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 worldwide employees. 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 September 30, 2009, are as follows:

• Sales were $533.8, a decrease of 1.3% compared to the same period last year. Excluding the impact of foreign currency exchange rates, which decreased sales by 3.6%, sales increased by 2.3% year over year.

• Gross margin was 49.7%, a decrease of 170 basis points when compared to the same period last year. Pretax income margin was 22.4%, down from 22.7% a year ago.

• Diluted income per share was $0.70, compared to $0.64, a 9.4% increase when compared to the same period last year.

• Net cash provided by operating activities for the nine months ended September 30, 2009 was $362.2, an increase of $62.4 when compared to the same period last year.

• Net debt, which includes total debt less cash, declined $200.3 since December 31, 2008.

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;

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

• Our failure to achieve planned cost reductions in global supply chain initiatives; and

• The impact of any restructuring.

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 are based on assumptions regarding the Company operations, investments, acquisitions and conditions in the markets the Company serves.

(1) 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) failure to achieve planned cost reductions in global supply chain initiatives,

(12) an unanticipated increase in interest rates,

(13) failure of planned sales initiatives in our Research and SAFC businesses,

(14) other changes in the business environment in which the Company operates, and

(15) 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

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



                                                       Three Months Ended       Nine Months Ended
                                                         September 30,            September 30,
                                                        2009         2008       2009        2008
Net sales                                            $    533.8    $  540.6   $ 1,575.1   $ 1,690.9
Cost of products sold                                     268.6       262.7       772.0       825.9

Gross profit                                              265.2       277.9       803.1       865.0

Selling, general and administrative expenses              127.2       135.2       383.7       427.4
Research and development expenses                          16.0        16.5        47.4        48.4

Operating income                                          122.0       126.2       372.0       389.2
Interest, net                                               2.4         3.5         8.0        10.9

Income before income taxes                                119.6       122.7       364.0       378.3
Provision for income taxes                                 33.5        40.8       109.9       121.1

Net income                                           $     86.1    $   81.9   $   254.1   $   257.2

Net income per share - Diluted                       $     0.70    $   0.64   $    2.06   $    1.98

Sales

Sales decreased 1.3% for the third quarter of 2009 to $533.8 from $540.6 in the third quarter of 2008. Sales decreased 6.8% for the first nine months of 2009 to $1,575.1 from $1,690.9 in the first nine months of 2008. Organic sales, which is defined as reported sales adjusted for changes in foreign currency exchange rates, for the third quarter and first nine months of 2009 increased 2.3% and 0.6%, respectively. Changes in foreign currency exchange rates decreased reported sales in the third quarter and first nine months of 2009 by 3.6% and 7.4%, respectively, when compared to the same periods last year. Price increases in the three research business units increased sales by 2.8% and 3.4% of the Company's total organic sales change for the third quarter and first nine months of 2009, respectively. The remainder of the sales change was primarily attributable to volume decreases of approximately 0.5% and 2.8% in the third quarter of 2009 and for the first nine months 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
                                            September 30, 2009
                                                 Currency       Adjusted
                                  Reported        Impact        (Organic)
           Research Essentials        (1.5 )%        (4.0 )%          2.5 %
           Research Specialties       (4.3 )%        (3.7 )%         (0.6 )%
           Research Biotech            2.5 %         (2.9 )%          5.4 %

           Research Chemicals         (2.2 )%        (3.6 )%          1.4 %
           SAFC                        1.1 %         (3.7 )%          4.8 %

           Total                      (1.3 )%        (3.6 )%          2.3 %




                                             Nine Months Ended
                                            September 30, 2009
                                                 Currency       Adjusted
                                  Reported        Impact        (Organic)
           Research Essentials        (3.5 )%        (8.2 )%          4.7 %
           Research Specialties       (7.6 )%        (7.8 )%          0.2 %
           Research Biotech           (4.5 )%        (6.7 )%          2.2 %

           Research Chemicals         (5.8 )%        (7.7 )%          1.9 %
           SAFC                       (9.4 )%        (6.6 )%         (2.8 )%

           Total                      (6.8 )%        (7.4 )%          0.6 %

Research Specialties currency adjusted sales in the third quarter of 2009 decreased by 0.6%, while currency adjusted sales increased by 0.2% for the first nine months of 2009 as compared to the same periods in 2008. Strong growth in CAPLA was offset by declines in the U.S. and Europe. Analytical products delivered the best growth in all world areas. Decreased demand in the chemistry and lab equipment product groups outside of CAPLA put pressure on the growth achieved in analytical products. Softness in demand was noted in the worldwide commercial and industrial sectors. During the first nine months of 2009, the analytical product group was the primary driver of growth in all world areas. These gains were offset by softening in demand for chemistry products in the U.S. and Europe. Softness in demand was also noted in the U.S. and Europe in the commercial, industrial and pharmaceutical sectors offset by strong growth for the academic sector in CAPLA.

Research Biotech currency adjusted sales growth in the third quarter and the first nine months of 2009 was 5.4% and 2.2% as compared to the same periods in 2008, respectively. Sales gains in global markets in cell signaling and molecular biology products drove the organic growth in both periods. Sales growth was strongest in CAPLA with more modest growth in the U.S., which offset declines in Europe for the third quarter. The academic sector was the main driver of the growth in the quarter. The trend for the nine months reflects growth driven by cell signaling products. CAPLA and Europe growth offset declines in the U.S. Demand in the academic and nonprofit customers were the major growth contributors in the first nine months.

SAFC currency adjusted sales increased 4.8% and declined 2.8% for the third quarter and first nine months of 2009 compared to the same periods in 2008, respectively. Sales growth in Europe offset declines in the U.S. and CAPLA in the third quarter. During the quarter, the biotechnology and pharmaceutical customer segments showed improved demand. All products reflected growth in Europe during the quarter. This growth was assisted by Bioscience growth in CAPLA. Sales in all world areas showed a decline for the first nine months of 2009 as compared to 2008, although biotechnology and diagnostic customer segments reflected positive sales growth. These gains were more than offset by declines in the industrial, hospital and pharmaceutical customer segments for the first nine months of 2009.

Reported diluted net income per share

Reported diluted net income per share for the third quarter of 2009 increased by 9.4% to $0.70 from $0.64 in the third quarter of 2008. The impact of foreign currency exchange rates lowered diluted earnings per share by $0.10 when compared to the same period last year. The Company's strategic pricing actions, global supply chain activities, lower selling, general and administrative costs and reduced interest expense, partially offset by an unfavorable product mix, contributed $0.11 to diluted earnings per share when compared to the same period last year. See discussion of these items below. A reduction in the Company's quarter-to-date effective tax rate contributed $0.05 to diluted earnings per share when compared to the same period last year. Volume decreases reduced diluted earnings per share by approximately $0.02 in the quarter. Lower fully diluted shares outstanding also added $0.02 to the diluted net income per share in the third quarter of 2009 as compared to the same period in 2008.

Reported diluted net income per share for the first nine months of 2009 increased by 4.0% to $2.06 from $1.98 in the first nine months of 2008. The impact of foreign currency exchange rates lowered diluted earnings per share by $0.34 when compared to the same period last year. The Company's strategic pricing actions, global supply chain activities, lower selling, general and administrative costs and reduced interest expense, partially offset by an unfavorable product mix, contributed $0.52 to diluted earnings per share when compared to the same period last year. See discussion of these items below. A reduction in the Company's year-to-date effective tax rate contributed $0.05 to diluted earnings per share when compared to the same period last year. Volume decreases reduced diluted earnings per share by approximately $0.23 in the first nine months of 2009. Lower fully diluted shares outstanding also added $0.08 to the diluted net income per share in the first nine months of 2009 as compared to the same period in 2008.

                                                   Three Months Ended           Nine Months Ended
                                                      September 30,               September 30,
                                                  2009            2008          2009           2008
Gross profit                                        49.7 %          51.4 %        51.0 %       51.2 %
Selling, general and administrative expenses        23.8 %          25.0 %        24.4 %       25.3 %
Research and development expenses                    3.0 %           3.1 %         3.0 %        2.9 %
Income before income taxes                          22.4 %          22.7 %        23.1 %       22.4 %
Effective tax rate                                  28.0 %          33.3 %        30.2 %       32.0 %

Gross profit margin

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

                                                Three Months Ended             Nine Months Ended
Contributing Factors                            September 30, 2009             September 30, 2009
Unfavorable product mix and other                             (2.5 )%                        (2.3 )%
Favorable pricing                                              2.0 %                          2.4 %
Lower unit sales volume                                       (0.2 )%                        (0.5 )%
Lower manufacturing and distribution
costs                                                          1.1 %                          1.4 %
Unfavorable currency impact                                   (2.1 )%                        (1.2 )%

Net decrease in gross profit margin as
a percentage of sales                                         (1.7 )%                        (0.2 )%

The gross profit margin decrease in the third quarter of 2009 from the third quarter of 2008 as a percentage of sales was primarily due to an unfavorable product mix, negative currency impacts and lower unit sales volume. These decreases were partially offset by the favorable pricing resulting from the Company's strategic pricing actions, as well as the favorable impact of 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. The contributing factors for the nine months ended September 30, 2009 are consistent with those stated above for the third quarter.

Selling, general and administrative expenses

Selling, general and administrative expenses decreased 1.2% as a percentage of sales in the three months ended September 30, 2009 compared to the same period of 2008. Currency impact increased selling, general and administrative expenses by 30 basis points as compared to the same period in 2008. The following categories are explained excluding the impact of currency. Salaries and other employment costs were reduced by 80 basis points due to the Company's continued focus on containment of discretionary spending. Travel and entertainment expenses and advertising and catalog expenses were each reduced by 40 basis points due to company-wide reductions in travel and advertising. Insurance expense increased by 60 basis points due to an adjustment of the future claims estimate that occurred in 2008. Legal and professional expense increased by 30 basis points due to an increase in the use of external resources for various company-wide initiatives. No other changes in expense categories were individually significant as a percentage of sales in the three months ended September 30, 2009.

Selling, general and administrative expenses decreased 0.9% as a percentage of sales in the nine months ended September 30, 2009 compared to the same period of 2008. Currency impact increased selling, general and administrative expenses by 60 basis points as compared to the same period in 2008. The following categories explained exclude the nine month currency impact as compared to the same period in the prior year. Salaries and other employment costs were reduced by 50 basis points due to the Company's continued focus on containment of discretionary spending. Travel and entertainment expenses and advertising and catalog expenses were each reduced by 40 basis points due to company-wide reductions in travel and advertising. These decreases were partially offset by a 30 basis point increase to insurance expense due to an adjustment of the future claims estimate that occurred in 2008. No other changes in expense categories were individually significant as a percentage of sales in the nine months ended September 30, 2009.

Research and development expenses as a percentage of sales was 3.0% for both the three and nine month periods ended September 30, 2009 compared to 3.1% and 2.9% for the three and nine month periods ended September 30, 2009, respectively. Research and development spending primarily relates to our innovation efforts and launches of new manufactured products. Products manufactured by the Company currently account for approximately 60% of total sales. No changes in currency or expense categories were individually significant as a percentage of sales in the three and nine months ended September 30, 2009.

Interest, net

Net interest expense was $2.4 and $3.5 for the three months ended September 30, 2009 and 2008, respectively, and $8.0 and $10.9 for the first nine months of 2009 and 2008, respectively. The decrease in net interest expense is primarily attributable to reduced interest rates on short-term borrowings. During the three months ended September 30, 2009 and 2008, the weighted average interest rate for short-term borrowings was 0.2% and 2.4%, respectively, on average borrowings of $366.3 and $379.2, respectively. During the nine months ended September 30, 2009 and 2008, the weighted average interest rate for short-term borrowings was 0.4% and 2.6%, respectively, on average borrowings of $419.8 and $332.9, respectively. Currency did not have a significant impact on interest expense for the three and nine months ended September 30, 2009.

Income before income taxes

Income before income taxes decreased to $119.6 for the three months ended September 30, 2009 from $122.7 achieved in the same period of 2008. The primary factors driving this decrease were the impact of foreign currency exchange rates and the reduction in sales volume, which reduced income before income taxes by $17.4 and $4.9, respectively. Management was able to partially offset these impacts with its strategic pricing actions, cost containment efforts, supply chain initiatives and reductions in selling, general and administrative expenses as a percentage of sales, as discussed above.

Income before income taxes decreased to $364.0 for the nine months ended September 30, 2009 from $378.3 achieved in the same period of 2008. The primary contributors were the impact of foreign currency exchange rates and the reduction in sales volume, which reduced income before income taxes by $60.4 and $43.3, respectively. Management was able to partially offset these impacts by improvements in gross margin through strategic pricing actions, supply chain initiatives and reductions in selling, general and administrative expenses as a percentage of sales, as discussed above.

Effective tax rate

The effective tax rate for the third quarter of 2009 was 28.0% compared to 33.3% in the same period in 2008, and was 30.2% for the first nine months of 2009 compared to 32.0% for the same period in 2008. The decreases in the third quarter and year-to-date tax rates compared to the same periods in 2008 are due primarily to the reduction of certain tax contingencies resulting from the statute of limitation closures in 2009 and the absence of the U.S. research and development tax credits in 2008.

Net income

Net income for the third quarter of 2009 increased to $86.1 from $81.9 for the quarter ended September 30, 2008 due to the items discussed above.

Net income for the nine months ended September 30, 2009 decreased to $254.1 compared to net income of $257.2 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:



                                                  Nine Months Ended
                                                    September 30,
                                                  2009          2008
              Net cash provided by (used in):
              Operating activities              $  362.2      $  299.8
              Investing activities                (104.3 )       (65.1 )
              Financing activities                (232.7 )      (236.8 )

Net cash provided by operating activities for the nine months ended September 30, 2009 increased $62.4 compared to the same period in 2008. The increase results primarily from a reduction in inventory as the benefits from the supply chain initiative were realized and less cash used for accounts receivable due to lower sales levels and better collection efforts. These cash inflows were offset by higher global tax payments.

Inventory on hand was 7.2 months at September 30, 2009, which is an increase . . .