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

The following discussion and analysis provides information that we believe is useful in understanding our operating results, cash flows and financial condition. The discussion should be read in conjunction with both the unaudited consolidated financial information and related notes included in this Form 10-Q, and the Management's Discussion and Analysis of Financial Condition and Result of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2008. The discussion contains various "Forward-Looking Statements" within the meaning of the Private Securities Litigation Reform Act of 1995. We refer readers to the statement entitled "Forward-Looking Statements" located at the end of Part I of this report.

Overview of the first quarter ended March 31, 2009

Our reported first quarter results were led by continued strong sales growth from our U.S. Kay and Healthcare businesses, as well as our Latin America and Canadian operations. Pricing and cost savings actions benefited results, but were more than offset by the effects of the global recession, higher delivered product costs, unfavorable foreign currency exchange, a change in our distributor incentive programs and restructuring charges during the first quarter of 2009.

Significant items impacting the year over year comparison of our results for the first quarter included the following:

We recorded restructuring charges of approximately $33 million ($21 million net of tax) or $0.09 per share in the first quarter of 2009 which negatively impacted our reported operating results.

In the first quarter of 2009 we reduced our distributor incentive promotions in our U.S. Institutional division in order to create better efficiency in our distributor system. This change impacted the timing of sales to distributors and had a negative impact on our year over year sales comparison in the first quarter, and we estimate it negatively impacted first quarter 2009 earnings by approximately $0.03 per share. However, the unfavorable timing impact of this change on the first quarter is expected to be reversed later this year and be slightly positive to earnings.

Sales Performance

† Consolidated net sales decreased 8% to $1.3 billion. Unfavorable foreign currency exchange negatively impacted sales during the quarter. When measured at fixed rates of exchange, sales decreased 1%. Adjusted for the distributor incentive program change, fixed rate sales were flat to last year.

† U.S. Cleaning & Sanitizing sales decreased 5% to $623 million. The change in the distributor incentive programs reduced sales by an estimated 3%. Good sales gains by Kay and Healthcare were more than offset by sales declines by Institutional and Food & Beverage. Food & Beverage's reported sales decline was due to an unfavorable comparison to the first quarter of 2008 which included a large Ecovation project sale.

† U.S. Other Services sales declined 3% to $107 million as modest growth by Pest Elimination was offset by decreased GCS sales.

† International sales, when measured in fixed currency rates, rose 3% to $625 million in the first quarter. Latin America and Canada enjoyed strong sales growth while Asia Pacific and Europe/Middle East/Africa ("EMEA") recorded moderate sales growth. When measured at public currency rates, International sales declined 11%.

Financial Performance

† Operating income declined 39% to $98 million. Excluding the impact of special gains and charges, operating income decreased 19%.

† Net income attributable to shareholders declined 44% to $57 million. Excluding the impact of special gains and charges, and discrete tax items, net income attributable to shareholders decreased 20%.

† Diluted net income per share decreased 41% to $0.24 for the first quarter of 2009 compared to $0.41 in the first quarter of 2008. First quarter 2009 results were reduced by $0.09 per share of special gains and charges and discrete tax items, $0.03 per share negative impact of unfavorable foreign currency exchange, and were also negatively impacted by an estimated $0.03 per share for the change in distributor incentive programs. First quarter 2008 results were increased by $0.02 per share of special gains and charges, and discrete tax items.

† Our reported effective income tax rate was 29.4% for the first quarter of 2009 compared to 29.3% for the first quarter of 2008. Excluding the tax rate impact of special gains and charges, and discrete tax items, our adjusted effective income tax rate was 31.3% and 32.8% for the first quarter of 2009 and 2008, respectively.

Results of Operations - First Quarter Ended March 31, 2009

Consolidated net sales for the first quarter ended March 31, 2009 were $1.3 billion, a decrease of 8% compared to last year. When measured in fixed currency rates, sales declined 1% compared to last year. Adjusted for the distributor incentive program change, fixed rate sales were flat to last year. The components of the first quarter sales decline are shown below.

                              First Quarter Ended
(percent)                       March 31, 2009
Volume                                         (5 )%
Price changes                                   4
Foreign currency exchange                      (7 )
Acquisitions & divestitures                     -
Total sales decrease                           (8 )%

The gross profit margin (defined as the difference between net sales less cost of sales divided by net sales) was 47.5% and 49.4% for the first quarter of 2009 and 2008, respectively. The decrease in gross profit margin reflected restructuring special charges included in cost of sales during 2009 of $8.0 million which reduced our reported gross profit margin by 0.6 percentage points. Our gross profit margin decline for the first quarter was driven by higher delivered product costs, especially in Europe, and lower sales volume, which more than offset pricing and cost savings initiatives.

Selling, general and administrative expenses as a percentage of consolidated net sales were 38.3% and 38.2% for the first quarter of 2009 and 2008, respectively. Strong pricing leverage, savings from our recent restructuring activities, and spending controls nearly offset the sales volume decline and cost increases in the business. We remain focused on key business investments to drive innovation and efficiency, through R&D and information technology systems.

Results of Operations - First Quarter Ended March 31, 2009 (Continued)



Special gains and charges reported on the Consolidated Statement of Income
included the following items:



                                        First Quarter Ended
                                              March 31
(millions)                               2009          2008
                                            (unaudited)
Cost of sales
Restructuring charges                 $       8.0    $       -

Special gains and charges
Restructuring charges                        24.7            -
Business structure and optimization           1.0          1.8
Gain on sale of business                        -         (1.7 )
Other non-recurring items                     0.8          1.8
Total                                        26.5          1.9

Total special charges                 $      34.5    $     1.9

In the first quarter of 2009, we announced plans to undertake restructuring and other cost-saving actions during 2009 in order to streamline operations and improve efficiency and effectiveness. A portion of these actions were completed during the first quarter, and as a result, we recorded restructuring expense of $33 million ($21 million after tax) or $0.09 per diluted share. Restructuring expense on the Consolidated Statement of Income has been included both as a component of cost of sales and as a component of special gains and charges.

We anticipate additional restructuring expenses during the remainder of 2009, which are expected to result in total pretax charges of $65 million to $75 million ($42 million to $49 million after tax) for the full year 2009. These actions are expected to provide annualized pretax savings of approximately $70 million to $80 million ($45 million to $50 million after tax), with pretax savings of $50 million to be realized in 2009. We anticipate that approximately $55 million to $65 million of the total restructuring charges represent cash expenditures, of which $8 million has been paid as of March 31, 2009 and the majority of the remainder is expected to be paid during 2009. Further details related to these restructuring expenses are included in Note 2.

Results of Operations - First Quarter Ended March 31, 2009 (Continued)

Net income attributable to shareholders decreased 44% to $57 million in the first quarter of 2009. On a per share basis, diluted net income per share decreased 41% to $0.24 per share compared to $0.41 per share in 2008. The first quarter of 2009 includes $22.3 million, net of tax, of special gains and charges, and $0.2 million of net discrete tax benefits which together reduced diluted net income per share by $0.09. Currency translation had an unfavorable impact of approximately $8 million or $0.03 per share for the first quarter of 2009 compared to 2008. Additionally, the impact of the distributor incentive program change also decreased net income attributable to shareholders for the first quarter by an estimated $7.5 million, or $0.03 per share. The first quarter of 2008 included $1.1 million, net of tax, of special gains and charges, and $4.8 million of discrete tax benefits which together increased reported diluted net income per share by $0.02.

Sales for each of our reportable segments are as follows:

                                           First Quarter Ended
                                                March 31
(millions)                                  2009         2008
                                               (unaudited)
Net Sales
United States
Cleaning & Sanitizing                    $     622.9   $   653.4
Other Services                                 107.1       110.4
Total                                          730.0       763.8
International                                  625.0       609.0
Effect of foreign currency translation          (6.8 )      85.1
Consolidated                             $   1,348.2   $ 1,457.9

Results of Operations - First Quarter Ended March 31, 2009 (Continued)

U.S. Cleaning & Sanitizing sales decreased 5% in the first quarter of 2009 compared to the prior year period. The change in our Institutional distributor incentive program reduced sales by approximately 3%. Sales for our large U.S. Cleaning & Sanitizing businesses were as follows:

† Institutional - As expected, reported Institutional sales declined due to weak market conditions and as we changed the way we implement our distributor incentive programs. Sales declined 8% in the first quarter of 2009 compared to the first quarter of 2008. Sales growth was negatively impacted by 5% due to the distributor incentive program change. We continue to see strong results for our Apex solids warewashing line due to customer demand for energy and cost savings solutions. New business gains were good and helped us mostly offset the effects from the recession's impact on our foodservice and lodging customers. While timing of the distributor incentive program change had a negative impact on the first quarter, the impact should be reversed this year. This change will ultimately lead to better efficiency in our distributor system.

† Food & Beverage - Sales decreased 8% in the first quarter compared to the first quarter of 2008. Strong results for the Food & Beverage and Water Care businesses were more than offset by the timing of a large Ecovation project sale in the first quarter of 2008, which negatively impacted year over year sales growth. Excluding the impact of Ecovation, Food & Beverage sales grew 7% compared to last year. Food & Beverage enjoyed gains in the dairy, beverage, food, agri and water care markets as pricing, corporate account wins and new products helped drive sales in spite of difficult market conditions.

† Kay - Sales grew 7% in the first quarter of 2009 compared to the prior year period. Kay's strong sales growth benefited from new products and programs as well as new account gains. Business trends remain attractive in the quick service restaurant and food retail markets with continued ongoing demand from new and existing customers.

† Healthcare - First quarter sales rose 8% comparing against a strong first quarter last year. Sales growth reflects continued solid growth for both our skincare and our surgical draping businesses.

Results of Operations - First Quarter Ended March 31, 2009 (Continued)

U.S. Other Services sales decreased 3% for the first quarter of 2009 compared to the first quarter of 2008. Sales for our U.S. Other Services businesses were as follows:

† Pest Elimination - Sales increased 1% for the first quarter of 2009. Moderate growth in contract services was partially offset by a decline in non-contract sales. We are seeing some contract growth being offset by customer cancellations as our customers are focusing on reducing their spending due to the current economic recession. Gains in the quick service restaurant and food & beverage plant market offset ongoing weak conditions in restaurants and lodging.

† GCS Service - Sales declined 13% in the first quarter. Both service and direct parts sales were soft as existing customers defer repairs and prospective customers delay their decision to buy contract services due to the uncertain economy.

We evaluate the performance of our International operations based on fixed management rates of currency exchange. Management rate sales for our International operations increased 3% for the first quarter of 2009 compared to the first quarter of 2008. When measured at public currency rates, International sales decreased 11%. Management rate sales growth for our International regions was as follows:

† EMEA - Sales grew 1% in the first quarter of 2009 as growth in Germany and South Africa were offset by flat sales in the U.K. and sales declines in France and Italy. Our Healthcare business showed solid growth in the region and our Textile Care and Food & Beverage businesses showed modest growth. Foodservice and lodging trends continue to be unfavorable in the region, negatively impacting our Institutional and Pest Elimination businesses.

† Asia Pacific - Sales increased 1% in the first quarter led by growth in New Zealand and China, partially offset by flat sales in Japan and Australia. New Zealand sales benefited from competitor gains in the Food & Beverage division and China sales grew due to continued strong Pest Elimination sales growth and good growth in Food & Beverage sales.

Results of Operations - First Quarter Ended March 31, 2009 (Continued)

† Latin America - Sales in the Latin America region increased 9% in the first quarter. Sales growth was led by double-digit growth in Brazil and Venezuela, offset partially by more moderate growth in Mexico and a sales decline in the Caribbean. Sales growth in Mexico and the Caribbean has been hurt by reduced tourism and low hotel occupancy rates because of the global recession. Our Institutional, Food & Beverage and Pest Elimination businesses all showed strong gains in the region against weak economic conditions.

† Canada - Sales in Canada increased 8% in the first quarter. Sales growth benefited from price increases, strong Institutional distributor sales volumes and new Food & Beverage accounts.

Operating income for each of our reportable segments is as follows:

                                           First Quarter Ended
                                                March 31
(millions)                                  2009          2008
                                               (unaudited)
Operating Income
United States
Cleaning & Sanitizing                    $     102.6    $  105.2
Other Services                                  13.2         7.0
Total                                          115.8       112.2
International                                   21.6        45.2
Effect of foreign currency translation          (0.8 )      10.1
Corporate                                      (39.1 )      (6.8 )
Consolidated                             $      97.5    $  160.7

U.S. Cleaning & Sanitizing operating income declined 3% for the first quarter of 2009. Adjusted for the change in distributor incentive programs, operating income increased 9% as strong pricing gains and cost savings more than offset increased delivered product costs and a decline in sales volume.

U.S. Other Services operating income increased 89% for the first quarter of 2009. The first quarter growth was driven by pricing gains, well-managed spending, and favorable comparison against prior year GCS system conversion costs.

Results of Operations - First Quarter Ended March 31, 2009 (Continued)

International segment operating income decreased 52% for the first quarter of 2009 at fixed currency rates. When measured at public currency rates, operating income decreased 62%. Delivered product cost increases internationally had a dramatic impact on our first quarter International operating income. The increased delivered product costs and other operating cost increases in the business, more than offset pricing gains in the quarter, particularly in Europe.

Consistent with our internal management reporting, the Corporate segment includes special gains and charges reported on the Consolidated Statement of Income. The Corporate segment also includes investments in the development of business systems and other corporate investments we are making as part of our ongoing efforts to improve efficiency and returns.

Net interest expense totaled $15.8 million in the first quarter of 2009, compared with $14.8 million in the first quarter of 2008. The increase in our net interest expense is due to higher debt levels during the current period compared to last year, as well as lower interest income due to lower average cash on hand during the first quarter of 2009.

The following table provides a summary of our reported tax rate:

                                                          First Quarter Ended
                                                                March 31
(percent)                                                2009             2008
                                                              (unaudited)
Reported tax rate                                            29.4 %           29.3 %
Decrease due to special gains and charges and
discrete tax items                                           (1.9 )%          (3.5 )%

The provision for income taxes for the first quarter of 2009 and 2008 include tax impacts from special gains and charges, and discrete tax events. Discrete tax events in the first quarter of 2009 included a net benefit of $0.2 million. Discrete tax items in the first quarter of 2008 included $4.8 million of discrete tax benefits primarily due to enacted tax legislation.

Excluding the tax rate impact of special gains and charges, and discrete tax items, the decrease in the adjusted effective 2009 rate over the 2008 rate, is due primarily to tax planning efforts and global rate reductions. We expect the effective income tax rate, excluding the tax impact of special gains and charges, and discrete tax items, will approximate 31% for the full year 2009.

Financial Position and Liquidity

Total assets were $4.7 billion as of March 31, 2009, compared to total assets of $4.8 billion at December 31, 2008. The decrease was due to a decrease in accounts receivable as well as the negative impact of foreign currency which reduced the value of international assets on our balance sheet when translated into U.S. dollars.

Total debt was $1.2 billion at March 31, 2009 and $1.1 billion as of December 31, 2008. The increase was due to an increase in our short-term borrowing. The ratio of total debt to capitalization (shareholders' equity plus total debt) increased to 43% at March 31, 2009 compared to 42% at December 31, 2008. We are in compliance with all of our debt covenants and believe we have sufficient borrowing capacity to meet our reasonably foreseeable operating needs.

Cash provided by operating activities totaled $27 million for the first three months of 2009 compared to $137 million in 2008. Operating cash flow in 2009 was negatively impacted by a $50 million voluntary contribution to our U.S. pension plan, lower earnings and higher tax payments compared to the prior year period.

Cash used for investing activities decreased in 2009 primarily due to significantly lower acquisition activity as the first quarter of 2008 included our Ecovation acquisition. Capital and software investments also decreased in 2009 compared to 2008.

Cash provided by financing activities in 2009 included $82 million in net proceeds from short-term borrowing. Due to our repurchase of 11.3 million shares from Henkel for $300 million in the fourth quarter of 2008, we did not repurchase shares in the first quarter of 2009 under our share repurchase program and do not expect to repurchase a significant amount of shares during the remainder of 2009. 2008 financing cash flow activities included the proceeds from the issuance of our $250 million 4.875% senior unsecured notes.

The schedule of contractual obligations included in the Financial Position and Liquidity section of our Form 10-K for the year ended December 31, 2008 disclosed total notes payable and long-term debt due within one year of $339 million. As of March 31, 2009, the total notes payable and long-term debt due within one year is $421 million. The increase from year-end is primarily due to additional short-term borrowings under our commercial paper program during 2009. Our gross liability for uncertain tax positions under FIN 48 was $111 million as of March 31, 2009 and December 31, 2009. We are not able to reasonably estimate the amount by which the liability will increase or decrease over time; however, at this time, we do not expect significant payments related to these obligations within the next year. No other significant changes to our contractual obligations occurred during the first three months of 2009.

Financial Position and Liquidity (Continued)

We currently expect to fund all of the cash requirements which are reasonably foreseeable for the remainder of 2009, including scheduled debt repayments, new investments in the business, dividend payments, possible business acquisitions and pension contributions with cash from operating activities, cash reserves and short-term or long-term borrowings. In the event of a significant acquisition or other significant funding need, funding may occur through additional short and/or long-term borrowing or through the issuance of the company's stock.

Beginning in the third quarter of 2008, global credit markets, including the commercial paper markets, began experiencing adverse conditions, and volatility within these markets temporarily increased the costs associated with issuing debt due to increased spreads over relevant interest rate benchmarks. Despite this volatility and disruption, we have continued to have access to the commercial paper market, and we believe we are well positioned to weather the current volatility in the credit markets. As of March 31, 2009, we had $80 million of cash on hand and expect our operating cash flow to remain strong. Additionally, we have a $600 million multi-year credit facility with a diverse portfolio of banks. As of March 31, 2008, $356 million of this facility is backing up U.S. commercial paper which is included in our short-term debt and $244 million remains available. In addition, we have committed and uncommitted credit lines of $141 million with major international banks and financial institutions to support our general global funding needs. Approximately $82 million of these credit lines were not drawn upon and available for use as of March 31, 2009.

New Accounting Pronouncements

We adopted SFAS 160, Noncontrolling Interests in Consolidated Financial Statements-an amendment of Accounting Research Bulletin No. 51, effective January 1, 2009. For information on this and other recent adoptions and new . . .