1st Quarter, 2013

The first quarter results achieved by your companies’ managements were better than good in a business environment where simply maintaining sales levels became arduous, while all the cost cutting measures that could be readily tried to sustain profit margins already seemed to have been implemented. The managers of several of the companies in your portfolios seem to be especially well-equipped to thrive in these difficult circumstances and to convince other leaders within their companies to follow their plans for the business enthusiastically. We hope our comments on the first quarter results give you a sense of the high quality of the performance of the managers of most of your companies. We are continually trying to improve your portfolio with better businesses run by more capable managers. To provide perspective, the companies in the S&P 500 achieved only 3% earnings growth, some of which was non-cash asset-writeups by financial companies. The S&P companies collectively recorded no year-to-year sales growth for the first quarter.

Automatic Data Processing

ADP’s fiscal third quarter revenues and earnings from continuing operations rose 7% and 9% respectively from the same period a year ago to $3.1 billion and 99¢ per share. Double-digit new business sales growth, 0.4% higher client retention and a 2.7% increase in the number of employees on existing client payrolls helped drive revenue growth in its core Employer Services business. New business booked was up 10% or more in North America across small, mid-size and large clients. ADP released new products in each of its three client segments which are leading to higher sales of profitable add-on software-as-a-service modules for human resources management and time and labor management. These cloud-based products have integrated mobile applications which are now used by more than one million active users. Continued strong revenue growth of 10% in ADP’s TotalSource full service HR outsourcing solution to $562.2 million more than offset the 16% decline in interest earned on client funds to $112 million during the quarter. This decline occurred even as client funds balances reached a record high during the quarter of $45.5 billion, 18% above the comparable figure a year ago. ADP’s stock price has risen 19% since the beginning of the year.

Donaldson Inc.

Donaldson’s fiscal third quarter revenues of $619 million and earnings of 46¢ per share were down 4% and unchanged respectively from the same period a year ago, reflecting the challenging global economic environment. The importance of Donaldson’s product diversification and intense focus on improving its operating efficiency were apparent during the quarter. Sales to on-road and off-road original equipment manufacturers declined 13% to $124 million because weaker customer demand reduced production schedules, especially for on-highway trucks and mining equipment. Engine replacement filter sales of $228 million declined just 1% as utilization of equipment remains solid, expansion continues into emerging economies and more equipment requires Donaldson proprietary replacement filters. Industrial filters sales declined 8% from the same period a year ago, reflecting the slowdown in global manufacturing activity. Partially offsetting these declines, gas turbine filters surged 35% to $68.7 million as Donaldson delivered a $25 million gas turbine filter system to Saudi Arabia. There are no more orders of this magnitude in the pipeline. As sales across most of Donaldson’s divisions were slowing, the company spent $1.1 million to reduce its cost structure while reporting a record operating margin of 15.9%. Free cash flow of more than $90 million was the second best ever recorded by Donaldson in a quarter. Donaldson’s stock price is up 11% since the beginning of the year.

Mettler-Toledo International Inc.

Strong execution and cost reduction programs started last year enabled Mettler-Toledo to deliver 11% earnings growth over the first quarter of 2012 with a 2% decline in sales. The company reported first quarter earnings of $1.81 per share and sales of $524.4 million. The company realized a 2% price increase while volumes fell 4%. This quarter was one of the few quarters where order growth was higher than sales growth. The difference was most pronounced in China where orders grew 5% and sales declined 1%. Government and state-owned enterprises are not paying as quickly as usual, which delayed sales of engineered-to-order equipment such as specialized scales used in large infrastructure projects. Mettler-Toledo does not begin building these products until they receive a deposit. The company also does not extend credit to mid and small-size companies in China. Dealers in second tier cities must pay for their March orders before Mettler-Toledo ships their April orders.

In 1987, Mettler-Toledo began manufacturing its core industrial products, large scales to weigh trucks or building products, in China to lower costs. Management realized that they could reduce costs further if they moved more of the production process to China. They moved entire product lines from France and the U.S. in 2003. The company currently employs 3,200 people, including 375 engineers responsible for product development in two facilities in Guangzhou and one facility in Shanghai. China accounts for 18% of the company’s sales to customers and 40% of the products it manufactures. Mettler-Toledo designed and manufactures its NewClassic ME balances in China. This new family of Mettler-Toledo branded balances extends its market positions in metals, electronics, plastics and academic laboratories in emerging markets, especially in China. The balance is reliable, easy to use and complies with ISO and good laboratory practices. The availability of a Mettler-Toledo branded entry level balance also makes it harder for local Chinese companies to enter the market with low cost, low-end products. Mettler-Toledo’s stock price is up 11% since the start of the year.


SGS reports its results semi-annually and does not provide an update on financial results in the interim. Already this year SGS has announced nine tuck-in acquisitions. Three of these businesses are located in the U.S., two in Europe, two in Brazil and one in Australia. On June 3, SGS announced that one of its two significant shareholders sold its 15% stake to a new strategic shareholder. The sale by EXOR (the Agnelli Family) was made to provide cash to enable them to maintain their share of ownership in Fiat after the pending increase in Chrysler ownership. The purchaser of the shares is Group Bruxelles Lambert, a Brussels based holding company which makes long term strategic investments. They will own the same percentage in SGS as the von Finck Family who have owned at least 15% for more than a decade. They are also supportive of SGS’ current management team and strategic objectives to grow revenues and profits organically and via tuck-in acquisitions. This means there will not be a potentially disruptive strategic acquisition made. SGS should be able to continue operating in a disciplined manner while continuing to pay out excess free cash flow through ordinary and special dividends. SGS ADR’s have risen 3% and the company has paid out an additional 2.7% in dividends since the beginning of the year.

Express Scripts

Express Scripts marked the one year anniversary of the Medco acquisition in April. Adjusted earnings for the first quarter, which exclude one-time costs associated with the acquisition and amortization of intangible assets, were 99¢ per share, up 36% from the first quarter of 2012. Operating earnings per claim rose 20% to $4.08 with 80.5% of prescriptions filled with generic drugs during the quarter, an increase of four percentage points from a year ago. Clients also used more of the company’s tools that improve health outcomes while controlling costs. Client retention rates have been high because of the seamless migration of client accounts to the new platform, stable account management teams and new clinical offerings.

The Medco acquisition adds several important tools to Express Scripts’ use of behavioral sciences to help health plan members make better decisions about their health. Medco’s Therapeutic Resource Centers (TRCs) specialize in managing prevalent chronic diseases including cancer, diabetes, cardiovascular disease and asthma. Specialized teams of pharmacists and nurses offer personalized care to ensure that patients get the right drugs at the right dosage and take them as required. Members of TRCs work with more patients suffering from an illness than do most doctors and thus have more experience with drug side effects and other issues specific to each illness that reduce adherence. RationalMed integrates medical, lab and drug prescription data from multiple sites of care to create a complete patient profile. It analyzes 30,000 variables, applies 3,500 detailed, evidence-based clinical rules to identify potential safety issues with new drug prescriptions and then notifies the pharmacist, physician and patient. Doctors change the therapy 65% of the time after receiving an alert from RationalMed. This “Big Data” application has resulted in two million successful interventions and $288 million in pharmacy savings.

Express Scripts generated $963 million in operating cash flow during the first quarter which allowed it to reduce its debt by $1.5 billion. The company reached its target debt level in 12 months instead of the 18 to 24 months projected at the time of the acquisition a year ago. Express Scripts repurchased 5.1 million shares of stock during the first quarter and another 1.2 million in April. Excellent client retention and the early initiation of its stock repurchase program contributed to the 14% rise in Express Script’s stock price since the beginning of the year.

Varian Medical Systems Inc.

Varian Medical Systems delivered solid fiscal second quarter revenue and earnings per share growth with increases of 7% and 9% over the same period a year ago to $786 million and $1.02 respectively. Net Oncology Systems orders declined 2% with a 4% increase in orders outside North America unable to fully offset a 9% decline in North America. International orders accounted for 57% of sales, a company record. Capital spending in the U.S. has slowed because of uncertainty about how to prepare for healthcare reform. Hospitals and freestanding clinics are seeking partnerships to ensure that they offer comprehensive cancer care. CEO Wilson commented that major health care reforms tend to freeze capital spending for 6 to 12 months. He saw steep declines in capital spending in 1982 when Medicare introduced pricing by diagnostic group and again in 1993 when the Clinton administration took up health care reform. Varian is well-positioned to grow in a healthcare market that rewards outcomes-driven care. Radiation therapy and radiosurgery are the least invasive and most cost-effective ways to treat cancer. The TrueBeam and EDGE Radiosurgery system can reduce the length of treatments from six weeks to one week. More precise patient positioning, image guidance and x-ray beam control enable patients to undergo fewer treatments at higher doses.

Varian saw order growth from a mix of developed and emerging markets. The company received sizable equipment orders from customers in Russia, South Africa, Switzerland and the U.K. during the quarter and installed the first TrueBeam systems in South Africa and Bangladesh. Order volume from Russia has doubled year-to-date and included a large order for several hospitals that included a TrueBeam. Varian shipped its 500th TrueBeam during the quarter and its average price remains stable even with more sales to price sensitive markets. The service business continues to perform well with order growth up 8% as more clinics sign service and software maintenance agreements when they purchase equipment. Varian expects service revenue to continue to grow as 300 TrueBeam machines go off-warranty in the next 18 months. Varian’s stock price is down 3% since the beginning of the year.


Roche’s first quarter sales of 11.6 billion Swiss Francs (CHF) rose 6% in constant exchange rates over the same period a year ago. Sales of Roche’s cancer drugs rose 10% during the quarter to CHF 5.7 billion, accounting for 50% of total sales. Revenues for drugs that target the HER2 receptor, Herceptin, along with recently launched Perjeta and Kadcyla, rose 15% to CHF 1.64 billion. Quarterly Avastin sales rose 11% to CHF 1.5 billion as a result of increased use in metastatic colorectal cancer in the U.S. and Europe and in ovarian cancer in Europe. Recently announced Phase III clinical trial results extend Avastin’s benefits to advanced cervical cancer, a difficult-to-treat disease that is one of the top three causes of cancer deaths in women. Adding Avastin to chemotherapy reduced the risk of death by 29% without significant side effects. Results from a Phase III study of the use of Avastin with chemotherapy and radiation to treat the initial occurrence of glioblastoma, an aggressive brain cancer, were less promising. While adding Avastin extended the time the disease was controlled and improved patients’ quality of life, it did not extend overall survival. The Diagnostics Division’s revenues grew 1% during the quarter to CHF 2.4 billion. Revenues for Professional Diagnostics, the company’s market- leading clinical diagnostic business which accounts for half the division’s sales, rose 5% but were mostly offset by lower sales in Diabetes Care. Roche has initiated a search for a buyer for its Diabetes business. The price of Roche ADRs has risen 7% since they were purchased in February and the company paid shareholders an additional 4% in dividends in March.

IDEXX Laboratories Corp.

IDEXX Laboratories reported first quarter revenues and earnings of $332.1 million and 81¢ per share, increases of 3% and 12% over the first quarter of 2012 respectively. Revenues from instrument consumables, the key driver of profitability for the in-clinic business, rose 9% to $75.7 million. This strong growth was offset, however, by a 22% decline in instrument sales to $15.8 million, a result of more reagent rental agreements with large, high consumable-using clinics and fewer placements of older VetTest chemistry analyzers and hematology instruments outside the U.S. Sales for in-clinic instruments, consumables and service rose 1.6% to $103 million. Reference lab sales rose 6% to $107 million.

The rapid uptake of VetConnect PLUS, IDEXX’s cloud-based service that presents test results from both the in-clinic and reference labs on a personal computer or tablet, is changing the way vets evaluate and report diagnostic data. Since it was launched last July, 6,700 vet practices have activated this service, the fastest uptake of a new service the company has offered. VetConnect PLUS uploads results as soon as they are available and allows vets to evaluate trends in blood chemistry for each pet. Just as vets switched to digital from film radiography, vets who use VetConnect PLUS will not return to paper-based reports to view, analyze and share test results with pet owners. With the launch of VetConnect PLUS, IDEXX examined cross-selling opportunities for its in-clinic and reference lab businesses and found that only 36% of its customers used both modalities. With 50% of the company’s revenues coming from its North American diagnostics business, IDEXX is replacing its two specialized sales forces with a single sales force who will work with vet clinics to maximize their use of diagnostic information. As part of this process, IDEXX has created 145 new sales territories that allow its existing sales representatives to call on each customer every four weeks. Management expects that this change will increase the number of sales calls by 60% and will lower sales representative turnover as a result of more manageable territory sizes, more productive customer relationships and clearer sales goals. IDEXX’s stock price has fallen 9% since January 1.


Wabtec’s first quarter earnings of $1.44 per share rose 18% above earnings for the comparable quarter a year ago. A lower tax rate from year-end enactments of a renewal of the R&D tax credit added 3¢ to earnings for the quarter. Record first quarter revenues of $615.5 million were propelled by a 66% increase in transit revenues which more than offset a 23% drop in freight revenues resulting from fewer freight locomotive and railcar deliveries along with a decline in power generator sales for oil and gas rigs. Although the U.S. backlog for freight cars has risen to a record 72,000 railcars, 40% of which are tank cars ordered to transport oil, only 12,000 freight cars were delivered during the first quarter. Wabtec’s management expects that the freight car production rate may stay as low as 12,000 a quarter for the rest of the year. That rate compares to 17,000 delivered during the first quarter of 2012. Transit revenues are benefitting from the year-end two-year renewal of Federal funding amounting to $10.5 billion annually. Wabtec’s transit revenues, which include sales of doors for 90% of the new buses bought by U.S. transit systems, are scheduled to more than make up for the expected decline in freight revenues. In addition to contracted passenger car deliveries, transit revenues will be increased by last year’s acquisitions of profitable U.K. and Dutch based suppliers of overhaul services and electronic components for transit systems. Installation of Positive Train Control (PTC) Systems for Denver Transit Partners and MRS Logistica in Brazil will add high margin revenues. PTC prevents collisions on heavily used rail lines. At the end of the quarter, Wabtec’s backlog had risen to a record $1.7 billion. Although only $1.2 billion is scheduled for delivery over the next twelve months, the backlog provides reassurance while freight car sales are down from a peak. Importantly, 55% of Wabtec’s revenues come from rebuilding or replacing worn parts for customers. Wabtec’s continued commitment to reducing manufacturing costs lifted its operating margin to 16.9% during the quarter, which is almost 1% above the 16.1% margin realized in the year ago quarter. On May 14th, Wabtec’s board and shareholders approved a two for one stock split payable on June 11 and an increase in the quarterly dividend to 4¢ on the split shares payable on August 30. Wabtec’s stock price has risen 25% since the beginning of the year.

Precision Castparts

Precision Castparts’ earnings for its fiscal fourth quarter ending March 31, 2013 were $2.82 per share, 22% higher than earnings for last year’s comparable quarter. This quarter was the first to include the results of Timet, the largest titanium manufacturer in the U.S. It was acquired on January 2, 2013 by Precision Castparts for $2.9 billion in cash. The financing of the purchase was secured through sale of $3 billion of notes paying an average interest rate of 2%. The integration of Timet is yielding operating efficiencies from improved inventory management, reuse of titanium scrap and chips and better work processes that deliver more effective labor and machine utilization. These efficiencies accounted for almost all of a 1.7% rise in the operating margin of the company’s Forged Products division where Timet’s results are reported. The company’s Forged Products division is Precision Castparts’ largest division producing 45% of sales and operating profits.

Boeing’s planned increase in 787 Dreamliner production from five a month to ten within a year constitutes the most important profit opportunity for Precision Castparts. Its Investment Castparts Division is the company’s highest margin business and is the only manufacturer capable of making the huge, flawless castings required to house the Dreamliner engines. That increased production will be followed soon by scheduled production of engine housings in 2014 for new fuel efficient engines for the latest versions of Boeing’s 737 and Airbus’ 320. Aerospace sales constitute 67% of Precision Castparts’ sales which include fasteners and airframe structures as well as castings. Sales of housings for industrial gas turbines and downhole pipe and well casing to oil and gas producers generated 18% of total company sales. Precision Castparts stock price is up 14% since the start of the year.

C.H. Robinson Worldwide Inc.

CH Robinson’s first quarter total revenues of nearly $3.0 billion rose 17%, while earnings of 64¢ per share were one penny lower than the same period a year ago. Acquisition amortization expense reduced earnings in the current quarter by 3¢ per share. Total net revenues of $455.7 million rose 10% while operating expenses rose 17% resulting in no growth in income from operations. Robinson’s first quarter results reflect the slower growth and continued margin contraction in its core trucking business along with the impact of a full quarter of results from Phoenix International, acquired in October. Its core truckload net revenues of $268.8 million rose just 2% during the quarter as volumes increased 9% overall and 5% in North America. Robinson management noted that its margins improved throughout the quarter and were consistent with year ago levels in March and April. Less-than-truckload net revenues of $58.5 million rose 13% on an increase in shipments of 12%. The addition of Phoenix International freight forwarding operations boosted net revenues from Ocean, Air and Customs to $67.9 million, up 142%. Phoenix adds 75 branches to Robinson’s 65 which are focused primarily on global forwarding. During the quarter, ten of the thirty-five branches which overlap were closed with no disruption to its customers. The remaining twenty-five branches will be closed during the next three quarters. Robinson has renegotiated its supplier contracts with air and ocean transportation providers to improve its cost structure as it seeks to secure more business from its new and existing customers. Robinson’s shares have declined 11% since the beginning of the year.

Teradata Corp.

Teradata’s first quarter results were even weaker than we anticipated three months ago as U.S. customers grew more cautious about making large IT capital expenditures during the first quarter of the year. Overall revenues of $613 million and earnings of 34¢ per share declined 4% and 34% respectively. Demand remains solid for maintenance and consulting services where revenues rose 12% in constant currency to $338 million from a year ago. Teradata’s consultants can help its customers fine tune their existing enterprise data warehouses in order to defer adding additional capacity. The revenue decline during the quarter was in hardware and software products which dropped 19% to $249 million. Geographically, the decline occurred in the U.S. in large transactions. Revenue from the Americas which generate 60% of total revenues and two-thirds of gross margin declined 8% in constant currency. International revenues of $232 million rose 5% on the same basis. The number and size of customer purchases over $5 million, which generate one-quarter of Americas revenues, dropped by $69 million! This was partially offset by 12% growth in revenues from smaller transactions. Based upon conversations with its customers, management forecasts sequential quarterly revenue growth from the Q1 low during the remainder of the year as the number of large transaction opportunities has increased. Teradata’s stock price has declined 11% since the beginning of the year.

Businesses are still increasing their reliance on Teradata to store, access and analyze rapidly growing quantities of data. Teradata maintained its investments in customer facing growth, expanding its consultative salesforce and R&D by 8% and 9% respectively during the quarter from the prior year. New customer wins in the Americas during the quarter included one of the world’s largest agricultural science companies implementing its enterprise data warehouse to improve crop yields, a Forture 500 aerospace company integrating multiple ERP systems in order to reduce costs and improve operating efficiency and a Blue Cross Blue Shield plan seeking to reduce costs and improve fraud detection through predictive analytics. International new customers included China Merchant’s Bank, China Southern Airlines and Otto, one of the world’s largest multi-channel retailers and e-commerce companies based in Germany. Expansions and upgrades from existing customers include the U.S. Navy Cyber Defense Operations Command, Toys R Us, Kohl’s, Groupon, Korea Telecom, Eircom and BNP Paribas.

Teradata’s free cash flow of $216 million was one-third higher than a year ago as receivables collections were strong, deferred revenues rose $84 million and cap-ex was cut. During the quarter Teradata purchased 1.6 million shares of stock for $94 million at an average cost of $58.75, reducing the share count by 1%. During April, Teradata purchased another 1.1 shares at an average cost of $55.50. At quarter-end, Teradata had $853 million of cash and cash equivalents and $271 million of long-term debt on its healthy balance sheet.

Core Laboratories

Core Laboratories’ first quarter revenues of $260.8 million and earnings per share of $1.22 were 11% and 8% above the results for the comparable quarter last year. Earnings per share benefitted from stock repurchases at an average price of $131 a share, which reduced the share count by 3%. During the quarter, Core’s Reservoir Description Services, the company’s largest division, produced revenues of $125.2 million, 48% of the company’s total and 8% more than last year’s first quarter revenues. The increase is attributable primarily to laboratory tests to measure flow under high pressures and temperatures that replicate conditions found in reservoirs of customers’ deep wells in the lower Tertiary trend in the Gulf of Mexico. The oil in these newly discovered deep wells is undersaturated in natural gas which, when present, helps oil flow. The tests measure the effect of differing quantities of nitrogen, carbon dioxide and natural gas injected into core samples taken from the wells. These tests precisely measure the point at which physical characteristics change within the reservoir fluid and enables Core to tell how production will change the composition of reservoir fluids. Core is the only firm with the calibrated pressurized furnaces, measuring instruments and professional skill to produce reliable results from these simulations. They alone can enable customers to commence production knowing oil can be produced safely without damaging the formation, thereby preserving the possibility of maximizing production as technology improves the prospect of extracting more. The initial tests indicate that injection of miscible and inert gases can double the recovery of the original oil in place from what otherwise might be achieved. The pre-salt discoveries offshore Brazil, Angola and elsewhere along the West African shore are undersaturated.

The prospect of rising earnings from its preeminent technical prowess in evaluating how best to produce the, as yet unquantified, immense reserves from these discoveries is not the reason Core’s stock price is up. It’s up because, once again, its second largest division Production Enhancement Products achieved higher revenues and earnings while the number of active North American land rigs declined 10%. Revenues for the first quarter of $107.4 million were up 11% over the year ago quarter and profit was up 2%. The operating margin achieved in the first quarter was 32%, the company’s highest. Its well casing perforating systems were used in 27% of the horizontal wells completed during the quarter, most of which were oil or oily gas wells. Its perforating charges are complemented by its Zero Wash downhole diagnostic tracers which identify, for the well operator, the locations where the formation has been penetrated as planned and, importantly, those places where it was not. Many of the perforations in these wells are more than twenty stages. Some are thirty-five. In all these, the company’s Spectra Scan diagnostic logging tool helps to complete the flow of information needed by identifying for the operators the gels transporting the proppant that returned to the surface, thereby confirming those stages that were completed as planned. These tools heighten operator’s control of horizontal wells and allow them to correct quickly any incompletions. They also insulate Production Enhancement from the woes of those drillers who lack the financial strength and skill to utilize the most advanced technology. Core’s stock price is up 25% this year.

Cenovus Energy Inc.

Cenovus Energy’s two U.S. refineries processed 103,000 barrels per day (bbl/d) of Canadian heavy crude oil, taking advantage of a C$30 to C$42.50 discount to generate cash flow of C$524 million, twice the cash flow delivered in the first quarter of 2012. These strong refining results exceeded the high end of the company’s C$400 million estimate for the quarter. This increase more than offset the decline in upstream cash flow to raise cash flow per share 7% over the first quarter of 2012 to C$1.28. Operating earnings rose 15% to C$0.52 per share. Many investors, however, discount strong refining results because they vary widely with the price of crude oil feedstocks and final products, making cash flows difficult to forecast.

Cenovus continues to execute its plan to develop its bitumen reservoirs. Average daily production from the oil sands of 100,347 bbl/d was up 22% as a result of the 79% increase in oil production at Christina Lake to 44,371 bbl/d from 24,733 bbl/d a year ago. The wells drilled in Christina Lake’s Phase C and Phase D demonstrate the quality of the reservoir. The first four wells produced over 3,000 bbl/d with the lowest amount of steam consumed of any wells the company has drilled in its eleven years of experience. Phase E will begin to produce bitumen during the third quarter and will add an additional 24,000 bbl/d of production net to Cenovus in six to nine months.

Cenovus’ stock price is down 10% since the beginning of the year. U.S. investors, in particular, have sold shares because they expect discounts for Canadian heavy oil to remain high for the next few years as new projects come on stream and refining and pipeline capacity doesn’t. Unlike conventional oil where reserves decline with production, oil sands volumes increase as companies extract bitumen and better define their reservoirs. Low prices for Canadian bitumen caused by today’s lack of transportation from Oklahoma have encouraged some analysts to reduce the long-term value of Canadian bitumen reserves. These revised valuations provide an opportunity to encourage U.S. investors to switch to more highly leveraged oil companies drilling for shale oil in the Bakken and Eagle Ford reservoirs.

National Oilwell Varco

National Oilwell Varco’s (NOV) first quarter earnings of $1.29 per share were 9% less than the $1.42 earned during the quarter a year ago. NOV’s stock price, nonetheless, rose slightly in response to a $3 billion rise in equipment orders for its Rig Technology division which produces half the Company’s revenues and 60% of operating profits. The orders booked in the quarter lifted the division’s backlog to $12.9 billion, a record. About $7.7 billion of these orders are scheduled to become revenues this year. Equipment for offshore rigs amounts to 92% of the backlog. Rig Technology revenues during the quarter rose to $2.6 billion, 16% above last year’s quarterly revenues but lower profit margins on lower volumes of well stimulation and pumping equipment comprising 16% of sales along with higher costs to meet rigid delivery schedules for equipping offshore rigs reduced profit margins for the division to 21.2%, 2.2 percentage points below the margin realized a year ago. The delivery time for drillships ordered today has declined to 30 months from 45 months in 2007. Margins also were compressed by uncapitalized expenses incurred to double capacity at the company’s blowout preventer plant in Houston where shipments are scheduled to increase 83% this year.

The company’s other two divisions Petroleum Services & Supplies (PS&S) and Distribution and Transmission (DT) experienced significant contractions in their profit margins during the quarter. Their decline compared to last year’s quarterly profit margin was almost 20% for PS&S to 18.2% while for DT whose margin dropped to 5.3%, it was over 30%. Sales of DT were more than double sales in the year ago quarter before the acquisition of Wilson, Schlumberger’s North American distribution business and CE Franklin, the leading distributor of oil field consumables, parts and equipment in Canada. DT depends upon sales to customers in the U.S. and Canada for 83% of its revenues. For PS&S, it’s 57%. A 10% decline in the number of active rigs in North America, during the quarter, cut orders more than the decline in usage, because customers chose to deplete inventories as well. The decline has ended, but demand has yet to revive. NOV has augmented its profitable growth in the past decade through timely counter-cyclical acquisitions when the market for oil field equipment and supplies contracted. The 18 acquisitions the company has made since the beginning of 2012 cost $5.3 billion, an amount equal to 18% of the current market value of all the outstanding shares. These acquisitions have not yet increased shareholder value. The most recent and largest acquisition of Robbins & Myers for $2.4 billion was just completed at the end of February. It is a leading manufacturer of drilling motors for directional and horizontal drilling and blowout preventers for onshore rigs. Its margins remain unchanged since the merger. Since the end of the first quarter, NOV has received orders to equip 3 drillships and 2 semi-submersibles and 11 jackup rigs which add $2.5 billion to its backlog. Rig Technology margins are back over 22%. NOV’s stock price is up 2% since the beginning of the year.

Sigma Aldrich Corp.

Sigma-Aldrich’s first quarter sales of $675 million increased 2% during the quarter with organic growth of 1%. Acquisitions contributed 2% to revenue growth while unfavorable changes in foreign exchange rates (primarily the Japanese Yen) reduced growth by 1%. Earnings per share were $1.01, up 2¢ from the first quarter of 2012. The Applied and SAFC Commercial businesses delivered 3% organic growth during, the quarter but a 1% decline in the larger Research business offset their growth. Sales to academic and government researchers in the U.S. and Europe declined because of funding cuts in the U.S. and uncertain funding in Europe. Sales to researchers in pharmaceutical companies were flat during the quarter, which was an improvement after three years of declining sales that resulted from the consolidation of pharma R&D labs. Sales to dealers, who account for 28% of Research sales, grew more than 10% as Sigma implemented its successful “Dealers as Partners” program in Europe. Sigma uses dealers to expand the geographic reach of the Research business with Asia, primarily Japan and India, and Europe accounting for 86% of sales through this channel.

Sigma continues to license new technologies to make them available to more scientists. They recently licensed a novel technology from a chemistry professor at The Scripps Research Institute that modifies molecules with biological activity to facilitate the identification of new drug candidates. Sigma sells the reagents used in this process and offers access to the full-text peer-reviewed papers describing this synthetic process that were published in 2012. Researchers access links to these papers on the product pages of Sigma’s web site. Peer-reviewed papers validate the products, and actual traffic to the web site has been higher than expected since the launch of this new service. Sigma expects to offer links to more than 2 million papers and targets a 25% increase in web traffic by the end of 2014. In 2012, the web site received 55 million visits and accounted for 56% of the Research business’ orders. Sigma’s stock price has risen 13% since the beginning of the year.

CME Group Inc.

CME transaction volumes have rebounded during 2013 from the lower levels recorded during the second half of last year. During the first quarter, overall average daily volume of 12.5 million was 19% higher than the second half of last year and 1% above the same period a year ago. The average rate per contract traded was 78.5¢, down 3% from the same period a year ago. During the quarter, increases of 19% and 9% in foreign exchange and equity index products respectively were partially offset by a 12% decline in energy contract volumes. Energy volumes turned up 20% from the prior year in April as the WTI and Brent spread tightened to under $9 in the June contract. Total trading volumes also strengthened in April and further in May with increases of 8% and 11% to 11.6 million contracts and 14.7 million contracts respectively from the same period a year ago.

CME has managed through the past years’ low market volatility well. Continued product innovation, along with diligent and focused sales and account management, has enabled CME to build substantial trading volumes in products and geographies that previously were insignificant. In interest rates, where Fed policy has brought short term rates to near-zero, CME developed products and developed customer relationships which have boosted trading volumes of Eurodollar contracts based upon interest rates of between two and ten years to 800,000 per day from 162,000 per day five years ago. Growing usage of CME products outside the U.S. has been an important driver of new trading volumes as well. During the quarter, volumes from Asia rose 24% to 440,000 per day resulting in 31% revenue growth compared to the same period a year ago. CME’s stock price has risen 36% since the beginning of the year.


Nestlé’s first quarter sales of 21.9 billion Swiss Francs (CHF) rose 4.3% organically over the first quarter of 2012. Product volumes contributed 2.3% to revenue growth and price increases contributed 2.0%. Reported sales growth for the quarter for the quarter was 5.4%. Revenues from the April 2012 Wyeth Nutrition acquisition contributed 2% to revenue growth which was offset by 0.9% from unfavorable foreign exchange rates. Emerging markets, which accounted for 45% of sales during the quarter, grew 8.4% organically, while sales in developing markets grew 0.9%. In spite of challenging conditions in Europe, which included a voluntary frozen pizza recall and a late start to spring ice cream sales because of cold weather, Nestlé’s European sales of CHF 3.7 billion increased 1.5% organically. Strong sales of Nescafé instant coffee, new premium ice cream products and pet food contributed to growth in this region. Sales in the Americas and Asia, Oceania and Africa rose 5.3% and 6.1% with volume growth of 1.8% and 4.6% respectively. Currency-related inflation in Latin America accounted for most of the 3.3% contribution of price towards organic revenue growth in the Americas. Nestlé reports its half year results on August 8. The price of Nestlé’s ADRs has fallen 7% since we purchased them in late March. This price decline is somewhat offset by a 3.3% dividend payment in April.

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