The following is a discussion and analysis of our financial condition and results of operations for the three months ended June 30, 2009 as compared to June 30, 2008. This discussion should be read in conjunction with the Condensed Financial Statements and Notes to Condensed Financial Statements included in this Form 10-Q and Item 8 of our Annual Report on Form 10-K as filed with the SEC on June 5, 2009.

Overview

We derive substantially all of our revenues from the sale of bulk and specialty chemicals to our customers in a wide variety of industries. We began our operations primarily as a distributor of bulk chemicals with a strong customer focus. Over the years we have maintained our strong customer focus and have expanded our business by increasing our sales of value-added specialty chemical products, including repackaging, blending and manufacturing certain products. In recent years, we significantly expanded the sales of our higher-margin blended and manufactured products. We expect this specialty chemical portion of our business to continue to grow.

We have continued to invest in growing our business. In fiscal 2009, we invested in two new facilities, which we expect will expand our ability to service our customers and facilitate growth within our Industrial Group. Our new facility in Centralia, Illinois began operations in July 2009 and primarily serves our food-grade products business. Additionally, our new facility in Minneapolis, Minnesota, built to handle bulk chemicals sold to pharmaceutical manufacturers, is currently operational. The total capital expenditures on these two facilities were approximately $7,500,000 in fiscal 2009 and $2,200,000 in the first three months of fiscal 2010, with approximately $400,000 of additional capital spending on these facilities expected in the second quarter of fiscal 2010. We opened one branch for our Water Treatment Group in the first quarter of fiscal 2010 and expect to continue to invest in new branches to expand our geographic coverage. The cost of these new branches is not expected to be material.

In February 2009, we entered into two agreements whereby we agreed to sell our inventory and enter into a marketing relationship regarding the business of our Pharmaceutical Segment, which provided pharmaceutical chemicals to retail pharmacies and small-scale pharmaceutical manufacturers. The transaction closed in May 2009 and we have no significant obligations to fulfill under the agreements. The results of the Pharmaceutical Segment have been reported as discontinued operations in our Condensed Financial Statements and Notes to Condensed Financial Statements for all periods presented in this Report on Form 10-Q.

In the first quarter of fiscal 2009, the prices of the majority of our primary raw materials began to increase rapidly and substantially and we continued to experience those pricing trends through the third quarter of fiscal 2009. We saw prices level off in the fourth quarter of fiscal 2009 and prices have declined significantly in the first quarter of 2010 as a result of the slower economy and lower demand for many of the commodity chemicals we sell, although market prices for many of the commodity chemicals were still higher in the first quarter of 2010 than they were one year ago. However, in this period of rapidly declining prices, we were negatively impacted by selling higher cost inventory on hand at lower market prices in the first quarter of fiscal 2010. This is the opposite of what was occurring in fiscal 2009 where our inventory costs were lower than the market prices. Using the last in, first out (LIFO) method of valuing inventory partially offsets the impact of the rapidly changing prices as the LIFO reserve decreased, due to declining costs, which increased our reported gross profit by $2,825,000 in the first quarter of fiscal 2010. In last year's first quarter, the LIFO reserve increased, due to rising costs, which decreased the reported gross profit for that quarter by $1,663,000. As previously disclosed we expect our fiscal 2010 business and the gross profit realized to return to levels more in line with our historic results prior to fiscal 2009.

While market forces in fiscal 2009 generated higher gross profit dollars and gross profit margins as a percentage of sales than we had experienced in the past, we seek to maintain relatively constant gross profit dollars on each of our products as the cost of our commodity chemical raw materials increase or decrease. Our product costs are subject to fluctuations, which are expected to continue in future periods. With this volatility in cost and the resulting fluctuations in selling prices, we believe that gross profit dollars is the best measure of our profitability from the sale of our products. If we maintain relatively stable profit dollars on each of our products, our reported gross margin percentage will decrease when the cost of the product increases and will increase when the cost of the product decreases. We use the LIFO method of valuing inventory, which causes the most recent product costs to be recognized in our income statement. The LIFO inventory valuation method and the resulting cost of sales are consistent with our business practices of pricing to current commodity chemical raw material prices.

Results of Operations

The following table sets forth the percentage relationship of certain items to
sales for the period indicated (in thousands, except percentages):


                                       Three months ended June 30,           Three months ended June 30,
                                                  2009                                  2008

Sales                               $         73,586            100.0 %   $         62,554            100.0 %
Cost of sales                                (57,730 )          (78.5 )            (49,113 )          (78.5 )
Gross profit                                  15,856             21.5               13,441             21.5
Selling, general and
administrative expenses                       (6,355 )           (8.6 )             (6,033 )           (9.6 )
Operating income                               9,501             12.9                7,408             11.8
Investment income                                  9              0.0                  141              0.2
Income from continuing
operations before income taxes                 9,510             12.9                7,549             12.1
Provision for income taxes                    (3,566 )           (4.8 )             (2,808 )           (4.5 )
Incoming from continuing
operations                                     5,944              8.1                4,741              7.6
Income from discontinued
operations, net of tax                           109              0.1                  135              0.2
Net income                          $          6,053              8.2 %   $          4,876              7.8 %

Sales

Sales increased $11,032,000, or 17.6%, to $73,586,000 in the three months ended June 30, 2009 as compared to $62,554,000 in the same period a year ago. Sales of bulk chemicals, including caustic soda, were approximately 25% of sales during the three months ended June 30, 2009 and 33% of sales during the three months ended June 30, 2008. The decrease in sales of bulk chemicals as a percentage of total sales was due to a combination of price and volume decreases resulting from lower commodity chemical prices and weaker demand related to the economic slowdown. The decline in bulk chemical sales, which was partially driven by lower caustic soda volumes sold, was offset by higher sales within the Water Treatment segment and of our specialty blended and manufactured products within the Industrial segment.

Industrial Segment. Industrial segment sales increased $8,512,000, or 20.7%, to $49,720,000 for the three months ended June 30, 2009 as compared to the same period of the prior year. The sales increase was primarily attributable to higher selling prices related to higher commodity chemical material costs along existing product lines compared to a year ago and to a lesser extent volume increases in higher-value manufactured and specialty chemical products.

Water Treatment Segment. Water Treatment segment sales increased $2,520,000, or 11.8%, to $23,866,000 for the three months ended June 30, 2009 as compared to the same period of the prior year. The sales increase was primarily due to increases in selling prices related to higher material costs as well as an increase in sales of specialty chemical products.

Gross Profit

Gross profit was $15,856,000, or 21.5% of sales, for the three months ended June 30, 2009, as compared to $13,441,000, or 21.5% of sales, for the three months ended June 30, 2008. Due to decreases in certain raw material costs, the LIFO method of valuing inventory positively impacted gross profit by $2,825,000 for the three months ended June 30, 2009, whereas LIFO negatively impacted gross profit by $1,663,000 for the three months ended June 30, 2008 due to increases in raw material costs.

Industrial Segment. Gross profit for the Industrial segment was $8,441,000, or 17.0% of sales, for the three months ended June 30, 2009, as compared to $7,125,000, or 17.3% of sales, for the three months ended June 30, 2008. The LIFO method of valuing inventory positively impacted gross profit in this segment by $2,154,000 in fiscal 2010 and negatively impacted gross profit by $1,332,000 in fiscal 2009. Excluding the LIFO impact, gross profit decreased by $2,170,000 and the gross profit margin as a percent of sales decreased to 12.6%. These decreases were attributable to the sale of inventory purchased earlier at a higher cost with decreasing chemical commodity prices. The decreases were partially offset by higher volumes sold of value-added manufactured and specialty chemical products.

Water Treatment Segment. Gross profit for the Water Treatment segment was $7,415,000, or 31.1% of sales, for the three months ended June 30, 2009, as compared to $6,316,000, or 29.6% of sales, for the three months ended June 30, 2008. The LIFO method of valuing inventory positively impacted gross profit in this segment by $671,000 in fiscal 2010 and negatively impacted gross profit in fiscal 2009 by $331,000. Excluding the LIFO impact, gross profit increased slightly and gross profit margin as a percent of sales decreased to 28.3%. The increase in gross profit was primarily driven by increased demand for specialty chemicals and favorable weather conditions this quarter compared to the first quarter of fiscal 2009. The decrease in gross margin as a percent of sales was due to the sale of higher cost inventory.

Selling, General and Administrative Expenses

Selling, general and administrative (SG&A) expenses were $6,355,000, or 8.6% of sales, for the three months ended June 30, 2009 as compared to $6,033,000, or 9.6% of sales, for the three months ended June 30, 2008. The increase was primarily a result of additional sales staff to support our Industrial and Water Treatment segments.

Operating Income

Operating income was $9,501,000 for the three months ended June 30, 2009, an increase of $2,093,000 from the same period of the prior year. The Industrial segment accounted for $994,000 of the increase, while the Water Treatment segment accounted for $1,099,000. The increase was driven by the positive impact of the LIFO method of valuing inventory and higher volumes of value-added manufactured and specialty chemical products.

Investment Income

Investment income was $9,000 for the three months ended June 30, 2009 compared to $141,000 for the same period in fiscal 2009. The decrease was due to lower yields on investments as excess cash had been invested in low-yielding cash equivalents until late June when $20,000,000 was invested in certificates of deposit with an average maturity of one year.

Provision for Income Taxes

Our effective income tax rate was 37.5% for the three months ended June 30, 2009, compared to 37.2% for the three months ended June 30, 2008.

Liquidity and Capital Resources

Cash provided by operations for the three months ended June 30, 2009 was $11,724,000 compared to $2,345,000 for the three months ended June 30, 2008. The increase in cash provided by operating activities was due primarily to fluctuations in working capital balances, including the timing of inventory purchases and the related vendor payments and a decrease in trade receivables associated with the timing of customer payments and the increase in net income. Due to the nature of our operations, which includes purchases of large quantities of bulk chemicals, timing of purchases can result in significant changes in working capital investment and the resulting operating cash flow. Historically, our cash requirements increase during the period from April through September as caustic soda inventory levels increase as the majority of barges are received during this period. Additionally, due to the seasonality of the water treatment business, our accounts receivable balance generally increases during the same period.

Cash and investments available-for-sale of $35,380,000 at June 30, 2009 increased by $5,844,000 as compared with the $29,536,000 available as of March 29, 2009, primarily due to the increase in cash generated from operations that was partially offset by capital expenditures and dividend payments. In February 2009, we sold our remaining investments classified as available-for-sale and the $29,536,000 balance at March 29, 2009 consisted entirely of cash and cash equivalents. In June 2009, we invested $20,000,000 in certificates of deposit which are classified as available for sale at June 30, 2009. Certificates of deposit with maturities dates of one year or longer are classified as non-current assets. The certificates of deposit were purchased from 84 different financial institutions in increments less than the FDIC insurance limits and have an average maturity of approximately one year. Cash equivalents include cash funds and money market accounts.

Our investment objectives in order of importance are the preservation of principal, maintenance of liquidity and rate of return. We monitor the maturities of our investments to ensure that funding is available for anticipated cash needs. At June 30, 2009, our available-for-sale investments consisted of certificates of deposit with a market value of $19,878,000. These fixed income securities, like all fixed income instruments, are subject to interest rate risk and will decline in value if market interest rates increase. However, while the value of the investment may fluctuate in any given period, we intend to hold the fixed income investments until recovery. Consequently, we would not expect to recognize an adverse impact on net income or cash flows during the holding period.

Capital Expenditures

Capital expenditures were $3,135,000 for the three months ended June 30, 2009 compared to $1,274,000 in the same period in the prior fiscal year. The $1,861,000 increase over the three months ended June 30, 2008 is primarily a result of approximately $2,200,000 of capital expenditures on the new facilities projects that commenced during fiscal 2009. We plan to spend approximately $400,000 to complete these facilities during the second quarter of fiscal 2010. Additional significant capital expenditures during the first quarter of fiscal 2010 consisted of new routes sales trucks and vehicles, facilities improvement projects, including machinery and equipment, and returnable containers. Recurring capital expenditures for the remainder of this fiscal year are expected to be comparable with the spend rate for the prior year, and they will primarily relate to storage, facilities improvement projects, returnable containers, and new route sales trucks and vehicles. We expect our cash flows from operations will continue to be sufficient to fund our capital expenditures in fiscal 2010.

Critical Accounting Policies

Our significant accounting policies are set forth in Note 1 to our financial statements in our Annual Report on Form 10-K for the fiscal year ended March 29, 2009. The accounting policies used in preparing our interim fiscal 2010 financial statements are the same as those described in our Annual Report.

Forward-Looking Statements

The information presented in this Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These forward-looking statements have been made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995. These statements are not historical facts, but rather are based on our current expectations, estimates and projections, and our beliefs and assumptions. We intend words such as "anticipate," "expect," "intend," "plan," "believe," "seek," "estimate," "will" and similar expressions to identify forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and other factors, some of which are beyond our control and are difficult to predict. These factors could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. Additional information concerning potential factors that could effect future financial results is included in our Annual Report on Form 10-K for the fiscal year ended March 29, 2009. We caution you not to place undue reliance on these forward-looking statements, which reflect our management's view only as of the date of this Quarterly Report on Form 10-Q. We are not obligated to update these statements or publicly release the result of any revisions to them to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect the occurrence of unanticipated events.