EARNINGS LETTER

1st Quarter, 2009

The 32% upturn in our stock market from the low registered by the S&P 500 on March 9 is, in our opinion, a welcome relief rally. The rise brings the market back to precisely where it was at the beginning of the year. Better stock prices are a reaction to a lessening of fears that escalating credit losses will result in insolvencies among some of our major banks, which would require a government takeover of one or more of them. The Treasury inspired “stress test” conducted by The Federal Reserve staff to assess the financial strength of the nation’s nineteen largest banks, which also are the initial TARP fund recipients, found all the banks able to withstand a deepening economic contraction. Several nonetheless were deemed to need additional capital. They quickly raised these funds in a receptive market. Coincident with this process, the number of reported U.S. job losses began to stabilize and the relentless decline in retail sales was punctuated with some evidence of improved sales. Rising stock prices, along with the feeling that the economy was not in an unstoppable free fall encouraged market participants, including us, to see if movements in our financial markets had any similarity to previous devastating declines. The markets act as though a growing number recognize that the current debacle, which may have more adverse aftershocks, is not unprecedented and not wholly dissimilar to others experienced in their lifetimes. It is bad. “The worst I’ve ever seen” seems an apt descriptor, and succinctly conveys the meaning of the statements made by the managers operating the businesses we own. Most think, but are not certain, that their businesses have endured the worst effects of the contraction. They see no immediate sales upturn. Having made the cuts necessary to preserve the financial strength and key personnel needed in the business to survive and seize unknown profit opportunities that a recovery may bring, the best are prepared for more difficult times but ready to compete when the upturn comes.

State Street Corporation

We have sold State Street stock during its price climb back above $40, after it sank twice, once in January and then in March to less than $14 and $17 respectively. These gyrations in State Street’s stock price are unconnected with its current or prospective earnings. Instead, it reflects traders’ and investors’ apprehensions about whether State Street possesses sufficient regulatory capital. Our government’s decision to use a new financial ratio in its highly publicized but sketchily described “stress test” of the capital adequacy of our nation’s nineteen largest banks added to the confusion. State Street’s stock price improved as rumors clarifying the stress test criteria were confirmed before release of the results on May 7. State Street passed and was deemed among the best in this non-graded test. On May 18 State Street increased its outstanding shares 13% by selling 59 million shares at $37.83 per share. In conjunction with this $2.2 billion offering it issued $500 million of 4.30% 5-year notes and announced that effective May 15 it would consolidate the assets and liabilities of four securities pools it administers and guarantees to provide its institutional customers with a return on their security settlement balances and other short-term funds. The consolidation results in State Street booking a $3.7 billion after tax loss equal to $8.50 per share and adding $16.6 billion of unmarketable securities to its balance sheet which already holds almost three times that amount invested in highly-rated illiquid asset and mortgage-backed securities.

We sold State Street reluctantly. Under the new financial architecture that is being constructed worldwide, imposition of regulations will lower returns in its business. Management’s decision to seek an increase in the net interest margin that might be earned by moving funds invested in treasuries and interbank repos to highly-rated asset-backed securities, sapped its financial strength. The financial crisis entrapped State Street along with all the other financially strong and weak banks.

We invested in State Street because unlike most banks, it did not depend upon earning a net interest spread by lending at a higher rate than its deposits cost. State Street had built a uniquely strong franchise by using information technology to serve the need of institutional investors worldwide for timely and seamless access to accurate data on portfolio transactions and holdings. It has the best customers, so it gets better by listening to them. It still is the best custodian and its operating earnings of $1.04 per share, though 25% below last year’s first quarter results, are commendable when evaluated in the context of a $3.5 trillion decline in the market value of its customer portfolio assets.

The CME Group

CME’s first quarter pro forma revenues of $647 million and earnings of $3.20 per share declined 21% and 30% respectively from a year ago. Operating expenses were reduced by 9% during the quarter, resulting in an operating margin of 61% compared to a record 66% a year ago. Average daily volume of 10.4 million contracts declined by one-third from a year ago but were flat with the fourth quarter. Volumes increased each consecutive month from December’s low of 8.2 million per day to 10.8 million in March. Volume growth appears to be stabilizing and will benefit from a reduction in unprecedented volatility levels and normalization of debt issuance by financial institutions, corporations and especially the U.S. Government. Treasury issuance is expected to more than double this year to $2 trillion.

CME is focused on capturing additional clearing opportunities in the vast over the counter derivatives market. Average daily volume cleared on ClearPort, its Internet based clearing platform, has risen to 600,000 contracts in the first quarter, generating a 24% increase in revenue. In addition to the push provided by regulators, companies and even dealers want to reduce their counter-party risk. Currently natural gas and crude oil contracts comprise the majority of ClearPort revenue but interest rate swaps present the greatest opportunity. CME shares have nearly doubled in price since reaching their low in January and have risen 43% since January 1.

Automatic Data Processing

ADP’s fiscal third quarter revenues of $2.37 billion declined 2% from the prior year while earnings of 80¢ per share rose 4%. Revenue growth was reduced 3% as a result of unfavorable foreign exchange. The company improved its pre-tax margin 70 basis points to 33.3% through its continued focus on expense control. ADP’s quarterly dividend payment of 33¢ per share was 14% higher than the amount paid a year earlier. These are good results considering that ADP’s customers reduced the number of employees per existing client payroll by 4.2% on average during the quarter. Gary Butler, ADP’s able CEO said that this is the largest decline in this number in over a decade. ADP’s sales to new and existing customers are running 10% below the year ago level as companies are more reluctant to commit to new spending, extending ADP’s sales cycle. During the quarter the average tax filing float balance was $17.6 billion, down 6% year-to-year. Interest earned on client funds fell 17% to $164 million reflecting a reduction in average yield to 3.7% from 4.2% a year ago.

Amazingly, ADP’s Dealer Services business, which provides auto dealership management and marketing systems, posted only a 3% quarterly revenue decline to $340 million. Announced dealership closings by U.S. auto companies will reduce revenues by $75 million during the next two years. This equates to less than 1% of total company revenue. Management has cut headcount at Dealer by 10% during the past two years and will now undertake further cuts. Dealer’s strength is in servicing the foreign owned auto company transplants which have prospered. ADP’s stock has risen only 12% since the low in March. It remains 6% below the level that it started the year.

C.H. Robinson Worldwide Inc.

Despite a 15% drop in gross revenues to $1.7 billion during Robinson’s first quarter, net revenues and earnings per share were flat with the same period a year ago. Reported earnings included nearly $3 million in severance expenses. The gross revenue decline is comprised primarily of a 20% Transportation services decline offset by an 8% increase in Sourcing fruits and vegetables. One-half of the decline in Transportation consisted of lower prices paid to Robinson’s trucking suppliers as a result of the decline in fuel prices. The rest of the decline came from lower truckload volumes. Strong growth in Sourcing fruits and vegetables was driven by increased volume from existing customers, primarily Wal-Mart. Robinson’s branch office managers reduced headcount during the quarter by 500 to 7,481. This, along with lower performance based compensation expenses due to slower growth, preserved operating profit at the same level achieved a year ago. Robinson’s share price is 29% above the low reached in March and 11% below the price at the start of the year.

EnCana Corp.

EnCana’s first quarter earnings of $1.26 per share were remarkably strong despite being 9% lower than the $1.39 earned during the comparable quarter last year. The strength of the results becomes apparent upon recognition of the substantial year-to-year fall in North American natural gas and heavy oil prices. During the year ago quarter, natural gas prices on the New York Mercantile Exchange averaged $8.03 per thousand cubic feet (mcf). This quarter the average price was $4.89. Because EnCana had hedged two-thirds of its production at $9.13 per mcf, it realized an average price of $7.22, 10% less than it realized a year ago. The company holds contracts at $9.13 per mcf covering two-thirds of its monthly production until the end of this September.

The natural gas price currently is $3.40 per mcf because increased North American gas production, coinciding with a recession-driven downturn in demand, has filled storage tanks with a glut of gas. EnCana has shut-in production of 90 million cubic feet of gas per day and curtailed drilling except in its most promising fields where it has secured pipeline capacity for the anticipated incremental production. It, also, has doubled the drilling planned in the Haynesville shale formation in Texas and Louisiana, where it purchased leaseholds during the past two years for $2.9 billion, which must be drilled over the next two years to secure perpetual rights to the acreage. The gas glut has enabled EnCana to negotiate a 25% savings on the contract costs for the fit for purpose rigs it uses. It also has managed to realize a 20% cut in field operating expenses and cut capital spending to $1.5 billion during the quarter, 18% below last year’s expenditure rate.

During the quarter, EnCana’s natural gas production rose 4% above last year to 3.87 billion cubic feet per day, while heavy oil production in its integrated oilsands joint venture with Conoco rose 18%. The profit from the production increase, along with a 27% rise in refining margins, generated cash flow equal to 70% of the capital spent on oilsand expansion during the quarter. EnCana’s stock price is 14% higher than it was at year-end and 41% above its mid-March prices.

Exxon Mobil

Exxon-Mobil’s first quarter earnings of 92¢ per share, 55% lower than the $2.03 earned in the comparable year ago quarter, are wholly attributable to a 55% year-to-year drop in the worldwide prices realized for the company’s oil and gas production. In every region throughout the world, the volumes produced hardly changed. Net oil and gas produced rose three-tenths of one percent after adjustment for OPEC imposed curtailments and increases under production sharing agreements with host country governments. Natural gas production dropped three-tenths of one percent although the recorded volumes do not reflect the incremental production coming from start-up of Exxon’s Qatargas 2 liquified natural gas (LNG) project. When fully operable this year, this fully integrated LNG project will link natural gas production liquification installations in Qatar, with a regasification terminal in South Hook Wales, which will be supplied by a fleet of newly commissioned vessels designed to transport 80% more cargo than conventional LNG carriers. The project can supply two million cubic feet of natural gas daily to the U.K. gas grid and will increase sales of natural gas for Exxon’s account by 20%. The sale price realized for gas in Europe is twice the price realized for natural gas consumed in the U.S. Exxon’s capital expenditures, dividend payments and stock repurchases of $4.7, $1.9, and $7.8 billion respectively exceeded by $5.6 billion the net cash provided from operations. Management has indicated that it will reduce the amount spent but not eliminate stock repurchase. During the first quarter, Exxon paid an average price of $73.80 to repurchase 107 million shares. Its stock price has declined 14% since the start of the year, although it is up 6% since March 9.

Express Scripts, Inc.

Express Scripts reported strong first quarter results with gross profit up 15% to $531.4 million and earnings up 23% to 86¢ per share over the first quarter of last year. Good expense control kept the quarter’s selling, general and administrative expense cost growth to 4%, contributing to operating earnings per prescription of $3.06, an increase of 24%. In March Express Scripts launched Select Home Delivery, a mail delivery program that has tripled home delivery use by requiring members to opt-out of home delivery for maintenance medications rather than signing up for it. By requiring members to fill out a simple form to opt-out of the program, Select Home Delivery takes advantage of our tendency to procrastinate when making decisions that require us to change our behavior. It is the first product of the company’s Consumerology program, the application of behavioral economics to health care choices.

On April 13, Express Scripts announced the $4.675 billion acquisition of NextRx, WellPoint’s pharmacy benefit management division and the fourth largest pharmacy benefit manager (PBM) in the U.S. This acquisition will increase Express Scripts’ membership and prescriptions filled by 50%. In addition to reaping cost synergies from consolidating this business into its information technology platform and its high throughput pharmacies, Express Scripts will manage WellPoint’s pharmacy benefit for 10 years. Express Scripts will pay $1.4 billion in stock and $3.275 billion cash. The company expects to realize a tax benefit of $800 million to $1.2 billion by purchasing the assets of the PBM. Express Scripts’ stock price has risen 36% since the market low in March and is up 12% since the beginning of the year.

Varian Medical Systems, Inc.

Varian Medical Systems reported fiscal second quarter revenues of $554 million, an increase of 7% over the first quarter of 2008. Earnings rose 12% to 64¢ per share. Order growth for Oncology Systems was 5% for the quarter with 4% growth in North American and 7% growth in international markets. Varian has felt the impact of constrained U.S. hospital capital spending as hospitals enter new budget cycles. Service, which now accounts for almost 25% of the company’s revenues, and upgrades to existing systems offset declines in orders for equipment and software. More aggressive pricing from competitors has also lengthened the sales cycle. Varian has a strong lead in the most advanced radiation technology with 120 installations of RapidArc worldwide. The international markets provided needed growth, 15% in local currencies. Varian’s focus on the ease of use, cost effectiveness and versatility of its systems has encouraged hospitals outside of North America to install Varian’s radiation oncology systems to provide modern cancer care to a higher percentage of their populations. Varian’s stock price has risen 30% since the mid-March market low and 2% since the beginning of the year.

IDEXX Laboratories

IDEXX Laboratories reported first quarter sales of $236.1 million, an increase of 3% in local currencies. Foreign exchange offset revenue growth by 6% during the quarter. Earnings rose 5% to 43¢ per share over the comparable quarter last year. In the first quarter patient visits to vets were down about 4% year-over-year which reduced purchases of instrument consumables and reference lab services. Although vets are delaying investments in capital equipment, strong sales of the new instruments, the chemistry analyzer Catalyst Dx and immunology analyzer SnapShot Dx, contributed to 10% growth in instrument sales, more than offsetting declines in other in-clinic diagnostic instruments and digital radiography system sales. IDEXX Labs placed 340 Catalyst Dx machines during the quarter, about 10% more than expected and had a backlog of more than 200 instruments as they entered the second quarter. Reference labs and consulting services revenues grew 6% during the quarter. The company launched its CardioPet® proBNP test for cats and dogs, the first blood test that can determine whether a pet has a cardiac condition. It is the most important and largest special test launched in the company’s global reference lab business. About 15% of its users are new IDEXX reference lab customers. Sales in the Water segment grew 3% during the first quarter, down from 7% growth during the fourth quarter 2008 because testing for new construction and cruise ship water systems declined. IDEXX Labs’ stock price is up 47% since the March market low and 16% since January 1.

Patterson Companies Inc.

Patterson Companies’ sales and earnings for its fiscal fourth quarter ending April 25, 2009 were less than the company’s forecast. Sales of $780 million during the quarter were essentially unchanged from a year ago. Earnings declined 10% to 46¢ per share compared to 51¢ in the comparable quarter last year. A 3% year-to-year increase in the accrual for taxes almost offset a 4% reduction in the shares outstanding. Earnings per share for the year were $1.69, precisely equal to the $1.69 reported for fiscal 2008, although 11% fewer shares are outstanding now. In reporting its earnings, the company forecast earnings for the coming year of $1.70 to $1.80 per share and announced that it would no longer provide quarterly earnings guidance. After a slight rise in anticipation of higher earnings from the benefit of robust equipment sales, Patterson’s shares are selling within 5% of our purchase prices.

The company’s dental, veterinary and medical rehabilitation equipment and consumable distribution businesses are all coping with slowing sales during the current severe economic contraction. The absence during the past quarter and year of any increase in Patterson Dental’s consumable sales, which constitutes 39% of total company sales, indicates dental patients are inclined to wait longer between treatments for basic care. The same attitude is evident among pet owners and those attending physical therapy or sports medicine clinics. The financial pressure and uncertainty caused by the recession unsurprisingly has resulted in a significant decline in sales of basic dental equipment such as chairs. We are encouraged that Patterson has increased sales of productivity enhancing technology products. During the quarter, sales of digital x-ray systems increased 25% while sales of the CEREC chairside tooth restoration systems rose almost 7%.

Stryker Corporation

Stryker reported first quarter sales of $1.6 billion, an increase of 3.3% in local currencies over the same period a year ago. Earnings declined 6% to 71¢ per share. A slow-down in elective surgeries for non-Medicare patients led to lower sales growth for the company’s Orthopaedic Implants businesses. Sales growth of spine implants were 11% during the quarter, down from 17% in the fourth quarter of 2008, while sales growth of knees, trauma and craniomaxillofacial implants dropped from 12 – 15% growth rates during the fourth quarter to 7 – 8% growth rates during the first quarter of 2009. The Hip business grew 6% during the quarter as expected because of weak sales in the first quarter of 2008 due to the recall of the Trident hip. The MedSurg businesses were affected by the slowing of hospital capital expenditures with sales growth of the Medical business, which sells the most capital equipment of the three businesses, down 18% over the same period a year ago. Sales from the bed rental market and mattresses (known as surfaces in the trade) could not offset a steep decline in the sale of beds, which a hospital can delay replacing for at least 12 to 18 months. Sales of the Instruments and Endoscopy businesses were up 8% and down 1% respectively. New products and consumables did not offset the decline in sales of capital equipment. Capital equipment for these businesses, which accounts for 40% and 60% of the sales respectively, is used in surgical procedures so hospitals can delay replacement by 3 to 6 months at most.

Stringent cost control allowed Stryker to reduce operating expenses by 1.8% offsetting the decline in gross margin from reduced volumes and the compliance program. At Stryker’s analyst meeting on May 20, CEO Steve MacMillan described the FDA compliance upgrade as a “journey” that was not close to ending. Stryker received an FDA warning letter for the cranial implant it had removed from the market in December 2008. Stryker’s stock price has risen 22% from its mid-March low, but is still down 5% since January 1.

SGS Group

SGS shares have risen 16% year-to-date and 29% from the March low. The company reports mid-year and full-year results only, but indicated recently that it continues to expect growth in revenue and profit for the full year. The company has taken and will continue to take measures within particular business units to reduce costs in order to protect profitability.

Mettler-Toledo

Mettler-Toledo’s stock price is up 7% since the beginning of the year, having risen 54% since the market low in March. Improved sales in March and April, as well as reports of improved visibility for their customers gave management confidence to make a forecast for 2009. Conditions will remain difficult throughout the year with sales forecast to decline 8% to 12% in local currencies and earnings per share to fall 14%. Investors responded positively to the fact that the company made a forecast and sent the share price up 23% on May 1, the day after the company announced its first quarter results.

Sales of $374.1 million were down 8% in local currencies from the first quarter of 2009 while earnings per share declined only 6% to 93¢. Mettler-Toledo reduced selling, general and administrative expenses by 11% through its cost reduction program, lower sales commissions and reduced discretionary spending. The company expanded its cost reduction program to achieve $100 million in annual savings by eliminating an additional 400 jobs bringing the total headcount reduction to 1,000, 9% of its workforce. The company reduced manufacturing and associated administrative positions to adjust to steep volume declines in its markets. They expect to add employees in the faster growing, lower cost Asia-Pacific markets when the economy recovers. These markets continue to grow at a faster rate than the North American and European markets. First quarter sales in Asia-Pacific were up 1% while sales declined 10% in North America and 11% in Europe. Mettler-Toledo continues to invest in growing businesses such as product inspection and in its marketing and sales program to develop tools to help sales associates close sales. The company’s careful management of its receivables and inventories resulted in a one day decrease in days’ sales outstanding and a $20 million reduction in inventories over the same period last year.

Donaldson Company, Inc.

Donaldson’s results indicate the broad-based decline across its global customer base continued through its fiscal third quarter. Sales of $413 million declined 24% excluding the impact of exchange rate movements while earnings of 34¢ per share were 40% lower after including $6.8 million or 6¢ per share in pre-tax restructuring expenses. Sales to customers in Europe fell 32%, while the Americas and Asia were 22% and 17% lower respectively than the prior year. Engine filter sales declined 26% overall with on-highway truck falling the most and aerospace and defense posting a small increase for the quarter. Industrial filters declined 21% overall with disk drive filters falling the most and gas turbine filters falling the least. Donaldson’s free cash flow during the quarter was a record at $100 million as capital expenditures were reduced and working capital improved significantly.

Donaldson’s restructuring actions have resulted in a workforce reduction of 2,700 or 20% of the total at the beginning of the fiscal year. This decisive action, which continues into the current quarter, will generate $100 million in annual cost savings. Management’s conversations with its key customers leads it to not expect a rapid upturn during the next six months. It is taking actions to protect profitability and position the company to profit from future opportunities. Donaldson’s stock is 4% below its price at the start of the year after rebounding 47% from the mid-March low.

PepsiCo, Inc.

PepsiCo’s divisions successfully balanced price increases, value offerings and new product innovation to deliver first quarter revenues of $8.3 billion, an increase of 6% in constant currencies over the comparable quarter a year ago. Earnings were 71¢ per share, unchanged from the first quarter of 2008 but were up 8% excluding the impact of foreign currencies. PepsiCo’s food and international businesses delivered double-digit net revenue and operating growth during the quarter. PepsiCo Americas Beverages performed as expected and showed slight improvement over the fourth quarter of 2008. Tens of thousands of store shelves now feature the rebranded carbonated sodas and the division launched grapefruit-flavored Sierra Mist and versions of Mountain Dew and Pepsi-Cola flavored with natural sugar.

On April 20, PepsiCo announced its offer to acquire the shares that it does not own of its two largest bottling groups, Pepsi Bottling Group and PepsiAmericas. The acquisition of Gatorade and Tropicana greatly expanded PepsiCo’s presence in non-carbonated beverages, a category that has grown much faster than traditional carbonated sodas. By reintegrating its largest bottlers, the company would control its entire manufacturing and distribution system, allowing it to move products more easily from one distribution system to another which will provide cost and competitive advantages. Both bottlers have turned down PepsiCo’s offer. The company’s stock price dropped 4% the day the company announced these offers. Investors are concerned that PepsiCo will pay a hefty premium to consummate these deals. PepsiCo’s stock price has risen 12% since the March market low and is down 8% year-to-date.

Western Union

Western Union’s first quarter revenues of $1.2 billion were flat after adjusting for the 5% negative impact from foreign exchange. Earnings of 32¢ per share rose 10% from the prior year. Western Union management has reduced operating costs while continuing to expand its agent base and extend its money transfer product offerings. Global consumer to consumer money transfers, which generate 84% of company revenue increased 7% from the year ago period. The amount of money sent per transaction declined 3% on a currency neutral basis. During the quarter Western Union handled $15 billion in total principal, up 4% from a year ago. Transactions that originated outside the U.S. rose 16% during the quarter led by transfers from the Gulf States and India.

During the quarter Western Union signed U.S. Bank, the sixth largest commercial bank in the U.S. with 2,791 branch locations. In Europe, Western Union bought the 75% of its super-agent FEXCO that it didn’t already own. FEXCO is one of Western Union’s largest agents with 10,000 locations in the UK, Ireland, Spain, Sweden, Norway, Denmark and Finland. This acquisition enables the company to roll-out new products more quickly and even more importantly, will reduce ongoing operating costs. The company ended the quarter with 379,000 agent locations, up 10% from a year ago. Western Union’s shares have surged by 58% since the mid-March low and are 16% above the price at the beginning of the year.

Intel Corp.

Intel reported first quarter revenues of $7.1 billion, down 26% from the first quarter of 2008. Earnings per share were 11¢. The company responded to weak demand for microprocessors during the quarter by reducing inventories to 19% below fourth quarter levels. Demand for PCs appears to have bottomed during the first quarter and continued to strengthen through mid-May according to CEO Otellini. The company’s execution of its “tick-tock” strategy remains crisp with multicore server microprocessors being produced in high volume while process development at the next technology node of 32 nanometers remains on track for volume production in 2010. The powerful server microprocessors will allow a company to replace nine or ten servers with one server. The reduction in energy cost alone pays for the server in less than one year. Intel’s stock price is up 6% since January 1 and 23% since the March market low.

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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2009 – 2nd Quarter EARNINGS LETTER 2008 – 4th Quarter EARNINGS LETTER