The following is a discussion and analysis of our financial condition and results of operations for the three and six months ended September 30, 2009 as compared to the same periods ended September 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 increase.

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. We closed our Linden, New Jersey food-grade production facility in September 2009 as these operations have been transferred to the Centralia facility. Additionally, we built a new facility in Minneapolis, Minnesota to handle bulk chemicals sold to pharmaceutical manufacturers. The total capital expenditures on these two facilities were approximately $10,000,000, of which approximately $7,500,000 occurred during fiscal 2009 and approximately $2,500,000 occurred in the first six months of fiscal 2010. We opened two new branch offices in late fiscal 2008 and one new branch in the first quarter of fiscal 2010 for our Water Treatment Group and expect to continue to invest in existing and new branches to expand our geographic coverage. The cost of the branch expansion 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.

Our raw material costs have fluctuated dramatically over the last year and a half. The costs of the majority of our primary raw materials began to increase rapidly and substantially in the first quarter of fiscal 2009 and we continued to experience those costing trends through the third quarter of fiscal 2009. We saw costs for these commodities level off in the fourth quarter of fiscal 2009, before declining significantly during the first half of fiscal 2010, with the costs in the second quarter of fiscal 2010 lower than they were in the second quarter of fiscal 2009. We believe that the decreased chemical raw material costs are a result of the slower economy and lower demand for many of the commodity chemicals we sell. In the first half of fiscal 2010, during this period of rapidly declining commodity prices, our profitability was negatively impacted because we were required to sell the higher cost inventory we had on hand at lower market prices. This is the opposite of what was occurring at the same time in fiscal 2009 when our inventory costs were lower than the escalating market prices. Our use of the last in, first out (LIFO) method of valuing inventory partially offsets the impact of the rapidly changing prices. Our LIFO reserve decreased significantly in the first two quarters of fiscal 2010, due to declining costs. This decrease in this reserve increased our reported gross profit in the first two quarters of fiscal 2010. In the prior year, our LIFO reserve increased significantly due to rising costs, which decreased our reported gross profit in the comparable periods in that year. In addition to the LIFO impact, our gross profit dollars in the first half of fiscal 2010 and, particularly in the second quarter, remained higher than our historic levels as the selling price for certain products did not decline commensurate with the decline in raw material costs. While the decline in raw material costs appears to be slowing or even stabilizing, we expect that our selling prices will continue to decline, reducing our reported gross profit dollars in future quarters and moving our business toward profitability levels more in line with our historic results preceding fiscal 2009.

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 profit 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 valuation of LIFO inventory for interim periods is based on our estimates of fiscal year-end inventory levels and costs. 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 (sales are in thousands):

                                              THREE MONTHS ENDED          SIX MONTHS ENDED
                                                 SEPTEMBER 30               SEPTEMBER 30
                                               2009          2008        2009         2008

Sales                                       $    64,976    $ 78,463    $ 138,562    $ 141,017
Cost of sales as % of sales                        73.2 %      77.9 %       76.0 %       78.2 %
Gross profit as % of sales                         26.8        22.1         24.0         21.8
Selling, general and administrative
expenses as % of sales                             10.1         7.7          9.3          8.6
Operating income as % of sales                     16.7        14.3         14.7         13.2
Investment income as % of sales                     0.1         0.1          0.1          0.2
Income from continuing operations before
income taxes as % of sales                         16.8        14.5         14.7         13.4
Provision for income taxes as % of sales            6.6         5.7          5.6          5.2
Income from continuing operations as %
of sales                                           10.3         8.8          9.1          8.2
Income from discontinued operations, net
of tax as % of sales                                0.0        (0.1 )        0.1          0.1
Net income as % of sales                           10.3         8.7          9.2          8.3

Three Months Ended September 30, 2009 Compared to the Three Months Ended September 30, 2008

Sales

Sales decreased $13,487,000, or 17.2%, to $64,976,000 for the three months ended September 30, 2009 as compared to $78,463,000 for the same period a year ago. The sales decrease was primarily driven by lower sales of bulk chemicals, including caustic soda. Sales of these products were approximately 25% of sales during the three months ended September 30, 2009 and 37% of sales during the same period a year ago. The decrease in sales of bulk chemicals was primarily due to lower sales prices resulting from passing on lower commodity chemical costs as well as volume decreases as a result of reduced demand.

Industrial Segment. Industrial segment sales decreased $12,317,000, or 22.9%, to $41,404,000 for the three months ended September 30, 2009 as compared to the same period a year ago. The sales decrease was primarily attributable to lower selling prices resulting from lower commodity chemical material costs as well as reduced volumes of bulk chemicals sold, partially offset by increased sales of higher-value manufactured and specialty chemical product sales. Additionally, sales into the agricultural market during the second quarter of fiscal 2010 were down as sales into that market were particularly strong a year ago.

Water Treatment Segment. Water Treatment segment sales decreased $1,170,000, or 4.7%, to $23,572,000 for the three months ended September 30, 2009 as compared to the same period a year ago, primarily due to decreases in selling prices related to lower commodity chemical material costs, partially offset by higher sales of specialty chemical products.

Gross Profit

Gross profit was $17,416,000, or 26.8% of sales, for the three months ended September 30, 2009, as compared to $17,320,000, or 22.1% of sales, for the three months ended September 30, 2008. Due to decreases in certain raw material costs, the LIFO method of valuing inventory increased gross profit by $4,220,000 for the three months ended September 30, 2009, whereas LIFO decreased gross profit by $3,564,000 for the comparable period in the prior year due to increases in raw material costs a year ago. The higher gross profit as a percentage of sales was primarily driven by lower selling prices in response to lower commodity chemical material costs in addition to an increase in sales of higher margin value-added manufactured and specialty chemical products and the LIFO reserve adjustments.

Industrial Segment. Gross profit for the Industrial segment was $8,823,000, or 21.3% of sales, for the three months ended September 30, 2009, as compared to $10,855,000, or 20.2% of sales, for the three months ended September 30, 2008. The lower gross profit dollars were primarily caused by reduced profitability on the sale of bulk chemicals resulting from passing on lower commodity chemical prices and lower volumes and lower demand in the agriculture market, which were partially mitigated by an increase in sales of value-added manufactured and specialty chemical products. The LIFO method of valuing inventory increased gross profit in this segment by $3,317,000 for the three months ended September 30, 2009 and decreased gross profit by $2,832,000 for the three months ended September 30, 2008.

Water Treatment Segment. Gross profit for the Water Treatment segment was $8,593,000, or 36.5% of sales, for the three months ended September 30, 2009, as compared to $6,465,000, or 26.1% of sales, for the three months ended September 30, 2008. The increase in gross profit was primarily driven by increased sales of higher-margin specialty chemical products and sales from our new branches. The LIFO method of valuing inventory increased gross profit in this segment by $903,000 for the three months ended September 30, 2009 and decreased gross profit by $732,000 for the three months ended September 30, 2008.

Selling, General and Administrative Expenses

Selling, general and administrative (SG&A) expenses were $6,568,000, or 10.1% of sales, for the three months ended September 30, 2009 as compared to $6,066,000, or 7.7% of sales, for the three months ended September 30, 2008. The increases were primarily the result of an increase in compensation expense related to our variable pay plans, with the higher expenses attributable to the Industrial segment. Water Treatment segment expenses were consistent with the same period in the prior year.

Operating Income

Operating income was $10,848,000 for the three months ended September 30, 2009, a decrease of $406,000 from the same period of the prior year. Operating income for the Industrial segment decreased by $2,636,000, while the Water Treatment segment increased operating income by $2,230,000. The Industrial segment's decrease was primarily attributable to the sale of higher cost inventory in a period of decreasing commodity chemical prices, lower levels of sales of bulk products, and higher SG&A expenses. The increase in the Water Treatment segment was driven by increased sales of value-added manufactured and specialty chemical products.

Investment Income

Investment income was $80,000 for the three months ended September 30, 2009 as compared to $115,000 for the same period in fiscal 2009. The decrease was due to lower yields on investments.

Provision for Income Taxes

Our effective income tax rate was 39.0% for the three months ended September 30, 2009, compared to 39.5% for the three months ended September 30, 2008.

Six Months Ended September 30, 2009 Compared to the Six Months Ended September 30, 2008

Sales

Sales decreased $2,455,000, or 1.7%, to $138,562,000 for the six month period ended September 30, 2009 as compared to $141,017,000 for the same period a year ago. The sales decrease was primarily driven by lower sales of bulk chemicals, including caustic soda. Sales of these products were approximately 25% of sales during the six months ended September 30, 2009 and 35% of sales during the same period a year ago. The decrease in sales of bulk chemicals was due to a combination of lower sales prices resulting from passing on lower commodity chemical prices in the last half of this period compared to the prior year and volume decreases as a result of reduced demand. The decline in bulk chemical sales was largely offset by higher sales of our manufactured and specialty chemical products.

Industrial Segment. Industrial segment sales decreased $3,805,000, or 4.0%, to $91,124,000 for the six months ended September 30, 2009, as compared to the same period of the prior year. The sales decrease was primarily attributable to lower selling prices resulting from lower commodity chemical material costs compared to a year ago, partially offset by increased sales of value-added manufactured and specialty chemical products.

Water Treatment Segment. Water Treatment segment sales increased $1,350,000, or 2.9%, to $47,438,000 for the six months ended September 30, 2009, as compared to the same period of the prior year. The higher sales were due to increased sales of specialty chemical products.

Gross Profit

Gross profit was $33,272,000, or 24.0% of sales, for the six months ended September 30, 2009, as compared to $30,761,000, or 21.8% of sales, for the six months ended September 30, 2008. Due to decreases in certain raw material costs, the LIFO method of valuing inventory increased gross profit by $7,045,000 for the six months ended September 30, 2009, whereas LIFO decreased gross profit by $5,227,000 for the comparable period in the prior year due to increases in raw material costs a year ago. The higher gross profit as a percentage of sales was primarily driven by lower selling prices in response to lower commodity chemical material costs in addition to an increase in sales of value-added manufactured and specialty chemical products and the LIFO reserve adjustments.

Industrial Segment. Gross profit for the Industrial segment was $17,264,000, or 18.9% of sales, for the six months ended September 30, 2009, as compared to $17,980,000, or 18.9% of sales, for the six months ended September 30, 2008. The decrease in gross profit was primarily attributable to lower sales prices on previously purchased, higher cost inventory during a period of declining commodity chemical prices as well as lower sales volumes for our bulk products. The decreases were partially offset by increased sales of value-added manufactured and specialty chemical products. The LIFO method of valuing inventory increased gross profit in this segment by $5,471,000 for the six months ended September 30, 2009 and decreased gross profit by $4,165,000 for the six months ended September 30, 2008.

Water Treatment Segment. Gross profit for the Water Treatment segment was $16,008,000, or 33.7% of sales, for the six months ended September 30, 2009, as compared to $12,781,000, or 27.7% of sales, for the six months ended September 30, 2008. The increase in gross profit was primarily driven by increased sales of higher-margin specialty chemical products and favorable weather conditions in the first quarter of fiscal 2010 as compared to the first quarter of fiscal 2009. The LIFO method of valuing inventory increased gross profit in this segment by $1,574,000 for the six months ended September 30, 2009 and decreased gross profit by $1,062,000 for the six months ended September 30, 2008.

Selling, General and Administrative Expenses

SG&A expenses were $12,923,000, or 9.3% of sales, for the six months ended September 30, 2009 as compared to $12,099,000, or 8.6% of sales, for the six months ended September 30, 2008. The increases were primarily the result of an increase in compensation expense related to our variable pay plans.

Operating Income

Operating income was $20,349,000 for the six months ended September 30, 2009, an increase of $1,687,000 from the same period of the prior year. A $3,329,000 increase in operating income for the Water Treatment segment, which was driven by the sale of higher volumes of specialty chemical products, was partially offset by a $1,642,000 decrease in operating income for the Industrial segment. The decrease in the Industrial segment was primarily attributable to the sale of higher cost inventory in a period of declining commodity chemical prices, lower levels of sales of bulk products, and higher SG&A expenses. This was partially offset by the increased sales of value-added manufactured and specialty chemical products.

Investment Income

Investment income was $89,000 for the six months ended September 30, 2009 as compared to $256,000 for the same period in fiscal 2009. The decrease was due to lower yields on investments.

Provision for Income Taxes

Our effective income tax rate was 38.3% for the six months ended September 30, 2009, compared to 38.6% for the six months ended September 30, 2008.

Liquidity and Capital Resources

Cash provided by operations was $27,419,000 for the six months ended September 30, 2009 compared to $8,445,000 for the six months ended September 30, 2008. The increase in cash provided by operating activities was primarily due to fluctuations in working capital balances. The $11,234,000 net decrease in working capital balances for the six month period ended September 30, 2009 was primarily attributable to the significant decrease in raw material costs and related selling prices which drove lower inventory and accounts receivable levels. Due to the nature of our operations, which include 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 for working capital have increased during the period from April through September as we receive the majority of our barges of caustic soda during this period as we build our annual seasonal inventory levels. Additionally, due to the seasonality of the Water Treatment business, our accounts receivable balance generally increases during the same period. Cash used for working capital increased by $6,258,000 during the six month period ended September 30, 2008.

Cash and investments available-for-sale of $49,889,000 at September 30, 2009 increased by $20,353,000 as compared with the $29,536,000 available as of March 29, 2009, primarily due to an increase in cash generated from operations that was partially offset by capital expenditures and dividend payments. The $29,536,000 balance at March 29, 2009 consisted entirely of cash and cash equivalents. We invested $20,000,000 in June 2009 and $10,000,000 in September 2009 in certificates of deposit which are classified as available for sale at September 30, 2009. The certificates of deposit were purchased from a number of financial institutions in increments less than the FDIC insurance limits and have an average maturity of approximately one year. As of September 30, 2009, $13,048,000 in certificates of deposit were classified as non-current assets as they were determined to be temporarily impaired with an aggregate carrying value exceeding market value by $52,000 and have maturity dates of one year or longer. The certificates of deposit were not determined to be other-than-temporarily impaired, as we have the intent and ability to hold the certificates of deposit for a period of time sufficient to allow a recovery of fair value. 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 September 30, 2009, our available-for-sale investments consisted of certificates of deposit with a market value of $29,942,000. 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 $4,461,000 for the six months ended September 30, 2009 compared to $6,812,000 in the same period in the prior fiscal year. The $2,351,000 decrease over the six months ended September 30, 2008 is partially a result of the timing of capital expenditures for our two new facilities, where we incurred approximately $2,500,000 of capital expenditures in the first half of fiscal 2010 as compared to approximately $3,500,000 in the first half of fiscal 2009. The remaining difference is a result of additional spending incurred in the six months ended September 30, 2008 for facilities improvement projects, including machinery and equipment, and returnable containers. Other significant capital expenditures during the first half of fiscal 2010 consisted of facilities improvement projects including machinery and equipment, new route sales trucks and vehicles, and returnable containers. We expect recurring capital expenditures for this fiscal year to be approximately $2,500,000 more than the recurring capital expenditure spend rate for the prior year, with second half of fiscal 2010 expenditures primarily relating to storage capacity expansion, 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," "appears," "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.