EARNINGS LETTER

3rd Quarter, 2009

The arrival of December means that the end of this extraordinary year in our financial markets is finally near. Figures given to us by a friend who is a good investor quantify for us just how exceptional the past months have been. Over the past 200 quarters ending on September 30, 2009, the S&P 500 has experienced double digit changes only 38 times. Four of those occurred in the past four quarters. Since the end of World War II, the S&P never before experienced four consecutive quarters of double-digit price changes. Since the beginning of January the S&P is up 22%.

Contemplation of the completion of a year when the height and depth of price movements in our stock market broke all patterns established during the last half century, theoretically ought to cause professional forecasters to refrain from predicting with certainty what might happen to security prices next year. That will not happen.

We are about to be inundated with forecasts for stocks, bonds and commodity markets as well as predictions for economic growth or contraction in economies around the world. All of these forecasts will be wrong and some, perhaps, may be harmfully misleading. These forecasts which the late John Kenneth Galbraith once characterized as “persuasive non-knowledge” are flawed because they necessarily depend upon inclusion of too many variables whose interactions vary erratically, making application of past correlations unreliable. One need only think of the vast gap that has opened up between the prices of oil and natural gas which once remained linked to their energy equivalent of six thousand cubic feet of gas to one barrel of oil. It currently is over sixteen to one. Many of the forecasts for the year ahead contain learned observations. Some have engrossing charts and graphs but none will have the market-moving impact of Henry Kaufman’s annual interest rate forecast when he was Dr. Doom in the late 1970’s. These booklets were replete with statistics and once correctly predicted most of the determinative numbers for 1979. Yet, that forecast for both the bond market and the stock market was wrong. It was worth reading, just not worth following.

The forecasts we find most reliable are those implicit in the businesses decisions made by the managers of companies whose stocks we own or are considering. The reasons they give for investing in some of their operations and not in others give us access to judgments informed by years of practical experience by men and women who know they bear responsibility for the consequences of their decisions. During the past year, their decisions were particularly difficult and not always right, but made in a way that permitted them to adjust their implementation to changing circumstances. Their ability to adapt to the changing reality of their businesses improves profitability and lessens the risk of owning their businesses.

C.H. Robinson Worldwide Inc.

Robinson’s third quarter net revenues of $353 million and earnings of 57¢ per share were up 0.3% and 5.6% respectively. Trucking net revenue rose 2% to $268 million from the same period a year ago despite the company’s total revenues, including the cost of hired transportation, declining 16% to $1.95 billion. The total revenue decline is primarily the result of lower prices for transportation resulting from lower fuel prices. Trucking volumes were flat year-over-year. Robinson’s fruit and vegetable sourcing business remains strong with net revenues up 9% from a year ago. The company’s other transportation and information services together declined 12%. Its intermodal business declined the most, falling 30%, while air declined 2%. During the quarter, operating profit per employee rose 13% as the number of employees declined 7.5% from a year ago. Robinson’s stock has risen 4% this year-to-date, which seems small until you remember that it went up 2% last year!

Robinson is emerging from the downturn with substantial financial flexibility and is beginning to make tuck-in acquisitions. During September, Robinson acquired Rosemont Farms and Quality Logistics, two related companies which market and ship produce. In June, the company purchased Walker Logistics, a provider of global freight forwarding based in the UK and in July acquired certain assets of International Trade and Commerce, a customs brokerage provider based in Laredo, Texas. Through September 30 this year, Robinson has paid $43.5 million for acquisitions, $29 million for capital projects including IT investments and new office facilities, $162 million on share repurchases and $122 million in dividends. It still has $376 million of cash and no debt on its balance sheet.

The CME Group

CME’s proforma third quarter revenues of $650 million and earnings of $3.35 per share declined 17% and 19% respectively. Average daily volume during the quarter was 10.1 million contracts, down 23% from a year ago and the average rate per contract rose 6% to 83¢. Eighty-two percent of total volume was traded electronically and 4.5% of total volume was OTC (over-the-counter) transactions cleared through ClearPort. From the same period a year ago interest rates, equity-index, foreign exchange and commodities contracts fell 27%, 31%, 7% and 14% respectively while energy contracts were flat. As compared to the second quarter, interest rate, foreign exchange and energy contracts rose 1%, 16% and 6% respectively while equity-index and commodities contracts declined 14% and 13% respectively. CME shares have surged 59% this year as macroeconomic stability has slowly returned and CME’s customer volumes are increasing again. In October average volume was 10.8 million contracts per day, up 2% from September. Average daily volume of 10.8 million in November is up 5% from the same period a year ago, the first month of year-over-year growth in 2009.

Automatic Data Processing

ADP’s fiscal first quarter revenues of $2.1 billion declined 4% from the same period last year while earnings of 56¢ per share rose 4%. One-half of the revenue decline was the result of unfavorable foreign exchange comparisons. The good earnings results benefited from cost reduction actions finished during the preceding quarter. CEO Gary Butler is confident that ADP has reduced the costs necessary to preserve ADP’s profitability while maintaining its investments in new products. Butler cited the strength in GlobalView during the quarter as an example of a new product which the company fortified during the downturn that is now experiencing renewed sales growth. ADP shares have risen 10% year-to-date.

ADP’s Employer Services unit reported a 3% revenue decline comprised of a 7% decline in the traditional US payroll business offset by a 3% increase in add-on products and services. The number of employees on clients’ payrolls declined 6.5% in the US during the quarter. Client retention was down 1% and new business sales were just 2% below the level achieved during the same period a year ago. ADP’s Dealer Services revenues declined 4%
as the impact from dealership closings was offset by an increase in transactional activity from the “cash for clunkers” program during August. The announcement by GM of the closure of its Saturn division resulted in a $7 million pre-tax intangible asset impairment charge. Saturn accounts for $12 million in annual company revenue. Dealer’s pre-tax margin, before this charge, rose 90 basis points as a result of reduced headcount and cost reduction efforts completed last quarter.

Interest earned on funds held for clients declined $24 million or 16% to $128 million due to a 30 basis point decline in the average portfolio yield to 4.0% and a 10% decline in average client funds balances to $12.7 billion. This decline in interest earned on client funds was offset by a $16 million net increase in corporate interest income. The net effect is $8 million or a 5% year-over-year decline in pre-tax interest income earned.

Global Payments

Global Payments fiscal first quarter revenues of $441 million and earnings of 78¢ per share rose 10% and 14% respectively in constant currency. Foreign currency reduced reported sales and earnings by $21 million and 7¢ per share respectively. Paul Garcia, the company’s CEO, cited robust performance from its US ISO (independent selling organization) channel, and its UK and international merchant processing operations. After the quarter ended, Global announced the welcome news that it has agreed to sell its small and minimally profitable money transfer business to a private equity firm for approximately $100 million. Paul readily admits the error he made in 2003 by entering the money transfer business in an attempt to compete with the dominant provider Western Union.

Global’s US revenues rose 11% to $223 million on 20% transaction growth. The average dollar value of each card transaction processed for merchants declined 10% from a year ago. This decline in the average ticket is a result of lower consumer spending, a shift to debit versus credit and a shift to smaller merchants added through Global’s ISO channel. Revenue of $81 million from the Canadian business declined 5% as a result of an unfavorable exchange rate and an approximate 5% decline in the average ticket. Revenues of $80 million from Europe rose 31% primarily as a result of its June 30, 2008 acquisition of 51% of HSBC’s UK merchant business. Growth of 23% in Asia Pacific to $25 million in revenues was the result of the company’s acquisition of HSBC’s Philippines merchant business on September 4, 2008. During the quarter Global implemented the first phase of its G2 next generation front end transaction processing platform placing $52 million of hardware and software into service. G2 will replace several higher cost legacy platforms in the US, Asia-Pacific, UK and Canada. Currently seven markets in the Asia-Pacific region are being processed on G2. Global shares have risen 40% in the last six months.

EnCana Corp.

The proposed split of EnCana into two separate publicly traded companies is happening as we write. Over 99% of its shareholders voted on the day before Thanksgiving to approve the reorganization which creates two new companies: Cenovus Energy Inc. and a new EnCana Corp. A Cenovus Energy share, which will trade on The New York and Toronto stock exchanges under the symbol CVE, will be issued on or before December 7 to existing EnCana shareholders for each share now owned. The existing shares held will represent the new EnCana Corp. Its stock symbol will remain ECA and it will continue to trade on The New York and Toronto stock exchanges. For shareholders the split is a non-taxable transaction. The basis for allocating the original cost of EnCana shares to the Cenovus shares received will be provided by EnCana before year-end.

The assets transferred to Cenovus comprise EnCana’s 50% ownership of its oil sand and refining joint venture with Conoco-Phillips along with ten undeveloped prospects in Alberta’s Athabasca oil region, all EnCana’s other Canadian enhanced oil producing properties and its conventional shallow Canadian gas production. These assets have 1.2 billion barrels of oil equivalent net proved reserves, 75% of which are oil, on 8.1 million net acres. The prudent cost-conscious technically proficient managers EnCana employed to develop and operate these properties over the past decade will manage Cenovus. A September 30, 2009 balance sheet for Cenovus as a separate company listed assets of $19.6 billion. Its debt is $11.3 billion after a planned payment of $3.5 billion to EnCana. The debt listed includes $2.6 billion payable to the Conoco joint venture to fund jointly approved capital expenditures. Cenovus shares currently are trading at $26 on a when-issued basis.

All of EnCana’s existing U.S. and Canadian unconventional shale and tight sand natural gas producing properties and undeveloped acreage, plus its Canadian coal bed methane production and The Deep Panuke prospect being drilled offshore Nova Scotia remain owned and operated by the new EnCana. After the split, the new EnCana will have assets of $29.5 billion, debt of $13.5 billion and a receivable of $3.5 billion from Cenovus. The management of the company’s natural gas properties is unchanged. The company holds 15.6 million net acres, has 12.4 trillion cubic feet equivalent of proved gas reserves and daily production of 3.6 billion cubic feet of gas after shutting in 500 million cubic feet a day during the third quarter. The company is North America’s second largest gas producer, although at the current gas price of $4.46 per thousand cubic feet (mcf), EnCana without benefit of contracts hedging half its production through November 1, 2010 at $6.08 per mcf would barely cover its costs.

EnCana’s third quarter operating earnings of $1.03 per share were 46% below the comparable year ago quarter when gas prices were $8.74 per mcf, almost three times the $3.11 per mcf realized during the quarter before after-tax hedging gains which added $1.22 to EnCana’s earnings for the quarter. EnCana’s stock price has risen 12% since the start of the year primarily because implementation of its plan to split the company’s oil and gas producing assets into two companies. This split will further sharpen the focus of its careful but resourceful managers which we and many other investors perceive as the way the value of the company’s position as the largest owner of developed and undeveloped oil and gas acreage in North America is preserved and enhanced.

Exxon Mobil

Exxon’s third quarter earnings of 98¢ per share were 66% below the $2.71 earned during last year’s comparable quarter even though oil and gas production rose 3%, making this quarter the first quarterly volume increase since the end of 2007. Earnings dropped because the oil and gas prices Exxon realized were less than 60% of the prices obtained a year ago, although the average oil selling price was 70% higher than the price at the start of this year. The combination of lower but rising prices compressed refining and chemical margins, while a $5.14 average price for natural gas produced and sold in the eastern hemisphere reduced the profit benefit of adding two fully operational LNG production trains in Qatar to the one already producing. During the quarter, Exxon’s offshore LNG terminal in the Adriatic Sea began supplying the Italian grid. In November, the Fujian refining and petrochemical plant jointly owned with Aramco, Sinopec and the province of Fujian began full operations. It is the world’s largest and most versatile integrated refining and chemical complex. Exxon’s stock price is down 6% since the beginning of January, making its stock the worst performing among the major publicly traded oils. It’s still a much better investment than the others.

Express Scripts, Inc.

On December 1 Express Scripts announced the closing of the acquisition of NextRx subsidiaries, WellPoint’s pharmacy benefit manager. The transaction includes a 10-year agreement under which Express Scripts will manage the prescription and specialty drug benefits for the 34 million members in WellPoint’s affiliated health plans. The two companies will also integrate their medical and pharmacy data to offer a more holistic view of members’ health and their use of health care services. Closing this transaction caps a strong selling season for Express Scripts. The company won 238 new accounts including eight accounts with more than one million claims per year. They also retained 98% of their existing clients’ business.

Express Scripts reported third quarter earnings of 81¢ per share which includes 18¢ of financing costs for the NextRx acquisition. Excluding these costs, earnings per share increased 22% over the same period last year. Gross profit rose 18% to $612.6 million. Operating profit per claim rose 18% per claim to $3.38 despite a 10% increase in selling, general and administrative expense associated with investments in information technology, and initiatives to increase productivity and to extend their lead in the application of behavioral economics to the pharmacy benefit. Express Scripts’ stock price has risen 57% since the beginning of the year.

Varian Medical Systems, Inc.

With over 270 installations of RapidArc software worldwide, Varian Medical Systems’ newest technological advance is quickly becoming the standard of care. RapidArc reduces beam-on time by an average of 76%, reducing a session of seven three minute treatments for a prostate tumor to one 80-second 360 degree rotation of the x-ray source. The treatment conforms more closely to the tumor and reduces the total radiation dose delivered to the body by one-third which reduces low-dose radiation exposure to the rest of the body. The faster treatment also increases its accuracy because prostate tumors move as the bladder fills with urine during longer treatments. The most exciting advance is the use of radiosurgery with RapidArc to treat patients with inoperable non-small cell lung tumors. Current clinical trials show survival rates of 55% to 81% after two years with the chance of the regrowth of the tumor at 3% to 5%. These results for this non-invasive treatment compare well with surgery where the two-year survival rates are 81% with the chance of tumor regrowth less than 20%.

Varian’s fourth quarter and fiscal 2009 revenues of $527 million and $1.8 billion increased 8% and 7% over their respective periods a year ago. Earnings for the quarter and the year each rose 15% to 78¢ and $2.31 respectively. Oncology Systems’ orders declined 7% during the quarter with a 20% decline in North America partially offset by 12% growth in international markets. Orders from free-standing clinics declined 50% during the quarter as they awaited the final decision on 2010 reimbursement guidelines from the Centers for Medicare and Medicaid Services. Varian and the clinics were relieved by the October 30 announcement rejecting the proposed 30% to 40% cuts. Domestic hospital capital budgets will remain tight until their fiscal year ends on June 30; however, hospitals continue to move forward with their existing projects so Varian is delivering 95% of its backlog. Total orders for the company rose 4% during the quarter to $755 million. Varian won its first order for a proton therapy system from a group of eight university hospitals in Sweden. Without this $62 million order, net orders for the company would have been down about 5%. Proton systems deliver particles with very specific energies that allow the radiation oncologist to control precisely how far the radiation penetrates the body and thus protect nearby critical organs from radiation exposure. Higher energy x-rays (photons) go all the way through the body. Varian is applying its extensive experience in manufacturing radiation sources along with its software expertise to deliver cost-effective image-guided proton systems. Varian’s stock price has risen 30% since the beginning of the year.

IDEXX Laboratories

IDEXX Laboratories reported third quarter revenues of $259 million, an increase in organic growth of 5% over the same period a year ago. A 2% decline in foreign currency exchange rates reduced the growth rate in U.S. dollars. The Companion Animal Group, which accounts for 82% of sales, delivered 7% organic revenue growth. Revenue declines of 3% in both the Water and Production Animal Segment offset some of this growth. Earnings per share rose 24% to 52¢ per share. Higher than expected deliveries to distributors and continued progress on operating efficiency programs accounted for 40% of the increase. Sales of IDEXX Labs in-clinic chemistry instruments, the Catalyst Dx and the VetTest, grew more than 25% over the third quarter of 2008 with 25% of the 469 Catalyst Dx placements made to new accounts or existing customers with low usage of IDEXX Labs’ products. The company has placed 1,300 Catalyst Dx instruments in 2009 and 2,047 since its launch at the beginning of last year. Placements in new accounts will accelerate the use of highly profitable consumables. Reference lab service revenues rose 6% organically to $76.4 million with higher volumes driven primarily by new customers and proprietary tests. Sales of CardioPet BNP, the company’s new assay for heart disease in dogs, grew 60% over the second quarter. The initiation of lean and efficient sample processing throughout the lab network is reducing the cost per test and the turn-around time. IDEXX Laboratories’ stock price is up 43% since the beginning of the year.

Patterson Companies Inc.

Patterson Companies increased revenues during its fiscal second quarter 7% and earned 41¢ per share, a slight improvement over the 40¢ earned during the quarter a year ago. Acquisitions contributed all but one percent of the quarterly sales increase. These are good results when assessed in the context of an absence of any upturn in demand from dental practices other than an inclination to purchase with financing incentives technology based equipment offering a rapid payback. Sales of dental consumables and equipment generate two-thirds of Patterson’s revenues. Dental consumable sales were 2% less than the $310 million sold in the quarter last year. That small decline was offset by a 5% year to year increase in equipment sales, wholly attributable to a 45% increase in CEREC chairside tooth restorative systems, which have a proven rapid payback and an ongoing high return. Unlike dentists, veterinary practices are experiencing an upturn as more owners bring in their pets for treatments. That produced underlying sales growth of 8%. The vet business is definitely better and a 5% increase in Patterson Medical’s sales, excluding sales from acquisitions, indicates that the physical rehabilitation market has begun to improve.

In announcing the earnings, Patterson’s CEO Jim Wiltz confirmed that Scott Anderson, President of Patterson Dental would succeed him as CEO and that Paul Guggenheim, the current southwestern regional manager of Patterson Dental would become President of the division at the end of the fiscal year on April 30. Both know the dental and distribution businesses well and are experienced at motivating sales forces and coping effectively with operating problems. Patterson’s stock has risen 29% since mid-April.

Stryker Corporation

Revenue growth in Stryker’s Orthopaedic Implants division offset the revenue decline in the MedSurg division to deliver third quarter sales of $1.7 billion, an increase of 1.2% in constant currency over the third quarter of 2008. Foreign currency rates offset this gain to yield flat sales in U.S. dollars. Earnings per share rose 4.5% to 69¢. The domestic Orthopaedics businesses reported 8% revenue growth. Sales grew in all businesses with the knee, spine and head and jaw implant businesses reporting double-digit growth. MedSurg revenues fell 7% with the instruments business reporting 3% growth and the endoscopy and medical businesses reporting 3% and 24% declines respectively. These results show some improvement over the second quarter where MedSurg revenues were down 8% year-over-year. Stryker also reported that the issues raised in a 2008 FDA warning letter to the Biotech division have been resolved following an inspection of its Massachusetts facility earlier this year. The successful inspection of this plant indicates that Stryker is making progress in its implementation of its company-wide quality system, but many of the issues resolved are specific to this facility.

On November 30 Stryker announced the acquisition of Ascent Healthcare Solutions for $525 million in cash or about four times expected 2009 sales. Ascent Healthcare is the leading reprocesser and remanufacturer of single use medical devices with 65% to 70% of the market. About 50% of its sales come from reprocessing cardiac devices, 30% from orthopedics and 20% from general surgery. The company’s orthopedics business focuses mainly on arthroscopy with Stryker’s products accounting for about 2% of its revenues. After collecting the devices from special disposal bins in operating rooms, they either remanufacture the devices following approved FDA protocols or disassemble them for recycling and disposal. Ascent Healthcare saves hospitals millions of dollars each year by reducing their medical waste and strengthens Stryker’s service offering to its customers. Stryker’s stock price has risen 30% since the beginning of the year.

SGS Group

SGS shares have risen 23% since the beginning of the year. On November 11, SGS largest shareholder, the Von Finck Family reduced their ownership in the company to 15% from 25% in an underwritten sale. In conjunction with the announcement, SGS management reiterated their expectation to achieve single digit revenue and earnings growth for the year.

Mettler Toledo

Mettler Toledo’s local currency sales declined 12% during the third quarter. Reported sales of $435.7 million fell 14% with foreign currencies contributing 2% of the decline. Strong sales of consumable products and service in the laboratory business along with tight cost controls throughout the company resulted in a 7% decline in the quarter’s earnings to $1.34 per share. Laboratory sales fell 8%, while sales of the industrial and food retailing businesses declined 16% and 14% respectively. The weak global economy with the resulting decline in manufacturing pushed core industrial sales down in all geographic markets. Product inspection revenues were down, but continued to grow in Asia. Food retailing customers continue to delay their projects.

Mettler Toledo continues to find new ways to reach its customers. The company uses web-hosted seminars, known as webinars, to reach customers whose travel budgets for training, product demonstrations and seminars have been reduced. They recently presented a webinar on food safety where a representative from an international food safety agency discussed food safety standards. Mettler Toledo’s industrial and product inspection teams then demonstrated how their solutions help customers comply with the regulations. More than 100 well-known consumer product companies participated. The company will continue to present webinars once the economy recovers. Mettler Toledo’s stock price is up 46% since the beginning of the year.

Donaldson Company, Inc.

Donaldson’s fiscal first quarter revenues of $428 million and earnings of 44¢ per share declined 25% and 27% respectively from the strong year ago period ending October 31. Sales were weakest in Europe, followed by the Americas and Asia Pacific. This marks the second consecutive quarter of higher sales on a sequential basis. Citing stabilizing and in certain cases recovering end markets, CEO Bill Cook noted that the pace of year-over-year declines have lessened and will turn positive during the company’s fiscal third and fourth quarter. Sales of engine filters declined 21% overall to $244 million. Despite historically low equipment utilization rates, replacement filters for engines declined 6% and represented 61% of total engine filter sales, exceeding one-half of total engine product sales for the first time. Sales of replacement filters benefited from greater adoption of the company’s patent protected Power Core filters which are extremely difficult for competitors to copy because of the technological innovations incorporated into the filter. Sales of industrial filters, gas turbine air intake filters and disk drive filters declined 30%, 43% and 16% respectively. Donaldson stock has risen 25% year-to-date.

PepsiCo, Inc.

PepsiCo reported third quarter sales of $11.1 billion, an increase of 5% in constant currency. Earnings per share were $1.08, an increase of 8% over the third quarter of 2008. Foreign currency reduced sales in U.S. dollars by 6.5% and earnings by 6%. PepsiCo’s American food and international businesses continued to perform well with net revenue growth of 7% and 13% respectively. Division operating profits rose 6% for the food business and 31% for PepsiCo international where most of the profit growth came from the inclusion of the profitable sales of a joint venture with Calbee Foods Company, the snacks market leader in Japan. PepsiCo has the #1 or #2 market position in every country where they sell snacks. There is no real global competitor which allows the company to price its snacks slightly above local brands. The snack businesses are very profitable. Frito-Lay North America has a 26% operating margin. Despite double-digit revenue growth for enhanced waters and G2, Gatorade’s reduced calorie sports drink, weak demand for beverages in North America resulted in a 6% decline in volume, a 7% decline in net revenue and a 5% decline in operating profit for Pepsi Americas Beverages. We will see how the integration of the Pepsi Bottling Group, which will give PepsiCo control of 80% of its beverage manufacturing and distribution in North America, will improve the performance of this division. The company expects the acquisition of the bottling companies to close in early 2010. PepsiCo’s stock price has risen 15% since the beginning of the year.

Western Union

Western Union’s third quarter revenues of $1.3 billion declined 2% in constant currency and operating earnings of 33¢ per share were flat with the same period a year ago. During the quarter Western Union opened its 400,000th agent location, up 10% from the same period a year ago. The company had 151,000 agent locations at the end of 2002. Consumer-to-consumer money transfer transactions of 50.1 million during the quarter increased 3% overall. In Asia Pacific, which includes the Philippines and China, transactions rose 15%. In Europe, the Middle East, Africa and India, transactions rose 8%, while in the Americas, which includes Mexico, transactions declined 4%. Principal per transaction and price per transaction each declined 2%. The November 1 implementation of the European Payments Directive enables Western Union to sign retailers as agents in the Euro area in addition to banks and post offices. The company has signed agreements with Lagardere Services, Ortel Finance and PayUp which potentially add 15,000 new agent locations in Europe. In China, Western Union renewed its agreement with Agricultural Bank of China and plans to add an additional 15,000 agent locations in China by 2011. Western Union’s stock has risen 24% year-to-date.

MSCI Inc.

MSCI’s revenues of $109 million for its fiscal fourth quarter ending August 31, fell 1.4% below the revenues earned during the comparable year ago quarter. The reported results include a $3.3 million retroactive reduction in revenues to correct the foreign exchange rate applied to subscription payments earned earlier this year when the British pound was lower against the dollar. The absence of revenue growth during the quarter is attributable to a 13% year to year drop to $37 million in subscription revenues earned from Barra’s equity portfolio analytics and its multi-asset class portfolio analytics. These declines were offset by equity index subscription revenue growth of 8.5% to $47.4 million and a 10% increase to $20.1 million in equity index asset based fees. The average value of ETF assets linked to MSCI’s equity indices rose to $180 billion in the quarter, 1% above the average market value attained in the third quarter of 2008. Almost half the ETF assets linked to MSCI indices are invested in emerging markets. At the end of October, the market value of EFT’s linked to MSCI’s indices had risen to $216 billion. During the quarter the company gained 86 customers and lost 59. The company has 3,097 paying subscription customers. Revenues from asset managers, broker dealers and hedge funds declined while revenues from asset owners, custodians and private banks rose. Revenues are growing in Asia-Pacific and Japan and shrinking in the Americas, Europe and the Mideast.

In commenting on MSCI’s sluggish third quarter revenues, its CEO, Henry Fernandez, cited the complementary nature of the company’s asset based fees and its subscription businesses. Changes in worldwide security prices affect asset based fees immediately, whereas subscription revenues, which are influenced by customers’ profitability, respond slowly.

MSCI’s careful management of expenses assumed upon its separation from Morgan Stanley, reduced operating costs 2.5% below the cost incurred in the year ago quarter. Attention to costs has not deterred the company from expeditiously investing in property, equipment and leasehold improvements to replace higher cost facilities provided by Morgan Stanley. Nor has it hindered severance payments and hiring to move operations to emerging market centers where 39% of its 850 employees work. A year ago, 26% of MSCI’s workforce, which was 15% smaller, worked in emerging market centers. Cost control enabled MSCI to achieve an EBITDA margin of 49.6%, three percentage points higher than last year’s margin. Third quarter earnings, before amortization of founders share grants, were 28¢ per share compared to 26¢ last year after comparable adjustments. Absent the foreign exchange revenue reduction, earnings would have been 30¢. MSCI stock has risen 15% since our initial purchase at the end of July. On November 5, the company sold 3,795,000 shares at $30.85, raising $116 million. The sale was timed to accommodate demand from index funds for shares occasioned by inclusion of MSCI’s stock in the S&P Midcap 400 Index.

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