is unchanged since the beginning of the year.

Last week we visited Donaldson’s expanded operations in centrally located Aguascalientes, Mexico, within a seven hour truck drive to Laredo, Texas, and a similar drive to ports on Mexico’s east and west coast which serve customers and distributors in Central and South America. Donaldson opened its first factory in Aguascalientes in 1984 and earlier this year opened a new air filter plant which will enable the older plant to expand its production of liquid filters. The expansion of the existing distribution facility by 130% will allow Donaldson to maintain the 20% compound annual growth rate of sales from these facilities and will achieve Donaldson’s strict ROI hurdles. We heard first hand from plant managers how operating costs are being taken out annually through Kaizen projects to meet cost reduction goals set each year. More distribution agreements with local distributors in Chile, Brazil, Columbia and Mexico are enabling Donaldson to expand its share of the after-market and to maintain market-leading growth.

Mettler-Toledo International Inc.

Mettler-Toledo’s third quarter sales rose 1% in local currencies. Unfavorable foreign currency rates reduced sales reported in U.S. dollars 4% to $578.5 million. Strong price realization and lower operating costs contributed to earnings of $2.37 per share, 19% growth over the same period a year ago. The third quarter of 2011 was one of the company’s strongest quarters with 15% revenue growth, so management was pleased to see modest revenue increases of 1% in the Lab business and 3% in the Industrial business during the quarter. Economic conditions remain challenging. While interest in Mettler-Toledo’s products remains high, tight corporate budgets require the scientists and engineers who purchase the company’s instruments to obtain additional approvals before they can buy new ones. The company wants its sales force to stay in touch with potential customers so that when they do make purchases, they consider Mettler-Toledo products. Mettler-Toledo performs a detailed analysis of its database of six million contacts to identify opportunities to sell more products to its existing customers. Management then ensures that the sales force focuses on the opportunities with the most near-term potential. By implementing concrete targets for each sales representative and developing tools to help them discuss the value of the proposed purchase, the company increases the conversion rate of leads as well as the dollar value of the sale. Mettler-Toledo’s stock price is up 28% since January 1.


SGS hosted an Analyst Meeting in South Africa in late October. The company entered South Africa in 1949. It currently employs 8,000 people and operates 92 laboratories in 38 countries in Africa. Although Africa is the company’s smallest region, accounting for 7.5% of its annual revenues, the small scale of the region’s operations offer a clear view of how SGS successfully develops local managers, acquires compatible businesses and creates new value-added services. While the Minerals and Agricultural labs we visited had state-of-the-art analytical instruments, many of the tests performed required more “art” than technology. The managers who led our tours demonstrated the patience, attention to detail, commitment to improving their operations and excitement about being part of a successful global business. Five of the eight presenters who work for SGS in Africa began their careers as chemists or metallurgists in the company’s labs in Africa. Two now manage the Minerals business in Africa and South Africa, and three are Managing Directors for the regions of East Africa, West Africa and Zambia. No managing director oversees operations in their country of origin to avoid pressure for special treatment. These rules distinguish SGS employees from those of the company’s competitors.

Most of the company’s acquisitions are of small owner-operated businesses that add new capabilities to a business in one region. SGS looks for businesses that the founder has grown to annual revenues of CHF 1 million to 5 million and employ as many as 50 people. These businesses often require additional capital and organizational support to continue to grow. One manager was thrilled that SGS now handles his human resources and cash management so he can focus on getting new business and developing new services. The former owners, now managers, of three of the four businesses that SGS acquired in Africa during the last 12 months described the benefits of being part of a large global company. The managers of ACUMAX, MetLab and Sentinel Services work together in Industrial Services to broaden their offerings to oil and gas, mining and large public infrastructure projects. ACUMAX provides non-destructive testing and inspections using rope access, mountaineering skills that allow workers to perform tests on hard to reach locations without scaffolding. The company tripled its revenues to CHF 3 million in the twelve months since joining SGS. The acquisition of MetLab and Sentinel Services strengthens SGS’s offering in destructive and non-destructive testing of steels and related materials. The managers of these businesses actually worked together on a large rail project before becoming part of SGS. These companies are getting new business because they have the backing of a large global company and because they provide a broader package of services to customers.

Entrepreneurial SGS managers regularly tap the company’s global network and expertise to offer new services to solve existing problems. South Africa has exported fruit since the early 1900s and is the third largest fruit exporter in the world. The U.K. and European Union countries consume 78% of the 200 million cases of citrus, grapes, apples, pears and other fruit exported each year. While farmers hired SGS to inspect and certify the quality of their fruit before it left South Africa, they sold fruit mainly by consignment and did not know why their shipments were rejected by their customers. Thus, they did not have enough information to recover their costs from their insurance companies. Graham Barnes, the current Business Manager of Agricultural and Consumer Testing Services in South Africa, and a former fruit farmer, worked with SGS inspectors in the U.K. and European ports to inspect the fruit when it first arrives at the destination port. SGS maintains the chain-of-custody as its inspectors open the containers sealed by inspectors in South Africa to determine whether the fruit has maintained its quality during shipment. Both farmers and their customers have adopted post-shipment inspections with secure live reporting through mobile web applications. SGS has added services to monitor cold storage at the ports as well as temperature tracking on the ships. The savings from fewer rejected shipments more than offsets the cost of these additional services. SGS ADR’s price is up 35% since the beginning of the year.

Express Scripts

The integration of Medco continues to progress on schedule. Express Scripts successfully transferred the fourth and largest group of client accounts to Medco’s IT platform and made significant progress rationalizing operations. The company reported strong operating results with gross margin rising to 8.1% from 7.5% in the third quarter of 2011, and third quarter operating earnings per claim of $4.06 increased 9% over the same period a year ago. These results demonstrate the company’s success in selling its home delivery, generic drugs and other programs to its clients. Home delivery claims increased 3% on an organic basis as a result of the company’s new programs. Earnings per share declined 6% to 62¢ per share, and includes the costs of high staffing levels to ensure that clients see no decline in service during the integration of the businesses.

Express Scripts’ stock price dropped 15% on November 6 when the company informed analysts during its quarterly conference call that their earnings estimates for 2013, which forecast 25% growth, were “too aggressive.” The company’s stock price is still up 22% since January 1. Express Scripts will provide its 2013 forecast in February once they receive the membership files from their clients and can forecast the number of prescriptions their members will fill. The company expects slower earnings growth in 2013 because it will fill fewer prescriptions. Large health plans such as WellPoint and Coventry Health, have announced that they have lost members. Large employers are hiring more part-time workers and contractors who do not receive health benefits, while mid-size and small businesses are cutting back or delaying health care coverage decisions until there is more certainty on health care reform. Drug utilization in 2012 actually declined for the first time because individuals are filling fewer prescriptions as they cope with an uncertain economy. Express Scripts will counter lackluster volume growth with new programs that combine the clinical expertise of the two companies and will continue to reduce its operating costs so that operating earnings per claim will grow about 15% next year.

Varian Medical Systems Inc.

Varian Medical Systems’ stock price jumped 15% on October 26, the day after the company reported fourth fiscal quarter order growth for Oncology Systems of 10% in both North America and internationally. International orders rose 14% in constant currency led by 20% growth in Europe and Asia. The company’s stock price is up 6% since January 1. Varian’s investment in research and development has risen 10% per year over the past five years and is currently 7% of sales. At this year’s annual conference for radiation oncologists that took place in the midst of Hurricane Sandy, Varian launched EDGE, a fully-integrated radiosurgery platform with a smaller footprint. John Adler, a neurosurgeon and Varian’s Chief Medical Officer, worked with neurosurgeons and thoracic surgeons to design a radiation system that is tailored to their needs. EDGE will fit into existing vaults, and thus, can easily replace smaller Accuray Cyberknife and Siemens systems. Varian has worked hard to engage thoracic surgeons in lung cancer radiosurgery. The Centers for Medicare and Medicaid Services have already approved reimbursement for treatment planning for lung tumors by thoracic surgeons. The company is working on an approval to reimburse the surgeon or pulmonologist who places Calypso beacons near a patient’s lung tumor. The Calypso system provides accurate tracking of a tumor’s movement during treatment and avoids additional radiation exposure to the chest that results from taking CT scans with the on-board imager to manage tumor movement during treatments.

Major medical centers recognize the improvements Varian has made in its equipment and software. The Cleveland Clinic signed a major long-term equipment and service agreement in October. Memorial Sloan Kettering and the University of Michigan recently decided to purchase Eclipse treatment planning software for their clinics. These leaders in radiation oncology used their own software for decades because none of the commercially available products met their needs. In addition to these strong votes of confidence in Varian’s software engineering, the company reported more than 10 conversions from competitive software to either Eclipse or to ARIA, Varian’s information management system. The company’s fourth quarter and fiscal year revenues of $756 million and $2.8 billion were up 5% and 8% respectively over the same periods last year. Earnings of $1.08 per share for the quarter and $3.78 for the year rose 14% and 10% respectively.

IDEXX Laboratories Corp.

IDEXX Laboratories delivered another quarter of solid results. Revenues rose 6% organically over the third quarter of 2011 to $315.5 million. Earnings rose 15% to 76¢ per share. While growth in chemistry instrument placements declined 14% over last year because of the successful launch of the company’s protocol-based rebate program during the third quarter last year, the quality of chemistry instrument placements was high. About 40% of the Catalysts placed during the quarter went to new customers in the U.S. and Europe, up from 30% last year. While it takes more sales effort to convince these clinics to install a Catalyst, the overall value of a new account is four or five times that of a clinic that upgrades from a VetTest chemistry analyzer. About one-third of the ProCyte hematology analyzers went to new accounts during the quarter, and half of the clinics that acquired a ProCyte also acquired a Catalyst. Catalyst users now account for over 80% of sales of consumables which grew 9% to $67.7 million during the quarter.

Reference lab revenues of $101.4 million grew 7%, with 70% of the growth coming from higher test volumes from the addition of new customers. The reference labs continue to attract new customers with their growing specialty test menu, their attractive bundle of in-clinic and lab testing supported by the decision tools and client communication capabilities of VetConnect Plus. 2,700 vet practices now use this unique cloud-based service to analyze and report test results to pet owners. The ease of combining data from current tests with historical data to develop a baseline for an individual pet allows vets to practice better medicine and to demonstrate the value of diagnostic tests for preventive care to pet owners. The high-volume lab in Leipzig, Germany on the DHL campus which opened in October will process samples from clinics outside major metropolitan areas and will allow the company to enter new markets in Europe. IDEXX Laboratories will consolidate all evening testing in its existing European labs to take advantage of scale economies. The high-volume lab in Memphis, TN, which opened about four years ago, is now the company’s largest lab in the U.S. The lab in Leipzig will offer twice-a-day service to clinics in Europe, making IDEXX Laboratories the first company to offer standard U.S. service levels to European veterinarians. IDEXX Laboratories stock price has risen 22% since the beginning of the year.

C.H. Robinson Worldwide Inc.

Robinson’s third quarter total revenues, net revenues and earnings of $2.9 billion, $432.7 million and 72¢ per share rose 7%, 2% and 3% respectively from the same period a year ago. While its operating margin in its core transportation business declined 80 basis points from the year ago period to 15.6%, it rose 70 basis points from the low recorded during the second quarter. The slow growth economy has provided stable transportation volumes and consistent customer pricing but cost pressure from transportation suppliers persists as a result of the difficulty recruiting and retaining drivers, the high cost of new equipment, tougher credit terms and higher costs from more onerous federal regulations. Robinson’s focus on improving productivity and generating new revenue sources from its continued investment in innovative customer-facing information technology solutions may be beginning to pay off. Its transportation management fees rose 17% during the quarter while its personnel expense rose less than 1% from the same period a year ago. Though Robinson’s stock has rebounded 19% since it reported second quarter results, it remains down 11% for the year to date.

During October, Robinson announced the sale of T-Chek, its fuel purchasing payments services business for $302.5 million in cash to EFS. The sale of T-Chek is a smart decision because it is a small player in a consolidating industry and the private-equity backed EFS paid a high price because it will likely try to take the combined business public as soon as it can. T-Chek contributed just 4% of Robinson’s overall net revenue. On November 1, Robinson closed on the acquisition of Phoenix International for $635 million, with 90% of the purchase price to be paid in cash and only 10% in newly issued shares of stock. Phoenix more than doubles the size of Robinson’s global forwarding business and will contribute $800 million in total revenue and $161 million in net revenues. Privately held Phoenix was founded in 1979 and is headquartered in Chicago. It has compounded its operating income at a 20% rate during the past five difficult years. This good deal will enhance Robinson’s profit growth in the years ahead.

Automatic Data Processing

ADP’s fiscal first quarter sales of $2.6 billion rose 5% from the same period a year ago. Excluding foreign exchange, the gain was 7%. Earnings of 62¢ per share rose 2% from the same period a year ago and were reduced by 3¢ or 5% from the decline in interest revenue received on client funds balances caused by the lower average yield on its high quality client funds portfolio. Even with the continued negative impact of lower rates, ADP management expects about 6% growth in revenue and earnings for its fiscal year ending June 2013 and is paying out 3% in annual dividends. ADP’s Employer Services and PEO businesses continue to grow despite tepid overall employment growth. Revenues from these units rose nearly 8% to $2.3 billion as the number of employees on each U.S. client payroll rose an average of 3.3% and total worksite PEO employees rose 11% during the quarter to 269,000. ADP continues to invest significant resources in innovative new products and services which helped drive worldwide new business sales growth of 15% during the quarter. Remarkably, its Dealer services revenues rose 9% from the same period a year ago to $440 million while operating income from this over-achieving business rose 12%. These strong results were driven by strong transaction volumes (new car sales), market share gains and cost control. ADP’s shares are up 6% since the beginning of 2012.

Teradata Corp.

Teradata’s third quarter revenues of $647 million were up 7% on a reported basis and up 10% in constant currency from the same period a year ago. Earnings of 60¢ per share rose 18% from a year ago. Revenue growth slowed from 14% last quarter as customers became more cautious and certain customers delayed adding capacity. In constant currency, software and hardware product revenue rose 9% to $306 million, consulting revenue of $194 million rose 13% and maintenance fees of $147 million were up 9%. The sharpest slowdown occurred in the Americas region which generated growth of just 3% to $384 million. Growth improved in Europe, the Middle East and Africa, increasing 28% to $456 million, as its sales force expansion paid off. Previously delayed deals in China closed during the quarter and Japan picked up leading to a 16% increase in revenues from Asia to $107 million. Teradata’s stock price is up 20% since the start of the year despite its 20% drop during the last three months as investors sold high tech stocks.

We attended Teradata’s annual customer conference in October and learned about new product releases being marketed which improve upon the existing tried and true Teradata enterprise data warehouse solutions while extending the capability to efficiently store and analyze newer, more complex and larger volumes of data, often referred to as “big data”. Big data includes data from websites which allow companies to better understand their customers, along with sensor data and geospatial mapping data which enables more precise tracking of goods through the supply chain. We also spoke with managers from Teradata’s partners including the premier analytic software provider SAS and NetApp, the supplier of the storage utilized in Teradata’s hardware, and came away impressed by the team work and focus in providing customers with solutions that make money for their business.

Precision Castparts

Precision Castparts’ (PCP) fiscal second quarter earnings per share of $2.28 were 11.7% higher than the $2.04 earned during last year’s quarter. These earnings were achieved despite an 8.7% decline in Forged Products operating earnings. This division in the 2012 fiscal year produced 44% of company sales and 35% of its operating profit. It is surpassed only by the extraordinarily strong market position, and hence, exceptional profitability of the Investment Cast Products division which produced 32% of company sales and delivered 40% of overall operating income. During the quarter, the Forged Products division had to close its 29,000 ton press in Houston for a complete rebuild and test. The closure was caused by malfunctioning parts which during the disassembly were found unable to bear the repeated force of the press. That took 7½ weeks to fix which coincided with the scheduled overhaul and rebuild of the company’s 50,000 ton press in Grafton, Mass, the largest in the U.S. No orders were lost as a result of the outages, but that meant almost $100 million of deferred orders had to be fulfilled as soon as possible after the forges began operating again in October. Accordingly, larger quantities of delayed parts and similar ones scheduled for current delivery were produced on the forges which resulted in inefficiencies. The response to the interruption attests to PCP’s management’s success in building customer loyalty. Its customers, in turn, have come to rely on the company placing their interests first when things go wrong. Forged Products and PCP’s other divisions are poised to profit from rising demand for the parts and components they produce for the new Boeing 787 Dreamliner.

At the end of November, PCP announced it would acquire Titanium Metals Corp for $2.9 billion through a cash tender offer unanimously approved by both companies’ boards. PCP buys 16% of Titanium Metal’s output and knows the business as well as an astute industry customer could. Titanium Metals is the largest independent titanium manufacturer in the US. In discussing the acquisition, Mark Donegan, PCP’s CEO compares the opportunity available through this acquisition with the successful 2006 acquisition of Special Metals Corp., a leading manufacturer of nickel alloys. PCP management quickly improved cost and quality controls, manufacturing workflows and yields while realizing savings by systematically saving metal cuttings and scraps for remelting and reuse. It has contributed to the steady rise in Forged Products operating margin over the past five years. PCP’s stock price is up 11% since mid-October.

Cenovus Energy Inc.

A 44% increase in oil sands production and increased yields, throughput and margins from Cenovus Energy’s refineries contributed to strong growth in cash flow and operating earnings for the third quarter. Cash flow and operating earnings per share rose 41% and 43% respectively over the third quarter of 2011 to C$1.47 and C$0.57. Net production from the company’s oil sands projects was 95,625 barrels of oil per day (bbl/d) up 44% from 66,389 bbl/d during the same period a year ago. Efficient and safe operations along with plant optimization enabled Foster Creek to produce 63,245 bbl/d of bitumen net to Cenovus, 5% above the design capacity. Foster Creek’s 48 wedge wells, a proprietary technology, account for 12% of total production. These wells are drilled between two producing wells and require very little additional steam to capture the already heated bitumen. These wells reduced the steam-to-oil ratio from 2.5 to 2.1 and permit Foster Creek to operate above its design capacity. About three-quarters of the capital and operating costs over the life of a steam assisted gravity drainage (SAGD) oil project are related to the steam-to-oil ratio because most of what a SAGD plant does is generate steam, and handle and treat water so that non-potable water can be reused to extract bitumen.

Christina Lake produced 32,380 bbl/d net to Cenovus, three times last year’s production. On September 25, Christina Lake produced 87,000 barrels gross or 89% design capacity just ten weeks after Phase D began producing. The 27% increase in the company’s bitumen and conventional oil production to 171,350 bbl/d more than offset a 1% decline in the average realized oil price to C$67.37 which includes C$2.02 of realized gains from oil price hedges. Cenovus Energy’s refineries generated operating cash flow of C$530 million during the quarter because the U.S. Midwest market crack spread remained at a two-year high of $35.99. Cenovus Energy’s stock price is up 3% since the beginning of the year while the price of oil has declined 12%.

National Oilwell Varco

National Oilwell Varco’s (NOV) good third quarter earnings of $1.52 per share were 21% higher than earnings for the comparable year ago quarter. When the earnings were reported the stock price nonetheless fell 6%, continuing a slide that began in mid-September after the stock soared to a high of $89. The slump in NOV’s stock price reflects worries about the effect on the company’s revenues and profits if the decline in land drilling for shale gas and oil persists or worsens in the US and Canada. NOV builds and fully equips the new automated land rigs that permit safe, rapid and electronically-controlled precise drilling of multiple deep horizontal wells from a single pad to produce shale oil and gas. The number of rigs actively drilling in the US has declined 9% since the end of June to fewer than 1800. The seasonal fourth quarter upturn in land drilling in Canada is weak. That falloff in activity directly affects the revenues of NOV’s Petroleum Services and Supplies division (PS&S) because it is the leading supplier of drill pipe, coiled tubing, conductor pipe connectors and pipe inspection services as well as many commoditized products. NOV’s management, while reviewing the third quarter results, announced that PS&S’s fourth quarter margin would be lower than the 22% margin realized in third quarter. This division produces a third of NOV’s revenues.

Foremost among the reasons for owning NOV is its Rig Technology Division’s preeminence as the leading provider of integrated electronically-controlled equipment and systems for offshore rigs. These systems range from pressure sensors on the rig and down hole to blowout preventers, and automated pipe handling systems to top drives with up to 100,000 lbs of torque. The division equips offshore rigs of all sizes from jackups to drill ships. It generates half of NOV’s revenues, two thirds of the company’s operating profits, and produces the highest margins. They were 23.9% in the third quarter. During the quarter, the Rig Technology order backlog rose 3% to $11.66 billion which includes orders to equip five new drill ships ordered by Petrobras. Demand for offshore rigs is undiminished. The newest deep water rigs equipped with the current generation of electronic controls begin completing their first five years of service next year which requires recertification and re-equipping the rigs. NOV’s stock is down 18% since its high on September 18th but is unchanged from the beginning of the year.


Wabtec’s third quarter earnings per share of $1.30 were 35% higher than the 96¢ per share earned in the comparable quarter last year. Sales of $588 million rose 18% above quarterly sales a year ago. Sales from manufacturing, rebuilding, and servicing freight cars, locomotives, railway electronics, train control equipment, signal services, brakes and heat exchangers for utilities were 12.3% higher than last year’s quarterly volume. These results are good when the 2.7% year-to-year quarterly decline in US railroad carloadings is considered. Half the sales gain is attributable to two acquisitions which cost $47.5 million. The larger of the two is a profitable UK manufacturer of cooling systems. The other much smaller acquisition is a profitable Brazilian engineering and marketing company which ought to strengthen Wabtec’s effort to gain market share in Brazil where MRS Logistica, the nation’s fourth largest railroad is installing Wabtec’s Positive Train Control System (PTC). During the quarter, Wabtec completed 50% of the initial work specified in the original $165 million contract. A follow-on for an equal amount is expected. The system connects locomotives equipped with on-board computers with track-side signaling equipment, all of which are connected to a network of control centers. The system prevents train collisions. Three US Class I railroads are slowly installing PTC. The Federal Railroad Administration has set a deadline which will be extended for installation of PTC on all multi-user lines by 2015. Revenues from PTC this year are on pace to reach $200 million compared to $125 million in 2011. Revenues of $5 million from PTC installations for US transit systems helped contribute to an 8.5% organic increase in Wabtec’s transit revenues. Overall transit revenues were up 27.3% due to six acquisitions which cost $211.7 million. They added $19.2 million to sales during the quarter. Two of the acquisitions expanded Wabtec’s maintenance and overhaul services and ability to provide replacement parts. The largest of the acquisitions produces electronic components for rail and industrial customers. It has profitable operations in the Netherlands, UK, France, the US, Hong Kong and China. Wabtec’s stock price is up 12% since early May and 7% since mid-September. At 88, it is at its all-time high.


Intel’s third quarter revenues of $13.5 billion and earnings per share of 58¢ were disappointing, although both were higher than the revised forecast published by the company in early September. Revenues for the quarter were 5.4% below 2011’s third quarter and a 14% earnings decline was 11% lower on a per share basis due to stock repurchases. On December 4, Intel announced the sale of $6 billion of notes at an annual rate of 1.35% for $3 billion maturing in 2017. The average rates for longer maturing notes is less than 3.5% even with the longer tranche maturing in 2042 at 4.25%. The reason given for issuance is general corporate purposes and stock repurchases.

Intel’s Data Center Group nearly equaled its year ago quarterly profit contribution on a 6% increase in sales spurred by demand from users of devices connected to the internet and corporate demand for cloud computing. The rest of Intel’s businesses, which produce 80% of the company’s revenues, reported lower revenues and profits. Sales in all geographical markets declined with Asia-Pacific where Intel obtains 57% of its sales down 4%. The company’s forecast is not encouraging. Intel’s fourth quarter gross margin is expected to decline to 57% or perhaps further due to excess capacity charges and associated writedown of high-cost inventory. Those charges amounting to $500 million are real, not just accounting adjustments, and occur as Intel is scheduled to introduce the last of its 22 nanometer microprocessors. As if this were not enough, Paul Otellini announced his retirement on November 19, a month after earnings were announced. We have learned since that he agreed to a six month transition and will remain as an advisor to his successor for an additional year. We understand that he believes Intel needs a CEO who is prepared to lead the company for the next five to seven years. He’s not that man. Intel remains the world’s most proficient and innovative manufacturer of microprocessors, but has yet to profit from users’ overwhelming preference for mobile devices. Its forthcoming 14 nanometer microprocessor, which will be available to developers late next year, promises vastly superior performance, including less power usage and leakage than anything being developed elsewhere. In the meantime, Intel’s stock in likely to languish. Earnings are unlikely to rise before mid-2013. The stock price is down 17% since the start of the year and almost 14% since mid-September. It yields 4½%.

Sigma Aldrich Corp.

Sigma Aldrich’s third quarter revenues rose 2% over the same period a year ago to $639 million. Revenue growth from acquisitions offset a 6% translation loss in foreign currency rates. Research Chemicals’ sales rose 1% organically, while sales of Sigma Aldrich Fine Chemicals, which accounted for 28% of sales during the quarter, grew 5%. Earnings for the quarter were 94¢ per share excluding one-time restructuring charges, but actually rose 9% to $1.05 per share excluding an 11¢ per share impact from foreign currencies. Strong sales of analytical chemistry products offset declining chemistry sales to large pharmaceutical company customers. Sigma’s analytical chemistry business continues to deliver double-digit revenue growth and now accounts for 15% of Research Chemicals revenues. It is now larger than the company’s core Chemistry business. The applied markets for Sigma’s analytical chemistry business – environmental testing, food and beverage testing, forensics and clinical diagnostics – operate in highly regulated environments where standardized solutions, simplicity, accuracy and throughput are important. Sigma’s commitment to quality control and compliance allows it to tailor products sold to research labs for these more regulated markets. Sigma Aldrich’s stock price has risen 17% since the beginning of the year.

Techne Corp.

Techne’s two largest markets, U.S. academic labs and large pharmaceutical companies, did not improve during the first fiscal quarter of 2013. Sales declined 0.9% in constant currencies from the same period last year. A stronger dollar reduced sales reported in U.S. Dollars by 3.3% to $75.0 million. The company reported earnings per share of 72¢ with unfavorable foreign exchange rates reducing earnings by 2¢ per share. Earnings in the first fiscal quarter of 2012 were 75¢. Biotechnology sales were 1.2% lower than they were a year ago with 3.1% growth in Europe and 25.1% growth in China unable to offset 5.0% and 4.0% sales declines for U.S. Industrial and Pharmaceutical and U.S. Academic customers respectively. Techne’s business remains extremely profitable, however. Net margin was 35% for the quarter. On October 31, Thomas Oland resigned as CEO and President of Techne as of November 30, 2012 and retired from the Board of Directors on November 1. He disagreed with the Board’s decision to evaluate external candidates for CEO in addition to Greg Melsen, the current Chief Financial Officer whom Oland hired in 2004 to be his eventual successor. We have decided to sell the stock which is up 2% since January 1.

CME Group Inc.

CME’s third quarter revenues of $683 million declined 22% from last year’s all time record quarter. Operating earnings of 70¢ per share were 20% below the year ago level as the average daily volume of futures and options contracts fell 26% to 10.8 million. The average rate per contract of 82.2¢ rose 6% from the same period a year ago. Innovation at the CME continues with the recent launch of deliverable swap futures which offer customers another way to hedge and trade interest rate exposure. CME has spent significant resources preparing for the implementation of Dodd Frank regulatory reforms which should lead to new revenue streams as buy and sell side market participants will need to clear over the counter interest rate swaps, credit default swaps and foreign exchange swaps. These costs are here today while the revenues to come are uncertain.

CME’s business remains very profitable despite challenging market conditions caused by the Fed’s zero interest rate policy and the uncertainty and expense caused by the slow and sometimes confusing implementation of Dodd Frank regulatory reforms. With a cash operating margin above 66% and low capital expenditure requirements, CME has become one of the highest dividend payers in the S&P 500 during 2012. Including the recently announced $1.30 per share accelerated payment of its annual variable dividend along with its first annual variable dividend of 60¢ paid this past March, and its four quarterly dividend payments of approximately 45¢ each, total dividend payments declared and to be paid by December 28 total $3.69 per share. CME’s stock price has risen 11% year-to-date.

Exxon Mobil

Exxon’ reported third quarter earnings of $2.09 per share were 2% lower than the $2.13 it earned in the comparable year ago quarter. Excluding gains from asset sales, earnings for the quarter were $1.97 due to a 7.5% decline in production volumes of oil and natural gas in every geographical region where the company operates except Australia-New Guinea. The prices Exxon realized for oil produced throughout the world were about the same as last year’s realizations. The price obtained for natural gas likewise was almost the same throughout the world except for North America where the price of $2.80 per mcf was one third the price realized elsewhere and a third less than last year’s price of $4.20 per mcf. With the gas price 25% higher than the third quarter average, Exxon in mid-October agreed to purchase 649,000 acres of producing properties in the Montney Shale in British Columbia and 104,000 acres in the Duvernay Shale in Alberta for $1.3 billion. The company also acquired in late September, 600,000 acres in the Bakken Shale in North Dakota and Montana for $1.6 billion. Exxon has completed its seismic survey of the acreage it secured from Russia in the Kara Sea in the Arctic, north of Siberia. It’s planning to begin drilling in 2014 or perhaps 2015. Exxon continued its $5 billion quarterly stock buyback program. It paid $88 per share during the quarter to purchase 58 million shares. The dividend was increased 10¢ to 57¢ a quarter providing a yield of 2.6%. Exxon’s stock price is up 4% since the beginning of the year.

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