The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the "Selected Financial Data" section of this report and our consolidated financial statements and the related notes and other financial information included elsewhere in this report. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under the section entitled "Risk Factors" and elsewhere in this report.

Introduction

We manufacture, formulate and globally distribute specialty chemicals. We operate specialty chemical businesses selling electronic chemicals and industrial wood treating chemicals. Our electronic chemicals are sold to the semiconductor industry where they are used primarily to clean and etch silicon wafers in the production of semiconductors. Our wood treating chemicals, penta and creosote, are used by industrial customers primarily to extend the useful life of utility poles and railroad crossties.

In fiscal year 2012, approximately 58.5% of our revenues were from electronic chemicals and 41.4% were from industrial wood preservation chemicals.

Our results of operations are impacted by various competitive and other factors including:

• fluctuations in sales volumes;

• 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.

Sale of the Animal Health Business

On March 1, 2012, we sold most of the assets of our animal health business to Bayer Healthcare, LLC for a purchase price of approximately $10.2 million, including $1.0 million held in escrow. The purchase price was paid in cash, subject to the escrow. We used the proceeds to reduce the amount outstanding on our revolving indebtedness. The escrowed amount is being held pending final acceptance by the EPA of certain studies being performed at its request on tetrachlorvinphos, the active ingredient used in Rabon products. The escrowed funds are to be released to us once the EPA has finally accepted the studies, the buyer has voluntarily canceled the products, or after five years. The escrowed funds are to be released to the buyer if the EPA cancels products to which the studies pertain before the funds are distributed to us. The sale included inventory, equipment and product registrations. We retained the real estate and building at our facility in Elwood, Kansas, and we will continue to operate it to manufacture products for the buyer under a transition services agreement that expires in February, 2013, subject to two six-month extensions.

Results of Operations

Segment Data

Segment data is presented for our two segments for the three fiscal years ended July 31, 2012, 2011 and 2010. The segment data should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this report. Our animal health business was sold in March 2012, and results from that former segment are included in discontinued operations. Prior year information has been reclassified to conform to the current period presentation.

                                                      Year Ended July 31,
                                               2012          2011          2010
                                                    (Amounts in thousands)
       Sales:
       Electronic chemicals                  $ 159,451     $ 151,481     $ 111,990
       Wood treating                           113,034       104,115        86,007

       Total sales for reportable segments   $ 272,485     $ 255,596     $ 197,997

Segment Sales

In fiscal year 2012, net sales from electronic chemicals were $159.5 million, an increase of $8.0 million, or 5.3%, over net sales of $151.5 million in fiscal year 2011. In fiscal year 2011, net sales in the electronic chemicals segment increased $39.5 million, or 35.3%, over net sales of $112.0 million in fiscal year 2010. In fiscal year 2012, the increase in net sales came from greater volume and from price increases implemented to recover higher raw material costs. In fiscal year 2011, the increase from the prior year was due the effect of our March 2010 acquisition of the electronic chemicals business of General Chemical.

Net sales of wood treating chemicals increased by $8.9 million, or 8.6%, to $113.0 million in fiscal year 2012 from $104.1 million in fiscal year 2011. Net sales of wood treating chemicals in fiscal year 2011 increased by $18.1 million, or 21.1%, from $86.0 million in fiscal year 2010. The increase in net sales of wood treating chemicals for each fiscal year was due to higher sales in both of our wood treating chemical product lines. The increase in fiscal year 2012 in wood treating products net sales came from price increases implemented to recover increased costs. The increase in fiscal year 2011 as compared with fiscal year 2010 came from a modest increase in volume to utility pole treaters and a significant increase in volume sold to crosstie treaters due to improved economic conditions. In the last five years, production of railroad crossties in North America has averaged 20.4 million ties annually.

Segment Income from Operations

Income from operations of the electronic chemicals segment was $13.4 million in fiscal year 2012, as compared to $6.2 million in fiscal year 2011 and $8.4 million in fiscal year 2010. Income from operations of electronic chemicals increased by $7.2 million, or 115.8% in fiscal year 2012, as compared to the prior year period, and decreased $2.2 million, or 25.9%, in fiscal year 2011 as compared to the prior year period.

The fiscal year 2012 improvement in income from operations in electronic chemicals was achieved despite corporate overhead allocated to the segment that was approximately $1.3 million higher than the prior year. Approximately half of the $7.2 million improvement came from improved efficiency in our supply chain operations. The balance of the improvement came from improved sales volume and, from manufacturing efficiency realized after the consolidation of manufacturing operations from the General Chemical acquisition. In fiscal year 2011, income from operations was adversely impacted by duplicative expenses associated with the integration of our March 2010 acquisition from General Chemical, and by rising raw material costs. We recognized an overall increase in net operating expenses of $10.1 million in fiscal year 2011 as compared to fiscal year 2010. That change was mainly caused by an increase of $8.3 million in freight, storage and handling expenses due to greater volume. That volume increase was primarily because we included results of operations from the General Chemical acquisition for the full fiscal year 2011. We also had approximately $970,000 of higher selling expenses from higher employee costs relative to fiscal year 2010.

In fiscal year 2012, income from operations of the wood treating segment was $15.6 million, as compared to $14.8 million in fiscal year 2011 and $23.0 million in fiscal year 2010. Income from operations for the wood treating segment increased by $856,000, or 5.8%, in fiscal year 2012, and decreased by $8.2 million, or 35.8%, in fiscal year 2011 as compared to the respective prior year period.

Income from operations in wood treating chemicals benefited in fiscal year 2012 from higher revenues, although there was a slight decline in operating margin. Overhead allocations to the segment increased by about $1.1 million over the prior year. We also had higher costs in fiscal year 2012 of $1.2 million for waste disposal attributable to the segment which were partially offset by a reduction in railcar cleaning and repair expenses of $382,000. In fiscal year 2011, over 90% of the decline in income from operations in wood treating chemicals as compared to fiscal year 2010 was because of increased costs and a lower average price on our creosote products. During the first half of fiscal 2010, we benefited from a temporary disruption in the global creosote market that dramatically lowered our costs. Normal costs returned by the end of fiscal year 2010. In the same fiscal year, we entered into a long-term contract to sell creosote to our largest customer. Although this arrangement has had the effect of increasing creosote volume substantially, margins declined from the unusually high levels experienced in fiscal year 2010 to a more normal level in fiscal 2011.

Net Sales and Gross Profit

Net Sales and Gross Profit for Fiscal Year 2012 vs. Fiscal Year 2011

Net sales increased $17.1 million, or 6.6% in fiscal year 2012 to $272.7 million from $255.6 million in fiscal year 2011. The increase came on increased sales of $8.0 million from our electronic chemicals segment and $8.9 million from our wood treating chemicals segment.

Gross profit increased in fiscal year 2012 by $9.0 million, or 13.2% to $77.1 million as compared to gross profit of $68.1 million in fiscal year 2011. Approximately half of the improvement in gross profits was due to higher revenues, and half was due to improved gross profit margins. Gross profit as a percent of sales improved in fiscal year 2012 to 28.3% of sales as compared to 26.6% of sales in fiscal year 2011 primarily due to improved margins in our electronic chemicals segment, as we were able to implement pricing increases to recapture cost increases experienced in the prior fiscal year, and because we achieved improved manufacturing efficiency upon completion of our manufacturing consolidation.

Because other companies may include certain of the costs that we record in cost of sales in distribution expenses or selling, general and administrative expenses, and may include certain of the costs that we record in distribution expenses or 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 2011 vs. Fiscal Year 2010

Net sales increased $57.6 million, or 29.1%, in fiscal year 2011 to $255.6 million from $198.0 million in fiscal year 2010. The increase resulted from increased sales of $39.5 million from our electronic chemicals segment and $18.1 million from our wood treating chemicals segment. In electronic chemicals the increase came primarily from greater sales in North America. We acquired General Chemical's electronic chemicals business eight months into fiscal year 2010. The increase in sales in that segment in fiscal year 2011 was primarily due to having the benefit of that acquisition for the full year. In wood treating chemicals in fiscal year 2011, the increase came entirely from improved volume in creosote product sales.

Gross profit increased in fiscal year 2011 by $1.3 million, or 2.0%, to $68.1 million as compared to gross profit of $66.7 million in fiscal year 2010. Gross profit increased primarily due to increased sales of electronic chemicals resulting from the acquisition of General Chemical's electronic chemicals business. The increase of approximately $7.8 million in gross profit in fiscal year 2011 from the electronic chemicals segment was significantly offset by a decrease in gross profit in the wood treating segment in the fiscal year of $6.5 million due to higher costs and lower average selling prices for creosote. Gross profit as a percent of sales declined in fiscal year 2011 to 26.6% of sales as compared to 33.7% of sales in fiscal year 2010. In electronic chemicals the gross profit percentage suffered from expenses of integrating the acquisition and from rising raw material costs.

A manufacturing agreement was entered into during fiscal year 2010 with General Chemical in connection with our acquisition of their electronic chemicals business. That agreement requires us to pay all of the direct costs of manufacturing associated with the production of electronic chemicals as General Chemical's Bay Point, California facility, and to pay a monthly fee set initially at $117,000. We incurred those costs for four months in fiscal year 2010, but as our integration progressed the monthly fee was reduced to approximately $68,000 by June 2011.

Distribution and Selling, General and Administrative Expenses

Distribution and Selling, General and Administrative for Fiscal Year 2012 vs. Fiscal Year 2011

Distribution expenses decreased to approximately $26.8 million in fiscal year 2012 from $28.8 million in fiscal year 2011, a decrease of about $2.0 million, or 7.1%. The decrease in distribution expense resulted from efficiency improvements in our electronic chemicals segment supply chain costs from the completion of the integration of the General Chemical acquisition. Distribution expense was 9.8% of net sales in fiscal year 2012 and 11.3% in the prior year. The electronic chemicals segment incurs approximately three-quarters of our distribution expense. In electronic chemicals, distribution expense was 13.2% of net sales in fiscal year 2012 as compared to 16.0% in fiscal year 2011.

Selling, general and administrative expenses increased to $24.9 million in fiscal year 2012 from $22.2 million in fiscal year 2011, an increase of $2.6 million, or 11.9%. As a percentage of net sales, those expenses were 9.1% and 8.7% in fiscal years 2012 and 2011, respectively. The increase in fiscal year 2012 over the prior year was primarily because of higher employee related costs of $1.6 million and waste disposal costs of $1.2 million for waste disposal at our Tuscaloosa facility and disposal of waste associated with cleaning rail cars in creosote service.

Distribution and Selling, General and Administrative for Fiscal Year 2011 vs. Fiscal Year 2010

Distribution expenses increased to $28.8 million in fiscal year 2011 from $19.1 million in fiscal year 2010, an increase of $9.8 million, or 51.3%. Approximately $8.3 million of the increase in distribution expense in fiscal year 2011 was from increased storage, handling and freight primarily in our electronic chemicals segment, in large part on increased volume attributable to the acquisition of the electronic chemicals business from General Chemical. Distribution expense was 11.3% of net sales in fiscal year 2011 and 9.6% in the prior year. In electronic chemicals, distribution expense was 16.0% of net sales in fiscal year 2011 as compared to 14.3% in fiscal year 2010.

Selling, general and administrative expenses increased to $22.2 million in fiscal year 2011 from $20.9 million in fiscal year 2010, an increase of $1.3 million, or 6.1%. As a percentage of sales, those expenses were 8.7% and 10.6% in fiscal years 2011 and 2010, respectively. The increase in fiscal year 2011 over the prior year was primarily for increases in employee costs of $674,000 and, permits and licenses of $345,000. Offsetting these increases, however, was a decrease of $353,000 in integration costs.

Corporate expenses that were not allocated to any segment decreased by approximately $706,000 in fiscal year 2011, as compared to the prior year period. The decrease was primarily in costs associated with our General Chemical acquisition in fiscal year 2010 which accounted for $308,000 of the decrease, and because we had lower key man life insurance expenses of $219,000, lower employee stock-based compensation expense of $219,000 and lower director's fees and expenses of $207,000.

Interest Expense

Interest expense was $2.1 million in fiscal year 2012 and $2.3 million in fiscal year 2011 and 2010. We increased borrowings under our credit facility to complete our acquisition of the electronic chemicals business of General Chemical in March 2010, and have subsequently reduced the amount of those borrowings.

Income Taxes

We had income tax expense from continuing operations of $8.8 million, $5.1 million and $9.1 million in fiscal years 2012, 2011 and 2010, respectively. Our effective tax rate was 37.9% in fiscal year 2012, 35.0% in fiscal year 2011 and 37.5% in fiscal year 2010. In general, differences between these effective tax rates and the rate of 35.0% are primarily due to foreign and state income taxes, and the release of a valuation allowance on a deferred tax asset in fiscal year 2011.

Discontinued Operations

Discontinued operations reflected a net loss of $490,000 and income of $311,000 and $153,000 for fiscal years 2012, 2011 and 2010, respectively. The sale of our animal health business was concluded in fiscal year 2012. The pre-tax gain on that sale was $90,000. The results of operations of that business reflected a pre-tax loss of $202,000 in fiscal year 2012, and pre-tax income of $634,000 and $247,000 in fiscal years 2011 and 2010, respectively, which are included in discontinued operations. We also incurred expense in fiscal years 2012 and 2011 of $599,000 and $120,000, respectively, in connection with the dismantling of the production facility related to the agricultural chemical segment that was discontinued in fiscal year 2008. Fiscal year 2012 also included expenses related to an accident at our Matamoros facility during the dismantlement of that facility.

Liquidity and Capital Resources

Cash Flows

Net cash provided by operating activities was $25.2 million in fiscal year 2012, $12.7 million in fiscal year 2011 and $14.9 million in fiscal year 2010.

In fiscal year 2012, net income adjusted for depreciation and amortization increased cash by $20.8 million. Cash flows from operating activities were favorably impacted by a decrease in accounts receivable of $6.8 million, primarily due to lower sales of creosote during the fourth quarter of fiscal year 2012 as compared to the prior year fourth fiscal quarter, and to a lesser extent because of the sale of the animal health business and currency translation adjustments of our Italian subsidiary's accounts receivable balance on lower currency exchange rates. Cash flows were also favorably impacted by an increase in accrued liabilities and a decrease in other receivables of $1.9 million and $2.2 million, respectively. The increase in accrued liabilities was mainly due to a higher employee incentive accrual of approximately $1.1 million, while the decrease in other receivables included a reduction in income taxes receivable applied to the current period tax payments. Cash flows from operating activities were unfavorably impacted by a decrease in our trade accounts payable and an increase in inventories of $2.8 million and $5.5 million, respectively. The decrease in accounts payable was due primarily to the timing of payments on our creosote purchases and lower freight accruals, while the increase in inventories was attributable to our creosote inventories due to the combination of higher quantities, higher average cost and material in transit at the end of the current year. We also had higher inventories in our electronic chemicals segment due to increased raw material purchases at the end of fiscal year 2012. All results reported were net of the sale of our animal health business which reduced our working capital requirements.

In fiscal year 2011, net income adjusted for depreciation and amortization increased cash by $17.2 million. Cash flows from operating activities were favorably impacted by an increase in accounts payable of $3.8 million, primarily from the timing of payments for our creosote purchases and increased activity in our electronic chemicals segment related to increased production and sales volume. Cash flows from operating activities was unfavorably impacted by increases in our trade accounts receivables and inventories of $5.9 million and $2.2 million, respectively. The increase in accounts receivable was due to higher creosote sales, while the increase in inventories was attributable to our increased electronic chemicals business.

In fiscal year 2010, net income adjusted for depreciation and amortization increased cash by $22.1 million. Approximately $9.3 million of cash was used to fund an increase in trade accounts receivable, and of that increase approximately $7.6 million was associated with the acquisition of the electronic chemicals business of General Chemical and the balance was due to increased sales levels in the rest of the electronic chemicals business and year end increases in animal health receivables due to the timing of sales. Approximately $3.5 million of cash was used as creosote inventories increased due to the timing of product shipments. That decrease in cash was offset by an increase of $4.4 million in cash from increased accounts payable, of which $2.1 million was associated with the acquisition of the electronic chemicals business of General Chemical and the balance was primarily due to the increase in electronic chemicals production.

Net cash provided by investing activities was $4.0 million in fiscal year 2012 compared to cash used of $8.0 million in fiscal year 2011 and $29.7 million in fiscal year 2010. In fiscal year 2012, we made $5.2 million of additions to property, plant and equipment, approximately $4.3 million of which was for electronic chemicals production and distribution equipment. The remainder of our additions to property was capital expenditures for normal equipment and system upgrades and purchases at our different locations. We received $10.2 million of proceeds for the sale of our animal health business during fiscal year 2012. In fiscal year 2011, we made $8.3 million of additions to property, plant and equipment, approximately $1.9 million of which was in connection with our integration efforts at our Hollister, California facility. We spent approximately $4.6 million at our Pueblo facility primarily for the purchase of tank wagons, shipping containers and equipment related to our sulfuric acid business, and to a lesser extent for our integration efforts. The remainder of our additions to property was for normal capital expenditures. In fiscal year 2010, we acquired the electronic chemicals business of General Chemical using $26.8 million in net cash, which included $17.7 million of additions to property, plant and equipment and $7.6 million of inventory. In that same year we made additions to property, plant and equipment of $3.0 million, of which about $1.7 million was for the purchase of shipping containers in our electronic chemicals business, our ongoing expansion project in Hollister, California and our Bay Point, California equipment upgrades.

In fiscal year 2012, net cash used in financing activities was $29.3 million. We reduced our revolving facility by $13.9 million and paid $11.3 million to pay off our term loan. In fiscal year 2011, net cash used in financing activities was $7.8 million. We reduced our revolving facility by $2.1 million, reduced our term loan by $8.0 million and also cleared the book overdraft that had been outstanding at July 31, 2011. In fiscal year 2010, net cash provided by financing activities was $12.6 million, which included $20.0 million of net borrowings on our revolving line to fund the acquisition of the electronic chemicals business of General Chemical, and principal payments on our term loan facility of $7.0 million. We paid dividends of $1.2 million in fiscal year 2012, $1.0 million in fiscal year 2011 and $894,000 in fiscal year 2010.

Working Capital

We have a revolving line of credit under an amended and restated credit agreement. At July 31, 2012, we had $4.0 million outstanding under that revolving facility. Management believes that our current credit facility, combined with cash flows from operations, will adequately provide for our working capital needs for current operations for the next twelve months.

Long Term Obligations

To finance the acquisition of the electronic chemicals business in December 2007, we entered into an amended and restated credit agreement and a note purchase agreement with Wachovia Bank, National Association, a subsidiary of Wells Fargo & Co., Bank of America, N.A., The Prudential Insurance Company of America, and Pruco Life Insurance Company. The credit facility included a revolving loan facility and a term loan facility.

We amended the credit agreement in November 2011 by raising the maximum amount that may be borrowed under the revolving loan facility to $60.0 million, extending the maturity to December 31, 2016, and allowing advances under the revolving loan facility without reference to a borrowing base restriction. The financial covenant for debt to capitalization was replaced by a current ratio minimum of 1.5 to 1.0. During the first quarter of fiscal year 2012 we paid off all outstanding advances under the credit facility's term loan commitment, and in the November 2011 amendment, that aspect of the facility was deleted.

Advances under the revolving loan mature December 31, 2016. The revolving loan bears interest at varying rate of LIBOR plus a margin based on our funded debt to EBITDA, as described below.

     Ratio of Funded Debt to EBITDA                                  Margin
     Equal to or greater than 3.0 to 1.0                                2.75 %
     Equal to or greater than 2.5 to 1.0, but less than 3.0 to 1.0      2.50 %
     Equal to or greater than 2.0 to 1.0, but less than 2.5 to 1.0      2.25 %
     Equal to or greater than 1.5 to 1.0, but less than 2.0 to 1.0      2.00 %
     Less than 1.5 to 1.0                                               1.75 %

Advances outstanding under the revolving loan facility bear interest at 2.22% as of October 12, 2012 and 2.25% as of July 31, 2012. Before the term loan facility was paid off in October 2011 and removed from the credit facility, the term facility required principal payments of $458,333 per month for the first 24 months, and then beginning in January 2010 principal payments became $666,667 per month for the balance of the term prior to maturity. On March 2, 2012, we repaid the $10.0 million principal balance outstanding on the revolving loan facility from proceeds received from the sale of the animal health business. At October 12, 2012 and at July 31, 2012, $4.0 million was outstanding on the revolving facility.

The financing for the acquisition of the electronic chemicals business in December 2007 included a $20.0 million note purchase agreement we entered into with the Prudential Insurance Company of America. Advances under the note purchase agreement mature December 31, 2014, and bear interest at 7.43% per annum. Principal is payable at maturity. At October 12, 2012 and at July 31, 2012, $20.0 million was outstanding under the note purchase agreement.

Loans under the amended and restated credit facility and the note purchase agreement are secured by our assets, including inventory, accounts receivable, equipment, intangible assets and real property. The credit facility and the note purchase agreement have restrictive covenants, including that we must maintain a fixed charge coverage ratio of 1.5 to 1.0, a ratio of funded debt to EBITDA of 3.0 to 1.0, and a current ratio of at least 1.5 to 1.0. For purposes of . . .