2nd Quarter, 2013

Your companies continue to deliver good operating results. During the second quarter they collectively produced 5% revenue growth and 7% earnings per share growth. The comparable figures for companies in the S&P 500 was 4% and 4%. We welcome the rise in long-term bond yields and the concomitant decline in bond prices which have been good for your portfolios. Over the five months since May 2, when the 10-year U.S. Treasury bond yield reached its low of 1.6%, the yield has risen 75% to 2.8%. That helped lift our stocks, which are up 12%, a third more than the S&P 500’s 8.8% gain. This reflection of an adjustment in investor preference may mark a beginning of a shift back to some market influence on intermediate and long term interest rates. The Fed has stated its intent to keep short-rates near zero. Investors may be starting to recognize that companies with significant amounts of debt may experience eroding profits. That may result in their valuing more highly companies that can deliver sustainable improvements in their operating profits from proven practices that steadily deliver operating efficiencies. Many of your companies are pursuing low risk initiatives which provide added profit by addressing the needs of underserved or occasional customers. Some have begun selling replacement parts and several have modified existing products or services to meet the precise needs of these customers.

Automatic Data Processing

ADP continues to gain new and retain existing clients with technology-based service offerings which help small, medium and large businesses navigate burdensome regulatory changes while reducing human resource administration costs. Its worldwide client count now exceeds 620,000, up 5% from a year ago. ADP shares have risen 12% since the beginning of May and 33% since January 1. At June 30, ADP had $14.7 million in long-term debt and $1.7 billion in cash and short term marketable securities on its AAA rated balance sheet. It held $22.7 billion of funds for its clients, up 7% from the prior year. During the fiscal year ended June, ADP paid $806 million in dividends providing a 2½% dividend yield and repurchased 10.4 million shares, 2% of shares outstanding, for $647 million, an average cost of $62.21 per share.

ADP delivers consistently good financial results with its solid execution. Revenues of $2.8 billion in its fiscal fourth quarter and $11.3 billion for fiscal year ended June each rose 7% from the same periods the prior year. Adjusted earnings of 55¢ for the quarter and $2.89 for the year each rose 6% on a comparable basis. Lower interest earned on client funds balances as a result of lower interest rates reduced earnings growth by 6% during the quarter and 4% for the full year. New business booked during the quarter was up 14%, boosting full year bookings to $1.35 billion, up 11%. Client retention increased to a new record level of 91.3%, while the number of employees on clients’ payrolls increased 2.8% in both the quarter and the full year on a same client payroll basis. These good results give management the confidence to forecast revenue growth continuing at 7% and earnings growth of 8 to 10% per share in the coming year.

Donaldson Inc.

Donaldson continues to expand its market presence as it reinforces its competitive position, increases its emerging market exposure and continues to build out the lucrative after-market business for its air and fuel filters. Despite revenue pressures, Donaldson reported fourth quarter earnings per share of $0.48, an increase of 2% over the fourth quarter of fiscal 2012. Earnings for the fiscal year declined 5% to $1.65. These results exemplified management’s effective ability to execute. Costs remained under tight control and the after-market business continued to increase as a percentage of sales. The Company’s gross profit margin expanded to a record 36.1% from 35.0% last year and free cash flow reached $222 million, the second best year in its history. Donaldson has tightened production cycles, helping to keep its competition one step behind. Replacement parts reached a record 53% of sales in the quarter, somewhat insulating the company from the cyclicality of its end markets. Sales, however, were down 2% for the year and 4% for the quarter, amounting to $2.44 billion and $6.33 million, respectively.

Although Bill Cook, CEO, believes that Donaldson’s end markets are bottoming, he anticipates a gradual recovery which means fiscal year 2014 sales may increase by no more than 5%. With the company’s keen focus on costs, earnings will continue to improve. High cash generation and limited cash requirements, will permit the company to continue to return cash to shareholders. The dividend increased 30% this year to 52¢ per share and Donaldson repurchased 2% of its outstanding shares. Management anticipates purchasing at least 2% of its shares in fiscal year 2014. Donaldson’s stock is up 6% since the beginning of May and 18% since January 1.

Mettler-Toledo International Inc.

Mettler-Toledo’s second quarter revenue rose 1% to $578.7 million in local currencies and U.S. dollars. Earnings rose 10% to $2.32 per share over the same period a year ago. Improving economic conditions contributed to 5% revenue growth in the Americas and to 2% revenue growth in Europe, both of which exceeded the company’s forecast. Strong growth in these regions offset a 5% revenue decline in Asia. The lack of available credit in China to fund infrastructure projects and small company purchasing contributed to an 11% decline in sales in China. Good execution of Mettler-Toledo’s marketing programs and cost control enabled it to increase both sales and gross profit by $8 million.

Autochem, which accounts for less than 10% of Laboratory sales or about $80 million annually, is one of Mettler-Toledo’s smaller but faster growing businesses. Its automated reaction vessels eliminate the need to monitor chemical reactions by keeping the vessel at a constant temperature and by tracking each step in the reaction process. Chemists can download the data from the reaction vessel to a computer and replicate the reaction exactly in any Mettler-Toledo reaction vessel. Autochem vessels also measure the heat generated during reactions second by second to ensure that reactions can be scaled up safely. Chemical reactions that generate large amounts of heat can lead to explosions when carried out on a large scale. Other Autochem instruments visually track crystallization processes to monitor the size and shape of crystals formed during a chemical reaction. Crystallization is used to isolate almost all solid products made in a solution. The ability to reproduce results easily and accurately reduces both the time and the cost to develop and produce oral and biologic drugs. Mettler-Toledo’s stock has risen 14% since the beginning of May and 23% since January 1.


SGS’s first half 2013 revenues of 2.7 billion Swiss francs (CHF) rose 7% in constant currency and adjusted profit of CHF 288 million rose 6% from the prior year period. Organic revenue growth contributed 5% while acquisitions added 2% to revenue growth. Weakness in Europe, where revenues were up just 3%, offset 13% growth in the Americas and 9.5% growth in Asia. Minerals was the only industry sector to decline, falling 3% from the prior year as a result of the global cyclical downturn in mining activity. SGS generated strong double-digit growth in Consumer Testing, Oil, Gas and Chemicals, and Governments and Institutions. These three industry groups account for nearly one-half of company profit.

In Minerals, which generates 14% of profit, lower commodity prices led to a slowdown in exploration spending, which caused sample testing volume to drop 20%. This drop is significantly less than the industry-wide decline of 33% because SGS laboratories are typically on-site dedicated production labs rather than commercial exploration labs. SGS has reduced operating costs, cutting headcount by 800 during the first half to align costs with lower revenues. The drop in sample testing was offset by a 15% increase in traditional trade-based testing and verification services for coal, fertilizer and iron ore. Consumer Testing, the company’s largest profit contributor, generated revenue and profit growth of 13%. SGS entered footwear successfully and has taken market share in wireless electronics testing after investing in advanced 4G LTE capability. Oil, Gas & Chemicals experienced strong 30% growth in its upstream services and good growth in plant and terminal operations leading to overall growth in revenue and profits of 11% and 12% respectively. SGS Government Services business expanded as TradeNet continues to grow, a program supported by the World Bank and governments across Africa which tracks trade and ensures tax compliance. SGS shares declined 3% since the beginning of May and have risen 8% since the beginning of the year.

Express Scripts

Express Scripts’ operating earnings per claim rose 26% over the second quarter of last year to $4.69 as clients used more tools to manage rising drug costs. This strong operating performance translated into 29% growth in adjusted earnings of $1.12 per share. Adjusted earnings exclude one-time costs and the amortization of intangibles from the Medco and NextRx acquisitions. Express Scripts is working closely with its managed care plan clients to ensure that they win business when individuals purchase health insurance on insurance exchanges which are expected to open on October 1. Many of these clients have added more highly managed programs for home delivery, drug formularies and pharmacy retail networks to deliver an affordable drug benefit that improves health outcomes. Even with 80% of prescriptions filled with generic drugs, specialty and branded drugs still account for two-thirds of total drug costs. The growth of specialty drugs, most of which are injected and often have serious side effects, present the greatest challenge to Express Scripts’ customers. The cost of these drugs which are used to treat cancer, multiple sclerosis and rheumatoid arthritis, is growing 20% per year though increased use and price inflation. By 2015, specialty drugs will account for 50% of U.S. drug spending. Express Scripts has 11 specialty therapy classes with enough competition that they can build formularies, negotiate volume discounts and apply clinical tools such as step therapy. Express Scripts achieves its high operating earnings per claim by working closely with its clients to help them decide which of its many tools will deliver a drug benefit that controls costs without upsetting their members. Express Scripts’ stock has risen 5% since the beginning of May and is up 15% since the beginning of the year.

Varian Medical Systems

Varian Medical Systems continues to deliver good financial results. Fiscal third quarter revenues of $726 million rose 3% over the same period a year ago, and earnings rose 7% to $1.03 per share. The weakening of the Japanese yen versus the U.S. dollar reduced the company’s revenue and earnings growth by 1% and 6% respectively. Oncology Systems revenues of $561 million accounted for 77% of the quarter’s total and rose 3% over the same period last year. Japan is Oncology Systems second largest market after the U.S. and took the full impact of the yen’s decline, which reduced sales by $10 million during the quarter. Net orders grew 4% to $582 million with international order growth of 8% more than offsetting a 1% decline in North American orders. Orders in Europe rose 21% with big wins in the U.K., Poland, Turkey and North Africa. Orders in China grew more than 10% during the quarter. Varian has installed about 300 systems in new vaults in China, with about 25% to 33% of the market installing high-end TrueBeams. The rest of the market is more value-oriented and purchases UNIQUE, a system that combines a low cost radiation source with Varian’s sophisticated software and accessories. Varian expects revenues in China to grow from $150 million this year to $450 million by 2018.

The company also expects the market for its systems to grow as radiation surgery is used to treat patients with soft tissue cancers. Carlo Greco, the director of clinical research at the Champalimaud Foundation in Lisbon, Portugal treated over 400 metastatic tumors in lung, bone, liver, adrenal glands and lymph nodes with a single, highly-focused dose of radiation. One year after treatment, 95% of the tumors have not grown, a promising early result. The Champalimaud Foundation is the first clinic in Europe to install an EDGE system, Varian’s dedicated system for advanced radiosurgery. Varian’s stock is up 17% since May and is up 8% since January 1.


Roche’s half year’s sales rose 5% in constant currencies over the first half of 2012 to CHF 23.3 billion. Earnings, excluding one-time items in both periods, rose 11% to CHF 7.28 per share. Sales in the U.S., Roche’s largest market, rose 10% while China contributed to 11% revenue growth from emerging markets with 26% and 19% growth in drug and diagnostics sales respectively. The Pharmaceutical division’s sales rose 6% to CHF 18.1 billion. Sales of the Herceptin family of drugs used to treat HER2 positive metastatic breast cancer rose 11% to CHF 3.3 billion with the contribution of the recently launched drugs Perjeta and Kadcyla. Increased use of Avastin in Europe to treat ovarian cancer contributed to the drug’s half-year revenues of CHF 3.1 billion, a 12% increase. Roche continues to make progress in the development of new treatments for leukemia and lymphoma. Obinituzumab, an engineered antibody that kills targeted tumor cells directly and increases immune system response in patients with a common form of leukemia, is the first drug to deliver better results than Rituxan, the best existing treatment for this cancer.

Roche’s Diagnostics business reported first half 2013 sales of CHF 5.1 billion, up 3% over the first half of 2012. The division increased its technology lead over its competitors in high volume clinical labs with the introduction of the Cobas 8100 series, a modular automation system that can prepare up to 1100 blood samples per hour for immediate testing and post-analytic processing. It works with all of Roche’s existing analyzers, and a lab can add modules as its volume grows. Roche also received FDA approval for Tarceva for the initial treatment of metastatic non-small cell lung cancer whose tumors contain certain genetic mutations along with the molecular diagnostic test that identifies these mutations. By taking Tarceva, patients whose tumors have these mutations reduce the chance of their tumor growing by 66%. Roche ADRs are up 19% since mid-February and are up 6% since the beginning of May.

IDEXX Laboratories Corp.

IDEXX Laboratories reported good second quarter results with revenues up 5.5% organically to $352.6 million, while earnings grew 9% to 99¢ per share. Instrument placements in vet clinics showed strong growth over the first quarter with a 35% increase in placements of Catalyst Dx chemistry analyzers and an 18% increase in placements of ProCyte hematology instruments. More than half of these instruments went to customers new to IDEXX. Instrument consumables’ revenue rose 15% organically to $78.5 million, the strongest quarterly result in many years. Reference lab revenue grew 9.5% organically to $115.9 million, driven by a fully staffed sales force that increased diagnostic testing from existing customers.

IDEXX implemented the reorganization of its U.S. diagnostics sales force on April 1 when it trained 20% of its instrument and reference lab sales reps to sell diagnostic services as veterinary diagnostic consultants (VDCs). IDEXX redesigned its sales territories from scratch, reducing their size from a 120 mile radius to a 60 mile radius and decreasing the number of customers from 300 to 150. The sales territories are designed so that a VDC calls on every hospital every four weeks and is compensated for selling both in-clinic instruments and reference lab services. Only 3% of the existing sales reps left the company, less than the 5% attrition management expected. In addition, IDEXX expanded its sales force at the existing pay scale by 14% to 184 with sales reps who have an average of 11 years of experience. The VDCs increased the number of sales calls by 60% faster than expected. With higher call productivity and additional reps, the company expects about an 80% increase in customer contacts for the North American sales force. The reorganization also addresses vets’ most consistent complaint — that they don’t see their IDEXX sales rep enough. Vets know that the IDEXX rep helps them improve their practice. IDEXX’s stock is up 12% since the beginning of May and 6% since the beginning of the year.


Wabtec’s second quarter earnings of 77¢ per share were 15% above the 67¢ earned during last year’s second quarter. This sizeable profit gain was achieved despite sales of only $638 million, 4.6% above a year ago. The improved profitability comes from the company inspiring and training its managers and workers to drive down costs while maintaining and even improving quality. Sales of replacement and rebuilt parts, which are more profitable than original equipment sales, grew 14% to a record 56% of total sales. This growth was propelled by well-managed rapid implementation of Wabtec’s operating practices in two companies acquired last year, one in the U.S. and another in the U.K., that provide parts and maintenance for transit cars. Remanufacturing and overhaul service sales of $141.2 million during the quarter were 28% higher than a year ago. Transit sales and operating earnings were 39% and 63% higher than last year’s quarterly results, while Wabtec’s freight sales and operating profit declined 12% and 6% respectively. The transit backlog remained constant at $1.2 billion, while the freight backlog is $500 million. Industry orders for freight cars have risen to 74,000, 80% of which are for tank cars to transport oil. Although orders are the highest since 2007, freight car builders are reluctant to build capacity to speed deliveries.

Sales of Wabtec’s Specialty Products and Electronics, which constitute its most profitable businesses, declined to $284 million in the quarter, 5% below the sales booked during the second quarter of last year. Over half of these sales are part of larger contractual commitments by customers for Wabtec’s electronic braking systems for unit trains and its Positive Train Control Systems which use on-board computers in locomotives and electronic signals at the end of trains, along the wayside and in towers to prevent rail collisions, derailments, switching errors and work zone incursions. PTC is slowly being installed by US Class I Railroads as required by the US Federal Railroad Administration. A deferral beyond the original 2015 deadline for full compliance by Class I freight lines is probable. Annual Federal funding for transit systems’ improvements including installation of PTC was renewed early in the summer at $10.7 billion for this year and next. PTC sales booked during the quarter were $55 million, $45 million for freight railroads and $10 million for transit. The company has signed contracts worth $100 million to install PTC on U.S. Transit systems. The company expects that PTC sales for combined freight and transit lines will reach $75 million in each of the next two quarters. Wabtec’s stock is up 42% since January 1 and 19% since May 1.

Precision Castparts

Precision Castparts’ (PCP) fiscal first quarter ending June 30, 2013 is the second quarter that includes the results of its $2.9 billion acquisition of Timet, the largest manufacturer of titanium in the U.S. Despite nickel prices plunging 16% during the quarter and disruptions caused by a failed union organizing effort at the company’s Oregon casting plant, quarterly sales and earnings at $2.36 billion and $2.88 were respectively 20% and 22.5% higher than the year ago quarter. Nickel alloys are essential for the castings for the housings for jet engine and industrial turbine compressors and combustors which must withstand temperatures as high as 2400 degrees Fahrenheit. With nickel prices low, the company has gone into the market to buy nickel trimmings and chips sold by other manufacturers which it will remelt and use in the months ahead. The lower material cost benefits customers as well as PCP under the terms of their contracts. Sales during the quarter also were reduced slightly by intercompany sales of $72 million, of which $68 million came from Timet. This lifts margins and helped the company bring its operating margin up to 27.2%, 1% above last year’s. PCP’s most profitable division, Investment Casting, as a result of the union disruption, recorded a miniscule $4 million decline in sales for the quarter while operating margins increased by 1.4% to 34.6%. PCP’s Forged Products division, which became the company’s largest with the addition of Timet, reported fiscal second quarter sales 25% above a year ago with an operating margin of 25% lifting profits 37%. Margins were helped slightly by passing lower nickel alloy costs onto customers which reduced sales by $55 million. The company’s 29,000 ton forge, its largest press, will be overhauled during the current quarter. The cost is $20 million. PCP has managed to keep its Airframe Products margin high at almost 30% while integrating four acquisitions of companies manufacturing fasteners and aerostructures such as frames, bulkheads, wing ribs, spars, and engine mounts for commercial aircraft including the 787. Sales to aerospace customers have risen to 68% of total sales from 64% a year ago. Its content on each 787 exceeds $10 million. On each 737 Max, it’s less than $2 million. Precision Castparts’ stock has risen 23% since the start of the year and 21% since May 1.

C.H. Robinson Worldwide Inc.

Robinson’s total revenues and net revenues of $3.3 billion and $472.6 million each rose 11% from the same period a year ago. Earnings of 70¢ per share were one penny less than a year ago as total expenses rose faster than revenues primarily as a result of the Phoenix acquisition. Higher expenses reported during the quarter include 2¢ per share of amortization of acquisition related intangible assets and 2¢ per share related to the settlement of an auto liability claim. Robinson’s total transportation net margin improved from the same period the prior year for the first quarter in seven as total revenues and net revenues rose 14% and 17% respectively. Overall truckload volumes rose 9% with North America up 5% and the European Aprio Logistics acquisition chipping in 4% of volume growth. Truckload net revenue growth of 3% reflects a stable margin in North America and a decline in margin in Europe. Less-than-truckload volumes and net revenues each rose approximately 8% from a year ago. Global forwarding net revenues more than doubled with the Phoenix acquisition.

Robinson’s shares are up 6% since the beginning of May and are unchanged since the start of the year. During the first half of the year Robinson repurchased 2.4 million of its shares outstanding for $146 million or an average cost of $60 per share, reducing the share count by 1.5%. On August 26, Robinson announced the repurchase $500 million of its shares through an accelerated share repurchase program, utilizing borrowings with an average 15 year maturity and coupon payment of 4.28%. The repurchase program will retire about 8.3 million shares through year-end, reducing the number of shares outstanding by an additional 5%. This accretive shareholder friendly decision is a good use of the company’s strong balance sheet to improve shareholder returns as it seeks to improve operating efficiency in a difficult freight environment.

Teradata Corp.

Teradata’s revenues of $670 million, its third highest quarterly total ever, and operating earnings of 66¢ per share rose 2% in constant currency and declined 4% respectively from the same period a year ago. Software and hardware product revenue of $303 million declined 5% in constant currency while consulting and maintenance service revenue rose 8% to $367 million. Teradata’s U.S. business recovered from the 8% decline it posted in the first quarter increasing 7% from the same period a year ago as the number of large customer transactions increased.

Customers rely on Teradata to get insights from their big data and integrate it with their traditional operational data. Big data is different from traditional data which is typically comprised of operational data on customers, finances and products. Examples of big data are weblog data, sensor data, software logs and web click data. These large data sets are expanding rapidly based in part on expanding use of wireless devices such as RFID readers and sensors. Teradata’s Unified Data Architecture integrates its traditional enterprise data warehouse and analytics with its Aster and Hadoop products and services. Aster enables customers to use the same SQL tools used for traditional data for big data housed in Hadoop, a low-cost data repository. Customers gain competitive advantage by integrating new insights from big data with the intelligence gained from their operational data. A large retail customer, for example, uses Aster to analyze its customer’s online behavior from weblogs stored in Hadoop and integrating these insights into its enterprise data warehouse to increase conversion rates and sales. Teradata’s stock has rebounded 19% from the beginning of May leaving it down 2% since the start of the year.

Core Laboratories

Core Laboratories’ second quarter revenues of $263.1 million and earnings per share of $1.32 were 6.5% and 14% higher than the comparable results for the year ago quarter. Both revenues and earnings per share reached record new highs. The repurchase of 378,000 shares for $52.7 million during the quarter at an average price of $139.50 per share lifted the earnings per share growth 1% above the growth in net income. Free cash flow from operations during the quarter amounted to 98.5% of net income and exceeds the cost of shares repurchased during the quarter. In reporting its results, Core raised its forecast free cash flow from operations this year to $250 million which amounts to $5.42 per share, almost as high as its recently raised earnings forecast of $5.50 per share.

During the quarter, Core’s Production Enhancement division generated 42% of company revenues while lifting its operating margin to 34%. That enabled it to contribute 45% of Core’s operating income for the quarter. It achieved almost an 11% increase in revenues even though slightly fewer horizontal rigs were actively drilling in North America during the quarter this year than last. Its casing perforating systems are used in 28% of North American horizontal well completions. Its perforating and chemical fluid tracing systems enable drillers to fracture the producing formation more precisely and, crucially, trace the fluids injected to determine if the cracks opened as planned. If not, the tracers provide an alert to prompt corrective action. Production Enhancement’s innovative technical solutions are not confined to use in onshore shale formations. The division currently provides innovative technical solutions for drillers and operators of offshore deep-water wells such as those located in the Lower Tertiary Formation in the Gulf of Mexico and the pre-salt formations off the coast of Brazil. These wells, beneath two miles of water and seven miles below the seafloor, penetrate rock under such high temperatures and pressures that it becomes friable, creating a risk that sand might clog the wellbore. The operator places a screen at the production interval in the wellbore to keep the sand out. To determine whether the screen was installed properly, Core has developed another diagnostic service that verifies its effectiveness. Like many of the solutions supplied by this division, it is conceptually straightforward in adapting Core’s existing technology to provide an innovative solution that works under extremely harsh conditions. Core’s stock is up 53% since the beginning of January and 15% since May 1.

Cenovus Energy Inc.

Cenovus Energy’s second quarter operating results benefitted from higher crude oil and natural gas prices along with a reduced price difference between light and heavy crudes. Daily bitumen production during the quarter rose 17% from 80,317 barrels to 93,787 barrels and generated operating cash flow of $424 million, up 12% from a year ago. The company’s 50% share of the Wood River, IL and Borger, TX refineries contributed operating cash flow of C$320 million during the quarter. High refining margins in Chicago ($31.07 per barrel of crude) offset the increased feedstock prices that helped Cenovus’ upstream performance during the quarter. The company continues its successful and replicable development of its oil sands reservoirs in manageable 40,000 to 50,000 barrel per day increments. Christina Lake’s Phase E, Cenovus’ tenth phase completed on-time and on-budget, produced its first bitumen on June 22 and will increase daily production by 20,000 barrels net to Cenovus in six to nine months. Cenovus also will install two additional boilers at Christina Lake which use boiler water as feedwater to generate more steam from the same water, increasing steam quality from about 77% to 92%. These blowdown boilers, a patented Cenovus innovation, will increase production by 22,000 barrels per day with less than half the investment required to build a new phase.

Second quarter cash flow and operating earnings of C$1.15 and C$0.34 per share, fell 6% and 35% respectively from C$1.22 and C$0.52 a year ago. Three one-time charges associated with the management of the company’s conventional oil assets spoiled the results of an excellent operating quarter. On July 3, Cenovus received C$240 million in cash for the land in the Shaunavon it put up for sale in March. This legacy asset acquired in the spin-off from Encana in 2009 had a book value of C$297 million, so the company incurred a non-cash impairment charge of C$57 million upon its sale. Cenovus also reported a non-cash exploration expense of C$46 million because it stopped exploring another legacy oil asset in Sasketchewan. The company also paid C$63 million in cash to extract itself from a unproductive land deal. This payment consumed 30% of the free cash flow generated by the conventional oil assets during the quarter. These write-offs distract investors from Cenovus’ core strategy. The company builds value by investing the cash flow generated by its conventional oil assets to develop their high-quality high-margin bitumen reservoirs. Cenovus’ stock dropped 9% since the beginning of the year and is up 1% since the beginning of May. U.S. investors find U.S. companies that currently produce oil from shale formations in the U.S. more appealing. These companies generate strong free cash flow from the capital they invest in their oil properties today.

Sigma Aldrich Corp.

Sigma-Aldrich’s realignment to offer solutions to customer problems in its Research and Applied businesses contributed to second quarter organic revenue growth of 4% over the second quarter of 2012. Sales in U.S. Dollars rose 3% to $681 million. Earnings per share, excluding one-time items, rose 8% to $1.05. Research sales grew 3% organically this quarter as Europe and Asia delivered strong growth. Sales to academic researchers in the U.S. were helped by the increased focus of Sigma’s sales force on academic labs that have research funding from large pharmaceutical companies. Pharmaceutical companies are funding academic “translational” research which enables academic scientists to see if their discoveries have any patient benefit. SAFC Commercial’s sales rose 2% organically to $168 million. Growing volumes, but weak prices, for metal organic precursors for LEDs partly offset the mid-single digit growth in the commercial life science business. Organic sales for the Applied business grew 6% during the quarter to $160 million as its customer focus led to the signing of two regional agreements with major food and environmental testing labs. Sigma won this business because of its ability to serve multi-site, multi-regional customers. Sales to its industrial customers also rose as sales representatives found existing products and services to offer to new customers. Sigma’s stock has risen 10% since the beginning of May and is up 18% since the start of the year.

CME Group Inc.

CME transaction volumes rose 16% during the quarter to 14.3 million futures and options contracts per day, led by a 33% increase in interest rate volumes. Higher U.S. transaction activity was bolstered by strong growth in Globex electronic trading originating in Europe, Asia and Latin America which rose 18%, 27%, and 40% respectively. Combined trading activity originating outside North America now accounts for 22% of electronic trading volume. Clearing and transaction fees of $692.5 million during the quarter rose 8% and adjusted earnings of 93¢ per share rose 4% from the same period a year ago. Surging interest rate activity, reflecting the rapid upward movement in long term interest rates, has led CME’s stock is up 24% since the beginning of May and 50% since the start of the year. On May 29, 19.4 million interest rate contracts traded, surpassing the previous single day record of 17.2 million set in February 2007. The operating leverage inherent in CME’s business is shown from a comparison with the first quarter results. Total transaction volume rose 15% quarter-over-quarter and revenue was up 14% or $100 million. Expenses rose just $9 million sequentially resulting in an incremental margin of 91%. Its overall operating margin was 62%.

The second phase of the Dodd Frank OTC clearing mandate was implemented on June 10 resulting in a tripling of CME’s cleared OTC interest rate volume from the prior quarter. Phase 2 customers include asset managers, insurance companies and government sponsored entities. During the quarter, $41 billion per day cleared at CME and in July $62 billion per day cleared, representing 23% market share, up from less than 5%, of the dealer-to-customer segment. CME’s OTC open interest doubled during the past two months to $4 trillion from 3,600 client accounts. In addition, CME’s deliverable swap future is becoming the preferred means to convert swap exposure into futures contracts with June monthly volume of 8,100 per day, up from less than 2,000 per day in January.

Nestlé delivered profitable growth during the first half of 2013. Revenues of CHF 45.2 billion rose 4.1% organically over the first half of 2012 with 2.7% of the growth from increased volumes and 1.4% from increased prices. Earnings of CHF 1.60 per share rose 7.2% in constant currencies. The strong Swiss franc reduced earnings growth by 3.8%. While lower prices resulted in lower organic growth than the company expected, they reduced cost of goods sold by 1.1% and allowed Nestlé to increase its total marketing spending by 0.6% while increasing its operating margin from 14.9% to 15.1%. Input prices vary by region and by product. In the first half of 2013, prices rose 5% in the Americas because weaker Latin American currencies drove inflation, but were down almost 2% in Europe. Coffee prices are down over the last 12 months, so Nestlé lowered the price of its coffee products in key markets such as the U.K. and Russia. Raw milk prices are high, so the company raised prices in its dairy and nutrition businesses. Pricing decisions are made locally in light of local cost pressures and competitive environments to ensure that products are priced correctly. When pricing is correct, Nestlé’s product volumes and profit margins grow. Nestlé ADRs are down 3% since the end of March and 2% since the beginning of May.

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