EARNINGS LETTER

3rd Quarter, 2008

The good third quarter earnings reported by all your companies had little effect on any of your companies’ stock prices. The principal price determinants were managements’ revenue and profit forecasts for the current quarter and the coming year. Everyone, including those aiming to sustain their company’s growth, forecast a slowing of the pace. We notice that company managements who chose not to ratchet down earlier forecasts sowed doubt among traders, analysts and investors. We believe that since the beginning of October forced selling by mutual funds and hedge funds to meet withdrawals and redemptions, plus sales by institutions to repay borrowings, has accentuated the declines of stocks that withstood the selling earlier in the year. Deleveraging requires sellers to sell stocks where bidders abound. In uncertain times these usually are the financially strong companies with records of reliable growth. They tend to be sold last. Under these circumstances a decline of no more than 30% for a stock since the beginning of 2008 is actually good. Our market as measured by the S&P is down 42% since the start of the year.

State Street Corporation

State Street’s stock price is down 53% this year, matching the decline of the S&P Financial Index. This is disappointing because service fees constitute 73% of State Street’s revenues making its business qualitatively better than the businesses of the other companies in the index which depend upon interest rate spreads. State Street reported good third quarter operating earnings of $1.24 per share, 8% above the $1.15 earned a year ago when 10% fewer shares were outstanding. State Street’s operating strengths enabled it to earn servicing fees 9% greater than a year ago despite a 7% drop in average assets under custody caused by worldwide declines in bond and stock prices. The good operating results were eclipsed by doubts about the value of State Street’s $75 billion investment securities portfolio whose credit quality, duration and composition remain essentially unchanged even though the unrealized loss has risen from $513 million at the end of last year’s third quarter to $3.3 billion. Questions about the sufficiency of State Street’s regulatory capital and the capital cost of possible consolidation of the off-balance sheet commercial paper funds it administers for mutual fund customers diverted attention away from operations before management informed investors that it intended to pay $450 million into fixed income funds sponsored by insurers and managed by State Street Global Advisors to bring up the redemption value for retirement account participants. The payment almost equals State Street’s net third quarter earnings. Extraordinary charges of this sort plus persistent questions about the unchanging assets on the company’s balance sheet weigh upon State Street’s stock price which is down to seven times earnings. The company’s capital is strengthened by the $2 billion it received from the U.S. Treasury’s TARP program. The warrant to buy State Street stock issued in conjunction with the preferred stock sold to the Government are non-dilutive. The exercise price is $53.50.

The CME Group

On August 22, CME closed its acquisition of NYMEX and on October 10 paid a special dividend of $5 per share to all CME shareholders. During the third quarter proforma Non-GAAP revenues of $787 million rose 6% while earnings of $4.13 per share increased 3% from the prior year. Average daily volume of 13.2 million contracts declined 6.5% from a year ago, though an improvement in the rate received per contract resulted in a 4% increase in clearing and transaction fee revenue. NYMEX energy contract volumes rose 23% during the quarter. These contracts generated on average $1.57 per transaction, 2¢ higher than the comparable quarter a year ago. Reflecting extreme stress in the global credit markets, interest rate volumes fell 25% to 6.0 million contracts per day. These are CME’s lowest priced contracts generating 52¢ per transaction and account for 26% of total revenues. Stock index volumes rose 18% to 3.6 million per day at 68¢ per contract. Foreign exchange and commodities contract volumes rose 12% and 15% respectively generating 94¢ and $1.15 per contract respectively.

Since quarter-end, interest rate volumes have declined further as credit markets remain frozen. Remarkably CME shares have declined 69% from the start of the year even as its earnings power remains solid. Whatever new financial architecture emerges, we think the CME will have a larger role as customers in over-the-counter derivatives markets move to regulated transparent, centrally-cleared markets.

Automatic Data Processing

Although ADP reduced its revenue growth forecast for the fiscal 2009 year beginning July, it confirmed its forecast for 10 to 14% earning per share growth. Fiscal first quarter results were strong. Revenues of $2.2 billion rose 10% and earnings of 54¢ per share increased 20% from a year ago. The core U.S. payroll business rose 5% and add-on products and service revenues increased 13%. Employee growth per existing client payroll was up 0.4%, one-half of the 0.8% increase during the previous quarter. New sales weakened during the quarter as the sales cycle lengthened. ADP indicated that just 3% of its total revenues are generated from financial services customers. Management is ratcheting back its discretionary expenses but it is not cutting funding for service or new product implementation. Interest earned on client funds declined 2% during the quarter to $151.9 million as a modest one-quarter point decline in interest yield to 4.3% was only partially offset by growth in average client fund balances to $14 billion. Despite the prospect for continued earnings growth and a pristine balance sheet, the stock is off 16% year-to-date.

EnCana Corp.

EnCana’s good third quarter earnings of $1.92, 40% higher than last year’s results for the comparable quarter had a negligible effect on its share price which trades 39% below its January 1 price and 57% below its July high when oil and natural gas prices peaked. While prices were up, EnCana hedged almost half its current 2008 natural gas production at $8.86 per Mcf (thousand cubic feet) and 60% of its scheduled 2009 production at $9.15 per Mcf. EnCana’s natural gas production increased 8% above year ago levels to 3.9 Bcf/d (billion cubic feet per day) although the company shut-in 8% of the production from its Jonah field in Wyoming, its largest U.S. producing field because scheduled completion early next year of added pipeline capacity to an alternate hub in the intermountain west should eliminate the existing discount from market prices now imposed on gas sales. The year-to-year increase in the company’s gas production resulted primarily from a 135% increase in production from its 100% owned Deep Bossier formation in East Texas which is located near two of the nation’s major gas transmission hubs. Operating earnings from EnCana’s integrated oilsands-refining joint venture were 90% less than the comparable quarter a year ago. Oil production was down 2% and refinery runs declined 10% due to maintenance and outages caused by Hurricane Ike. This joint venture with Conoco has embarked on a three year expansion at its Wood River, Illinois refinery which will double its heavy crude refining capacity to 240,000 barrels a day. Coincidently, EnCana announced on October 15, eight days before earnings were released, that financial market turmoil caused it to indefinitely postpone its planned split of the company’s ownership of its natural gas and integrated oil business into two separate independent companies. The decision to amend plans when circumstances change exemplifies EnCana’s management’s practicality. This flexible approach to plans and problems helps them scale back when cost inflation takes hold and to manage their capital prudently when competitors become enthusiastic about prospects.

C.H. Robinson Worldwide Inc.

CH Robinson continues to execute in this difficult environment. Third quarter net revenues of $352 million and earnings of 54¢ per share each rose 12% from a year ago. Truckload volumes increased 9% while rates charged by truckers including fuel rose 17% from a year ago, resulting in gross revenues of $2.3 billion, up 24%. Unlike last quarter, Robinson successfully passed through all of its increased fuel costs to its customers. Robinson continues to gain market share as it secures strong volume growth in a flat to down freight environment. The company’s fruit and vegetable sourcing business produced 13% growth while its T-Chek fuel and transportation management business was up 11%. Robinson shares are only 7% below the price at the start of the year.

Ritchie Bros. Auctioneers

We sold Ritchie Brothers stock after it reported mediocre third quarter results which did not result in a further decline in its stock price. The stock had declined by one-quarter prior to our sale. We sold the stock because we learned that prices for used equipment selling at Ritchie’s auctions had begun to decline at an accelerating rate. This will reduce Ritchie’s revenues which are based upon a percentage of the proceeds realized at auction. We are also concerned that the company will not rein in the growth of its expenses as management focuses on its long-term revenue objectives.

During the quarter gross auction proceeds of $768 million rose 15% and net auction revenues of $75.9 million rose 13% from a year ago. Ritchie’s expenses, however, surged by 25% resulting in earnings of 11¢ per share down 21% from a year earlier. We intend to closely monitor Ritchie’s ability to rein in expense growth because their unique franchise is more valuable to investors if they can keep operating expense growth below revenue growth. We expect to have the opportunity to buy shares in this unique company at lower prices in the year ahead.

Express Scripts, Inc.

Express Scripts posted strong third quarter results with earnings per share of 81¢ up 33% over the third quarter of last year. A rise in company’s generic utilization rate to 66.2% from 62.2% last year and lower drug procurement costs contributed to 22.8% growth in gross profit to $520.4 million. Express Scripts’ clients have become more interested in the company’s proven tools to lower drug costs while maintaining health outcomes. Increased use of generics, specialty drugs and home delivery lifted operating profit per prescription 15.7% to $2.87. During the 2008 selling season, Express Scripts won 226 new accounts covering 1.4 million lives which should offset the expected decline in claims from existing clients in 2009. As a result of the strong selling season and customer interest in their programs, the company expects 2009 earnings per share to grow 19% over those in 2008. This fine performance and outlook has not kept Express Scripts’ stock price from falling 22% since the beginning of the year.

Stryker Corporation

Stryker reported third quarter revenues of $1.7 billion, a 12% operational increase over the third quarter of 2007. Foreign currency contributed 2% to the growth. Earnings rose 20% to 66¢ per share. Revenue growth in Hips, Knees, Trauma and Spine accelerated from the second quarter and contributed to the 10% quarterly revenue growth for Orthopaedic Implants. A new primary cup for hip implants has encouraged the Reconstructive Joint sales force to spend more time promoting Hips along with the extremely successful Knee products. Total Knee revenues rose 14% with 18% growth in the U.S. The MedSurg businesses posted revenue gains of 15% with the Medical business delivering 30% revenue growth during the quarter. The introduction of a second generation critical care bed has strengthened Stryker’s position in the $150 million U.S. critical care patient-handling market, a market that the company entered recently.

Stryker continues to invest in its company-wide quality initiative. It has decided to implement a common set of quality standards throughout the company’s 20 manufacturing plants rather than focus on the three plants that received FDA warning letters in 2007. Stryker now expects to spend at least $150 million over the next three years on this initiative with the highest amount of the spending coming in 2009. The company’s stock price has fallen 48% since the beginning of the year. Investors sold stock in anticipation that Stryker will break its long record of delivering 20% earnings per share growth in 2009.

Varian Medical Systems, Inc.

Strong demand for Varian Medical Systems’ oncology systems and cargo screening systems contributed to their excellent fiscal fourth quarter and full year results. The company’s revenues and orders for the fourth quarter were $593 million and $725 million, increases of 15% over a year ago. Full year revenues rose 18% to $2.1 billion and orders rose 15% to $2.3 billion. Earnings per share from continuing operations for the quarter and the year were 68¢ and $2.31, increases of 10% and 24% respectively. Oncology Systems’ orders rose 17% during the quarter with 15% growth in the U.S. and 19% growth in international markets. Varian extended its lead in the most advanced radiation oncology technologies with the installation of over 1,000 on-board imagers for Image Guided Radiation Therapy and with 300 orders for RapidArc, up from 150 at the end of June. The increased patient throughput and the versatility of Varian’s systems have resulted in increased international orders earlier in a new technology cycle. Varian has not yet seen much impact from the credit crunch because radiation oncology is one of the few areas where a hospital can increase revenues through capital investment. Revenues for the Security and Inspection business rose 69% during the year to $92 million. The company supplied imaging systems that detect nuclear materials, explosives, drugs and other contraband in a one minute scan of a shipping container or a car. U.S. Customs has ordered several systems for border crossings. Varian’s stock price has declined 29% since the beginning of the year.

Genentech

Genentech’s third quarter revenues grew 17% to $3.4 billion while Non-GAAP earnings per share rose 11% to 81¢ over the third quarter of 2007. Increased use of Avastin in metastatic breast cancer rose to 40% from 35% in the second quarter leading to year-over-year revenue growth of 18% to $704 million. Avastin plus paclitaxel (generic Taxol) is now the most commonly used regimen in metastatic breast cancer. Sales of Lucentis, Genentech’s treatment for age-related macular degeneration, rose 14% to $225 million as dosing frequency in existing patients increased. The expectation of the deal with Roche has kept its stock price from declining since the beginning of the year. The precipitous decline in the Swiss France since Roche announced its intention to purchase the shares it does not already own for $43.7 billion makes it less likely that they will raise the purchase price substantially. We sold your Genentech shares in October to lock in the gain.

SGS Group

SGS Group reports its results bi-annually, but their interim management statement declared that all business segments and all geographies continued to grow. Management reiterated their commitment for 10% growth in revenues and earnings per share. SGS shares are down 33% year-to-date, reflecting fear that the economic slowdown will crimp SGS’ results.

Amdocs

Amdocs reported fiscal fourth quarter and full year revenues of $825 million and $3.2 billion, increases of 13.6% and 11.5% respectively. Earnings per share for the fourth quarter rose 17% to 50¢ and 14.5% to $1.87 for the year. These results do not include one-time restructuring charges or foreign exchange losses. Amdocs’ business remains strong. Comcast will deploy the company’s newest customer care, billing and operations support system (OSS) offerings. MetroPCS, the nation’s leading provider of unlimited flat-rate wireless services, signed a six-year services agreement to deploy similar capabilities. On November 18 Amdocs announced that Guandong Mobile, a subsidiary which accounts for 25% of China Mobile’s total revenues, will deploy Amdocs OSS to manage the network more efficiently for its six million customers. This system will replace an in-house system. About 70% of Amdocs’ annual revenue is recurring with 40% coming from long-term managed services contracts and 30% from ongoing support and services for mission-critical systems for Tier 1 telecom and cable customers. Amdocs’ stock price is down 45% since January 1.

Donaldson Company, Inc.

Yesterday, Donaldson reported a solid start to its fiscal year 2009 ending July, with sales of $573 million, up 9% and earnings of 60¢ per share, up 13% from a year ago. Sales rose 11% in the Americas, 4% in Europe and 14% in Asia. The company’s off-road filters rose 10% with particular strength coming from aerospace and defense, mining, heavy construction and agriculture offsetting weakness in residential construction and on-highway truck engines. Replacement filter sales remained solid from growing sales of newer PowerCore products, steady equipment utilization, and geographic expansion. Industrial filter sales rose 11% and gas turbine filters were up 22%. In response to current economic factors that could influence demand, Donaldson is implementing a cost containment program which includes a global hiring freeze, a reduction of contract and temporary workers in the U.S. and discretionary spending cuts. During the quarter the company repurchased 802,000 shares of stock for $32.8 million or $40.90 per share. Donaldson’s stock has fallen 34% since the start of the year.

Emerson Electric

We sold Emerson in October realizing a loss of almost one-quarter of the funds invested in the stock during the spring. It has declined further since our sale. The company’s good fiscal fourth quarter earnings of 88¢ per share, 13% above last year’s quarter along with a detailed forecast of why earnings should not decline more than 10% for the 2009 fiscal year seems to have stabilized the stock price. Emerson is the worldwide leader in providing energy saving automated process control systems and equipment. Its new wireless control systems improve productivity, save costs and provide crucial safety benefits. The company’s industrial automation division, the primary supplier of power alternators to Caterpillar and Cummins, has benefitted from the expansion of oil and gas drilling and production. It also supplies GE’s wind turbine business. Its network power business has experienced growing demand to equip datacenters being constructed by internet content providers such as Google and Microsoft. All these businesses are slowing and depend upon capital spending by customers. Emerson’s managers are experienced at coping with downturns in their businesses. We expect their operations will remain profitable and strengthen their lead on competitors during this recession.

PepsiCo, Inc.

Strong performance of PepsiCo’s snack and international businesses offset weak results in the beverage business to deliver third quarter revenues of $11.2 billion, an 11% increase over the third quarter of 2007. Earnings per share rose 6% to $1.06 and do not include a loss on energy contracts that resulted from the steep price decline during the quarter. Frito-Lay’s salty snack volumes increased during the quarter after incorporating all planned price increases. Pepsi International reported 20% revenue growth and 18% operating profit growth. Operating profits for Pepsi Americas Beverages (PAB) declined 11% during the quarter as liquid refreshment beverage volumes in North America declined for the first time in 20 years. Pepsi’s North American beverage volumes fell 4% during the quarter with carbonated soft drinks down 3% and unflavored water and Propel down more than 10%.

PepsiCo announced a new productivity program that will reduce pre-tax operating costs by $1.2 billion over the next three years. The company will close six plants and eliminate 3300 jobs, most of them managerial. Much of the savings will be reinvested in the North American beverage business to support completely new brand identity, packaging, store merchandising and marketing programs. The three “independent republics” of Pepsi, Gatorade and Tropicana have been merged into a single North American operating unit resulting in significant reduction in general and administrative costs. In addition, Pepsi has developed cold-fill processes for Aquafina bottled water and Propel. This important process improvement allows them to reduce the weight of the plastic bottles by 25% to 30%, addressing a key consumer concern about environmental sustainability while cutting costs. PepsiCo’s stock price is down 27% since the beginning of the year.

Intel Corp.

Intel reported third quarter revenue of $10.2 billion, an increase of 1% over the same period a year ago. Earnings per share rose 17% to 31¢. The company shipped a record number of microprocessors driven by strength in mobile computing. Revenue in the Mobility Group rose 18% to $4.7 billion with strong microprocessor sales in all notebook segments. Asia Pacific and Japan experienced the strongest seasonal growth while the Americas lagged because of weak corporate sales. Atom family microprocessors and chipsets added $200 million in sales to the Mobility Group and led to a decline in average selling prices for Intel’s microprocessors. Prices were flat without the Atom products. Steady prices and lower unit costs contributed to the increase in the company’s gross margin of 7.5 points to 58.9%. Demand for Intel’s products was also affected by the sudden decline in information technology purchasing by U.S. companies in mid-October. The company revised its fourth quarter forecast on November 12 to reflect significantly weaker than expected demand in all geographies and market segments. The new forecast lowers the quarter’s estimated operating profit by 35% to $2.2 billion. Intel’s stock price is down 49% since the beginning of the year. We sold high cost shares in mid-October.

Corning Inc.

We took the loss in your Corning position at the end of October when the company announced that U.S. purchases of LCD television sets slowed considerably during the month of September. In addition, purchases of computer monitors and notebook computers, two major users of display glass, essentially stopped in the middle of October. Corning’s net sales for the third quarter were unchanged from those of a year ago, while adjusted earnings per share were 46¢, an increase of 21%. Third quarter sales for Display Technologies were $696 million, down 14% from the previous quarter with volume down 10%. Equity earnings from Samsung Corning Precision, which provides glass to Korean flat panel makers, increased 6% over the second quarter to $259 million. Strong volume gains of 12% offset price declines and the impact of the yen. All LCD glass is priced in yen. On November 18, Corning withdrew its fourth quarter earnings guidance and 2009 forecast because demand from their Taiwanese customers has declined more than they expected. Factory utilization in Taiwan is below 70% and the sales of top brands like Samsung and Sony have softened since the end of October.

Western Union

Investors chose to ignore Western Union’s good third quarter results, focusing instead on management’s decision to withdraw its long term objectives of 10 to 12% revenue growth and 15 to 18% earnings per share growth. During the third quarter, revenues of $1.4 billion and earnings of 33¢ per share each rose 10% from a year ago. Consumer-to-consumer money transfer revenues rose 12% to $1.2 billion while transactions grew 13% to 48.8 million. Within this segment, international consumer-to-consumer transactions that originate outside of the U.S. generated 57% of total revenue and produced 21% revenue and 28% transaction growth. A slowdown in China and Europe during the quarter was partially offset by strength in India, the Middle East and the Philippines. The consumer-to-business bill payment business declined 2% during the quarter.

Several factors will prevent Western Union from meeting its previous long term growth objectives in 2009. The 20% decline in the value of the euro relative to the dollar since June will reduce reported revenues for the next year as 45% of revenues come from its Europe, Africa and Middle East segment. During the third quarter revenues included $24 million of benefit from currency translation of the euro, adding nearly two percentage points to revenue growth. More importantly, during the quarter the company began to experience slowing in the rate of growth in principal per transaction which will reduce revenue and profit growth. We think, however, that the company will continue to grow profitably as it adds new agent locations around the world providing the growing worldwide immigrant population with its trusted money transfer service. Western Union ended the quarter with 365,000 agent locations, up 14% from a year ago. The company generates nearly $1 billion in free cash flow annually and has repurchased 11% of its shares outstanding for $2 billion or $22.69 per share in the past two years. Its stock price is down 46% from the start of the year.

ExxonMobil

ExxonMobil achieved record earnings of $2.59 per share for the third quarter, 52% higher than the year ago quarter. Share repurchases, which reduced shares outstanding 7%, boosted earnings which benefitted mightily from oil and natural gas price realizations 50% and 60% higher than last year. Profit from production, which after adjusting for Venezuelan expropriation, declined 4% due to shut-ins caused by Hurricanes Gustav and Ike, and production sharing agreements with governments in West Africa and around the Caspian Sea. Higher oil prices helped widen refining margins as did the company’s continuing ability to process difficult crudes. During the quarter, Exxon refineries processed 44 crudes new to particular refineries and 8 new to the company. Refining profit during the quarter was 50% higher than last year primarily because the technological versatility of the company’s newer non-U.S. refineries enabled Exxon to nearly double their profit. Exxon’s stock price is 16% lower than at the start of the year and is 18% below the high of 96 it reached when oil prices were rising rapidly. The lower stock price reflects a lowering of earnings estimates as oil and natural gas prices drop. At quarter-end Exxon had $37 billion invested in cash equivalents and debt of $10 billion. The company’s effective tax rate for the first nine months of 2008 was 45%.

Client portfolio holdings may change, and stocks of companies noted may or may not be held by one or more client portfolios from time to time. Investors should not consider references to individual securities as an endorsement or recommendation to purchase or sell such securities. Transactions in such securities may be made which seemingly contradict the references to them for a variety of reasons, including but not limited to, liquidity to meet redemptions or overall client portfolio rebalancing. Investing in the stock market involves gains and losses and may not be suitable for all investors. Investment return and principal value of an investment will fluctuate.

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2008 – 4th Quarter EARNINGS LETTER 2008 – 2nd Quarter EARNINGS LETTER