EARNINGS REPORT

1st Quarter, 2011

Your companies’ first quarter earnings with few exceptions were excellent. That attests to their managers’ concentration on execution of business decisions made better by the experience gained from having to respond, with inadequate information, to changing conditions during the downturn. All are determined to build their businesses by carefully exploiting opportunities they understand well. They also remain wary of dangers that may arise if conditions suddenly worsen. Several of your companies have made small acquisitions that add earnings from products or services complementing or strengthening existing business lines. The few large acquisitions are notable for managements’ thorough knowledge of the businesses they bought and the rapid accomplishments of flawless integrations. Most of your stocks are up since the beginning of the year which we attribute to the good jobs done by sensible managers during a difficult period. The S&P 500 is up 2.3% since January 1.

C.H. Robinson Worldwide Inc.

C.H. Robinson’s total revenues, net revenues and earnings rose 14%, 17% and 18% respectively during the quarter to $2.4 billion, $390 million and 59¢ per share. Robinson’s core trucking business generated 22% net revenue growth driven by a 31% increase in LTL (less-than-truckload) net revenues on an 18% increase in LTL volume. Truckload volume rose 7.5% and prices increased 8%, excluding the change in fuel costs, while the cost of truckload capacity rose 6%. Intermodal and international freight forwarding net revenues rose 13% and 12% respectively while sourcing fresh fruits and vegetables declined 5.5% as Wal-Mart continues to transition the sourcing of certain fruits and vegetables in-house, a process which should be complete by the fourth quarter. The company’s non-Wal-Mart sourcing business rose nearly 10%.

Robinson’s focus on execution is exemplified by the strong LTL growth garnered as a result of its streamlined IT integration with its customers. This focus on cross-selling and further penetrating existing customers has enabled Robinson to handle all LTL freight for an increasing number of its customers. Robinson’s stock price has declined 3% since the beginning of the year.

Donaldson Inc.

Donaldson’s fiscal third quarter sales of $595 million rose 19% and earnings of 79¢ per share rose 27% from the same period a year ago. Favorable foreign currency translation boosted sales and earnings per share 3% and 4% respectively, while earnings also benefited 4¢ per share from a one-time tax benefit. Operating income rose 16% to $83 million representing an operating margin of 14.0%. Revenue growth was 26% in the Americas, 15% in Europe and flat in Asia as a result of declines in gas turbine and disk drive filters. Engine and industrial filter sales in Asia rose 18% driven by rapid growth in China.

During the quarter total Engine filter product sales rose 25% to $378 million with replacement filter sales accounting for nearly 60% of the total. The company’s agriculture, mining, construction equipment and heavy-duty truck manufacturers continue to expand production globally while utilization of equipment in the field remains strong. Donaldson also continues to expand its replacement filter distribution network in emerging economies and benefits from more systems equipped with its proprietary filtration systems. Donaldson’s Industrial filters rose 11% during the quarter to $217 million as flat sales of gas turbine filters and disk drive filters were offset by a strong 19% increase in dust collectors and other industrial filter solutions. The company sold 350 of its new Torit PowerCore line of dust collectors during the quarter which are 70% smaller than the previous generation system. Donaldson’s liquid filters, which generate 18% of total sales and focus on hydrocarbon based liquids such as fuels and hydraulics, rose 27% during the quarter. Donaldson is focused on taking share in this market as new high performance diesel engines require higher performance liquid filters. Donaldson’s stock price is down 1% year-to-date.

SGS Group

SGS will report their first half results on July 15. At its investor day meetings held in Toronto last month, CEO Chris Kirk reported that all ten of its business units were growing and that total revenue growth year-to-date was above 10%. We visited the company’s Lakefield, Canada facility which is its largest metallurgical test facility worldwide. Mike Belton, who leads the company’s Minerals business, explained how SGS’ services reduce project risk associated with minerals exploration and production and he highlighted the important role the company plays in facilitating the financing of mine projects. SGS’ feasibility studies determine the key technical and operational risks to optimize capital investment and minimize project risk. The company provides orebody modeling, resource calculation and technical reports which are required by investors, lenders and stock exchanges. Lakefield’s integrated pilot plant provides detailed analysis of ore samples to determine mine profitability. Once a mine site is operating, SGS seeks to embed its lab test services for the life of the mine. The following day we visited the company’s Mississauga, Canada life sciences lab facility. The facility provides a range of testing services including quality control of raw materials through microbial, sterility and potency tests. At the lab, SGS showed us the company’s innovative well-head instruments which it shipped from its oil and gas R&D and production facility in Houston. These instruments enable oil and gas drillers to take precise measurements at the well-head, allowing customers to make immediate decisions which can save millions of dollars. The company has a substantial backlog of orders for these profitable products sold as a part of its services offering. SGS’ stock price has risen 13% since January 1.

Mettler-Toledo International Inc.

Mettler-Toledo’s first quarter results benefited from another quarter of strong sales as European customers catch up after the rapid decline in spending on precision instruments and services during the downturn. Sales of $498.8 million rose 17% in local currencies over the first quarter of 2010 and favorable foreign exchange rates added 3% growth. Earnings per share rose 29% to $1.42. All three businesses and geographies delivered double-digit first quarter sales growth. Year-over-year sales growth in Europe was 16% compared to a 1% decline in 2010. Sales in Asia rose 25% and now account for 28% of the company’s revenues. Price increases during the quarter of more than 1.5% offset a 0.6% increase in steel prices and a strong Swiss franc to deliver a gross margin of 52.4%, an increase of 0.1% over the same period last year.

On May 4 the company announced the acquisition of Eagle X-ray for $14.5 million in cash. Eagle X-ray is the second largest supplier of X-ray inspection instruments in the U.S. and Europe after Mettler-Toledo’s Safeline business. This acquisition gives the company a second brand to increase market share as they have with the Mettler and less expensive Ohaus brands of laboratory balances. Increasing concerns and regulations about food safety drive sales of these products. Mettler-Toledo offers the broadest portfolio of in-line physical contamination detection and overfill-underfill inspection instruments to its food and beverage customers. The company’s global service organization, which is two or three times larger than that of its nearest competitor, ensures high reliability and uptime of these instruments. Mettler-Toledo’s customers depend on this support because if the inspection instruments are down, their manufacturing lines are down. Mettler-Toledo’s stock price is up 7% since the beginning of the year.

CME Group Inc.

CME’s first quarter revenue and earnings of $832 million and $4.36 per share respectively each rose 20% from the same period a year ago. The earnings exclude a $164 million one-time Federal tax benefit but include higher Illinois state taxes. Operating income rose 26% to $524 million and the operating margin rose to 63% from 60% a year ago. Remarkably, the stock price is down 13% since January 1, a result of worries surrounding the as yet undefined rules relating to Dodd Frank. Average daily volume of 13.8 million contracts rose 19% compared to a year ago and marked the second highest quarterly volume ever. The average rate per contract was 80.8¢, down 2% as stronger growth in higher priced energy and agricultural products were offset by volume-related discounts. Energy, commodities and interest rate contract volume rose 23% or more while foreign exchange and equity index contract volume were up 8% and 3% respectively during the quarter. In June open interest at the CME rose for the 21st consecutive month and reached a record 100 million contracts.

In September 2010, CME, under the leadership of Derek Sammann who is head of FX & Interest Rate Products, refocused the sales and support organization in order to further penetrate and cross-sell to its customer base. The successful implementation has increased the number of customer relationship managers and added product specialists to support the sales process. The sales teams are cross-selling CME’s diverse range of futures and educating customers on the use of new products including Ultra T-Bond futures, one of the company’s most successful new product introductions. This new product, along with five others which blanket the entire U.S. yield curve, have generated trades of 17 million contracts and one million open interest positions. Many customers who are confronted with the prospect of higher capital requirements for OTC swap transactions under Dodd Frank, are realizing the benefits of CME’s futures, resulting in greater transaction volumes in CME’s core futures and options business. The company’s added resources, particularly outside the U.S., are resulting in strong trading volume growth outside of U.S. trading hours. These transactions rose 27% in the first quarter and now account for 15% of Globex volume. CME will introduce non-dollar based products this year on sovereign yield spreads and Euribor.

Express Scripts Inc.

Express Scripts reported first quarter earnings of 61¢ per share, an increase of 20% over the first quarter of 2010. The company processed 186.1 million claims during the quarter, down slightly from 186.6 million claims processed last year. The weak economy reduced drug utilization rates and the number of new members added to the health plans of their existing clients. Year-over-year quarterly gross profit and operating earnings rose 8% and 13% respectively to $774 million and $615 million. Profits are usually lower in the first quarter than in the fourth quarter of the previous year because Express Scripts increases spending to achieve flawless implementation of plans that begin on January 1. Successful January implementations make it easier for the company to encourage clients to add their new Select programs. These programs make it easy for members to make the right choices or put them in the right option and increase the effort required to change it.

Express Scripts’ Select Network program allows health plans to reduce their retail pharmacy networks from 60,000 to 30,000 without member disruption. Members already fill two-thirds of their prescriptions at pharmacies in narrow networks, but health plans pay the large network price for all prescriptions. With Select Network, members have a few months to decide which network they want to use. If they don’t make a choice, they are automatically enrolled in a narrow network. Members who opt out pay more to obtain their drugs at higher cost out-of-network pharmacies. During a pilot program only 5% opted out and about 90% of the claims were filled in the narrow network. These claims were billed at a lower price which yielded significant savings to plan sponsors. Customer interest in this new program has given Express Scripts leverage to negotiate better deals with retail pharmacies. Walgreen’s June 21 announcement of its failure to sign a contract with Express Scripts to provide retail pharmacy services in 2012 reflects Express Scripts’ commitment to reduce costs for its clients.

On April 27 the company took advantage of low interest rates to issue $1.5 billion of 5-year debt with a yield of 3.21% and announced a $1.75 billion accelerated share repurchase of 29.5 million shares one month later. This program will retire more than half of the shares issued to purchase NextRx in 2009. Express Scripts’ stock price is unchanged since the beginning of the year.

Varian Medical Systems Inc.

Varian Medical Systems reported good fiscal second quarter results with revenues up 11% over a year ago to $648 million while earnings rose 18% to 86¢ per share. An accelerated repurchase of 3.5 million shares during the quarter accounted for 4% of this increase. While hospitals have begun to purchase capital equipment, orders from free-standing oncology clinics remain very small. Sales of new radiation systems are still below the expected replacement rate for machines that are over ten years old. The timing of the TrueBeam launch enabled Varian to take share from competitors and to increase the overall size of the global market for these systems during this slow recovery. Strong sales of TrueBeam machines lifted Oncology Systems’ orders by 9% during the quarter with orders growing 12% in North America and 7% in international markets. TrueBeam’s capabilities continue to deliver clinical success treating lung, liver and pancreatic cancers while allowing radiation therapists to maintain a standard schedule of 15 minute appointments. At Stanford University, clinicians used a TrueBeam to deliver complex treatments for lung and pancreatic cancers in less than three minutes of treatment time. The machine’s easy-to-use operating system has built-in safety measures that make radiation oncologists more confident that they can deliver the high doses required to treat lung or liver tumors while sparing healthy tissue. Varian continues to improve its hardware, software and service to treat more patients in an eight hour shift and to maintain 99% machine uptime. The company’s stock price has declined 1% since the beginning of the year.

Gen-Probe Incorporated

Gen-Probe’s stock price leapt almost 22% to $84 per share on April 27 after Bloomberg News reported that the company had retained Morgan Stanley to seek bids from potential acquirers. Management refused to comment on the rumors and the stock price stayed above $80 per share until a June 6 news story indicated that the potential buyers including Novartis, Gen-Probe’s partner in its blood screening business, decided not to bid. The stock price dropped into the high 60’s and is up 16% for the year. Gen-Probe reported solid first quarter results with revenues of $143 million up 6% over the first quarter of 2010. Earnings rose 14% to 40¢ per share as the company continues to focus on operational efficiencies. The European launch of the PANTHER instrument is going well. Customer feedback has been positive, and placements and reliability are meeting the company’s goals. On May 20 the company filed an application with the FDA to run its market-leading women’s health APTIMA Combo test on PANTHER and expects to launch the instrument in the U.S. before the end of the year. In addition to running all of Gen-Probe’s current diagnostic tests, PANTHER’s ability to produce quantitative results enables the company to enter the $935 million virology market where most of the testing measures the severity of HIV and hepatitis infections.

Techne Corp.

Demand for Techne’s products remains strong with sales for the third fiscal quarter rising 8.5% in local currencies to $76.3 million. Earnings of 84¢ per share rose 12% over last year’s earnings, excluding a one-time tax expense last year. Sales to research scientists in North American pharmaceutical and biotech companies rose 9.9% and contributed to sales of $49.9 million for the Biotechnology Division. R&D Europe’s net sales rose 8.4% in local currencies with favorable foreign exchange rates adding 2.1% to sales growth in U.S. dollars. In April the company announced the acquisition of two privately-held companies, Boston Biochem and Tocris. The company will pay $8 million for the assets of Boston Biochem. With 2010 sales of $2.5 million, Boston Biochem is a leading developer of research products for the study of ubiquitins, proteins that regulate many functions inside a cell. By manufacturing and distributing these proteins from its Minneapolis facility, Techne will meet the increased demand for Boston Biochem’s products while allowing its employees to focus on their core strength, developing new products. Tocris is a U.K.-based company that sells 3,000 chemicals which regulate many of the same cellular pathways studied by the scientists who purchase Techne’s products. With sales of $18.0 million in 2010 and a net margin of 40%, Tocris’ business is as profitable as Techne’s. Techne’s stock price is up 20% since the beginning of the year.

IDEXX Laboratories Corp.

IDEXX Laboratories reported first quarter revenues of $240.6 million, organic growth of 8% over the same period a year ago with a 1% contribution from favorable foreign currency rates. Earnings per share rose 13% to 62¢. Strong sales of the ProCyte Dx hematology instrument and reference lab services contributed to the company’s revenue growth during a quarter when patient visits to veterinarians fell slightly and practice revenues rose only 2%. The in-clinic instrument sales force executed well, delivering competitive placements of 40% of the Catalyst Dx chemistry analyzers, up from 30% in the past three quarters. They also placed ProCytes in accounts of opinion leaders such as referral hospitals and veterinary schools. With 5,533 Catalyst Dx and 684 ProCyte instruments running in veterinary clinics in the U.S. and Europe, consumables sales rose 10% to $63.9 million during the quarter. Quarterly sales for the Reference Lab and Consulting business rose 10% to $89.1 million. Investments in new labs, proprietary laboratory information management software and best practice dissemination among the company’s 50 labs increased sales and operating efficiency. Two-thirds of the revenue growth came from higher test volumes, most of which was from new customers. New labs in New Orleans and in London allow the company to reach more customers and deliver faster turn-around times, the key metric for all diagnostic reference labs. IDEXX Laboratories’ stock price has risen 9% since the beginning of the year.

Stryker Corp.

Strong sales growth in Stryker’s MedSurg businesses and revenues from acquisitions more than offset continued weakness in knee and spine implants sales to deliver first quarter sales of $2.0 billion, a 10.2% increase in constant currency over the same period last year. Organic growth from existing businesses was 6%. The company reported earnings of 87¢ per share, an increase of 8.8%, excluding one-time charges associated with the acquisition of Boston Scientific’s neurovascular business which closed on January 3. Stryker now reports its results in three segments: Reconstructive Products, 45% of company sales, which includes hip, knee, trauma and extremities (hand, arm, foot, and ankle) implants; MedSurg, 38% of sales, which includes instruments, endoscopy, medical and instrument reprocessing; and Neurotechnology and Spine, 17% of sales, which includes neurovascular and neurosurgery (spine, head and jaw implants and navigation systems). The May 24 FDA approval of OtisMed’s cutting guides will strengthen U.S. sales of the Triathlon knee, the company’s leading implant which accounts for 35% of Reconstructive Products’ sales. The Shapematch® guides are manufactured from patient-specific data taken from MRI or CT scans. They enable surgeons to develop a customized pre-operative plan for each patient which reduces the patient’s recovery time after surgery. The guides also shorten the time required to perform a total knee replacement by as much as 20%.

Stryker strengthened its spine and the extremities businesses with two small acquisitions. The acquisition of orthobiologics company Orthovita for $316 million adds its unique synthetic bone graft technology to Stryker’s spine business. This synthetic polymer replaces bone tissue from the patient or from cadavers used in spinal fusion surgeries. The $162 million acquisition of privately-held French company Memometal strengthens Stryker’s extremities business with the addition of market-leading implants for foot and ankle surgery. On May 31 the company announced that Michael Mogul, Group President of Orthopaedics and a 22 year Stryker veteran, will become CEO of DJO Global, a manufacturer of orthopedic rehabilitation products. Kevin Lobo, the former global president of Johnson & Johnson’s $4 billion Endo-Ethicon division, will replace him. He joined Stryker in April as part of a planned succession. Stryker’s stock price is up 9% since January 1.

Patterson Companies Inc.

Patterson Companies’ sales and earnings per share for its fiscal year ending April 30 rose to $3.4 billion and $1.89 respectively. These constituted respective gains of 5.5% and 6%. The year-to-year gain in fiscal fourth quarter sales was 8.7%. The rise in earnings was 2% to 53¢ per share. Importantly, Patterson’s dental sales force’s strong execution revived during the quarter sales of CEREC chairside dental restorative systems, digital radiography products and cone beam imaging equipment. In the previous quarter equipment sales dropped 12% below the year earlier level because Patterson’s management misread the strength of the market and ended promotional financing of dental equipment purchases. With the help of rebates to customers, which cuts the profit margin, the sales force achieved an 11% year-to-year gain in the past quarter which is propitious because CEREC is upgrading its software which over 85% of Patterson’s 12,000 CEREC customers automatically get. The software makes the CEREC system easier to operate and more effective when used with Patterson supplied blue ray cone beam camera. That invites Patterson’s salesmen to call upon the 7,000 CEREC users still using older imaging equipment. The cost of a complete equipment upgrade is $36,000. The rebound in dental equipment sales along with a 3% increase in dental consumable sales is seen by Patterson’s management as confirmation that dentists are becoming more confident about investing in their practices. Dentists find they must refurbish their offices and especially invest in new technology if they wish to successfully recruit dental school graduates.

Patterson’s stock price is up 5% since January 1 despite a drop of almost 10% since the beginning of May when apprehensions about a slowing economy began weighing upon stock prices. Management’s earnings forecast for the coming fiscal year released along with the earnings is only $1.90 to $2.00 per share but that number is after a 12¢ non-cash expense for shares granted to employees through its Employee Stock Ownership Plan. Heretofore these stock grants were expensed at the company’s historical purchase cost twenty years ago. Now the grants must be expensed at current market prices. The current 2012 fiscal year will contain only 52 weeks instead of 53 as 2011 did. The company estimates that the adjustment for the absent week is about 3¢.

Sonova

Sonova reported fiscal year 2011 revenues of CHF 1.6 billion. Earnings of CHF 3.94 per share fell 36% below fiscal year 2010 results with impairment charges excluded for both periods. The gross margin was 69.2% and would have been 2 percentage points higher without the Advanced Bionics hearing implant recall and the impact of foreign exchange rates. Hearing Instruments’ revenues of CHF 1.55 billion accounted for 96% of the company’s annual revenues. They grew 10.1% in local currencies with above-market organic growth of 5.8% over fiscal year 2010. The strong Swiss franc reduced reported revenue growth to 4.3%. Revenues from premium and advanced Phonak hearing aids grew 11% and 12% respectively as hearing care professionals in Europe, the U.S. and Brazil successfully promoted new hearing aids based on the company’s Spice technology launched in October 2010. Customers continue to respond to Sonova’s steady stream of innovation as 74% of hearing aids sold in fiscal year 2011 were introduced during the last two years. Sales were slower during the second half of the year because new fitting software that is released every 7 or 8 years required more training and some adjustments to enable hearing aid dispensers in Germany and France to take advantage of its new features. In addition, the FDA required more discussions about the novel features of the new hearing aids which delayed their U.S. launch by several weeks last October. The April release of version 1.2 of the fitting software that solves these problems and delivers new benefits has been well-received.

The Hearing Implants business reported fiscal year 2011 revenues of CHF 70 million which represents sales before Sonova issued a voluntary recall of all Advanced Bionics cochlear implants in November 2010. There have been no sales since the recall. The correct decision to maintain the sales, service and R&D organizations led to an operating loss of CHF 45 million. On April 14 Sonova received approval to sell implants from the TÜV, the European regulator of medical devices. This approval allows the company to sell them in Europe, Canada, Australia and several other countries. The company submitted the application to the FDA in early May. Advanced Bionics recently introduced a waterproof external processor that is worn on the body. This processor is especially important for children because it makes it possible for them to hear while swimming or participating in sports or other vigorous activities.

We met with interim CEO Alexander Zschokke and CFO Paul Thompson on June 1. While Sonova continues to lead the industry in the introduction of smaller and better hearing aids, it also is actively working to expand the market to people with mild hearing loss and to countries with growing middle classes such as China, India and Brazil. Lyric, a hearing aid that sits deep in the ear canal and is changed four times a year, addresses the major concerns for invisibility and convenience of people with mild hearing loss. Sonova successfully launched Lyric in France, Germany and Canada this year and is integrating the existing Lyric sales force with the U.S. Phonak sales force to increase U.S. sales. The company’s experience in retail sales helps it build its business in emerging markets where the company has to train audiologists and outfit them to sell and fit their sophisticated devices. Sonova’s stock price is down 29% since we purchased the ADRs in March. We continue to hold them while we await the appointment of the new CEO. We believe that Alexander Zschokke’s knowledge of the business and the company along with his temperament makes him the best candidate for the position. We will realize the loss in taxable accounts later this year.

Intel

Intel achieved record revenues and earnings of $12.8 billion and 56¢ per share respectively during its fourteen week first quarter ending April 2, 2011. Year-to-year revenue growth was 24.7% and earnings grew 29% to $3.2 billion. Although the extra week would account for 8% of the gain if everything were equal which never happens in business, the achievement is exceptional and especially so for a company of Intel’s size and worldwide presence. We think these results come from the problem-solving work habits renewed and reinforced within the company that encourage engineers to push the limits of technology to engineer more reliable solutions for the everyday needs of customers. Intel’s senior management at its May 17th analyst meeting focused on the next generation of products that will give customers greater efficiency, connectivity and security. They acknowledge that Intel needed and could produce a low voltage high performance processor for smartphones and tablets. They explained that the new Tri-Gate transistors built with extremely small 22 nanometer geometries could consume half the power while providing the same performance as Intel 32 nanometer Sandybridge microprocessors, which are now the fastest in the world. These Tri-Gate transistors are really small. Intel states, “More than 7 million 22 nanometer Tri-Gate transistors could fit in the period at the end of this sentence.” The key to the Tri-Gate design is a silicon fin protruding from the substrate that permits such precise control of the current within the transistor that it is close to zero when switched off. No one, until Intel, has ever manufactured high volumes of anything so small and complex as this “reinvented transistor”. Intel management also pointed out that company server revenues were up 32% in the first quarter while commenting that one server is required to support 600 smartphones or 122 tablets. Despite all these financial and technical achievements Intel’s stock price continues to languish as investors behave as though PC’s and laptops are buggy whips. The company spent $4 billion during the quarter repurchasing 189 million shares at $21.15. It also raised its dividend to 84¢ per share annually providing a yield of 3.9% and has $9 billion in net cash. Intel’s stock price is up 2% since the beginning of the year.

Cenovus Energy Inc.

Cenovus’ first quarter operating earnings were 28¢ per share, lower than the 49¢ earned in the year ago quarter, largely because this year the company incurred a 14¢ non-cash charge for incentive compensation arising from its higher stock price. Earnings also were hurt because Cenovus produced and sold 16% less natural gas during the quarter at an average price 27% less than last year’s. Cenovus management considers its natural gas properties as valuable sources of funding for the development of the company’s vast oilsands acreage. Ongoing drilling is required to maintain production levels in Cenovus’ gas fields which is inadvisable when prices are depressed and the asset is managed as a source of funds. Lower funding from natural gas sales fortunately was offset by much higher refining margins at Cenovus’ two 50% owned U.S. refineries operated by Conoco. Operating cash flow rose to $180 million compared to a $6 million loss a year ago because an almost completed investment of $4 billion in upgrading the refineries made them able to effectively run heavy crudes available at depressed prices resulting from pipeline and storage capacity constraints around Cushing, Oklahoma.

From our perspective operating earnings are less informative than cash flow from operations for a company such as Cenovus which has committed most of its current and future cash flow to build value by developing the vast oilsand resource it owns by applying its proven management skill and engineering technology. Cash flow from operations in the three months ending March 31, 2011 was $693 million or 91¢ per share compared with $721 million or 95¢ per share in last year’s quarter. The difference is almost fully accounted for by a $20 million royalty payment to the Province of Alberta on bitumen produced by steam assisted gravity drainage (SAGD) at its Foster Creek facility. It is the first and only site producing bitumen from the oilsands in Athabasca to reach payout!

Cenovus, which is the operating partner in a joint venture with its 50% partner Conoco Phillips, produces 116,000 barrels of oil daily at Foster Creek and has received Provincial approval to increase production at the site by 105,000 barrels a day in 35,000 barrel increments over a three year period beginning in 2014. In the meantime, Cenovus is expanding the joint venture’s production at Christina Lake where it now produces 18,000 barrels a day and is in the process of completing a 40,000 barrel a day increase in production. Thereafter that will be followed by similar sized increases in 2014, 2016 and 2017. Christina Lake holds the promise of being more efficient than Foster Creek. Its steam oil ratio already has dropped to 1.7 compared to 2.2 at Foster Creek. A low steam oil ratio reduces the water needed, increases the percentage of water reused while reducing the consumption of natural gas to heat the steam. At Christina Lake 92% of the water is reused.

Keeping production increases down to manageable increments enables Cenovus to ensure safety, avoid environmentally damaging spills, adapt its technical solutions to varying conditions above and below ground and helps manage costs. For example Cenovus unlike other SAGD operators has dedicated construction management teams who work regularly with multiple qualified small contractors to construct and install Cenovus designed but standard equipment. The company operates a module yard just north of Edmonton which allows workers to live with their families and assemble and rework equipment while avoiding the harsh weather further north in Fort McMurray. Operating costs at Foster Creek and Christina Lake averaged $12.48 per barrel during the quarter 6% above a year ago.

Cenovus has nearly completed the evaluation of 440 stratigraphic wells drilled during the quarter to assess the quality of its Athabasca bitumen deposits. The analysis has altered the drilling plans at Foster Creek to improve reservoir management and enhance recovery. Half the wells were drilled on three underdeveloped properties. Narrows Lake owned by Cenovus joint venture with Conoco and Telephone Lake and Grand Rapids where Cenovus is considering bringing in a joint venture partner before year-end. Cenovus’ stock price has risen 2% since the start of the year.

Exxon Mobil Corp.

Exxon’s first quarter earnings of $2.14 per share were 61% higher than the $1.33 earned during the year ago quarter. The company’s cash balance increased by $4.7 billion to $13.2 billion at quarter end after capital and exploration investments of $7.8 billion and expenditures of $7.2 billion for dividends and the repurchase of 69 million shares at an average price of $81. The quarterly dividend payable June 10 was raised to 47¢ per share. Additional production from Exxon’s acquisition of XTO tripled U.S. natural gas production bringing volume up to 3.9 billion cubic feet a day. The price realized however, remained depressed at less than $4 per thousand cubic feet compared to prices above $9 in Europe and $8 in Asia. Despite the low current U.S. price resulting from excess supply from operators producing gas to retain leases on acreage containing gas trapped in shale, Exxon continues to acquire shale gas acreage. Earlier this month it paid $1.69 billion to acquire two companies owning mineral rights on 317,000 net acres containing 228 billion cubic feet of proven gas reserves in the Marcellus shale formation in Pennsylvania. Also in June, Exxon confirmed discovery of 700 million barrels of oil equivalents from a successful well drilled in 7,000 feet of water above the Keathley Canyon, 250 miles southwest of New Orleans. The deep discovery well is one of the first authorized by the Bureau of Ocean Energy Management since BP’s Macondo blowout. Oil constitutes over 85% of the hydrocarbons in place in the sandstone reservoir. Exxon’s stock price is up 9% since January 1.

Automatic Data Processing

ADP’s fiscal third quarter revenues and earnings from continuing operations of $2.7 billion and 85¢ per share rose 12% and 8% respectively from the same period a year ago. Acquisitions boosted revenue growth by 5%. Employer Services revenues rose 9% as traditional payroll grew by 5% and add-on services rose 15%. The number of employees on each clients’ payroll was up 2.7% in the U.S. while in Europe the figure declined 2%. The gain in the U.S. was the largest quarterly year-over-year increase in four years. During the quarter, client retention improved 1.9 percentage points and new business sales rose 13% from a year ago. The company’s PEO (professional employer organization) which provides comprehensive payroll, benefits including healthcare and human resources outsourcing, generated 18% revenue growth on a 13% increase in employees to 233,000. The interest earned on client funds balances was unchanged from a year ago at $148 million during the quarter. A 12% increase in the average balance to $20.6 billion was offset by a 30 basis point decline in the average interest yield to 2.9%. Dealer Services, which contributes 14% of company revenues, produced 29% revenue growth as a result of the Cobalt acquisition made during the fiscal first quarter. Cobalt enables auto manufacturers and dealerships to improve their online marketing capability.

ADP’s investment in innovative new products and services during the downturn and investments in its sales force during the recovery is leading to good sales growth and higher market share in its small, medium and large employer customer bases. In the small business market, for example, ADP’s RUN platform, which enables faster and more accurate on-line payroll management and reporting, rose more than 10% while its largest competitor in the small and mid-size market, Paychex, experienced declining sales. ADP’s stock price has risen 13% year-to-date.

EnCana Corporation

Your remaining shares of Encana were sold at over $33 a share at the end of March after its price had risen 17% from the start of the year. We sold because those whom we considered knowledgeable about the oil and gas industry persuaded us that the price of North American natural gas would remain depressed. That in turn would weigh down Encana’s realizable return from the hard-earned cost savings achieved through greater efficiencies judiciously applied in field operations and management. Although successful hedging allowed Encana to realize $5.00 per thousand cubic feet (mcf) instead of the $4.64 it received on unhedged sales to customers, its margins are becoming compressed even though the company over the past three years has lowered its supply cost 25% to $3.70 per mcf. Direct operating costs and administrative costs are $1.40 and $1.02 respectively. They cannot be driven much lower. That calculation encouraged Encana to bring in joint venture partners, such as Kogas (Korean Gas Corporation) to help finance production from some of its most prolific fields such as Cutback Ridge in British Columbia. Earlier this year, PetroChina International Investment signed a letter of intent that effectively allowed them to acquire a 50% interest in the Cutback Ridge acreage not subject to the Kogas JV. An upfront payment from a joint-venture partner and 50% sharing of production costs vastly improves Encana’s realizable return. Negotiations with the Chinese were terminated on June 21 after many arduous months. Encana’s stock price is down 13% from our March sale price.

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