4th Quarter, 2010

Our stocks, along with the stock market, began rising after last summer’s slump when Chairman Bernanke announced in Jackson Hole at the end of August that the Federal Reserve intended to institute a policy of sustained monthly purchases of U.S. Government debt. Investors bought stocks on the announcement even though the Fed waited until late November before it began buying the debt. As of this writing, the S&P with income is up 25.6% since August. Our stocks are up 27.4%.

Once the Fed started buying, its purchases equaled the debt being issued by the Treasury and amounted to two-thirds of the newly issued treasuries with maturities of four and a half to ten years. This would be odd if debt management rather than interest rate manipulation were a consideration because the average duration of the U.S. publicly owned debt is less than four years. The Fed purchases have increased the size of its treasury portfolio to $1.201 trillion which is more than the $1.160 trillion owned by the Chinese. Economists and financial commentators often assure us that we need not worry about the Chinese harming us by selling their treasuries because the losses incurred on such massive sales would hurt them more than us. The Fed is slated to end its purchases in June. Mr. Bernanke and Vice Chair Janet Yellen recently stated that the sale of treasury securities from the Fed’s portfolio is one possible option the Fed could use to tighten monetary policy.

Bill Gross, the manager of Pimco’s Total Return Fund, the world’s largest bond fund, reported last Friday the sale of all the fund’s U.S. Government bonds, including treasuries and agencies. These securities constituted 35% of his portfolio at the end of September. This sale, by an astute investor, along with the rise of the Euro and commodity prices, notably food and fuel, are telling evidence of a lack of confidence in the Fed’s commitment to contain inflation. We know from experience that ownership of companies run by managements with intimate knowledge of their operations including the experience of their division managers, are able to control costs and maintain margins when inflation takes hold. We are asking questions now to make certain that the people running the companies we own have comparable hands-on experience and a similar dedication to building value.

C.H. Robinson Worldwide Inc.

Robinson’s total fourth quarter revenues of $2.3 billion rose 16% from the same period a year ago while revenues net of third party transportation costs rose 15% to $388 million. Earnings accelerated during the quarter to 62¢ per share up 19% from a year ago. During the quarter truckload volumes rose 9% and prices passed through to its shipping customers, excluding the impact of higher fuel costs, rose 8%. For the year, Robinson’s total revenues and net revenues rose 22% and 6% to $9.3 billion and $1.47 billion respectively while earnings of $2.33 per share rose 9%. These good results follow 2009 when total revenues dropped 12% and earnings actually increased slightly. Its stock price has pulled back 10% since January 1 after a 37% gain last year. The S&P is up 3.5% since January 1 after a 15.1% gain last year.

Ocean and air freight forwarding services rose 23% and 16% respectively during the fourth quarter and 12% and 30% respectively for the full year. Sourcing net revenues declined 4% during the quarter as a result of changes made by Wal-mart’s global sourcing initiative. Robinson’s focus on execution and its ability to control costs, have served shareholders well. During January truckload volumes rose 7% while net revenues rose more than 15%. Robinson’s technology investments have enabled it to automate routine tasks and drive productivity improvements which have resulted in stronger and deeper customer relationships. As companies focus on improving their supply chain productivity, Robinson garners new profitable customers.

Donaldson Inc.

Donaldson delivered another strong quarter as sales rose 23% to $537 million and earnings of 56¢ per share rose 44% from the same period a year ago. Reported earnings growth actually understates the strength of Donaldson’s profitability during the quarter because of a low tax rate during the same period a year ago. Total expense growth was held to 19% resulting in operating income of $67.4 million, up 59%! Donaldson continues to benefit from both the cost reduction initiatives and investments made during the downturn leading to the significant operating leverage experienced during the past year. Raw material costs are rising now and will impinge further margin expansion in coming quarters from current record levels.

Donaldson’s global and diverse filtration businesses were generally strong during the quarter. Local currency sales rose 31% in the Americas, 20% in Europe and 18% in Asia. The company is experiencing continuing strength in its markets outside the U.S. where it obtained 59% of its sales during the quarter. Off-road filters used in construction, mining and agriculture equipment rose 52%. On-road filters sold to customers manufacturing medium and heavy duty trucks also rose 52%. Replacement filter sales rose 28% to $200 million, accounting for 60% of total Engine Product sales. Donaldson’s Industrial Product filters rose 15% to $206 million during the quarter. Donaldson shares are down 3% this year after rising 38% last year.

SGS Group

During the second half of 2010, SGS’ revenues of 2.4 billion Swiss francs rose 6.6% in constant currency from the same period a year ago. The operating profit margin rose to 19.1% from 18.6% during the same period a year ago. Minerals Services, including metallurgy and geochemistry testing in support of mining operations, surged 20%. Exploration spending with a strong focus on gold and iron ore returned to 2007 levels. A huge increase in demand for energy minerals, especially coal and bitumen also drove demand for SGS Minerals Services. Its Consumer Testing, Industrial Services, Government and Institutions Services and Systems & Services Certification all reported second half revenue growth of 7% or more.

For the full year SGS constant currency revenues of 4.8 billion Swiss francs rose 4% and net profit of 588 million Swiss francs rose 8% from the same period a year ago. The company completed ten acquisitions during the year which added about 1% to revenue growth during the year. Two acquisitions were made in Minerals, one in Chile and one in Canada, six were Industrial services companies with three in Asia and three in Europe, one Life Sciences company and one Environmental company. The combined cost was CHF 302 million for businesses generating annual revenues of CHF 146 million and profit of CHF 34 million. The Board has declared an ordinary dividend of CHF 30 per ordinary share (32¢ per ADR) and a special dividend of CHF 35 per ordinary share (38¢ per ADR) as a result of SGS’ continued strong free cash flow generation. These dividend payments provide a yield of more than 4% on the current stock price.

Revenues from Asia Pacific rose 9% for the year and now represent 28% of revenues, an increase of 2% from the prior year. Revenues from the Americas, which represents 21% of total revenues rose 2.2% and Europe/Africa and Middle East rose 2.5%, representing 51% of company revenue. Eight of SGS’ ten businesses posted revenue growth for the year. Agricultural Services was flat while Automotive Services was down 22% as a result of the Irish government terminating its statutory vehicle testing concession effective at the start of the year. SGS’ ADR price is up 3% since January 1 while the Swiss franc is up 1% against the dollar. During 2010, SGS’ ADR price rose 31% while the Swiss franc gained 11% against the dollar.

Mettler-Toledo International Inc.

Mettler-Toledo’s fourth quarter performance exceeded management’s expectations as sales in the Americas returned to pre-downturn levels and contributed to the company’s 17% sales growth in local currencies. Fourth quarter sales were $592.8 million while full year sales were $1.97 billion, a 14% increase in local currencies. Earnings for the quarter and the year rose 24% over the same periods a year ago to $2.56 and $6.83. Europe delivered 13% sales growth as demand for laboratory and core industrial products rebounded strongly from the downturn in mid-2009. Asia/Pacific sales, which now account for 23% of total sales, rose 23% during the quarter and the year. Fourth quarter Laboratory sales rose 17%, Industrial sales rose 20% and Retail sales rose 5% over the same period last year.

Emerging markets now account for 31% of Mettler-Toledo’s sales with China accounting for 15% of total sales. The company already has a broad product offering tailored to the local Chinese market and is expanding its pipette and product inspection offerings to meet growing needs in life sciences and food quality inspection. Food inspection requirements are growing as more middle-class Chinese purchase packaged and ready-made food. The company continues to reduce manufacturing and materials costs by developing and manufacturing more products in China and by sourcing at least 40% of its materials in low-cost emerging markets. These initiatives boosted fourth quarter gross margins by 60 basis points to 53.4%. Spinnaker marketing tools increased sales force productivity that contributed to a record operating margin of 21.1%, in spite of a negative impact of 80 basis points that resulted from an increase in the value of the Swiss France relative to the Euro.

We visited Mettler-Toledo’s headquarters in Greifensee, Switzerland during the last week of February. CEO Olivier Filliol provided detailed explanations of many of the company’s new products and their value proposition for customers in specific market segments. We also discussed new markets for weighing instruments. Customers are purchasing analytical balances for their manufacturing lines as the miniaturization of parts and electronic products requires more precise weighing for in-line quality control. We toured the company’s manufacturing facility and learned first-hand why the Swiss franc/euro exchange rate affects its financial results. All load cells for Mettler-Toledo brand balances, the core of the weighing instrument, are made in Switzerland to protect proprietary technology and because they require precise machining, a specialty of skilled workers in Switzerland. Skilled workers also assemble the wide array of printed circuit boards that are made in short runs at this facility and sent to assembly plants around the world. Mettler-Toledo’s stock price is up 11% since the beginning of the year on top of a 44% increase in 2010.

CME Group Inc.

CME’s average daily volume of futures and options executed during the fourth quarter rose 17% to 12 million contracts. The largest percentage increase came from agricultural commodities which surged 42% to 1.1 million contracts per day as the prices of corn, wheat and soybeans each rose 26% from September 30 through December 31. Interest rate and foreign exchange contract volumes were also strong, increasing 27% and 18% respectively as greater volatility in Treasury prices and the dollar boosted trading volumes. Equity indexes and energy contract volumes were up only slightly during the fourth quarter though energy volumes surged 24% in January and 26% in February of this year. Trading activity outside of U.S. trading hours rose 33% during the quarter and now comprise 16% of total electronic volume. CME’s fourth quarter revenues and earnings per share of $763 million and $3.77 per share rose 14% and 12% respectively before non-recurring charges. For the year, revenues and earnings rose 15% and 16% respectively to $3.0 billion and $15.46 respectively before non-recurring charges. Its operating margin remained above 60% during the fourth quarter and was 61% during the full year. The quarterly dividend for 2011 was raised 22% to $1.40 per share. CME shares have declined 9% since January 1 despite continued strong contract volume growth of 10% and 17% in January and February respectively. CME stock price declined 3% last year.

During the second half of last year, CME began spending more on regulatory costs associated with the Dodd Frank Act and on the build-outs of its over the counter interest rate swap clearing service and its European clearing house. OTC interest rate swap clearing launched on October 18 and has cleared $1 billion in gross notional value, just a fraction of the $321 trillion in interest rate swaps traded annually. Its new European clearing house has received all necessary regulatory approvals and will launch nearly one hundred OTC energy products later this year. The CFTC’s July deadline for enacting rules in support of Dodd Frank is leading CME to spend money to ensure that the proposed rules do not impose excessive compliance costs or other unnecessary damage to the competitiveness of U.S. markets.

Express Scripts Inc.

Express Scripts’ success in aligning its ability to reduce clients’ drug costs with the company’s profits resulted in strong earnings growth in both the fourth quarter and the full year. The company’s focus on execution increased generic drug usage over three percentage points to 71.6%, and Express Scripts successfully moved 265 million NextRx members from WellPoint’s system to its system without any disruptions to other clients. Earnings per share, excluding non-recurring items, were 66¢ for the fourth quarter, an increase of 40% from the fourth quarter of 2009. Earnings per share for 2010 rose 33% to $2.32. Operating earnings, another key metric for Express Scripts, grew 35% to $658 million for the quarter and 42% for the year to $2.4 billion, despite incurring increased costs during the fourth quarter to handle unexpectedly large call volumes. The company’s call centers fielded questions from Medicare members about drug plans and a huge volume of calls from commercial members with healthcare reform-based questions about coverage for pre-existing conditions and for their children up to the age of 26.

Express Scripts’ information systems provide detailed savings estimates for each client so they can choose which programs will work best for their members. For example, the company recommends that health plans encourage members to stay on Lipitor even though plans could save money now by switching members to generic Zocor. Keeping Lipitor volumes high maintains the Lipitor rebates and will result in a seamless switch to generic Lipitor when it loses patent exclusivity later this year. This strategy also eliminates the risk that doctors will switch patients to other higher-cost branded statins, a choice that will actually increase a plan’s drug costs in the long-run. Express Scripts has developed a software program that allows health plan directors to see the impact of each change to its drug benefit on both its members and its bottom line. Express Scripts’ stock price is down 3% since the beginning of the year after rising 25% in 2010.

Varian Medical Systems Inc.

Varian Medical Systems’ first fiscal quarter’s earnings rose 27% to 80¢ per share. Revenues increased 7% over the first fiscal quarter of 2010 to $580 million. Oncology Systems sales were $452 million, up 5%. Sales of high-margin TrueBeam systems and Trilogy high-energy radiation sources, along with lower warranty and installation costs lifted the quarter’s gross margin to 47.3%, an all-time record. Net orders rose 5% with 20% growth in North America offset by a 6% decline in international markets. All regions except Japan reported double-digit order growth. Japan’s order growth returned to normal levels following a two-year stimulus program that resulted in orders of $40 million during the first quarter of last year. All of the orders in North America were for the versatile TrueBeam system. The company has received 170 TrueBeam orders since its launch in April 2010 and installed 40 systems during 2010.

The company also reported progress in two of its new businesses. Varian received FDA clearance for the Varian Proton Therapy System which uses protons instead of X-rays to treat tumors. The therapist can tune the energy of the proton beam so that it targets the tumor and spares all of the nearby healthy tissue. Having FDA clearance may make it easier for customers to secure financing for these $100 million facilities. Construction on the Scripps Proton Therapy Center in San Diego is moving ahead rapidly. Varian also received a $21 million order for five turn-key cargo screening systems for the U.S. border. The IntellX system incorporates proprietary technology to identify both hazardous and radioactive materials in a moving vehicle. Varian’s stock price declined 4% since the beginning of the year after a 48% rise in 2010.

Gen-Probe Incorporated

Gen-Probe reported fourth quarter and full year revenues of $136.7 million and $543.3 million respectively, a decrease of 2% over the fourth quarter of 2009 and an increase of 9% for the full year. Year-over-year sales declined during the quarter because fewer people visited the doctor and last year’s flu season generated large sales of Prodesse’s flu tests. Earnings, not including non-recurring items and the amortization of purchased intangible assets, rose 17% to 61¢ for the quarter and 12% to $2.19 for the year. The company’s efficient research and development programs sent five submissions to the FDA. Gen-Probe also kept the growth of marketing expense to 1% while strengthening its European sales team to support the recent launch of PANTHER, the fully-automated instrument for mid-size labs. This expense control delivered a record operating margin of 21.5%.

The December acquisition of GTI Technologies for $53 million in cash strengthens Gen-Probe’s transplant diagnostics products business. GTI manufactures the detection kits sold under the company’s LIFECODES brand and also supplies other assays and consumable products used to match tissues and to monitor patients with transplanted organs. The company’s strict control of its working capital produced an 8% increase in product sales with a 1% decline in receivables and inventories, not including GTI’s, grew 1% while the cost of goods sold increased 11%. Gen-Probe’s stock is up 10% since the beginning of the year on top of a 36% increase during 2010.

Techne Corp.

Techne’s second fiscal quarter earnings rose 7.6% to 71¢ per share. Unfavorable foreign exchange rates and lower interest rates reduced reported earnings by 8¢ and 4¢ respectively. Sales of $67.7 million grew 5.1% in constant currency with unfavorable foreign exchange rates reducing revenue growth in U.S. dollars to 3.3%. The Biotechnology division’s sales rose 4.8% to $44.4 million, with sales to U.S. academic labs and biotech and pharma companies up 7% and 3.9% respectively. R&D Europe sells products made by the Biotechnology Division in Europe. This division reported sales of $18.6 million, an increase of 5.5% in local currencies. Gross margin for the quarter was 77.5%. Research and development expenses for the quarter rose 3.3% to $6.6 million and accounted for almost 10% of sales. The company spent $960,000 to remodel lab space in its Minneapolis facility and expects to spend $5.5 million on laboratory and computer equipment during the fiscal year. Cash flow from operations was $29.4 million for the quarter, 111% of net income. Techne’s stock price has risen 9% since the beginning of the year, following a 3% decline last year. Several quarters of strong sales growth suggests to investors that sales growth in local currencies, Techne’s key metric, is returning to pre-recession levels.

IDEXX Laboratories Corp.

Higher than expected placements of IDEXX Laboratories’ Procyte hematology analyzer contributed to fourth quarter sales growth of 5% to $283.8 million. Fourth quarter earnings were 62¢ per share, an increase of 22% over the fourth quarter of 2009. Full year revenues and earnings rose 7% and 18% to $1.1 billion and $2.37 per share respectively. The company placed 449 ProCyte instruments with veterinary practices during 2010, exceeding management’s October forecast of 400 instrument placements. Catalyst Dx, IDEXX Labs’ high throughput chemistry analyzer, and ProCyte complement each other in the lab to deliver diagnostic results during the patient visit that increase compliance with the recommended treatment. Higher compliance rates along with better charge capture increased vet practice revenues 3% while the number of visits remained unchanged during the quarter. Over 90% of the ProCytes sold went to customers who owned a Catalyst Dx or purchased one concurrently. IDEXX Labs also continues to gain new customers with the placement of these instruments with 30% of Catalysts and 20% of ProCytes placed with new customers in 2010. The company expects 2011 revenues to increase by 2.5 to 3 percentage points as clinics purchase more consumables to run diagnostic tests on these high-throughput instruments.

IDEXX Labs also introduced a rapid-assay SNAP test to measure thyroid hormone levels in cats and dogs. This test can be run on the SnapShot Dx instrument which can now time, interpret and record electronically all of the company’s SNAP tests to the IDEXX VetLab Station. Using the SnapShot Dx to run these tests simplifies the work flow for the technician and ensures that the charges for these tests are automatically recorded. Technicians often forget to include the cost of these tests in the patient’s record when they read them manually. Adding important new tests like the thyroid rapid assay and increasing the efficiency of the work flow by adding new capabilities to the instrument enhances the value of this system to the veterinary practice and should increase the use of IDEXX Labs’ SNAP tests in the competitive and cost-sensitive rapid assay market. Reference laboratory and consulting services’ revenues rose 8% to $81.2 million with about 75% of the growth coming from new customers. Unique proprietary tests like CardioPet for heart health bring new business to the reference labs as more vets understand the benefits they offer. IDEXX Labs’ stock price is up 11% year-to-date following a 30% increase in 2010.

Stryker Corp.

Stryker reported fourth quarter and full year earnings of 93¢ and $3.19, increases of 13.4% and 15.2% over the same periods a year ago. The company’s focus on operational efficiency reduced SG&A expenses by 90 basis points to 36.8% while fourth quarter sales increased 8.6% in constant currency to $2.0 billion. Sales for the year were $7.3 billion, an increase of 7.8%. Fourth quarter U.S. sales of Stryker’s new hip implants were up 7% and contributed to Orthopaedic Implant revenues of $1.2 billion, an increase of 4.3% as these products took market share from metal-on-metal hip implants. The Trauma franchise continued to perform well with 7% revenue growth. MedSurg revenues grew 15% over the fourth quarter of 2009 as Stryker added new products and services to its offering, the result of its investment in research and development during the downturn. Instruments delivered 9% growth while the Medical franchise’s revenues grew 21%. Organic growth accounted for 10% as hospitals increased their capital spending in the second half of the year. The acquisition of privately-held Gaymar Industries, a supplier of high-performance mattresses and products that reduce pressure sores, added 11% to sales. Stryker’s stock price jumped 6% on January 11 after the company reported better than expected fourth quarter revenues and earnings. Its stock price is up 16% since the beginning of the year, after an 8% increase last year.

Patterson Companies Inc.

Patterson’s stock price is up 4% since the beginning of the year despite its disappointingly poor third quarter results. Its share price rose 11% last year. Sales were less than 1% higher than those for the comparable year ago quarter, and earnings of 47¢ per share were the same. The lack of any sales or earnings increase results wholly from Patterson’s management misreading the strength of the dental equipment market and ending before year-end promotional financing for CEREC dental restorative systems and incentive discounts for digital radiography and Galileo cone beam imaging equipment. These inducements to buy ended while the tax treatment for purchasing capital equipment remained unresolved. Management’s decision led to a $26 million year-to-year drop in Patterson’s dental equipment sales for the quarter even though list price sales of chairs, cabinetry and lights rose. Patterson’s sales of dental consumables rose 3% during the quarter providing further confirmation that the dental business is improving. As we expected, Patterson’s management candidly stated they were responsible for the decline in dental equipment sales, which is the most profitable part of their largest business. The cost and time to recover the lost sales makes it difficult for Patterson to earn more during the current quarter ending this April than it earned in the year ago quarter. The quarterly results for Patterson veterinary and medical rehabilitation distribution businesses, though good, are not sufficiently profitable to offset the profit decline experienced in the dental equipment business during the quarter.


Intel’s revenues and earnings for the fourth quarter and the year ending December 25, 2010 were its best quarterly and annual results ever. The figures for the sales and earnings for the quarter are $11.4 billion and 56¢ per share respectively. For the year, Intel’s revenues were $43.6 billion. Earnings reached $2.01 per share. In the fourth quarter Intel resumed its stock repurchases by buying 70.3 million shares at $21.35. On January 11, when directors raised Intel’s dividend 15% to 18¢ per share, they also authorized an expenditure of an additional $10 billion to repurchase shares, raising the total available to $14 billion. Amazingly, Intel’s stock price, which is unchanged since year-end, provides a yield of 3.5% which is higher than Exxon’s! Intel’s stock price has languished because many investors and analysts believe Intel is wholly dependent upon the PC which is being rendered obsolete by tablets and smartphones. Many knowledgeable commentators state that Intel now is reaping profits from the last PC upgrade cycle. This forecast occurs as over one million PCs a day are shipped to customers throughout the world. Half the PC’s powered by Intel processors are sold in China, the rest of Asia, Eastern Europe and South America. A PC which allows someone to connect with the knowledge based economy is now affordable for people heretofore, considered too poor to be buyers. In China it costs less than seven weeks of a typical urban workers wages to buy a PC. In Eastern Europe and South America, it’s eight weeks. Intel’s server microprocessors produced 28% of last year’s operating income. They provide the processing power for the growth of the internet. Last year the traffic crossing the internet exceeded the combined volume of internet traffic for all years prior to 2010. Intel expects that internet traffic will quadruple over the next five years.

EnCana Corporation

Remarkably, EnCana’s stock price is up 10% since the beginning of the year while the price of North American natural gas is down 11%. Last year its stock price declined 8%. It currently sells at the deepest discount to oil ever. Six mcf (thousand cubic feet) of natural gas provides the energy equivalent of one barrel of oil. The current oil price is $104. The average price EnCana realized on its daily production of 3.4 billion cubic feet per day during the fourth quarter was $4.40 per mcf. It rises to $5.03 with the addition of hedging gains. Half of EnCana’s scheduled 2011 production is hedged at $5.75 per mcf. The gas glut created by shale operators like EnCana has raised demand and prices for well completion and reservoir fracturing services in the U.S. which caused EnCana to delay completion of wells in Colorado and in the Haynesville shale in Texas. We cut your EnCana position to ensure that you did not own too much if gas prices remain depressed for a prolonged period.

EnCana’s stock price benefitted from the announcement the day before the company reported disappointing fourth quarter earnings of 9¢ per share that it signed a long-awaited agreement with PetroChina. The agreement creates a 50-50 joint venture ownership of EnCana’s Cutbank Ridge business assets, current gas production and 2 trillion cubic feet of proven gas reserves underlying 635,000 net acres straddling the British Columbia-Alberta border. Upon the scheduled mid-year closing, EnCana receives $5.4 billion. EnCana will manage the operations until a joint management committee is formed. Cutbank Ridge, which currently produces 510 million cubic feet per day, is EnCana’s largest producing Canadian property and is increasing its volumes most rapidly. In the past when EnCana’s operating managers reviewed the prospects for its Canadian properties, they have emphasized the suitability of the gas-bearing shales underlying Cutbank Ridge for implementation of EnCana’s “gas factory” extraction process. That process centralizes drilling on pads from which as many as 63 wells can be drilled with horizontal pipes stretching as far as two miles. As many as 24 fracs have been executed along several single extended pipes in this formation. The cost per frac now is 67% less than four years ago and 20% less than last year. The centralization and size of current operations at Cutbank Ridge have permitted EnCana to re-inject 80% of the water produced from its wells in its ongoing fracing of the formation. Successful implementation of the “gas factory” process has made Cutbank Ridge EnCana’s lowest cost producing property. The joint venture gives EnCana a cash infusion and provides outside capital. That lowers the cost and increases EnCana’s reported profit from rapidly rising production. The joint venture results in EnCana selling 1 trillion cubic feet of proven reserves from the 14.3 trillion it owns.

Cenovus Energy Inc.

Cenovus’ fourth quarter earnings of 19¢ per share were below than management’s forecast and the 23¢ per share earned in last year’s fourth quarter. The year-to-year decline is attributable to non-cash charges for writedown of a unit at its Texas refinery and higher accruals for employee stock appreciation rights. The company’s cash flow for the quarter of 86¢ per share compared to 31¢ in the year-ago quarter lifted cash flow for the year to $3.21 per share, close to the $3.79 generated in 2009. The decline in operating cash flow for the year is attributable to lower natural gas volumes and price realizations on production used to fund Cenovus’ development of its vast Athabasca bitumen reserves. Production expansions at its two bitumen sites, Foster Creek and Christina Lake, approved in 2007 by The Province of Alberta, along with more efficient extraction from adding wedge wells at both sites, is scheduled to increase average daily production to 72,000 barrels a day by year-end, 20% higher than this past year. Wedge wells are single horizontal wells drilled between existing pairs of Steam Assisted Gravity Drainage Injection wells to extract bitumen heated by the steam that collects in the gap between producing well pairs. Use of wedge wells, a Cenovus innovation, already is proving to increase recovery from the reservoir by 10%. Cenovus continues to lower its steam water ratio to less than 2.2 barrels of water for each barrel of oil produced at Foster Lake. The ratio at Christina Lake is 2. The lower ratio increases the percentage of water reused while reducing consumption of natural gas to produce the steam for the wells. In conjunction with its earnings release, Cenovus reported that it’s proved bitumen reserves at year-end were 1.2 billion barrels, 33% higher than a year ago. Cenovus’ immense bitumen reserves expand as production proves economic recovery feasible so unlike other oil bearing formations, the inevitable decline will not appear for years. Cenovus stock price has risen 8% since the beginning of the year, following a 35% increase last year.

Exxon Mobil Corp.

Exxon’s fourth quarter earnings of $1.85 per share were 46% higher than the amount earned a year ago. Earnings for the year of $6.22 per share were 55% higher than the $4.01 earned in 2009. The strong earnings achieved during the quarter resulted primarily from a 5% increase in oil production and an average realized price of $84.26 a barrel, $10.00 higher than a year ago. A $1.3 billion operating profit improvement at Exxon’s refineries also helped the fourth quarter earnings comparison. A year ago, Exxon’s U.S. refineries lost $488 million in the final six months of 2009. These losses were an aberration. Exxon’s refineries outside the U.S. are consistently profitable. They are 60% larger than the industry average, are able to adjust quickly to run 60% more chemically complex, difficult crudes which improves margins and lowers feedstock costs for Exxon petrochemical plants situated next to its refineries. Exxon’s quarterly earnings also benefitted from rising volumes of non-U.S. natural gas sales at an average price of $7.24 per mcf (thousand cubic feet), which is significantly higher than the $3.70 price obtained in the U.S. where, as a result of the XTO acquisition, Exxon produces 26% of its natural gas. XTO’s production of 3.2 billion cubic feet of natural gas per day during the quarter produced less than one-half of one percent of Exxon’s earnings. The acquisition of XTO accounted for the 8% increase in Exxon’s proved reserves at the end of 2010. During the quarter, Exxon spent $5.3 billion to acquire 83 million shares at an average price of $69.90. It announced its intent to spend $5 billion during the current quarter to buy back stock. Exxon’s stock price has risen 13% since the beginning of the year. Last year its shares rose 10%.

Automatic Data Processing

ADP’s revenue growth continues to accelerate and a similar acceleration in earnings growth is not far behind. Our meeting last month with Gary Butler and Chris Reidy, ADP’s CEO and CFO respectively, confirmed the current strength in ADP’s key business metrics and the importance of management’s continued investment in product innovation during the downturn. During its fiscal second quarter, ADP’s revenues of $2.4 billion rose 9% while earnings of 62¢ per share were up 3%. ADP’s stock price is up 9% since January 1. Its shares rose 11% last year. Employer services revenues, including its professional employer organization (PEO) rose 8% driven by strong new sales of add-on products and services including time and labor management, benefits, workers comp and healthcare. The number of employees on existing clients’ payrolls rose 2.4% during the quarter in the U.S., up from a 1.7% increase the previous quarter. New business sales grew 16% during the quarter and included strength in the large company market in the U.S. for the first time in two years. Its PEO added 21,000 new employees to 221,000, an increase of 11% from the same period a year ago. ADP is gaining marketshare across its business lines. The benefit of a 9% increase in client funds balances to $14.7 billion which ADP collects interest on, was offset by a decline in the average interest yield earned 3.5% from 3.8% a year ago.

Verisk Analytics Inc.

Verisk’s fourth quarter revenues of $293.2 million and adjusted earnings of 39¢ per share rose 10.6% and 22% respectively from the same period a year ago. For the year, revenues of $1.1 billion rose 10.8% while adjusted earnings of $1.40 per share were 15.7% above the prior year. Excluding recent acquisitions, revenues rose 8.9% and 9.8% during the quarter and the full year respectively. Despite continued difficult industry-wide conditions amongst its property and casualty insurer customer base, Verisk generated 4.5% revenue growth from core risk assessment solutions and 16% growth in add-on analytic services from P&C insurers. Verisk continues to control expense growth in its business delivering a 44.7% operating margin for the year.

The company’s Decision Analytics revenues, which comprise fraud identification and detection, loss prediction and loss quantification rose 13.2% in the fourth quarter and 16.4% for the full year excluding recent acquisitions. Verisk’s mortgage fraud revenue growth slowed during the quarter as fewer forensic audits were performed for mortgage insurers. Usage of Verisk’s data and analytics amongst mortgage underwriters in order to reduce underwriting risk remained strong. Decision Analytics revenues now comprise 53% of total company revenues while core Risk Assessment generates 47% of revenue. In December, Verisk acquired for $110 million, 3E, a leading provider of environmental health and safety compliance services to help businesses comply with government regulations related to chemical lifecycle management throughout the supply chain. 3E’s five thousand customers include eight of the top ten U.S. retailers and six of the top ten chemical manufacturers. 3E has compiled valuable databases which include 3.7 million material safety data sheets and 300,000 hazardous substances used by its customers. Verisk shares have declined 7% since the beginning of the year, following a 13% increase last year.

Global Payment Inc.

We sold Global Payments stock during January after its stock price rebounded 30% from its low in July. We think that its once crisp execution has slipped under the direction of its new President, Jeff Sloan. This conclusion is supported by the most recent reported results. Expense growth of 13% far exceeded revenue growth of 8% leading to a 6% drop in operating income. Management has stated that their recently announced joint venture with la Caixa of Spain will be dilutive to earnings by 2 to 4 cents per share during the next two quarters. This is not the way to build value.

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