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Sigma Aldrich Corp – ‘10-K’ for 12/31/08 – EX-13

On:  Friday, 2/27/09, at 4:24pm ET   ·   For:  12/31/08   ·   Accession #:  1193125-9-41007   ·   File #:  0-08135

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 2/27/09  Sigma Aldrich Corp                10-K       12/31/08   10:1.2M                                   RR Donnelley/FA

Document/Exhibit                   Description                      Pages   Size 

 1: 10-K        Annual Report                                       HTML    240K 
 2: EX-10.(V)   Summary Description of the Compensation of          HTML     46K 
                          Non-Employee Directors                                 
 3: EX-10.(W)   Summary Description of the Compensation for the     HTML     49K 
                          Executive Officers                                     
 4: EX-13       Pages 19-46 of the Annual Report to Shareholders    HTML    734K 
                          Year Ended 12/31/2008                                  
 5: EX-21       Subsidiaries of Registrant                          HTML     44K 
 6: EX-23       Consent of Independent Registered Public            HTML     10K 
                          Accounting Firm                                        
 7: EX-31.1     Section 302 Certification of Chief Executive        HTML     15K 
                          Officer                                                
 8: EX-31.2     Section 302 Certification of Chief Financial        HTML     15K 
                          Officer                                                
 9: EX-32.1     Section 906 Certification of Chief Executive        HTML      9K 
                          Officer                                                
10: EX-32.2     Section 906 Certification of Chief Financial        HTML      9K 
                          Officer                                                

Exhibit 13

Selected Financial Data

(Unaudited)

Common Stock Data (per share):

The Company’s common stock is traded in the National Association of Securities Dealers Automated Quotation System (“NASDAQ”) Global Select Market. The trading symbol is SIAL.

On January 31, 2009, there were 764 record holders of the Company’s common stock.

See Management’s Discussion and Analysis related to items affecting the comparability of results and accounting changes for the financial data presented below.

Annual Financial Data ($ In Millions, except per share data):

All per share and common stock information presented above prior to 2007 has been retroactively adjusted to reflect the December 2006 common stock split.

19

Exhibit 13 (continued)

Sigma-Aldrich

2008 Financial Report

Table of Contents

20

Exhibit 13 (continued)

Management’s Discussion And Analysis

($ In Millions, Except Per Share Data)

The following should be read in conjunction with the consolidated financial statements and related notes.

INTRODUCTION

Sigma-Aldrich Corporation (“the Company”) is a leading Life Science and High Technology company. The Company develops, manufactures, purchases and distributes the broadest range of high quality chemicals, biochemicals and equipment available throughout the world. These 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. The Company operates in 37 countries, manufacturing 46,000 of the 100,000 chemical products it offers. The Company also offers 30,000 equipment products. The Company sells into nearly 160 countries, servicing over 88,000 accounts representing over one million individual customers.

The Company has four business units featuring the Research units of Essentials, Specialties and Biotech and the Fine Chemicals unit, SAFC. The units are closely interrelated in their activities and share services such as order entry, billing, technical services, Internet, purchasing and inventory control and share production and distribution facilities. Additionally, these units are supported by centralized functional areas such as finance, human resources, quality, safety and compliance and information technology.

Research Essentials, representing 19% of sales, provides customized, innovative solutions for our economic buyers. Research Specialties, representing 38% of sales, facilitates accelerated research by lab scientists through information and innovation in services and new products. Research Biotechnology, representing 15% of sales, provides innovative first-to-market products and technologies for the Life Science researcher. SAFC, representing 28% of sales, drives commercial project managers’ success through rapid delivery of custom projects.

The Company has a broad customer base of commercial laboratories, pharmaceutical companies, industrial companies, universities, diagnostics companies, biotechnology companies, electronics companies, hospitals, governmental institutions and non-profit organizations located in the United States and internationally, and would not be significantly impacted by the loss of any one customer. However, economic conditions and government research funding in the United States and internationally do impact demand from our customers.

The current uncertainty in the global markets reduces future visibility, making it difficult to forecast sales with a desirable level of certainty. Demand from several of the Company’s key markets is expected to decline in 2009, but with new program launches, global sales initiatives and market share gains, the Company expects to be able to achieve low single digit organic sales growth in 2009.

HIGHLIGHTS

Reported sales increased 7.9% to $2,200.7 in 2008 from $2,038.7 in 2007. Organic sales growth, excluding currency impacts and the contribution from the acquisition of Epichem, Ltd. (Epichem), was 5.0% in 2008. The impact of changes in currency rates increased otherwise reportable sales growth by 2.7%.

Reported net income in 2008 increased 9.8% to $341.5 from $311.1 in 2007. The increase in net income in 2008 resulted from an improved gross profit margin reflecting the benefits of pricing actions and favorable currency, selling, general and administrative expenses that were consistent with 2007 due to successful efforts to control costs to offset losses on equity investments and a litigation settlement, and lower net interest expense due primarily to lower interest rates.

Diluted earnings per share in 2008 increased 13.2% to $2.65 from $2.34 in 2007. The increase in diluted earnings per share resulted from items identified in the discussion of net income and benefits from share repurchase activity during 2008.

Reported sales increased 13.4% to $2,038.7 in 2007 from $1,797.5 in 2006. Organic sales growth, excluding currency impacts and the contribution from the acquisition of Epichem, Ltd. (Epichem), was 6.5% in 2007. The impact of changes in currency rates increased otherwise reportable sales growth by 4.8%. The acquisition of Epichem in February 2007 added 2.1% to sales growth.

Reported net income in 2007 increased 12.4% to $311.1 from $276.8 in 2006. The increase in net income in 2007 resulted from organic sales growth in each of the Company’s four business units, lower selling, general and administrative expense levels and lower net interest costs. A higher effective tax rate partially offset net income improvement.

Diluted earnings per share in 2007 increased 14.1% to $2.34 from $2.05 in 2006. The increase in diluted earnings per share resulted from items previously identified in the discussion of net income, with additional benefits from share repurchase activity.

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, and where indicated, acquisition impacts. While we are able to report currency impacts after the fact, we are unable to estimate changes that may occur in 2009 to applicable exchange rates and are 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 our 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 and the sales benefit from acquisitions. The Company excludes these other items in judging its historical performance and in assessing its expected future performance. Management also uses free cash flow, a non-GAAP measure, to judge its performance. Management believes this non-GAAP information is useful to investors as well.

21

Exhibit 13 (continued)

Management’s Discussion And Analysis (continued)

($ In Millions, Except Per Share Data)

The following should be read in conjunction with the consolidated financial statements and related notes.

CRITICAL ACCOUNTING ESTIMATES

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to use judgment in making estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the years presented. Actual results could differ from those estimates under different assumptions or conditions.

The following accounting policies are based on, among other things, judgments and assumptions made by management that include inherent risks and uncertainties. Management’s estimates are based on the relevant information available at the end of each period.

Inventories Inventories are valued at the lower of cost or market. The Company regularly reviews inventories on hand and records a provision for slow-moving and obsolete inventory, inventory not meeting quality standards and inventory subject to expiration. The provision for slow-moving and obsolete inventory is based on current estimates of future product demand, market conditions and related management judgment. Any significant unanticipated changes in future product demand or market conditions that vary from current expectations could have an impact on the value of inventories.

Long-Lived Assets Long-lived assets, including intangibles with definite lives, are amortized over their expected useful lives. Goodwill and other intangibles with indefinite lives are not amortized against earnings. Goodwill is assessed annually for impairment. All long-lived assets are assessed whenever events and changes in business conditions indicate that the carrying amount of an asset may not be fully recoverable. If impairment is indicated, the asset value is written down to its fair market value. Any significant unanticipated changes in business or market conditions that vary from current expectations could have an impact on the fair market value of these assets and any potential associated impairment.

Pension and Other Post-Retirement Benefits The determination of the obligation and expense for pension and other post-retirement benefits is dependent on the Company’s selection of certain assumptions used by actuaries to calculate such amounts. Those assumptions are described in Note 13 to the consolidated financial statements and include, among others, the discount rates, expected return on plan assets and rates of increase in compensation and health care costs.

In accordance with U.S. generally accepted accounting principles, actual results that differ from the assumptions are accumulated and amortized over future periods and therefore, generally affect the recognized expense and recorded obligation in such future periods. While the Company believes that the assumptions are appropriate, significant differences in actual experience or significant changes in the assumptions may materially affect the Company’s pension and other post-retirement benefit obligations and the Company’s future expense. A 1% increase in the discount rate assumption would have reduced the net periodic benefit cost by $0.8 for the U.S. plans and $2.3 for the International plans. A 1% reduction in the discount rate assumption would have increased the net periodic benefit cost by $0.8 for the U.S. plans and $5.5 for the International plans. A 1% change in the expected return on plan assets would have an impact on the Company’s pension expense of $2.7.

Stock Options The Company accounts for stock-based compensation in accordance with Statement of Financial Accounting Standards No. 123 (Revised 2004), “Share-Based Payment” (SFAS 123(R)). Under the provisions of SFAS 123(R), stock-based compensation cost for stock options is estimated at the grant date based on the award’s fair value as calculated by the Black-Scholes option-pricing model and is recognized as expense ratably over the requisite service period. The Black-Scholes model requires the input of various estimates including volatility, forfeiture rates and expected option life. Those inputs to the Black-Scholes model are described in Note 11 to the consolidated financial statements. If any of the assumptions in future periods used in the Black-Scholes model vary significantly from current expectations, future stock-based compensation expense may also change significantly. Therefore, current year stock-based compensation expense is not necessarily indicative of future results.

Taxes The Company operates within multiple taxing jurisdictions and is subject to audit in these jurisdictions. These audits can involve complex issues, which may require an extended period of time to resolve. The Company regularly reviews its potential tax liabilities for tax years subject to audit. Changes in the Company’s tax provision and liability occurred in 2008, 2007 and 2006 and may occur in the future as its assessments change based on the progress of tax examinations in various jurisdictions and/or changes in worldwide tax regulations. In management’s opinion, adequate provisions for income taxes have been made for all years presented.

Deferred tax assets and liabilities are recognized for the future tax benefits or liabilities attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates would be recognized in income in the period that includes the enactment date. The Company regularly reviews its deferred tax assets for recoverability and establishes a valuation allowance when it believes that such assets may not be recovered, taking into consideration historical operating results, expectations of future earnings, changes in its operations and the expected timing of the reversals of existing temporary differences.

22

Exhibit 13 (continued)

Management’s Discussion And Analysis (continued)

($ In Millions, Except Per Share Data)

The following should be read in conjunction with the consolidated financial statements and related notes.

OPERATING RESULTS

Sales Sales increased 7.9%, 13.4%, and 7.9% in 2008, 2007 and 2006, respectively. Sales increases were primarily attributable to improved unit volume growth, price increases, currency benefits and acquisitions. The Company’s pricing strategy changed in 2008 to reflect the pressure that the Company was facing from its vendors, including products dependant on petroleum. The 2008 price increase was responsible for approximately 2% of the indicated sales increase. New product sales, while not material in the year introduced, do contribute to sales growth in subsequent years. The effect of translating foreign currency sales into U.S. dollars increased the 2008, 2007 and 2006 sales growth by 2.7%, 4.8%, and 0.4%, respectively.

Reported sales growth, currency benefits, sales increases from acquisitions and the adjusted sales changes are as follows:

Currency and acquisition adjusted sales growth in Research Essentials, Research Specialties, Research Biotech and SAFC for 2008 was 4.9%, 6.4%, 7.0% and 2.5%, respectively. Research Essentials sales growth was due to solid demand in all world areas with the strongest growth in CAPLA (Canada, Asia Pacific and Latin America). Customer segments primarily driving the unit’s growth were commercial labs and industrial companies. Research Specialties sales growth was due to gains in biotechnology, hospital and academic accounts. Product initiatives driving this growth were Analytical and Lab equipment. Europe was the strongest driver of growth from a geography perspective. Research Biotech had its strongest growth in CAPLA followed closely by the U.S. customer segments. Contributing to this growth were commercial, industrial and diagnostics companies. Molecular biology was the strongest initiative in terms of growth over the prior year. SAFC growth in 2008 was driven by strong demand in biotechnology, diagnostics, commercial labs and academic customer segments. Demand for SAFC products in CAPLA showed the strongest growth over the prior year compared to Europe and the U.S. Hitech was the initiative with the most momentum during 2008.

Currency and acquisition adjusted sales growth in Research Essentials, Research Specialties, Research Biotech and SAFC for 2007 was 4.6%, 8.3%, 3.7% and 7.1%, respectively. Research Essentials’ sales growth was due to strong demand in all customer segments and all geographies, with particularly strong growth in the industrial and pharmaceutical customer segments and the cell culture and lab essentials product initiatives. Research Specialties delivered sales growth that was helped by increased sales to pharmaceutical and academic accounts in Europe, the U.S. and CAPLA. Better product availability from intentional inventory increases and new supplier relationships in CAPLA markets continued to fuel double-digit organic growth in CAPLA. Customer-centric marketing programs aimed at serving pharmaceutical customers and their contract research organizations wherever located around the globe continued to gain traction. Research Biotech growth was driven by strong spending by academic customers in Europe and by growth in molecular biology and peptide products in both the U.S. and Europe in the latter part of the year. 2007 growth was impacted by softness in demand for synthetic DNA products. The addition of sales specialists and ongoing expansion of product offerings through internal development and technology licenses contributed to resurgent growth during the last half of 2007. Hitech products, including sales from Epichem, helped SAFC drive double-digit growth with commercial and industrial customers in European and CAPLA markets. Strong sales to pharmaceutical customers in the U.S. also contributed to this unit’s growth. Demand for industrial cell culture products declined during the second half of 2007.

Our goal to accelerate growth in our non-European international markets was achieved, increasing sales in these markets to approximately 22%, which includes 2% from export sales from other global regions, of total sales for 2008. Our focus countries of China, India and Brazil collectively increased reported sales at a double-digit rate in 2008. Our initiative to build on our Internet superiority continued to drive sales growth. Web-based sales increased to 42% of total Research based sales in 2008 from 40% in 2007.

Full year 2009 currency and acquisition adjusted sales are expected to grow modestly at a low single-digit rate. At 2008 year-end rates, currency is expected to negatively impact sales in 2009 versus providing a benefit as it has in 2006 and 2007. The current economic environment makes predicting future sales particularly challenging. We believe some business units will be more impacted by the global economic slowdown, specifically SAFC with its larger dependence on the pharmaceutical industry. There is also uncertainty about the funding of biotech companies which may also impact our Research businesses. Academic spending is also uncertain.

23

Exhibit 13 (continued)

Management’s Discussion And Analysis (continued)

($ In Millions, Except Per Share Data)

The following should be read in conjunction with the consolidated financial statements and related notes.

OPERATING RESULTS (continued)

Gross Profit Margin Gross profit margin was 51.3%, 50.8%, and 51.2% of sales in 2008, 2007 and 2006, respectively. The following table reflects the significant contributing factors to the net change in gross profit margin for the years ended December 31, 2008, 2007 and 2006, respectively, as a percentage of sales compared to the same period in the prior year:

The increase in gross profit margin as a percent of sales of 0.5% in 2008 was primarily due to currency benefits, favorable pricing and higher unit volumes. These were offset by unfavorable product mix and higher manufacturing and distribution costs.

The decrease in gross profit margin as a percent of sales of 0.4% in 2007 is primarily due to higher manufacturing and distribution costs partially offset by favorable pricing, increased unit sales volume and favorable currency benefits. There was also downward pressure on gross profit margin from a lower margin acquired business in 2007.

We have various cost containment initiatives underway including a supply chain initiative, which we expect to provide benefits in 2009. We expect currency to have a negative impact on the gross profit margin in 2009.

Selling, General and Administrative Expenses Selling, general and administrative expenses were 25.5%, 25.4%, and 25.8% of sales in 2008, 2007 and 2006, respectively. Losses on equity investments and a legal settlement were the primary drivers of the increase in selling general and administrative expenses in 2008 representing a 0.5% increase as a percent of sales. These amounts were primarily offset by decreases in salaries and wages and legal and professional consulting expenses, aggregating 0.4% of sales. Insurance expense decreased by 0.6% of sales in 2007 as compared to 2006 as a result of decreased claims activity and other recoveries. No other expense category was individually significant as a percent of sales in explaining the change from 2006 to 2007.

Research and Development Expenses Research and development expenses were 2.9% of sales in 2008, 2007 and 2006. The research and development expenses relate primarily to efforts to add new manufactured products. All manufactured products currently account for approximately 60% of total sales.

Interest Expense, Net Net interest expense reduced pretax earnings by $14.3, $22.0, and $24.0 in 2008, 2007 and 2006, respectively. Lower interest rates in 2008 reduced net interest expense compared to 2007, partially offset by higher debt levels in 2008. Lower interest rates during 2007 and shifting debt from higher rate to lower rate world areas reduced net interest expense in 2007 compared to 2006, even with consistently higher debt levels during 2007 as compared to 2006.

Income Taxes Income taxes, which include federal, state and international taxes were 30.2%, 28.9%, and 26.9% of pretax income in 2008, 2007 and 2006, respectively. The higher effective tax rate for the full year of 2008 compared to the same period in 2007 is primarily due to a decrease in the U.S. manufacturing deduction in 2008. The higher effective tax rate for the full year of 2007 compared to the same period in 2006 reflects the absence of a net benefit from audit activity in 2007 and expiring U.S. export tax benefits in 2006, partially offset by increases in the U.S. manufacturing deduction and net international taxes benefits in 2007.

Our effective tax rate for 2009 is expected to be in the range of 31–32%, due to a reduction in net international taxes benefit and an increased charge for tax audit and related contingencies.

Accounting Changes In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (SFAS 158). SFAS 158 requires companies to recognize, on a prospective basis, the funded status of their defined benefit pension and other post-retirement benefit plans in the Consolidated Balance Sheets and recognize as a component of other comprehensive income, net of tax, the gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit costs. SFAS 158 also requires additional disclosures in the notes to the consolidated financial statements and the use of a company’s fiscal year-end as the measurement date for plan assets and benefit obligations, eliminating the use of earlier measurement dates that were previously permissible. The Company adopted all provisions of SFAS 158 as of December 31, 2006, except the measurement date requirement. The net impact of applying SFAS 158 on the Company’s 2006 consolidated financial statements was a $31.7 reduction of stockholders’ equity. The new measurement date requirement is effective for fiscal years ending after December 15, 2008. The adoption of the measurement date provision did not have a significant impact on the consolidated financial statements.

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007), “Business Combinations” (SFAS 141(R)). SFAS 141(R) establishes principles and requirements for how an acquiring entity recognizes and measures in its financial statements the assets acquired and liabilities assumed. SFAS 141(R) also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS 141(R) is effective for fiscal years beginning after December 15, 2008, and will be applied prospectively to acquisitions beginning January 1, 2009. As this adoption impacts prospective acquisitions, the adoption of SFAS 141(R) is not expected to have a significant impact on the Company’s consolidated financial statements.

In December 2007, the EITF reached a consensus on EITF Issue No. 07-1, “Accounting for Collaborative Arrangements” (EITF 07-1). EITF 07-1 addresses the accounting for activities of collaborative arrangements outside of an established separate legal entity, such as those to jointly develop and commercialize intellectual property. Under EITF 07-1, revenues and costs incurred with third parties in connection with the collaborative arrangement should be presented gross or net based on the criteria in EITF Issue No. 99-19, “Reporting Revenue Gross as Principal versus Net as an Agent” and other applicable accounting literature. The consensus is effective for fiscal years beginning after December 15, 2008, and will be applied to using a retrospective method that requires reclassification in all periods presented for those arrangements still in effect at January 1, 2009. The adoption of EITF 07-1 is not expected to have a significant impact on the Company’s consolidated financial statements.

24

Exhibit 13 (continued)

Management’s Discussion And Analysis (continued)

($ In Millions, Except Per Share Data)

The following should be read in conjunction with the consolidated financial statements and related notes.

OPERATING RESULTS (continued)

In April 2008, the FASB issued FASB Staff Position FAS 142-3, “Determination of the Useful Life of Intangible Assets” (FSP FAS 142-3). FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (SFAS 142). The intent of FSP FAS 142-3 is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141(R). FSP FAS 142-3 is effective for fiscal years beginning after December 15, 2008. The Company does not expect the impact of FSP FAS 142-3 on its consolidated financial statements to be significant.

In December 2008, the FASB issued FASB Staff Position (FSP) No.132 (R)-1, “Employers’ Disclosures about Pensions and Other Postretirement Benefits” (FSP 132(R)-1). FSP 132(R)-1 provides additional guidance regarding disclosures about plan assets of defined benefit pension or other postretirement plans. FSP 132(R)-1 is effective for fiscal years ending after December 15, 2009. The Company does not expect the impact of FSP FAS 132(R)-1 on its consolidated financial statements to be significant.

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:

Operating Activities Net cash provided by operating activities decreased $13.0 or 3.1% in 2008 compared to 2007. This decrease results primarily from higher pension plan contributions and investments in working capital to support current year growth which were partially offset by increased net income and net changes in income taxes.

Net cash provided by operations increased $88.7 or 26.8% in 2007 compared to 2006. The increase relates primarily to higher net income from operations, including the $19.0 non-cash impact of stock-based compensation expense. The most significant offset to operating cash inflows was the impact of higher inventory balances at December 31, 2007 as compared to 2006 when high accounts receivable balances were the significant impact. Higher inventory balances are due to intentional international inventory increases to improve service to customers in CAPLA markets. Income taxes paid in 2007 were impacted by the timing of international payments resulting in an increase in accrued income taxes at December 31, 2007.

Investing Activities Cash used in investing activities decreased $62.3 primarily due to lower levels of acquisition activity in 2008 as compared to 2007. Capital expenditures increased $12.3, or 15.9%, from 2007 to $89.9 in 2008, to expand our business systems and website capabilities, as well as increasing production and warehousing capacity at certain locations.

Investing activities in 2007 were focused on capital expenditures to upgrade our website, continuing to expand our business systems utilizing SAP software, and providing incremental production capacity for material science and pharmaceutical customers. These activities are included in the $77.6 of capital expenditures in 2007. Acquisitions used another $67.6 of cash in 2007.

For 2009, capital spending is expected to be approximately $110.0.

Financing Activities In 2008, cash used in financing activities increased $61.9 from 2007. This increase is due primarily to payments for treasury stock purchases of $421.2 compared to $184.3 in 2007, as well as repayment of $90.0 in long-term debt. These cash outflows were partially offset by an increase in short-term debt, net of repayments, of $270.5 in 2008 compared to $61.8 in 2007.

In 2007, financing cash outflows included the repayment of long-term debt of $69.7 and payment of dividends of $60.0. The most significant outflow was for the purchase of treasury stock at $184.3. Cash inflows of $94.2 were received from the exercise of stock options and the issuance of short-term debt.

In March 2007, the Company entered into a $200.0 seven-year multi-currency European revolving credit facility with a syndicate of banks having a maturity date of March 13, 2014. Borrowings of $135.9 and $56.5 were outstanding at December 31, 2008 and 2007, respectively.

Long-term debt at December 31, 2008 was $200.1 compared to $207.0 in 2007. Total debt as a percentage of total capitalization was 34.6% and 25.0% at December 31, 2008 and 2007, respectively. The significant change in the percentage primarily relates to the stock repurchase of $421.2 which (1) decreased equity and therefore increased the total debt as a percentage of total capitalization and (2) also contributed to the $197.5 increase in short-term debt.

For a description of the Company's material debt covenants, see Notes 5 and 6 to the consolidated financial statements.

Share Repurchases At December 31, 2008 and December 31, 2007, the Company had repurchased a total of 92.3 million shares and 84.0 million shares, respectively. On October 20, 2008, the Board of Directors authorized the repurchase of up to an additional 10.0 million shares under the existing repurchase program, to be available for purchase within three years, bringing the total authorization to 100.0 million shares. There were 122.1 million shares outstanding as of December 31, 2008. The Company expects to acquire the remaining 7.7 million authorized shares; however, the timing of these future repurchases, if any, will depend upon market conditions and other factors.

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 might be 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, its credit facilities and long-term debt 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 continues to assess the potential impact of recent trends in the global economic environment on its liquidity and overall financial condition, particularly with respect to the Company’s availability of and access to short-term credit, including the market for commercial paper. Management does not believe that a significant risk exists of commercial paper or other credit becoming unavailable 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, acquisitions, dividends, share repurchases, funding of pension and other post-retirement benefit plan obligations, and working capital presently and for the next 12 months.

25

Exhibit 13 (continued)

Management’s Discussion And Analysis (continued)

($ In Millions, Except Per Share Data)

The following should be read in conjunction with the consolidated financial statements and related notes.

OTHER MATTERS

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 December 31, 2008 and 2007.

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 will be submitted to the court for approval. 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 14 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 responsibility for phase one, existence of liability. The case is currently in the compensatory damages phase, where, because no class status exists, each plaintiff must individually establish actual damages. The initial phase two, compensatory damages trial, for 31 plaintiffs was completed on April 27, 2007 with a jury verdict establishing actual damages of approximately two hundred dollars per plaintiff. The plaintiffs filed an appeal staying further action on the case until the appeal has been resolved. The appellate court granted in part and denied in part plaintiffs’ appeal on evidentiary rulings and jury instructions, and the Company has appealed some elements of that decision to the Ohio Supreme Court. The Company continues to believe it has substantial legal defenses to the allegations, which it will vigorously assert.

The Company believes its reserves and insurance are sufficient to provide for claims outstanding at December 31, 2008. While the outcome of the current claims cannot be predicted with certainty, the possible outcome of the claims is reviewed at least quarterly and reserves adjusted as deemed appropriate based on these reviews. Based on current information available, the Company believes that the ultimate resolution of these matters will not have a material adverse effect on its consolidated financial condition, results of operations or liquidity. Future claims related to the use of these categories of products may not be covered in full by the Company’s insurance program.

At December 31, 2008, there were no other known contingent liabilities that management believes could have a material adverse effect on the Company’s consolidated financial condition or results of operations, nor were there any material commitments outside of the normal course of business. Material commitments in the normal course of business include notes payable, long-term debt, lease commitments and pension and other post-retirement benefit obligations which are disclosed in Note 5, Note 6, Note 8 and Note 13, respectively, to the consolidated financial statements for the year ended December 31, 2008.

INFLATION

Management recognizes that inflationary pressures may have an adverse effect on the Company through higher asset replacement costs and higher material and other operating costs. The Company tries to minimize these effects through cost reductions and productivity improvements as well as price increases to maintain reasonable profit margins. It is management’s view, however, that inflation has not had a significant impact on operations in the three years ended December 31, 2008.

26

Exhibit 13 (continued)

Management’s Discussion And Analysis (continued)

($ In Millions, Except Per Share Data)

The following should be read in conjunction with the consolidated financial statements and related notes.

MARKET RISK SENSITIVE INSTRUMENTS AND POSITIONS

The market risk inherent in the Company’s financial instruments and positions represents the potential loss arising from adverse changes in interest rates and foreign currency exchange rates.

Interest Rates At December 31, 2008, the Company’s outstanding debt represents 34.6% of total capitalization. Approximately 28.4% of the Company’s outstanding debt at December 31, 2008 is at a fixed rate. Cash flows from operations and available credit facilities are sufficient to meet the working capital requirements of the Company. It is management’s view that market risk or variable interest rate risk will not significantly impact the Company’s results of operations.

Foreign Currency Exchange Rates The functional currency of the Company’s international subsidiaries is generally the dominant currency in the respective country of residence of the subsidiary. The translation from the functional currencies to the U.S. dollar for revenues and expenses is based on the average exchange rate during the period. Large increases or decreases in the spread between currencies have affected and may continue to affect the Company’s revenues, revenue growth rates, gross profit margins, net income and stockholders’ equity.

The Company transacts business in many parts of the world and is subject to risks associated with changing foreign currency exchange rates. The Company’s objective is to minimize the impact of foreign currency exchange rate changes during the period of time between the original transaction date and its cash settlement. Accordingly, the Company uses forward exchange contracts to stabilize the value of certain receivables and payables denominated in foreign currencies. Most of the contracts are single currency. Gains and losses on these contracts, based on the difference in the contract rate and the spot rate at the end of each month for all contracts still in force, are typically offset either partially or completely by transaction gains and losses, with any net gains and losses included in selling, general and administrative expenses. The market risk of foreign currency rate changes represents the potential loss in fair value of net currency positions at year-end due to an adverse change in foreign currency exchange rates. The Company does not enter into foreign currency contracts for speculative trading purposes. The Company’s policy is to manage the risks associated with existing receivables, payables and commitments.

The Company continues to assess the potential impact of recent trends in the global economic environment on the availability of and its access to these forward currency exchange contracts in the open market, as well as the ability of the counterparties to meet their obligations. Based on the relative stability of the significant foreign currencies utilized by the Company, management does not believe that a significant risk exists of these forward contracts becoming unavailable in the global marketplace within the next 12 months.

The market risk of the Company’s foreign currency positions at December 31, 2008, assuming a hypothetical 10% change in foreign currency exchange rates, would be less than $3.5.

AGGREGATE CONTRACTUAL OBLIGATIONS

The following table represents contractual obligations of the Company at December 31, 2008:

See Notes 6 and 8 to the consolidated financial statements for additional disclosures related to long-term debt and lease commitments, respectively. See Note 13 to the consolidated financial statements for the Company’s obligations with respect to its pension and post-retirement medical benefit plans.

FORWARD-LOOKING STATEMENTS

Management’s Discussion and Analysis and other sections of this Annual Report to shareholders should be read in conjunction with the consolidated financial statements and notes thereto. Except for historical information, the statements in this discussion may constitute 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,” “plans,” “anticipates,” “should” or similar expressions, and other statements contained herein regarding matters that are not historical facts. Additionally, this Annual Report to shareholders 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, return on equity, cash flow, 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 Annual Report to shareholders, 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 our 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 9 – Income Taxes to the consolidated financial statements, (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 the acquisitions, (12) other changes in the business environment in which the Company operates, and (13) the outcome of the matters described in Note 10 – Contingent Liabilities and Commitments — to the consolidated financial statements. A further discussion of the Company’s risk factors can be found in Item 1A of the Company’s December 31, 2008 Form 10-K. The Company does not undertake any obligation to update these forward-looking statements.

27

Exhibit 13 (continued)

Consolidated Statements of Income

($ In Millions, Except Per Share Data)

The accompanying notes are an integral part of these statements.

28

Exhibit 13 (continued)

Consolidated Balance Sheets

($ In Millions, Except Per Share Data)

The accompanying notes are an integral part of these statements.

29

Exhibit 13 (continued)

Consolidated Statements of Stockholders’ Equity

($ In Millions, Except Per Share Data)