Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Management's Discussion and Analysis and other sections of this Quarterly Report on Form 10-Q (the "Report") should be read in conjunction with the consolidated financial statements and notes thereto. Except for historical information, the statements in this discussion may be deemed to include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934 that involve risk and uncertainty, including financial, business environment and projections, as well as statements that are preceded by, followed by, or that include the words "believes," "expects," "anticipates," "should" or similar expressions, and other statements contained herein regarding matters that are not historical facts. Additionally, the Report contains forward-looking statements relating to future performance, goals, strategic actions and initiatives and similar intentions and beliefs, including without limitation, statements regarding the Company's expectations, goals, beliefs, intentions and the like regarding future sales, earnings, cost savings, process improvements, share repurchases, capital expenditures, acquisitions and other matters. These statements involve assumptions regarding the Company operations, investments, acquisitions and conditions in the markets the Company serves.

Although the Company believes its expectations are based on reasonable assumptions, such statements are subject to risks and uncertainties, including, among others, certain economic, political and technological factors. Actual results could differ materially from those stated or implied in this Report, due to, but not limited to, such factors as: (1) declining global economic conditions, (2) changes in pricing and the competitive environment and the global demand for its products, (3) fluctuations in foreign currency exchange rates, (4) changes in research funding and the success of research and development activities, (5) dependence on uninterrupted manufacturing operations, (6) changes in the regulatory environment in which the Company operates, (7) changes in worldwide tax rates or tax benefits from domestic and international operations, including the matters described in Note 4 of this Quarterly Report on Form 10-Q and in Note 9 to the Consolidated Financial Statements in the Company's Form 10-K for the year ended December 31, 2008,
(8) exposure to litigation, including product liability claims, (9) the ability to maintain adequate quality standards, (10) reliance on third party package delivery services, (11) the impact of acquisitions and success in integrating and obtaining projected results from acquisitions, (12) other changes in the business environment in which the Company operates, and (13) the outcome of the outstanding matters described in "Other Matters" below. A further discussion of the Company's risk factors can be found in Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2008. The Company does not undertake any obligation to update these forward-looking statements.

Non-GAAP Financial Measures

The Company uses certain non-GAAP financial measures to supplement its GAAP disclosures. The Company does not, and does not suggest investors should, consider such non-GAAP financial measures in isolation from, or as a substitute for, GAAP financial information. These non-GAAP measures may not be consistent with the presentation by similar companies in the Company's industry. Whenever the Company uses such non-GAAP measures, it provides a reconciliation of such measures to the most closely applicable GAAP measure.

With over 60% of sales denominated in currencies other than the U.S. dollar, management uses currency adjusted growth, and believes it is useful to investors, to judge the Company's controllable, local currency performance. Organic sales growth data presented herein excludes currency impacts. While the Company is able to report currency impacts after the fact, it is unable to estimate changes that may occur later in 2009 to applicable exchange rates, and is thus unable to reconcile the projected non-GAAP, currency adjusted internal growth rates to reported GAAP growth rates for the year 2009 as required by Regulation G adopted by the Securities and Exchange Commission. Any significant changes in currency exchange rates would likely have a significant impact on the Company's reported growth rates due to the volume of our sales denominated in foreign currencies.

The Company also reports both GAAP and adjusted sales and income amounts and comparisons to reflect what it believes is ongoing and/or comparable operating results excluding currency impacts. The Company excludes this item in judging its historical performance and in assessing its expected future performance and believes this non-GAAP information is useful to investors as well.

Results of Operations

OVERVIEW

Sigma-Aldrich is a leading Life Science and High Technology company. The Company's biochemical and organic chemical products and kits are used in scientific research, including genomic and proteomic research, biotechnology, pharmaceutical development, and as key components in pharmaceutical, diagnostic and other high technology manufacturing. We have customers in life science companies, university and government institutions, hospitals and in industry. Over one million scientists and technologists use our products. Sigma-Aldrich operates in 38 countries and has 7,800 employees providing excellent service worldwide. The Company is committed to accelerating its Customers' success through Innovation and Leadership in Life Science, High Technology and Service.

Highlights of our consolidated results for the three months ended March 31, 2009, are as follows:

• Sales were $519.3, a decline of 9% compared to the same period last year. Excluding the impact of foreign currency exchange rates, which decreased sales by 10%, sales increased by 1% year over year.

• Pretax income margin was 23.6%, up from 21.8% a year ago.

• Diluted income per share was $0.68, compared to $0.64, a 6% increase when compared to the same period last year.

• Net cash provided by operating activities was $114.1, an increase of $24.9 when compared to the same period last year.

COMPANY OUTLOOK

Significant factors that could affect our results and cash flows in fiscal year 2009 include:

• Our performance may be affected by the economic conditions in the U.S. and in other nations where we do business;

• We face significant competition, including changes in pricing;

• Our sales and results of operations are dependent on the research and development spending patterns at pharmaceutical, biotechnology and diagnostic companies;

• Our sales and results of operations depend on our customers' research and development efforts and their ability to obtain funding for these results;

• Foreign currency exchange rate fluctuations may adversely affect our business;

• Due to heavy reliance on manufacturing and related operations to produce, package and distribute the products we sell, our business could be adversely affected by disruptions of these operations;

• Changes in worldwide tax rates or tax benefits will impact our tax expense and our profits; and

• Our failure to protect our intellectual property may significantly harm our results of operations.

                                                         Three Months Ended
                                                             March 31,
                                                          2009         2008
        Net sales                                      $    519.3    $  569.6
        Cost of products sold                               250.7       277.4

        Gross profit                                        268.6       292.2

        Selling, general and administrative expenses        127.2       147.7
        Research and development expenses                    15.7        15.9

        Operating income                                    125.7       128.6
        Interest, net                                         2.9         4.2

        Income before income taxes                          122.8       124.4
        Provision for income taxes                           38.4        39.9

        Net income                                     $     84.4    $   84.5

        Net income per share - Diluted                 $     0.68    $   0.64

Results of Operations

Sales

Sales decreased 8.8% for the first quarter of 2009 to $519.3 from $569.6 in the first quarter of 2008. Organic sales growth, which is defined as reported sales adjusted for changes in foreign currency exchange rates, for the first quarter of 2009 was 1.0%. Changes in foreign currency exchange rates decreased reported sales in the first quarter of 2009 by 9.8% when compared to the same period last year. Price increases in the three research business units represented 3.7% of the Company's total organic growth for the first quarter of 2009. The remainder of the sales change was primarily attributable to volume decreases of approximately 2.7%.

Reported sales growth, currency impact, and the adjusted (organic) sales growth for 2009, compared to the same period in 2008, were as follows:

                                             Three Months Ended
                                               March 31, 2009
                                                  Currency      Adjusted
                                    Reported       Impact       (Organic)
             Research Essentials        (4.0 )%      (11.1 )%         7.1 %
             Research Specialties       (8.3 )%      (10.5 )%         2.2 %
             Research Biotech           (7.1 )%       (9.0 )%         1.9 %

             Research Chemicals         (6.9 )%      (10.3 )%         3.4 %
             SAFC                      (13.9 )%       (8.6 )%        (5.3 )%

             Total                      (8.8 )%       (9.8 )%         1.0 %

Research Essentials currency adjusted sales for the first quarter of 2009 reflected a 7.1% increase over the same period in 2008. Strong sales gains in lab essential products in all world areas were the primary driver of growth in the quarter. Customer segments contributing to this growth were pharmaceutical and academic customers.

Research Specialties currency adjusted sales growth in the first quarter of 2009 was 2.2%. Improved demand from the academic and government sectors in Europe and CAPLA (Canada, Asia Pacific and Latin America) fueled the majority of the organic growth in the first quarter of 2009. The analytical and biochemistry product groups were the main drivers of the growth in the first quarter of 2009. Demand is down from our pharmaceutical and contract research organization customer base due to lower research spending.

SAFC currency adjusted sales change was a decrease of 5.3% for the first quarter of 2009 compared to the same period in 2008. Sales in the United States were flat with declines in both Europe and CAPLA. Sales declines in our non-life science products and our custom pharmaceutical business were only partially offset by improved sales in our bioscience industrial media business. Our booked orders for future delivery in SAFC increased by 16% at March 31, 2009 from their December 31, 2008 level.

Web-based sales through our award winning website during the three months ended March 31, 2009 increased by 0.7% over the same period in 2008. Web-based sales improved to 44% of worldwide first quarter 2009 Research Chemical (Research Essentials, Research Specialties and Research Biotech) sales as e-commerce sales to U.S. customers increased by 4.9%. E-commerce sales to U.S. Research customers were 54% of total U.S. Research sales compared to 51% level achieved during the first quarter of 2008.

Reported diluted net income per share

Reported diluted net income per share for the first quarter of 2009 increased by 6.3% to $0.68 from $0.64 in the first quarter of 2008. The impact of foreign currency exchange rates lowered diluted earnings per share by $0.13 when compared to the same period last year. The Company's strategic pricing actions, global supply chain activities and efforts to lower selling, general and administrative costs, together with reduced interest expense and a lower effective tax rate contributed $0.18 to diluted earnings per share when compared to the same period last year. Lower fully diluted shares outstanding also added $0.04 to the diluted net income per share in 2009 as compared to the same period in 2008.

Gross profit, selling, general and administrative expenses, research and development expenses and income before income taxes, all expressed as a percentage of sales, and the effective tax rate (income tax expense expressed as a percentage of income before income taxes) for the three months ended March 31, 2009 and 2008 were as follows:

                                                        Three Months Ended
                                                             March 31,
                                                        2009           2008
       Gross profit                                       51.7 %         51.3 %
       Selling, general and administrative expenses       24.5 %         25.9 %
       Research and development expenses                   3.0 %          2.8 %
       Income before income taxes                         23.6 %         21.8 %

       Effective tax rate                                 31.3 %         32.1 %

Gross profit margin

The following table reflects the significant contributing factors to the net change in gross profit margin for the three months ended March 31, 2009 as a percentage of sales compared to the same period in 2008:

                                                                       Three Months Ended
Contributing Factors                                                     March 31, 2009
Favorable pricing                                                                     2.0 %
Unfavorable product mix                                                              (1.7 )%
Manufacturing and distribution                                                        1.2 %
Unfavorable currency                                                                 (0.8 )%
Lower unit sales volume                                                              (0.3 )%

Net increase in gross profit margin as a percentage of sales                          0.4 %

The gross profit margin increase from the first quarter of 2008 as a percentage of sales was primarily due to the Company's global supply chain initiatives which among other things are designed to lower manufacturing and distribution costs including supplies, repairs and maintenance and salaries and favorable pricing resulting from the Company's strategic pricing actions. Negative impacts as compared to the same quarter of the prior year included currency, product mix and unit volume.

As part of its cost containment efforts management was able to reduce its selling, general and administrative expenses to 24.5% of sales in the first quarter of 2009 compared to 25.9% of sales in the same period in 2008. Travel and entertainment expenses were reduced by 40 basis points due to company wide reductions in travel. Salaries and other employment costs were reduced 50 basis points. Variable labor is being closely monitored and adjusted consistent with changes in sales demand and production volumes. Catalog expenses and repairs and maintenance were both down 20 basis points, respectively. No other changes in expense categories were individually significant as a percentage of sales in the three months ended March 31, 2009.

Research and development expenses

Research and development expenses were 3.0% of sales in the first quarter of 209 compared to 2.8% of sales in the same period in 2008. The research and development expenses relate primarily to efforts to add new manufactured products. Manufactured products currently account for approximately 60% of total sales.

Interest, net

Net interest expense was $2.9 and $4.2 for the three months ended March 31, 2009 and 2008, respectively. The decrease in net interest expense is primarily attributable to reduced interest rates on short-term borrowings. The weighted average interest rate for short-term borrowings at March 31, 2009 was 0.5% on borrowings of $434.8 compared to a weighted average interest rate for short-term borrowings of 2.8% on borrowings of $304.4 at March 31, 2008.

Income before income taxes

Income before income taxes decreased to $122.8 for the three months ended March 31, 2009 from $124.4 achieved in the same period of 2008. The primary factor driving this decrease was the impact of foreign exchange rates, which reduced income before taxes by $23.5. Management was able to offset much of this currency impact with its strategic pricing actions, cost containment actions and supply chain initiatives, which were discussed above.

Effective tax rate

The effective tax rate for the first quarter of 2009 was 31.3% compared to 32.1 in the same period in 2008. The reduction was largely due to the R&D credit taken in 2009 which was not available in 2008. The effective tax rate for all of 2009 is expected to be approximately 31% to 32% of pretax income.

Net income

Net income for the first quarter of 2009 decreased slightly to $84.4 from $84.5 for the quarter ended March 31, 2008 due to the items discussed above.

Liquidity and Capital Resources

The Company's cash flows from operating, investing and financing activities, as
reflected in the Consolidated Statements of Cash Flows, are summarized in the
following table:



                                                  Three Months Ended
                                                       March 31,
                                                   2009          2008
              Net cash provided by (used in):
              Operating activities              $     114.1     $  89.2
              Investing activities                    (28.8 )     (17.8 )
              Financing activities                   (103.4 )     (91.6 )

Operating Activities

Net cash provided by operating activities for the three months ended March 31, 2009 increased $24.9 compared to the same period in 2008. This increase results primarily from increases in accounts payable primarily due to the timing of cash payments.

Investing Activities

Cash used in investing activities was $28.8 and $17.8 for the three months ended March 31, 2009 and 2008, respectively. This increase was primarily due to an increase in capital expenditures. Capital expenditures increased to $28.2 during the first three months of 2009 from $18.9 during the same period of 2008 resulting from plant expansions in Wisconsin, California and Israel. During 2009, capital spending is expected to be approximately $110.

Financing Activities

For the three months ended March 31, 2009, the Company's financing activities used cash of $103.4 compared to $91.6 for the same period of 2008. This increase is due primarily to repayments on short-term debt net of issuances, of $73.9 in the first three months of 2009 compared to $50.0 in net issuances of short-term debt, during the same period of 2008. Long-term debt of $6.9 was repaid in the first three months of 2009 compared to $90.0 repaid in 2008. Additionally, no long-term debt was issued in 2009 or 2008. During the first quarter of 2009, the Company purchased 0.2 shares of treasury stock totaling $7.2 compared to 0.9 shares totaling $47.3 in the same period last year.

Long-term debt at March 31, 2009, excluding current maturities, was $200.0 compared to $200.1 at December 31, 2008. Consolidated total debt as a percentage of total capitalization was 31.3% and 34.6% at March 31, 2009 and December 31, 2008, respectively. For a description of the Company's material debt covenants, see Note 7 to the consolidated financial statements included in Part 1, Item 1 of this Report.

Share Repurchases

At March 31, 2009 and December 31, 2008, the Company had repurchased a total of 92.5 and 92.3 shares, respectively, of an authorized repurchase of 100.0 shares. The Company has 7.5 remaining shares authorized for purchase but, the timing and number of shares purchased, if any, depends upon market conditions and other factors. There were 122.1 shares outstanding as of March 31, 2009.

Liquidity and Risk Management

Liquidity risk refers to the risk that the Company might be unable to meet potential cash outflows promptly and cost effectively. Factors that could cause such risk to arise include disruption to the securities market, downgrades in the Company's credit rating or the unavailability of funds. In addition to the Company's cash flows from operations, the Company utilizes commercial paper, short-term multi-currency and long-term debt programs as funding sources. The Company maintains committed bank lines of credit to support its commercial paper borrowings, term loans, and local bank lines of credit to support international operations. Downgrades in the Company's credit rating or other limitations on the ability to access short-term financing, including the ability to refinance short-term debt as it becomes due, would increase interest costs and adversely affect profitability.

The Company has considered the potential impact of recent trends in the global economic environment on its liquidity and overall financial condition, particularly with respect to availability of and the Company's access to short-term credit, including the market for commercial paper. Based on discussions held with the Company's lenders, management does not believe that a significant risk exists of commercial paper or other credit becoming unavailable or existing debt being called within the next 12 months. Management believes that the Company's financial condition is such that internal and external resources are sufficient and available to satisfy the Company's requirements for debt service, capital expenditures, selective acquisitions, dividends, share repurchases, funding of pension and other post-retirement benefit plan obligations, and working capital presently and for the next 12 months.

Contractual Obligations

At March 31, 2009, the Company had $343.0 of commercial paper outstanding and other debt of $91.8 with maturities of less than one year. The Company had long-term borrowings of $200.0, for a total decrease in all outstanding debt of $94.1 from December 31, 2008.

The Company is involved in legal proceedings generally incidental to its business, as described below:

Insurance and Other Contingent Liabilities and Commitments

The Company is a defendant in several lawsuits and claims related to the normal conduct of its business, including lawsuits and claims related to product liability and personal injury matters. The Company accrues for such liabilities when it is probable that future costs (including legal fees and expenses) will be incurred and such costs can be reasonably estimated. The Company has self-insured retention limits and has obtained insurance to provide coverage above the self-insured limits for product liability and personal injury claims, subject to certain limitations and exclusions. Reserves have been provided to cover expected payments for these self-insured amounts at March 31, 2009.

In one group of lawsuits and claims, the Company, as well as others engaged in manufacturing and distributing similar products, is a defendant in multiple claims alleging injuries from exposure to various chemicals by a limited number of employees of one electronics manufacturer. These claims have been filed in three states. A global settlement has been reached for all cases, which has been approved by the court. The settlement is not significant to the Company's consolidated financial statements.

In another group of lawsuits and claims, the Company provided a product for use in research activities in developing various vaccines at pharmaceutical companies. The Company, together with other manufacturers and distributors offering the same product and several pharmaceutical companies, has been named as a defendant and served in 294 lawsuits, of which 59 lawsuits have been dismissed to date. Several of the outstanding suits have been stayed by various state and federal courts pending a decision on coverage available under a U.S. federal government relief program. No definite date has been set for this decision. In all cases, the Company believes its products in question were restricted to research use and that proper information for safe use of the products was provided to the customer.

In another group of lawsuits and claims, the Company, as well as others engaged in manufacturing and distributing flavoring products, is a defendant in multiple claims alleging personal injuries from exposure to the products. The Company has been named as a defendant and served in 15 lawsuits, 2 of which have been dismissed. These claims have been filed in four states. On November 4, 2008 a settlement, which was not material to the Company's consolidated financial condition, results of operations or liquidity, was reached in one case. Additionally, the Company believes the settlement reached does not change its position as it relates to other claims in this group. The Company is vigorously defending its rights as to the remaining claims. The Company believes it is covered by insurance for the above matters, subject to its self-insurance retention limits.

A class action complaint was filed against a subsidiary of the Company in the Montgomery County, Ohio Court of Common Pleas related to a 2003 explosion in a column at the Company's Isotec facility in Miamisburg, Ohio. The case was separated into the following four phases: phase one - existence of liability, phase two - quantification of any compensatory damages, phase three - existence of any punitive damages and phase four - quantification of any punitive damages. Class certification was granted to phases one, three and four, but denied to phase two. Compensatory damages for all plaintiffs must be established before the case can proceed to the punitive damages phases. The Company has accepted . . .