Item 2. Management's Discussion and Analysis of Financial Condition and 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 June 30, 2009, are as follows:

• Sales were $522.0, a decline of 10.1% compared to the same period last year. Excluding the impact of foreign currency exchange rates, which decreased sales by 8.4%, sales decreased by 1.7% year over year.

• Gross margin was 51.6%, an increase of 80 basis points when compared to the same period last year. Pretax income margin was 23.3%, up from 22.6% a year ago.

• Diluted income per share was $0.68, compared to $0.70, a 2.9% decrease when compared to the same period last year.

• Net cash provided by operating activities for the six months ended June 30, 2009 was $214.7, a decrease of $6.5 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, and universities;

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

• 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 may impact our tax expense and our profits; and

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

Cautionary Statement Regarding Forward-Looking Statements

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.

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

The following is a summary of our financial results (in millions, expect per
share amounts)



                                                       Three Months Ended       Six Months Ended
                                                            June 30,                June 30,
                                                        2009         2008       2009        2008
Net sales                                            $    522.0    $  580.7   $ 1,041.3   $ 1,150.3
Cost of products sold                                     252.7       285.8       503.4       563.2

Gross profit                                              269.3       294.9       537.9       587.1

Selling, general and administrative expenses              129.3       144.5       256.5       292.2
Research and development expenses                          15.7        16.0        31.4        31.9

Operating income                                          124.3       134.4       250.0       263.0
Interest, net                                               2.7         3.2         5.6         7.4

Income before income taxes                                121.6       131.2       244.4       255.6
Provision for income taxes                                 38.0        40.4        76.4        80.3

Net income                                           $     83.6    $   90.8   $   168.0   $   175.3

Net income per share - Diluted                       $     0.68    $   0.70   $    1.36   $    1.34

Sales

Sales decreased 10.1% for the second quarter of 2009 to $522.0 from $580.7 in the second quarter of 2008. Sales decreased 9.5% for the first half of 2009 to $1,041.3 from $1,150.3 in the first half of 2008. Organic sales growth, which is defined as reported sales adjusted for changes in foreign currency exchange rates, for the second quarter and first half of 2009 was a decrease of 1.7% and a decrease of 0.4%, respectively. Changes in foreign currency exchange rates decreased reported sales in the second quarter and first half of 2009 by 8.4% and 9.1%, respectively, when compared to the same periods last year. Price increases in the three research business units increased sales by 3.5% and 3.6% of the Company's total organic sales change for the second quarter and first half of 2009, respectively. The remainder of the sales change was primarily attributable to volume decreases of approximately 5.2% and 4.0% for the second quarter and first half of 2009, respectively.

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
                                               June 30, 2009
                                                 Currency       Adjusted
                                  Reported        Impact        (Organic)
           Research Essentials        (4.8 )%        (9.3 )%          4.5 %
           Research Specialties      (10.1 )%        (9.0 )%         (1.1 )%
           Research Biotech           (8.3 )%        (7.9 )%         (0.4 )%

           Research Chemicals         (8.3 )%        (8.8 )%          0.5 %
           SAFC                      (14.4 )%        (7.2 )%         (7.2 )%

           Total                     (10.1 )%        (8.4 )%         (1.7 )%

--------------------------------------------------------------------------------
                                             Six Months Ended
                                               June 30, 2009
                                                 Currency       Adjusted
                                  Reported        Impact        (Organic)
           Research Essentials        (4.4 )%       (10.2 )%          5.8 %
           Research Specialties       (9.2 )%        (9.7 )%          0.5 %
           Research Biotech           (7.7 )%        (8.5 )%          0.8 %

           Research Chemicals         (7.6 )%        (9.6 )%          2.0 %
           SAFC                      (14.2 )%        (7.9 )%         (6.3 )%

           Total                      (9.5 )%        (9.1 )%         (0.4 )%

Research Essentials currency adjusted sales for the second quarter and first half of 2009 reflected a 4.5% and 5.8% increase over the same periods in 2008, respectively. Sales gains in lab essential products in all world areas, with the U.S. leading, coupled with cell culture product sales gains in CAPLA (Canada, Asia Pacific and Latin America) were the primary drivers of growth in the quarter. Customer segments contributing to this growth were pharmaceutical and academic customers. The lab essential products in the U.S. and CAPLA, as well as modest growth in all world areas for the cell culture products, drove growth during the first six months of 2009. Customer segments contributing were pharmaceutical and academic customers during the first six months of 2009.

Research Specialties currency adjusted sales declined in the second quarter of 2009 by 1.1%, as compared to the same period in 2008. Decreased demand in the chemistry and lab equipment product groups put pressure on growth achieved in analytical products. Softness in demand was noted in the worldwide commercial, industrial and pharmaceutical sectors as well as certain dealers in Europe. Improved demand from the academic and government sectors in the U.S. and CAPLA helped offset some of the unfavorable volume impacts. Currency adjusted sales growth in the first half of 2009 was 0.5% as compared to the same period in 2008. The analytical product group was the main driver of growth in Europe and CAPLA assisted by strong growth in Biochemistry in CAPLA. These gains were offset by softening in demand for chemistry products in the U.S. and Europe.

Research Biotech currency adjusted sales declined in the second quarter of 2009 by 0.4% as compared to the same period in 2008. Sales growth in CAPLA offset some of the decreases in both the U.S. and Europe. The currency adjusted sales growth for the first half of 2009 was 0.8% compared to the same period in 2008. Sales in all world areas in cell signaling and molecular biology products drove the organic growth.

SAFC currency adjusted sales declined 7.2% and 6.3% for the second quarter and first half of 2009 compared to the same periods in 2008, respectively. Sales in all world areas reflected a decrease in the quarter. During the quarter the biotechnology and government customer segments showed improved demand, reflecting an increase of 23.9% and 33.3%, respectively. Certain products reflected positive growth including pharmaceutical products in the U.S., hitech products in Europe and bioscience products in CAPLA. Softening in demand in the other product groups more than offset these gains. Bioscience and supply solutions product groups were particularly hard hit in the U.S. during the quarter, which experienced declines of 6.3% and 7.4%, respectively. Sales in all world areas showed a decline for the first half of 2009 as compared to 2008, although biotechnology and universities/government customer segments reflected positive sales growth. These gains are more than offset by declines in the industrial, hospital and pharmaceutical customer segments for the first half of 2009.

Web-based sales, through our award winning website, as a percentage of worldwide Research Chemical (Research Essentials, Research Specialties, and Research Biotech) sales during the three and six months ended June 30, 2009 increased by 3.0% and 3.1% over the same period in 2008, respectively. Web-based sales improved to approximately 45% of worldwide second quarter 2009 Research Chemical sales as e-commerce sales to U.S. customers increased by 4.7%. E-commerce sales to U.S. Research customers were 54% of total U.S. Research sales compared to the 52% during the second quarter of 2008. For the first half of 2009, Web-based sales were approximately 44% of worldwide 2009 Research Chemical sales with sales to U.S. customers increasing by 4.8%. E-commerce sales to U.S. Research customers during the first half of 2009 were 54% of total U.S. Research sales compared to the 51% level achieved during the first half of 2008.

Reported diluted net income per share for the second quarter of 2009 decreased $0.68 from $0.70 in the second quarter of 2008. The impact of foreign currency exchange rates lowered diluted earnings per share by $0.11 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 contributed $0.19 to diluted earnings per share when compared to the same period last year. Volume decreases reduced diluted earnings per share by approximately $0.13 in the quarter. Lower fully diluted shares outstanding also added $0.03 to the diluted net income per share in the second quarter of 2009 as compared to the same period in 2008.

Reported diluted net income per share for the first six months of 2009 increased to $1.36 from $1.34 in the first half of 2008. The impact of foreign currency exchange rates lowered diluted earnings per share by $0.24 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 contributed $0.42 to diluted earnings per share when compared to the same period last year. Volume decreases reduced diluted earnings per share by approximately $0.20 in the first half of 2009. Lower fully diluted shares outstanding also added $0.06 to the diluted net income per share in the first half of 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 and six months ended June 30, 2009 and 2008 were as follows:

                                                   Three Months Ended            Six Months Ended
                                                        June 30,                     June 30,
                                                  2009            2008          2009          2008
Gross profit                                        51.6 %          50.8 %       51.7 %        51.0 %
Selling, general and administrative expenses        24.8 %          24.9 %       24.6 %        25.4 %
Research and development expenses                    3.0 %           2.8 %        3.0 %         2.8 %
Income before income taxes                          23.3 %          22.6 %       23.5 %        22.2 %
Effective tax rate                                  31.3 %          30.8 %       31.3 %        31.4 %

Gross profit margin

The following table reflects the significant contributing factors to the net change in gross profit margin for the three and six months ended June 30, 2009 as a percentage of sales compared to the same period in 2008:

                                                Three Months Ended            Six Months Ended
Contributing Factors                              June 30, 2009                June 30, 2009
Unfavorable product mix                                       (2.0 )%                     (1.9 )%
Favorable pricing                                              2.6 %                       2.6 %
Lower unit sales volume                                       (0.9 )%                     (0.7 )%
Lower manufacturing and distribution
costs                                                          1.8 %                       1.5 %
Unfavorable currency impact                                   (0.7 )%                     (0.8 )%

Net increase in gross profit margin as a
percentage of sales                                            0.8 %                       0.7 %

The gross profit margin increase in the second quarter of 2009 from the second 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. The contributing factors for the six months ended June 30, 2009 are consistent with those stated above for the second quarter.

Selling, general and administrative expenses as a percentage of sales decreased to 24.8% for the three months ended June 30, 2009 compared to 24.9% during the same period last year. Travel and entertainment expenses as a percentage of sales declined 30 basis points due to company-wide reductions in travel. Advertising and Catalog expenses as a percentage of sales were reduced by 30 basis points, as a result of reduced advertising campaigns. Salaries and other employment costs as a percentage of sales increased 30 basis points, primarily due to the lower sales base, as the amount spent decreased approximately 9% from the same period in 2008. Bad debt expense as a percentage to sales increased by 30 basis points due to a provision for a specific small volume European dealer. Worldwide transaction expense related to fluctuations in foreign currencies also increased 40 basis points due to the currency volatility within the quarter. No other changes in expense categories were individually significant as a percentage of sales in the three months ended June 30, 2009.

Selling, general and administrative expenses as a percentage to sales decreased to 24.6% for the six months ended June 30, 2009 compared to 25.4% during the same period last year Travel and entertainment expenses as a percentage of sales declined 40 basis points due to company-wide reductions in travel. Advertising and catalog expenses as a percentage of sales declined 30 basis points as a result of reduced advertising campaigns. No other changes in expense categories were individually significant as a percentage of sales in the six months ended June 30, 2009.

Research and development expenses

Research and development expenses as a percentage to sales increased to 3.0% for the three and six months ended June 30, 2009 compared to 2.8% during the same periods last year. The increase in research and development spending primarily relates to our innovation efforts and launches of new manufactured products. Manufactured products currently account for approximately 60% of total sales.

Interest, net

Net interest expense was $2.7 and $3.2 for the three months ended June 30, 2009 and 2008, respectively, and was $5.6 and $7.4 for the first six months of 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 June 30, 2009 was 0.3% on borrowings of $411.4 compared to a weighted average interest rate for short-term borrowings of 2.4% on borrowings of $387.1 at June 30, 2008.

Income before income taxes

Income before income taxes decreased to $121.6 for the three months ended June 30, 2009 from $131.2 achieved in the same period of 2008. The primary factors driving this decrease were the reduction in sales volume and the impact of foreign exchange rates, which reduced income before income taxes by $25.3 and $19.4, respectively. Management was able to partially offset these impacts with its strategic pricing actions, cost containment efforts and supply chain initiatives, which were discussed above.

Income before income taxes decreased to $244.4 for the six months ended June 30, 2009 from $255.6 achieved in the same period of 2008. The primary contributors were the decrease in sales volumes and the currency impacts, which reduced income before income taxes by $39.0 and $42.9, respectively. Management was able to partially offset these impacts by improvements in gross margin through both strategic pricing actions and supply chain initiatives and reductions in selling, general and administrative expenses as a percentage of sales, which were discussed above.

Effective tax rate

The effective tax rate for the second quarter of 2009 was 31.3% compared to 30.8% in the same period in 2008, and was 31.3% for the first half of 2009 compared to 31.4% for the same period in 2008. The increase in the second quarter tax rate compared to the same period in 2008 is due primarily to the reduction of certain tax contingencies resulting from the settlement of certain audits in the second quarter of 2008. This was partially offset by increased earnings in lower tax jurisdictions and the benefits of the research and development tax credit.

Net income

Net income for the second quarter of 2009 decreased to $83.6 from $90.8 for the quarter ended June 30, 2008 due to the items discussed above.

Net income for the six months ended June 30, 2009 decreased to $168.0 compared to net income of $175.3 for the same period of 2008 due to 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:



                                                   Six Months Ended
                                                       June 30,
                                                  2009          2008
              Net cash provided by (used in):
              Operating activities              $  214.7      $  221.2
              Investing activities                 (56.9 )       (39.6 )
              Financing activities                (161.0 )      (193.7 )

Operating Activities

Net cash provided by operating activities for the six months ended June 30, 2009 decreased $6.5 compared to the same period in 2008. This decrease results primarily from higher global tax payments. This was partially offset by less cash used for accounts receivable primarily due to lower sales levels and better collection efforts and lower uses of cash for inventory as the benefits from the supply chain initiative are realized.

Inventory on hand was 7.4 months at June 30, 2009, which is an increase from 7.0 months at December 31, 2008. Accounts receivable days sales outstanding at June 30, 2009 were 49 days, a slight decrease from 51 days at December 31, 2008.

Investing Activities

Cash used in investing activities was $56.9 and $39.6 for the six months ended June 30, 2009 and 2008, respectively. This increase was primarily due to an increase in capital expenditures. Capital expenditures increased to $55.9 during the first six months of 2009 from $41.4 during the same period of 2008 resulting from expansions in its biotech capacity in Israel and its SAFC capacity in the U.S. During 2009, capital spending is expected to be approximately $110.0.

Financing Activities

For the six months ended June 30, 2009, the Company's financing activities used cash of $161.0 compared to $193.7 for the same period of 2008. This decrease is due primarily to purchases of 0.6 shares of treasury stock totaling $25.1 compared to 4.0 shares totaling $230.5 in the same period in 2008. Repayments on short-term debt net of issuances, were $99.6 in the first six months of 2009 compared to $141.3 in net issuances of short-term debt, during the same period of 2008. Long-term debt of $6.9 was repaid in the first six months of 2009 compared to $90.0 repaid in 2008. Additionally, no long-term debt was issued in . . .