• raw material pricing and availability;

• our ability to acquire and integrate new products and businesses; and

• the difference between prices received by us for our specialty chemical products and the costs to produce those products.

Acquisitions
A key element of our business strategy is to acquire businesses and assets that operate in segments of the specialty chemical industry exhibiting those characteristics we believe provide us with opportunities to grow our company in a manner that increases shareholder value. The acquisitions we have completed since fiscal year 2004 are summarized below.
In December 2007, we acquired the high-purity process chemicals business of Air Products. That business sells high purity wet process chemicals to the semiconductor industry. The chemicals are used primarily to clean and etch silicon wafers in the production of semiconductors. Our purchase of this electronic chemicals business included two facilities, accounts receivable, inventory, and intangible assets. The cost of the acquisition was approximately $75.7 million, which included $25.8 million for working capital. In February 2006, we purchased an animal health pesticides business of Boehringer Ingelheim. We purchased one production facility, pesticide registrations for products used on cattle, swine, poultry and livestock premises and inventory. The pesticides registrations acquired in the transaction were for the United States, Canada, Australia, Mexico and several other countries in Latin America. These products complemented our existing animal health pesticides registrations, and included a leading brand of insecticidal ear tags for cattle and several liquid and dust formulations for livestock and their premises. The purchase price was approximately $8.9 million, including $2.7 million of inventory.
In June 2005, we purchased certain penta assets from Basic Chemicals Company, LLC, a wholly-owned subsidiary of Occidental Chemical. We purchased product registrations and data, manufacturing equipment and certain other assets. The product registrations we acquired in the transaction were for the United States and Canada. Following this acquisition, we became the sole producer and registration holder for penta in North America. The purchase price was $13.4 million.

In fiscal year 2004, we made three acquisitions with an aggregate purchase price of approximately $11.6 million. In December 2003, we purchased penta distribution assets from Wood Protection Products, Inc., including distribution and plant equipment, inventory and penta product registrations. In June 2004, we purchased creosote product registrations from Trenton Sales. In connection with our purchase, we entered into a long term supply agreement with Lufkin Creosoting Co., an affiliate of Trenton Sales, under which we sell Lufkin Creosoting its creosote requirements for its wood treating operations. Also in June 2004, we expanded our animal health product line by purchasing the Ravap trade name and inventory from Boehringer Ingelheim. Results of Operations
Segment Data
Segment data is presented for our five segments for the three fiscal years ended July 31, 2009, 2008 and 2007. You should read the foregoing segment data in conjunction with our consolidated financial statements and related notes thereto included elsewhere in this report. The information for the fiscal year ended July 31, 2007 has been revised to reflect the discontinuation of the agricultural chemicals segment as discussed in note 5 to our consolidated financial statements.

                                                      Year Ended July 31,
                                                2009          2008          2007
                                                     (Amounts in thousands)
       Sales:
       Electronic Chemicals - North America   $  69,701     $  47,645     $      -
       Electronic Chemicals - International      16,123        13,524            -
       Penta                                     26,189        26,366       28,377
       Creosote                                  67,776        55,207       43,645
       Animal Health                             10,931        11,652       14,149


       Total sales for reportable segments    $ 190,720     $ 154,394     $ 86,171

Segment Sales
We operate the electronic chemicals business as two segments, one segment for North America and one for the international portion of the business. In fiscal year 2009, net sales from the North America segment increased by $22.1 million, or 46.3%, to $69.7 million from $47.6 million in fiscal year 2008. The international segment increased net sales by $2.6 million, or 19.2%, to $16.1 million from $13.5 million in the prior year. The prior year comparison is skewed by the fact that we owned the two electronic chemicals segments for only seven months in fiscal year 2008. The economic downturn caused demand for electronic chemicals for the semiconductor industry to soften beginning in the second quarter of fiscal year 2009, and demand decreased by approximately 28.0% over the last half of the year as compared to fiscal year 2008. Although demand appears to have improved toward the end of the fiscal year, we are continuing to experience weakness in demand in both segments, particularly in our international segment.
Penta segment net sales were essentially flat in fiscal year 2009 at $26.2 million as compared to $26.4 million for the prior year, but in fiscal year 2008 penta net sales decreased by $2.0 million, or 7.1%, to $26.4 million from $28.4 million in fiscal year 2007. Despite the recession, utility company demand for poles treated with penta held steady in fiscal year 2009 as compared to the prior year. In fiscal year 2008, however, penta sales decreased on reduced sales of penta solutions when several customers switched to our penta blocks, and because spending for maintenance of utility poles in the southeast United States was at reduced levels.
Sales in the creosote segment increased $12.6 million, or 22.8%, to $67.8 million in fiscal year 2009 as compared with fiscal year 2008, which came after an increase in fiscal year 2008 over 2007 of $11.6 million, or 26.5%. Our creosote revenues were higher in both fiscal years on price increases, as volume was down about 4.1% in fiscal year 2009 and up only about 1.3% in fiscal year 2008. Demand for treated railroad crossties by major railroads, the principal use for creosote, continued at approximately 20.0 million crossties per year, near the upper end of the historic range.
Animal health pesticides segment sales decreased by $721,000, or 6.2%, to $10.9 million in fiscal year 2009 as compared to fiscal year 2008. In fiscal year 2008 animal health segment sales decreased $2.5 million, or 17.6%, to $11.7 million. In fiscal year 2009 the recession held down purchases of our animal health products, in both fiscal years 2009 and 2008 high costs for feed, fuel, and fertilizer led our customers to economize by reducing ear tag purchases. Sales also lagged in fiscal year 2008 because cooler than normal weather reduced parasitic fly infestation, and because the distribution chain had ended fiscal year 2007 with a substantial base inventory of ear tags. Sales of our animal health products are seasonal, and occur primarily in the second half of our fiscal year. Seasonal usage follows varying agricultural seasonal patterns, weather conditions and weather related pressure from pests, and customer marketing programs and requirements. The end users of some of our products may, because of weather patterns, delay or intermittently curtail use of some products, which may result in a reduction of our revenues and profitability. The combined revenues from products subject to seasonal variations represented about 5.7% of our total annual revenues in fiscal year 2009. Their peak selling season is during the last two quarters of the fiscal year, and revenue and profit are concentrated in these periods.

Segment Income (Loss) from Operations
Income from operations of the electronic chemicals segment in North America was $5.0 million in fiscal year 2009 and $3.3 million for the seven months we owned the business in fiscal 2008. Our international electronic chemicals segment, however, had a loss from operations of $1.3 million in fiscal year 2009 and a loss of $1.2 million in fiscal year 2008. Both segments suffered in fiscal year 2009 from the effect of the world-wide recession, and our operations in Europe were particularly affected. In fiscal year 2008, our electronic chemicals international segment income was adversely affected by selling through the Air Products distribution chain for much of the year. Fiscal year 2008 also saw significant raw material price volatility, and we were not always able to respond timely with increased prices, particularly in Europe. We also operated the electronic chemicals business under a transition services agreement with Air Products in fiscal year 2008 and for the first two months of fiscal year 2009. Under that agreement, Air Products supplied certain supply chain, information technology and accounting services for the business, while we developed the infrastructure to integrate the new business into our operations. We estimated that the transition services cost us approximately $175,000 per month more than it would have cost us to provide those functions internally. During the first two months of fiscal year 2009 we built and staffed our post-transition infrastructure while at the same time purchasing transitional services from Air Products. We believe that the redundant infrastructure added approximately $600,000 of additional expense during fiscal year 2009. We additionally incurred consulting costs associated with the integration of the business of approximately $434,000 in fiscal year 2009 and $667,000 in fiscal year 2008. In fiscal year 2009 income from operations of the penta segment increased $2.7 million, or 43.8%, to $9.0 million, and in fiscal year 2008 it decreased $2.9 million, or 31.3%, to $6.3 million. The increase in fiscal year 2009 resulted from a decrease in certain raw material costs of $1.6 million along with a decrease in amortization expense of $1.1 million related to intangible assets primarily from the fiscal year 2005 acquisition of certain penta assets. Those intangible assets were fully amortized during fiscal year 2009. The decline in fiscal year 2008 was mainly due to a 35.4% increase in the cost of a petroleum-based raw material combined with a 7.1% decline in penta net sales. Creosote segment income increased $6.5 million in fiscal year 2009 to $15.6 million, a 71.2% increase, and increased $278,000 in fiscal year 2008 to $9.1 million, a 3.1% increase. Higher creosote prices contributed to the increases in each year. Additionally, improved pricing on our imported creosote, and a greater proportion of imported creosote in our sales mix during the second half of fiscal year 2009, improved segment income.
Animal health pesticides segment income from operations decreased $616,000, or 75.5%, in fiscal year 2009 to $200,000, and decreased $2.1 million, or 72.1%, in fiscal year 2008 to $816,000. The reduction in income from operations for the animal health pesticides segment in each year largely hinged on the sales volume decline, primarily because of lower sales of our ear tags in response to the recession.
Net Sales and Gross Profit
Net Sales and Gross Profit for Fiscal Year 2009 vs. Fiscal Year 2008. Net sales increased $36.3 million, or 23.5%, in fiscal year 2009 to $190.7 million from $154.4 million in fiscal year 2008. The increase was composed of increased sales from our two electronic chemicals segments of a combined $24.7 million, and an increase of $12.6 million in sales from our creosote segment. We acquired our electronic chemicals business in December 2007.
Gross profit increased in fiscal year 2009 by $17.3 million, or 37.0%, to $64.2 million as compared to gross profit of $46.8 million in fiscal year 2008. Gross profit as a percent of sales improved in fiscal year 2009 to 33.6% of sales as compared to 30.3% of sales in fiscal year 2008.

Our electronic chemicals business contributed to higher gross profit in fiscal year 2009 due to price increases and cost initiatives implemented since the business was acquired. We also realized improved margins in our penta and creosote segments as compared to fiscal year 2008 because of a reduction in the cost of the chlorine and solvent raw materials used to make our penta products, and because of improved pricing for creosote.
Because other companies may include certain of the costs that we record in cost of sales in selling, general and administrative expenses, and may include certain of the costs that we record in selling, general and administrative expenses as cost of sales, our gross profit may not be comparable to that reported by other companies.
Net Sales and Gross Profit for Fiscal Year 2008 vs. Fiscal Year 2007. Net sales increased $68.2 million, or 79.2%, in fiscal year 2008 to $154.4 million from $86.2 million in fiscal year 2007. The increase was attributable to the addition of the electronic chemicals business and improved creosote pricing. For fiscal year 2008, $47.6 million of improved net sales came from the electronic chemicals North America segment, $13.5 million came from the international segment, and $11.6 million came from the creosote segment. On the other hand, penta segment net sales revenue declined $2.0 million and animal health net sales revenue declined $2.5 million, reductions of 7.1% and 17.6%, respectively.
Gross profit increased in fiscal year 2008 by $16.4 million, or 53.9%, to $46.8 million as compared to gross profit of $30.4 million in fiscal year 2007. Gross profit as a percent of sales declined in fiscal year 2008 to 30.3% of sales as compared to 35.3% of sales in fiscal year 2007. Price increases in electronic chemicals were implemented after we acquired the business in December 2007. However, margins for these products for fiscal year 2008 were lower than margins we have been able to achieve over time on some of our wood preserving and animal health products. Our creosote segment gross profit improved by $700,000 in fiscal year 2008, but our penta segment and animal health segments both declined significantly as compared to fiscal year 2007. The penta segment gross profit decreased by $2.5 million, and the animal health segment decreased by $2.0 million.
Margins were impacted in fiscal year 2008 by the high costs of raw materials used to produce our products. In electronic chemicals, raw material price increases beginning in January 2008 in phosphoric acid, sulfuric acid and isopropyl alcohol put serious pressure on product pricing. Penta raw material costs for chlorine and phenol remained at high levels in fiscal year 2008 and the cost of solvent used for penta solutions increased approximately 35.4% over fiscal year 2007.
Selling, General and Administrative Expenses SG&A for Fiscal Year 2009 vs. Fiscal Year 2008.
Selling, general and administrative expenses increased to $43.3 million in fiscal year 2009 from $35.3 million in fiscal year 2008, an increase of $8.0 million, or 22.6%. Those expenses were 22.7% of net sales in fiscal year 2009 and 22.9% in the prior year. Increased selling, general and administrative expenses in our electronic chemicals North America and international segments, of $6.4 million and $2.5 million, respectively, contributed to the higher expense in fiscal year 2009. The prior year comparison is skewed by the fact that we owned the two electronic chemicals segments for only seven months in fiscal year 2008. Corporate expenses not directly identified with a particular segment increased $873,000 to $7.7 million in fiscal year 2009 from $6.8 million in fiscal year 2008. The increase was primarily because of increased employee related costs.
Our distribution expenses, which are included as a sales expense, increased by $5.4 million to $20.6 million in fiscal year 2009 as compared with $15.2 million in fiscal year 2008. In our wood treating and animal health segments, distribution expense only represents 2.8% of their aggregate net sales, or $2.9 million in fiscal year 2009. However, distribution expense for the electronic chemicals business was 20.7% of that business's fiscal 2009 revenue, which was an increase in distribution expense of $6.2 million in fiscal year 2009 over that expense for the seven months we owned that business in fiscal 2008. While we incurred no distribution expense associated with electronic chemicals during the first five months of fiscal 2008 before we owned the business, we incurred $8.8 million of distribution expense during the first five months of fiscal 2009 associated with that business.
Administrative expenses include the amortization of intangible assets. Starting January 2009, certain amortization expenses associated with an earlier acquisition in the Penta segment ceased as that asset was fully amortized. As a result, amortization expense for fiscal 2009 was approximately $1.1 million less than fiscal 2008. Also, amortization expense associated with those same assets will decrease by approximately $800,000 in fiscal 2010 versus fiscal 2009.

Also included in sales, general and administrative expenses for fiscal 2009 was approximately $1.0 million of non-recurring costs associated with the transition and integration of the acquired electronic chemicals business. Those costs were predominantly incurred in the first fiscal quarter of fiscal year 2009. SG&A for Fiscal Year 2008 vs. Fiscal Year 2007.
Selling, general and administrative expenses increased to $35.3 million in fiscal year 2008 from $15.3 million in fiscal year 2007, an increase of $20.0 million, or 130.7%. Selling, general and administrative expenses were 22.9% of net sales in fiscal year 2008 and 17.8% in the prior year. Of the increase in fiscal year 2008, $17.4 million was attributable to the addition of the electronic chemicals North America and international segments. Corporate expense not directly identified with a particular business segment increased to $6.8 million in fiscal year 2008 from $5.8 million in fiscal year 2007. The increase in other corporate expense in fiscal year 2008 was primarily because of increased expense for legal and professional services of $646,000, including accounting expense, and $177,000 in increased employee related costs. Selling, general and administrative expenses included charges for transitional services provided by Air Products and approximately $667,000 for consultants assisting with the integration of the electronic chemicals business. Although approximately 60% of transitional services were costs from third parties allocated to us by Air Products, about $3.7 million were allocated to us in fiscal year 2008 for Air Products' internal costs, including corporate overhead. Selling, general and administrative expenses attributable to our wood preserving chemicals and animal health segments increased in fiscal 2008 over the prior fiscal year by $2.6 million in the aggregate. We had increases in supply chain costs of approximately $477,000 primarily related to our creosote segment, increased expenses for new product research and for employee, marketing and advertising expenses for animal health of approximately $746,000, increased legal and regulatory expenses of approximately $605,000, and increased headquarters administrative expenses of $700,000. Supply chain increases consisted of rail car maintenance and creosote storage facility costs. Legal expenses increased because of higher litigation expense and added regulatory personnel. Headquarters administrative costs increased because of higher costs generally, higher auditing costs and because of Sarbanes-Oxley compliance costs. We incurred $466,000 of expense in fiscal year 2008 for additional auditing and third-party consulting in connection with our first year of assessing internal control over financial reporting under Sarbanes-Oxley. Interest Expense
Interest expense was $3.0 million in fiscal year 2009 compared with $2.7 million in fiscal year 2008 and $945,000 in fiscal year 2007. The year-over-year increase was due to increased borrowings to complete our acquisition of the electronic chemicals business in December 2007. Income Taxes
We had income tax expense of $7.2 million, $3.6 million and $5.6 million in fiscal years 2009, 2008 and 2007, respectively. Our effective tax rate was 41.5% in fiscal year 2009, 38.8% in fiscal year 2008 and 37.7% in fiscal year 2007. In fiscal year 2009, the effective tax rate varied from the statutory rate primarily due to the recognition of a valuation allowance in connection with our deferred tax asset and foreign exchange losses relating to our electronic chemicals international segment.
Liquidity and Capital Resources
Cash Flows
Net cash provided by operating activities was $26.5 million in fiscal year 2009 as compared with $15.7 million in fiscal year 2008 and $9.0 million in fiscal year 2007.
In fiscal year 2009, net income adjusted for depreciation and amortization increased cash by $16.5 million. We realized an additional increase in cash of $16.5 million resulting from a reduction in trade accounts receivables from collections of amounts obtained in our acquisition of the electronic chemicals business. Cash was unfavorably impacted from increased inventories of $3.4 million and a decrease in accounts payable of $6.0 million. The increase in inventory was primarily made up of an increase of $2.4 million in creosote inventory, due to timing of inventory purchases, and an increase of $2.3 million in inventory for our electronic chemicals North America segment as sales declined in the recession. That increased inventory was offset by a decrease of $620,000 in our electronic chemicals international segment. The decrease in accounts payable was related to both of our electronic chemicals segments.

In fiscal year 2008, net income added $5.4 million to net cash provided by operations. However, substantial net cash from operations was used in the year as accounts receivable increased by $13.7 million. Accounts receivable increased during fiscal year 2008 from sales in our electronic chemicals segments and due to the transitional services provided by Air Products. Accounts receivable owed to us by Air Products was approximately $10.1 million, which primarily represented amounts owed to us for customer payment to the Air Products lock box account. Inventories, net of the effect of $12.4 million of acquired electronic chemicals inventory, declined by $1.0 million in fiscal year 2008, or 7.5%, because inventory from discontinued operations was sold. Accounts payable increased in fiscal year 2008 by $14.8 million, $13.8 million of which was from increased payables in our electronic chemicals business which include $10.4 million payable to Air Products primarily for amounts paid to vendors on our behalf. Accrued liabilities increased in fiscal year 2008 by $3.9 million, primarily because of liabilities pertaining to the electronic chemicals business increased by $1.9 million, net of accrued liabilities acquired in the purchase of that business.
In fiscal year 2007, net income increased cash by $8.8 million, but that was offset in the year by an increase in accounts receivable of $3.8 million. The increase in net income was primarily a result of higher sales revenue. Inventories increased in fiscal year 2007 by $3.1 million, due to increases in animal health inventory necessary to support higher sales volume and to higher than normal creosote inventory.
Net cash used in investing activities was $6.3 million in fiscal year 2009, $75.5 million in fiscal year 2008 and $802,000 in fiscal year 2007. In fiscal year 2009 we made additions to property, plant and equipment of $3.0 million, mainly comprised of $1.8 million in capital expenditures for our electronic chemicals business for shipping containers and other equipment, and $496,000 for the purchase of additional land adjacent to our facility in Matamoros. We also spent $2.9 million in fiscal year 2009 to purchase inventory and accounts receivable pertaining to our electronic chemicals acquisition. In fiscal year 2008, we used approximately $72.5 million for the electronic chemicals business acquisition, and another $2.7 million for capital expenditures. About $1.8 million of the additions to property, plant and equipment in fiscal year 2008 were in the electronic chemicals segment for totes for large quantity product deliveries, for a project to improve our sewer system at our facility in Milan, Italy, and for normal facility improvements in Pueblo, Colorado and Milan. Otherwise in fiscal year 2008, we added to property plant and equipment consistent with normal practices. In fiscal year 2007, $581,000 of net cash from investing activities was used for additions to property and plant, primarily in Matamoros, Mexico, and Tuscaloosa, Alabama.
In fiscal year 2009, net cash used in financing activities was $15.4 million which included principal payments of $9.5 million on our long term borrowings and net payments on our revolving line of $5.2 million. The payments on our long term borrowings included $5.5 million of indebtedness incurred with the purchase of the electronic chemicals business and $4.0 million used to pay the principal outstanding on seller-financed indebtedness incurred with we purchased certain penta assets in fiscal year 2006. We repaid that indebtedness in full in October 2008 from available cash. In fiscal year 2008, net cash provided by financing activities was $46.4 million. We borrowed $64.0 million to finance the acquisition of the electronic chemicals business and refinance existing bank debt at the end of December 2007. That amount consisted of $55.0 million borrowed on our term loans and $9.0 million borrowed on our revolving facility. In connection with the new financing, we paid $466,000 of deferred financing costs. In fiscal year 2008, we made principal payments of $13.3 million on our borrowings under our term loans, $7.4 million of which paid our then outstanding . . .