UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

KMG CHEMICALS, INC.

(Exact name of registrant as specified in its charter)

Texas		75-2640529
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
9555 West Sam Houston Parkway South, Suite 600
Houston, Texas		77099
(Address of principal executive offices)		(Zip Code)

(713) 600-3800
(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of March 10, 2011, there were 11,313,991 shares of the registrant’s common stock outstanding.

 

 

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS AS OF JANUARY 31, 2011 AND JULY 31, 2010			3
CONDENSED CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE AND SIX MONTHS ENDED JANUARY 31, 2011 AND 2010			4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JANUARY 31, 2011 AND 2010			5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)			6
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK			20
ITEM 4. CONTROLS AND PROCEDURES			21
PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS			21
ITEM 1A. RISK FACTORS			22
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			22
ITEM 3. DEFAULTS UPON SENIOR SECURITIES			22
ITEM 4. REMOVED AND RESERVED			22
ITEM 5. OTHER INFORMATION			22
ITEM 6. EXHIBITS			22
SIGNATURES			23
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I — FINANCIAL INFORMATION

ITEM 1.		FINANCIAL STATEMENTS

KMG CHEMICALS, INC. AND SUBSIDIARIES

		January 31,				July 31,
		2011				2010
		(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	4,456			$	4,728
Accounts receivable:
Trade, net of allowances of $260 at January 31, 2011 and at July 31, 2010			30,240				30,214
Other			3,366				2,864
Inventories, net			39,896				39,102
Current deferred tax assets			798				672
Prepaid expenses and other current assets			718				1,882
Total current assets			79,474				79,462
PROPERTY, PLANT AND EQUIPMENT, net			69,980				68,645
DEFERRED TAX ASSETS			873				606
GOODWILL			3,778				3,778
INTANGIBLE ASSETS, net			19,948				20,534
RESTRICTED CASH			—				189
OTHER ASSETS, net			3,010				2,807
TOTAL ASSETS		$	177,063			$	176,021
LIABILITIES & STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable		$	22,653			$	20,899
Accrued liabilities			5,102				7,147
Current deferred tax liabilities			28				28
Current portion of long-term debt			8,000				8,000
Total current liabilities			35,783				36,074
LONG-TERM DEBT, net of current portion			44,333				51,333
DEFERRED TAX LIABILITIES			3,497				2,644
OTHER LONG-TERM LIABILITIES			1,239				1,192
Total liabilities			84,852				91,243
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY
Preferred stock, $.01 par value, 10,000,000 shares authorized, none issued			—				—
Common stock, $.01 par value, 40,000,000 shares authorized, 11,309,336 shares issued and outstanding at January 31, 2011 and 11,229,487 shares issued and outstanding at July 31, 2010			113				112
Additional paid-in capital			25,081				24,319
Accumulated other comprehensive loss			(2,154	)			(3,335	)
Retained earnings			69,171				63,682
Total stockholders’ equity			92,211				84,778
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	177,063			$	176,021

See notes to condensed consolidated financial statements.

KMG CHEMICALS, INC. AND SUBSIDIARIES

		Three Months Ended								Six Months Ended
		January 31,								January 31,
		2011				2010				2011				2010
NET SALES		$	64,936			$	45,134			$	127,040			$	94,548
COST OF SALES			46,670				28,422				91,406				59,445
Gross Profit			18,266				16,712				35,634				35,103
DISTRIBUTION EXPENSES			7,351				4,356				13,723				9,377
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES			6,109				5,432				11,545				10,852
Operating income			4,806				6,924				10,366				14,874
OTHER INCOME (EXPENSE):
Interest income			—				1				1				2
Interest expense			(599	)			(535	)			(1,194	)			(1,092	)
Other, net			(241	)			(71	)			(190	)			(99	)
Total other expense, net			(840	)			(605	)			(1,383	)			(1,189	)
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES			3,966				6,319				8,983				13,685
Provision for income taxes			(1,506	)			(2,356	)			(3,007	)			(5,102	)
INCOME FROM CONTINUING OPERATIONS			2,460				3,963				5,976				8,583
DISCONTINUED OPERATIONS
Loss from discontinued operations, before income taxes			(47	)			—				(47	)			—
Income tax benefit			11				—				11				—
Loss from discontinued operations			(36	)			—				(36	)			—
NET INCOME		$	2,424			$	3,963			$	5,940			$	8,583
EARNINGS PER SHARE:
Basic
Income from continuing operations		$	0.21			$	0.36			$	0.53			$	0.77
Loss from discontinued operations			—				—				—				—
Net income		$	0.21			$	0.36			$	0.53			$	0.77
Diluted
Income from continuing operations		$	0.21			$	0.35			$	0.52			$	0.75
Loss from discontinued operations			—				—				—				—
Net income		$	0.21			$	0.35			$	0.52			$	0.75
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic			11,308				11,162				11,303				11,153
Diluted			11,495				11,420				11,477				11,397

See notes to condensed consolidated financial statements.

KMG CHEMICALS, INC. AND SUBSIDIARIES

		Six Months Ended
		January 31,
		2011				2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	5,940			$	8,583
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			3,846				2,817
Amortization of loan costs included in interest expense			54				44
Stock-based compensation expense			374				212
Bad debt expense			—				171
Inventory valuation adjustment			30				(59	)
Loss on disposal of property			113				—
Deferred income tax expense			442				589
Tax benefit from stock-based awards			(196	)			(81	)
Changes in operating assets and liabilities
Accounts receivable — trade			247				(584	)
Accounts receivable — other			(434	)			(236	)
Inventories			(632	)			(2,030	)
Prepaid expenses and other current assets			939				1,015
Accounts payable			1,641				(2,277	)
Accrued liabilities			(1,933	)			(2,948	)
Net cash provided by operating activities			10,431				5,216
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment			(4,009	)			(500	)
Proceeds from sale of property			59				—
Change in restricted cash			189				110
Net cash used in investing activities			(3,761	)			(390	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments under revolver credit agreement			(3,000	)			—
Principal payments on borrowings on term loan			(4,000	)			(2,958	)
Proceeds from exercise of stock options			200				138
Tax benefit from stock-based awards			196				81
Payment of dividends			(452	)			(445	)
Net cash used in financing activities			(7,056	)			(3,184	)
EFFECT OF EXCHANGE RATE CHANGES ON CASH			114				(62	)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			(272	)			1,580
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD			4,728				7,174
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	4,456			$	8,754
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest		$	1,188			$	1,060
Cash paid for income taxes		$	2,479			$	7,183

See notes to condensed consolidated financial statements.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(1) Basis of Presentation. The (a) consolidated balance sheet as of July 31, 2010, which has been derived from audited consolidated financial statements, and (b) the unaudited condensed consolidated financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission for interim reporting. As permitted under those requirements, certain footnotes or other financial information that are normally required by generally accepted accounting principles in the United States of America (“GAAP”) have been condensed or omitted. The Company believes that the disclosures made are adequate to make the information not misleading and in the opinion of management reflect all adjustments, including those of a normal recurring nature, that are necessary for a fair presentation of financial position and results of operations for the interim periods presented. The results of operations for the interim periods are not necessarily indicative of results of operations to be expected for the full year. The unaudited condensed consolidated financial statements included herein should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended July 31, 2010.

These condensed consolidated financial statements are prepared using certain estimates by management and include the accounts of KMG Chemicals, Inc. and its subsidiaries (collectively, the “Company”). All significant intercompany balances and transactions have been eliminated in consolidation. Certain reclassifications have been made to the prior period consolidated financial statements to conform to the current period presentation.

During the second quarter of fiscal year 2011, the Company changed its estimate of the useful lives of certain equipment purchased in the General Chemical acquisition. This change had the effect of decreasing depreciation expense by $411,000, and the effect of increasing income from continuing operations by $411,000, increasing net income by $255,000 and increasing basic and diluted earnings per share by $0.02 for each of the three and six month periods ended January 31, 2011.

(2) Acquisition. On March 29, 2010, the Company acquired certain assets of the electronic chemicals business of General Chemical Performance Products, LLC (“General Chemical”). The acquired business included products similar to the products of the Company’s then existing electronic chemicals business. The purpose of the acquisition was to expand the Company’s manufacturing capability and increase market share.

The purchase included inventory, a 48,000 square foot manufacturing facility in Hollister, California and certain equipment at General Chemical’s Bay Point, California facility. The Company additionally entered into a manufacturing agreement with General Chemical under which they will continue to manufacture certain acid products at their Bay Point facility, using the equipment at the facility which was purchased by the Company. The Company paid $26.8 million in cash for the acquisition which was financed with available cash and borrowings under the Company’s revolving credit facility.

The following table summarizes the consideration paid for the acquired assets and the acquisition accounting for the fair value of the assets recognized in the consolidated balance sheets at the acquisition date (in thousands):

Consideration:
Cash		$	26,784
Fair value of identifiable assets acquired:
Inventory, net of allowance		$	7,604
Property, plant and equipment			17,706
Intangible assets:
Value of product qualifications			1,300
Non-compete agreement			150
Total intangible assets			1,450
Other			24
Total identifiable assets acquired		$	26,784

The following table sets forth pro forma results for the three and six months ended January 31, 2010 had the acquisition occurred as of the beginning of fiscal year 2009. The pro forma financial information is not necessarily indicative of what our consolidated results of operations would have been had we completed the acquisition as of the date indicated.

		Three months ended				Six months ended
		January 31, 2010				January 31, 2010
		(Unaudited)
		(in thousands, except per share data)
Revenues		$	55,374			$	115,571
Operating income			7,601				16,103
Net income			4,364				9,298
Earnings per share — basic		$	0.39			$	0.83

The Company is consolidating manufacturing for its U.S.-based electronic chemicals at its Pueblo, CO and Hollister, CA facilities. As a result it is not practicable to determine the revenue and earnings attributable to the acquired business included in the Company’s consolidated statements of income for the reporting period.

Depreciation included in the pro forma financial information is approximately $230,000 per month.

(3) Recent Accounting Standards. The Company has considered all recently issued accounting standards updates and SEC rules and interpretive releases, and believes that only the following item could have a material impact on the Company’s consolidated financial statements.

In December 2010, the Financial Accounting Standards Board issued new accounting guidance for the disclosure of supplementary pro forma information for business combinations. The guidance clarifies the acquisition date that should be used for reporting the pro forma financial information disclosures when comparative financial statements are presented and specifies that the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The guidance also expands the supplemental pro forma disclosure requirements to include a description of the nature and amount of material, non recurring pro forma adjustments directly attributable to the business combination included in the reported pro forma information. The new guidance is effective prospectively for business combinations with an acquisition date on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. The Company does not expect the new guidance to have a material impact on its consolidated financial statements.

(4) Earnings Per Share. Basic earnings per share have been computed by dividing net income by the weighted average shares outstanding. Diluted earnings per share have been computed by dividing net income by the weighted average shares outstanding plus potentially dilutive common shares. The following table presents information necessary to calculate basic and diluted earnings per share for periods indicated:

		Three Months Ended								Six Months Ended
		January 31,								January 31,
		2011				2010				2011				2010
		(Amounts in thousands, except per share data)
Income from continuing operations		$	2,460			$	3,963			$	5,976			$	8,583
Loss from discontinued operations			(36	)			—				(36	)			—
Net income		$	2,424			$	3,963			$	5,940			$	8,583
Weighted average shares outstanding-basic			11,308				11,162				11,303				11,153
Dilutive effect of options and stock awards			187				258				174				244
Weighted average shares outstanding-diluted			11,495				11,420				11,477				11,397
BASIC EARNINGS PER SHARE
Basic earnings per share from continuing operations		$	0.21			$	0.36			$	0.53			$	0.77
Basic earnings per share on loss from discontinued operations			—				—				—				—
Basic earnings per share		$	0.21			$	0.36			$	0.53			$	0.77
DILUTED EARNINGS PER SHARE
Diluted earnings per share from continuing operations		$	0.21			$	0.35			$	0.52			$	0.75
Diluted earnings per share on loss from discontinued operations			—				—				—				—
Diluted earnings per share		$	0.21			$	0.35			$	0.52			$	0.75

Outstanding stock based awards are not included in the computation of diluted earnings per share under the treasury stock method, if including them would be anti-dilutive. There were approximately 1,500 shares and less than 1,000 shares of potentially dilutive securities not included in the computation of diluted earnings per share for three and six month periods ended January 31, 2011, respectively. There were no potentially dilutive securities not included in the computation of diluted earnings per share for the periods ended January 31, 2010.

(5) Inventories. Inventories are summarized in the following table (in thousands):

		January 31,				July 31,
		2011				2010
Raw materials and supplies		$	9,947			$	8,578
Finished products			30,332				30,942
Less reserve for inventory obsolescence			(383	)			(418	)
Inventories, net		$	39,896			$	39,102

(6) Property, Plant and Equipment. Property, plant and equipment and related accumulated depreciation and amortization are summarized as follows (in thousands):

		January 31,				July 31,
		2011				2010
Land		$	9,780			$	9,428
Buildings & improvements			34,851				34,399
Equipment			41,138				40,195
Leasehold improvements			132				132
			85,901				84,154
Less accumulated depreciation and amortization			(21,252	)			(18,054	)
			64,649				66,100
Construction-in-progress			5,331				2,545
Property, plant and equipment, net		$	69,980			$	68,645

(7) Stock-Based Compensation. The Company has stock-based incentive plans which are described in more detail in note 11 to the consolidated financial statements in the Company’s Annual Report on Form 10-K for fiscal year 2010. The Company recognized stock-based compensation costs of approximately $193,000 and $126,000, respectively, for the three months ended January 31, 2011 and 2010, and approximately $374,000 and $212,000 for the six months ended January 31, 2011 and 2010, respectively, which are recorded as selling, general and administrative expenses in the consolidated statements of income.

As of January 31, 2011, the unrecognized compensation costs related to stock-based awards was approximately $1.6 million, including $28,000 related to non-vested stock options expected to be recognized over a weighted-average period of 1.7 years and $1.6 million related to unvested performance and time-based stock awards expected to be recognized over a weighted-average period of 1.6 years.

A summary of stock option and stock activity is presented below.

Stock Options

A summary of activity associated with the six months ended January 31, 2011 is presented below.

						Weighted-
						Average
		Shares				Exercise Price
Outstanding on August 1, 2010			272,000			$	3.98
Granted			—				—
Exercised			(50,000	)			4.00
Forfeited/Expired			—				—
Outstanding on January 31, 2011			222,000				3.98

The following table summarizes information about stock options outstanding at January 31, 2011 based on fully vested (currently exercisable) stock option awards and stock options awards expected to vest:

										Weighted-
						Weighted-				Average
						Average				Remaining				Aggregate
		Options				Exercise Price				Contractual				Intrinsic Value
		Outstanding				per Share				Term (years)				(in thousands) (1)
Fully vested and currently exercisable			159,500			$	3.84				5.4			$	2,104
Expected to vest			62,500				4.34				11.6				793
Total outstanding stock options			222,000				3.98				7.1			$	2,897

No options were granted in the first six months of fiscal years 2011 or 2010.

The total intrinsic value of options exercised during the six months ended January 31, 2011 and 2010 was approximately $546,000 and $282,000, respectively.

Performance Shares

On August 1, 2010, there were 197,249 non-vested performance shares outstanding which reflected the maximum number of shares under the awards. During the six months ended January 31, 2011, there were no awards vested and there were 103,298 performance-based stock awards granted. The fair value of the award was measured on the grant date of December 7, 2010 using the Company’s closing stock price of $15.65. Stock-based compensation expense on the award will be recognized on a straight line basis over the requisite service period beginning on the date of grant through the end of the measurement period ending July 31, 2013, based on the number of shares expected to vest at the end of the measurement period. As of January 31, 2011, the non-vested performance-based stock awards consisted of Series 1 and Series 2 awards granted to certain executives in fiscal years 2011, 2010 and 2009, are summarized below.

										Closing Stock
						Maximum				Price				3-Year				Expected
		Series				Award				(Fair Value)				Measurement				Percentage of				Shares Expected
Date of Grant		Award				(Shares)				on Grant Date				Period Ending				Vesting				to Vest
Fiscal Year 2011 Award 12/7/2010		Series 1					61,980			$	15.65				07/31/2013				36.25	%			22,468
12/7/2010		Series 2					41,318			$	15.65				07/31/2013				0.00	%			—
							103,298																22,468
Fiscal Year 2010 Award 3/17/2010		Series 1					63,605			$	15.55				07/31/2012				47.50	%			30,212
3/17/2010		Series 2					42,402			$	15.55				07/31/2012				100.00	%			42,402
							106,007																72,614
Fiscal Year 2009 Award 12/02/2008		Series 1					54,745			$	3.19				07/31/2011				52.50	%			28,741
12/02/2008		Series 2					36,497			$	3.19				07/31/2011				20.00	%			7,299
							91,242																36,040
Total							300,547																131,122

Series 1: Vesting for the Series 1 awards are subject to a performance requirement composed of certain revenue growth objectives and average annual return on invested capital or equity objectives measured across a three year period. These objectives are measured quarterly using the Company’s budget, actual results and long term projections. For the fiscal year 2011, 2010 and 2009 awards the expected percentage of vesting is based on performance through January 31, 2011 and reflects the percentage of shares projected to vest for the respective awards at the end of their measurement periods.

Series 2: Vesting for the Series 2 awards are subject to performance requirements pertaining to the growth rate in the Company’s basic earnings per share over a three year period. The achievement of performance requirements is measured quarterly using the Company’s budget, actual results and long-term projections. For the fiscal year 2011, 2010 and 2009 awards the expected percentage of vesting is based on performance through January 31, 2011 and reflects the percentage of shares projected to vest for the respective awards at the end of their measurement periods.

The weighted-average grant-date fair value of performance awards outstanding at August 1, 2010 and January 31, 2011 was $12.33 and $12.17, respectively.

Time Based Shares

A summary of activity for time-based stock awards for the six months ended January 31, 2011 is presented below:

						Weighted-Average
						Grant-Date
		Shares				Fair Value
Non-vested on August 1, 2010			24,070			$	12.66
Granted			25,977				16.95
Vested (1)			(10,631	)			13.42
Forfeited			—				—
Non-vested on January 31, 2011			39,416				14.46

During the six months ended January 31, 2011, a grant was made to non-employee directors under time-based awards whereby each non-employee director will be issued shares having a value of $50,000 for service as a director for the twelve-month period ending November 30, 2011. Each non-employee director shall be issued shares in quarterly installments for service as a director in the preceding three months in an amount equal in value to $12,500 valued on the closing price of the Company’s stock price as of the last trading day of each three month service period ending in February, May, August and November. The aggregate grant-date fair value of $350,000 for the award will be recognized on a straight-line basis over the requisite service period beginning January 24, 2011.

The Company also granted 5,769 time-based shares to certain employees during the six months ended January 31, 2011 which vest on July 31, 2013. The fair value of the award of $90,285 was measured on the date of grant on December 7, 2010, using the Company’s closing stock price of $15.65, and will be recognized on a straight line basis over the requisite service period from December 7, 2010 through July 31, 2013.

The total fair value of shares vested during the six months ended January 31, 2011 and 2010 was approximately $175,000 and $99,000, respectively.

There were 21,944 time-based shares granted during the six months ended January 31, 2010.

(8) Intangible Assets. Intangible assets are summarized as follows (in thousands):

		January 31, 2011
		Original				Accumulated				Carrying
		Cost				Amortization				Amount
Intangible assets subject to amortization: (range of useful life):
Creosote supply contract (10 years)		$	4,000			$	(3,822	)		$	178
Animal health trademarks (4-5 years)			364				(363	)			1
Animal health product registrations and other related assets (5-20 years)			6,165				(1,837	)			4,328
Electronic chemicals-related contracts (3-8 years)			1,164				(995	)			169
Electronic chemicals-related trademarks and patents (10-15 years)			117				(32	)			85
Electronic chemicals—value of product qualifications (5 years)			1,300				(217	)			1,083
Total intangible assets subject to amortization		$	13,110			$	(7,266	)			5,844
Intangible assets not subject to amortization:
Creosote product registrations											5,339
Penta product registrations											8,765
Total intangible assets not subject to amortization											14,104
Total intangible assets, net										$	19,948

		July 31, 2010
		Original				Accumulated				Carrying
		Cost				Amortization				Amount
Intangible assets subject to amortization: (range of useful life):
Creosote supply contract (10 years)		$	4,000			$	(3,689	)		$	311
Animal health trademarks (4-5 years)			364				(359	)			5
Animal health product registrations and other related assets (5-20 years)			6,165				(1,667	)			4,498
Electronic chemicals-related contracts (3-8 years)			1,164				(844	)			320
Electronic chemicals-related trademarks and patents (10-15 years)			117				(26	)			91
Electronic chemicals-value of product qualifications (5 years)			1,300				(95	)			1,205
Total intangible assets subject to amortization		$	13,110			$	(6,680	)			6,430
Intangible assets not subject to amortization:
Creosote product registrations											5,339
Penta product registrations											8,765
Total intangible assets not subject to amortization											14,104
Total intangible assets, net										$	20,534

Intangible assets subject to amortization are amortized over their estimated useful lives. Amortization expense was approximately $282,000 and $244,000 for the three month periods ended January 31, 2011 and 2010 respectively, and was approximately $586,000 and $487,000 for the first six months of fiscal years 2010 and 2011, respectively.

(9) Dividends. Dividends of approximately $226,000 ($0.02 per share) and $223,000 ($0.02 per share) were declared and paid in the second quarter of fiscal years 2011 and 2010, respectively. Dividends of approximately $452,000 ($0.04 per share) and $445,000 ($0.04 per share) were declared and paid in the first six months of fiscal years 2011 and 2010, respectively.

(10) Comprehensive Income. The Company’s other comprehensive income includes foreign currency translation gains and losses which are recognized as accumulated other comprehensive income (loss) in the consolidated balance sheets. The following table summarizes total comprehensive income for the periods indicated (in thousands):

		Three Months Ended								Six Months Ended
		January 31,								January 31,
		2011				2010				2011				2010
Net income		$	2,424			$	3,963			$	5,940			$	8,583
Other comprehensive income:
Net foreign currency translation gain (loss)			(297	)			(1,372	)			1,181				(346	)
Total comprehensive income		$	2,127			$	2,591			$	7,121			$	8,237

(11) Segment Information. The Company operates four reportable segments organized around its three product lines: electronic chemicals, industrial wood treating chemicals and animal health products.

The Company previously had five reportable segments, Electronic Chemicals — North America, Electronic Chemicals — International, penta, creosote and animal health. During the fourth quarter of fiscal year 2010 the Company re-evaluated the criteria used to determine operating segments, and concluded that its electronic chemicals product line met the criteria of a single operating segment. As a result, the composition of the Company’s reportable segments was revised to reflect a change from five to four reportable segments, electronic chemicals, penta, creosote and animal health. Prior year information has been reclassified to conform to the current period presentation.

		Three Months Ended								Six Months Ended
		January 31,								January 31,
		2011				2010				2011				2010
		(Amounts in thousands)
Sales
Electronic Chemicals		$	36,001			$	22,894			$	72,794			$	45,905
Penta			5,275				5,107				11,746				11,050
Creosote			20,532				14,670				38,221				34,197
Animal Health			3,128				2,463				4,279				3,396
Total sales for reportable segments		$	64,936			$	45,134			$	127,040			$	94,548
Depreciation and amortization
Electronic Chemicals		$	1,117			$	958			$	2,873			$	1,854
Penta			147				154				292				309
Creosote			73				69				146				139
Animal Health			193				191				385				383
Other — general corporate			76				66				150				132
Total consolidated depreciation and amortization		$	1,606			$	1,438			$	3,846			$	2,817
Segment income (loss) from operations (1)
Electronic Chemicals		$	1,331			$	2,499			$	4,356			$	3,401
Penta			1,568				1,446				3,629				3,821
Creosote			2,804				4,070				4,572				10,390
Animal Health			144				87				(253	)			(283	)
Total segment income from operations		$	5,847			$	8,102			$	12,304			$	17,329

		January 31,				July 31,
		2011				2010
Assets
Electronic Chemicals		$	112,455			$	109,367
Penta			22,968				20,094
Creosote			16,053				21,731
Animal Health			15,483				15,950
Total assets for reportable segments		$	166,959			$	167,142

		Three Months Ended								Six Months Ended
		January 31,								January 31,
		2011				2010				2011				2010
		(Amounts in thousands)
Electronic Chemicals		$	952			$	884			$	1,884			$	1,788
Penta			218				180				387				364
Creosote			622				498				1,188				1,008
Animal Health			137				84				249				170
Total corporate overhead expense allocation		$	1,929			$	1,646			$	3,708			$	3,330

A reconciliation of total segment information to consolidated amounts is as follows:

		January 31,				July 31,
		2011				2010
		(Amounts in thousands)
Assets:
Total assets for reportable segments		$	166,959			$	167,142
Total assets for discontinued operations (1)			689				739
Cash and cash equivalents			4,299				3,073
Prepaid and other current assets			2,000				2,174
Other			3,116				2,893
Total assets		$	177,063			$	176,021

		Three Months Ended								Six Months Ended
		January 31,								January 31,
		2011				2010				2011				2010
Sales:
Total sales for reportable segments		$	64,936			$	45,134			$	127,040			$	94,548
Net sales		$	64,936			$	45,134			$	127,040			$	94,548
Segment income from operations:
Total segment income from operations (2)		$	5,847			$	8,102			$	12,304			$	17,329
Other corporate expense (2)			(1,041	)			(1,178	)			(1,938	)			(2,455	)
Operating income			4,806				6,924				10,366				14,874
Interest income			—				1				1				2
Interest expense			(599	)			(535	)			(1,194	)			(1,092	)
Other income (expense), net			(241	)			(71	)			(190	)			(99	)
Income from continuing operations before income taxes		$	3,966			$	6,319			$	8,983			$	13,685

(12) Long-Term Obligations. The Company’s debt consisted of the following (in thousands):

		January 31,				July 31,
		2011				2010
Senior Secured Debt:
Note Purchase Agreement, maturing on December 31, 2014, interest rate of 7.43%		$	20,000			$	20,000
Secured Debt:
Term Loan Facility, maturing on December 31, 2012, variable interest rates based on LIBOR plus 2.00% (2.26% at January 31, 2011)			15,333				19,333
Revolving Loan Facility, maturing on December 31, 2012, variable interest rates based on LIBOR plus 2.00% (2.26% at January 31, 2011)			17,000				20,000
Total debt			52,333				59,333
Current portion of long-term debt			(8,000	)			(8,000	)
Long-term debt, net of current portion		$	44,333			$	51,333

To finance the acquisition of the electronic chemicals business in December 2007, the Company entered into a credit agreement and a note purchase agreement. The credit facility included a revolving loan facility of $35.0 million and a term loan facility of $35.0 million. The Company amended those facilities in March 2010 to increase the amount that may be borrowed under the revolving loan facility to $50 million. The facility was entered into 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. Advances under the revolving loan and the term loan mature December 31, 2012. The revolving loan and the term loan each bear interest at varying rate of LIBOR plus a margin based on our funded debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”).

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	%

As of February 28, 2011, advances under the revolving loan and the term loan bear interest at 2.26% per year (LIBOR plus 2.00%). For the first 24 months of the term facility, principal payments were $458,333, per month and then beginning January 2010 principal payments became $666,667 per month for the balance of the term prior to maturity.

The purchase of the electronic chemicals assets from General Chemical on March 29, 2010 was funded with available cash and borrowings under the revolving loan. At January 31, 2011, the amount outstanding on the revolving loan was $17.0 million and the amount outstanding on the term loan was $15.3 million.

In fiscal year 2008 the Company also entered into a $20.0 million note purchase agreement 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 January 31, 2011, $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 the Company’s assets, including inventory, accounts receivable, equipment, intangible assets, and real property. The credit facility and the note purchase agreement have restrictive covenants, including that the Company must maintain a fixed charge coverage ratio of 1.5 to 1.0, and maintain a ratio of funded debt to EBITDA of 3.0 to 1.0. The Company is also obligated to maintain a debt to capitalization ratio of not more than 50%. For purposes of calculating these financial covenant ratios, we use a pro forma EBITDA. On January 31, 2011, the Company was in compliance with all of its debt covenants.

(13) Income Taxes. Income tax expense for the interim periods was computed using the effective tax rate estimated to be applicable for the full fiscal year. The effective tax rate for first six months of fiscal year 2011 was 33.5%, which included the effect of an adjustment recognized during the first quarter of $410,000 for the reversal of a portion of the valuation allowance related to a foreign subsidiary.

(14) Discontinued Operations. In fiscal year 2008 the Company discontinued operations of its herbicide product line that had comprised the agricultural chemical segment. During the three and six months ended January 31, 2011, there were no sales reported in discontinued operations, and the Company reported a net loss from discontinued operations of $36,000 from the dismantling of related equipment which began in the second quarter. No amounts were recorded for the three and six months ended January 31, 2010.

ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

We manufacture, formulate and distribute specialty chemicals globally. We operate businesses engaged in electronic chemicals, industrial wood treating chemicals and animal health products. Our electronic chemicals are used in the manufacturing of semiconductors. Our wood preserving chemicals, pentachlorophenol (“penta”) and creosote, are used by our industrial customers primarily to extend the useful life of utility poles and railroad crossties. Our animal health products include biotech feed additives, farm and ranch hygiene products and pesticide products used on cattle, other livestock and poultry to protect the animals from flies and other pests.

Results of Operations

Three Month and Six Month Periods Ended January 31, 2011 compared with Three and Six Month Periods Ended January 31, 2010

Segment Data

Segment data is presented for our four reportable segments for the three and six month periods ended January 31, 2011 and 2010. The segment data should be read in conjunction with our condensed consolidated financial statements and related notes thereto included elsewhere in this report. We previously had five reportable segments, Electronic Chemicals-North America, Electronic Chemicals-International, and segments for penta, creosote and animal health. During the fourth quarter of fiscal year 2010 we re-evaluated the criteria used to determine operating segments, and we concluded that our electronic chemicals product line met the criteria of a single operating segment. As a result our reportable segments were revised to reflect a change from five to four reportable segments, electronic chemicals, penta, creosote and animal health. Prior year information has been reclassified to conform to the current period presentation.

		Three Months Ended								Six Months Ended
		January 31,								January 31,
		2011				2010				2011				2010
		(Amounts in thousands)
Sales
Electronic Chemicals		$	36,001			$	22,894			$	72,794			$	45,905
Penta			5,275				5,107				11,746				11,050
Creosote			20,532				14,670				38,221				34,197
Animal Health			3,128				2,463				4,279				3,396
Net sales		$	64,936			$	45,134			$	127,040			$	94,548

Net Sales

Net sales increased $19.8 million, or 43.9%, to $64.9 million in the second quarter of fiscal year 2011 as compared with $45.1 million for the same period of the prior year. For the six month comparison, net sales increased $32.5 million, or 34.4%, to $127.0 million in fiscal year 2011 from $94.5 million in fiscal year 2010.

In the second quarter of fiscal year 2011, the electronic chemicals segment had net sales of $36.0 million, an increase of $13.1 million, or 57.3%, as compared to $22.9 million for the prior year period. For the six month comparison, net sales in the electronic chemicals segment increased $26.9 million, or 58.6%, to $72.8 million in fiscal year 2011 from $45.9 million in fiscal year 2010. We had increased sales from our March 2010 acquisition of General Chemical’s electronic chemicals business, and demand recovered in the segment from the effect of the economic downturn in the semiconductor industry.

Net sales of penta products increased $168,000, or 3.3%, to $5.3 million in the second quarter of fiscal year 2011 as compared to $5.1 million for the prior year period. For the six month comparison, net sales in the penta segment increased $696,000, or 6.3%, to $11.7 million in fiscal year 2011 from $11.1 million in fiscal year 2010. The increases in sales for both the three and six month periods were due to higher volume. We benefited from an incremental improvement in purchases of treated poles by utility companies.

Creosote net sales also increased in the second quarter of fiscal year 2011, as compared with the prior year period, by $5.9 million, or 40.0%, to $20.5 million. For the six month comparison, net sales in the creosote segment increased $4.0 million, or 11.8%, to $38.2 million in fiscal year 2011 from $34.2 million in fiscal year 2010. For the three and six month periods the increase was due to higher volumes offset in part by lower average prices. Demand by railroads for crossties treated with creosote eased in 2010 from the high levels of previous years, but now appears to be rebounding as the United States comes out of the recession. Crosstie purchases appear to be moving back toward about 18 million ties for the United States market. However, average pricing for creosote for both the quarter and the six month period declined because of a shift in product mix and renegotiated pricing following consolidation of our wood treating customer base. We anticipate that pricing will remain relatively flat through fiscal year 2011, but we believe that creosote sales volume will increase in the second half of the fiscal year as rail tie production rates more closely approximate tie purchases.

Net sales of animal health pesticides increased by $665,000, or 27.0%, to $3.1 million in the second quarter of fiscal year 2011 as compared with $2.5 million in the prior year period. For the six month comparison, net sales in the animal health segment increased $883,000, or 26.0%, to $4.3 million in fiscal year 2011 from $3.4 million in fiscal year 2010. The increase was primarily driven by improvement in demand for pest control in the United States in the feed animal sector. However, we have seen a significant increase in orders for ear tag products in Australia, and because we are continuing to add registered products in South America, we see increased animal health sales in that region. Although we are working to have EPA re-establish appropriate tolerances, pending a successful conclusion of that effort, sales of our Rabon products in the U.S. may be adversely affected. Sales of our Rabon products in the U.S. constituted approximately 2% of our fiscal year 2010 consolidated net sales. Seasonal usage of animal health pesticides is dependent on varying seasonal patterns, weather conditions and weather-related pressure from pests, as well as customer marketing programs and requirements. Our revenue from the animal health pesticides segment is seasonal and weighted to the third and fourth quarters of our fiscal year. Revenues from products subject to significant seasonal variations represented 5.0% of our fiscal year 2010 revenues.

Gross Profit

Gross profit increased by $1.6 million, or 9.3%, to $18.3 million in the second quarter of fiscal year 2011 from $16.7 million in the same quarter the prior year. For the six month comparison, gross profit increased $531,000, or 1.5%, to $35.6 million in fiscal year 2011 from $35.1 million in fiscal year 2010. Gross profit as a percentage of sales decreased to 28.1% in the second quarter of fiscal year 2011 from 37.0% in the second quarter of fiscal year 2010, and decreased to 28.0% for the first six months of fiscal year 2011 from 37.1% for the prior fiscal year.

The increase in aggregate gross profit for both the three and six month periods came from improved sales in our electronic chemicals segment, as discussed above. As a percentage of sales, however, profit margins in our electronic chemicals segment was down for the second quarter and for the full six months of fiscal year 2011 as compared to the prior year. In our electronic chemicals segment margins were impacted in both the second quarter and the six months period by duplicative costs associated with the integration of our March 2010 acquisition of General Chemicals’ business, and by rising raw material costs. In connection with the integration, we are shifting operations to our Hollister, CA and Pueblo, CO facilities, but we have continued to incur expense for contract manufacturing in Dallas, TX and Bay Point, CA. We expect that duplication will be eliminated by the end of the fiscal year as we complete the transition to Hollister and Pueblo. We implemented a global price increase to take effect during the third fiscal quarter to address our increased raw material costs. In our creosote segment, we have experienced increased costs this fiscal year as compared to the prior year, and a lower average price. At the end of fiscal year 2010 we entered into a long-term contract to sell creosote to our largest customer following its acquisition of another of our large customers. Although this arrangement has had the effect of increasing creosote volume substantially, margins have declined from the unusually high levels experienced in fiscal year 2010 to what we believe is a more normal level.

Other companies may include certain of the costs that we record in cost of sales as 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 a component of cost of sales, resulting in a lack of comparability between our gross profit and that reported by other companies.

Distribution Expenses

Distribution expenses are presented as a line item separate from our selling, general and administrative expenses in the consolidated statements of income. Prior year information has been reclassified to conform to this presentation.

Distribution expenses increased $3.0 million, or 68.8%, to $7.4 million in the second quarter of fiscal year 2011 as compared with $4.4 million in the prior year period. For the six month comparison, distribution expense increased $4.3 million, or 46.3%, to $13.7 million in fiscal year 2011 from $9.4 million in fiscal year 2010. Distribution expenses were approximately 11.3% and 10.8% of net sales for the second quarter and for the first six months of fiscal year 2011, respectively, and 9.7% and 9.9% for the comparable prior year periods.

We recognized an increase in distribution expense in our electronic chemicals segment of approximately $2.7 million and $3.8 million for the three and six months ended January 31, 2011, respectively, as compared to the same prior year periods. The increase was primarily due to increased expense on greater volume from the General Chemical acquisition for storage, handling and freight of about $2.4 million and $3.5 million for the three and six month periods, respectively, as compared to the prior year periods. For electronic chemicals, distribution expense was 17.4% of net sales in the second quarter and 15.9% for the six month period in fiscal year 2011, as compared to 15.6% and 16.9%, respectively, for the comparable periods in the prior year. The increase in distribution expense as a percent of sales was due to higher diesel fuel costs, the impact of our integration effort and additional freight incurred to meet shortage conditions arising from unscheduled plant outages at two suppliers in the United States. Those suppliers have now resumed production. Our two wood preservatives segments and our animal health segments had an aggregate increase of approximately $300,000 and $500,000 in distribution expenses in the second quarter and first six months of fiscal year 2011, respectively, mainly because of higher freight costs, storage and steaming costs for creosote storage and higher, volume related railcar cleaning expenses. With increased creosote throughput and milder temperatures, we expect storage and steaming costs will decline in the second half of the fiscal year.

Selling, General and Administrative Expenses

Selling, general, and administrative expenses were $6.1 million in the second quarter of fiscal year 2011 and $5.4 million in the same quarter of fiscal year 2010. Those expenses were 9.4% of sales in the second quarter of fiscal year 2011 and 12.0% of sales in the second quarter of the prior year. For the six month comparison, selling, general and administrative expense increased $693,000, or 6.4%, to $11.5 million in fiscal year 2011 from $10.9 million in fiscal year 2010.

Selling, general and administrative expenses associated with our electronic chemicals segment increased approximately $710,000, to $3.1 million, in the second quarter of fiscal year 2011 as compared to $2.4 million for the second quarter of fiscal year 2010, and increased $1.1 million, to $6.0 million, for the six month period as compared to the same prior year period. The increases in both the three and six month periods were primarily related to higher employee costs of approximately $300,000 and $500,000, respectively. The three and six month periods included integration costs of approximately $61,000 and $237,000, respectively, in connection with the electronic chemicals business we acquired from General Chemical in March 2010. We also recognized modest increases in other professional services for both the three and six month periods. Selling, general and administrative expenses related to each of our other segments were relatively flat.

Other corporate expense decreased by approximately $137,000 and $517,000 for the three and six month periods, respectively, as compared to the prior year periods. Other corporate expense represents those expenses associated with our operation as a public entity and includes costs such as board compensation, audit expense and fees related to the listing of our stock. See Note 11 to the condensed consolidated financial statements.

Interest Expense

Interest expense was $599,000 in the second quarter and $1.2 million in the first six months of fiscal year 2011 as compared with $535,000 and $1.1 million in the comparable periods of fiscal year 2010. The increase was due to an increase in our revolving loan facility balance to finance the acquisition of the electronic chemicals business of General Chemical in March 2010.

Income Taxes

Our effective tax rate was 38.1% and 33.5% in the second quarter and the first six months, respectively, of fiscal years 2011, and 37.3% for each of the prior year periods. The current six month period income tax expense was net of a discrete period adjustment of $410,000 recognized in the first quarter of fiscal year 2011 reflecting the reversal of a portion of the valuation allowance related to a foreign subsidiary.

Liquidity and Capital Resources

Cash Flows

Net cash provided by operating activities was $10.4 million for the first six months of fiscal year 2011 as compared to $5.2 million for the comparable period in 2010. Net income adjusted for depreciation and amortization increased cash to $9.8 million in the first six months of fiscal year 2011. Changes in operating assets and liabilities included an increase of $1.6 million in accounts payable and a decrease in prepaid expenses and other current assets of approximately $939,000, both of which had a favorable impact on cash. The increase in accounts payable was primarily related to our recently acquired electronic chemicals business and the timing of creosote purchases. Prepaid expense and other current assets decreased as a result of a reduction in prepaid insurance. Cash was unfavorably impacted by a decrease in accrued liabilities of $1.9 million and an increase in inventories of $632,000. Accrued liabilities decreased mainly as a result of a reduction in our employee bonus accrual. The net increase in inventories was due to increased inventories in our electronic chemicals segment mostly offset by reduced inventories in our creosote segment.

Net cash used in investing activities in the first six months of fiscal 2011 was $3.8 million as compared with $390,000 in the prior year period. We made additions to property, plant and equipment of $4.0 million during the first six months of fiscal year 2011 as compared to $500,000 in the same period of fiscal year 2010. In the first six months of fiscal year 2011 we spent approximately $1.3 million in connection with our ongoing expansion project at our Hollister, CA facility. We additionally made approximately $1.7 million of capital expenditures at our Pueblo, CO facility for equipment purchases and upgrades, some of which are in connection with our ongoing consolidation of our United States based electronic chemicals manufacturing. We also made expenditures of $411,000 for equipment at our Milan, Italy facility. The remaining capital expenditures were for normal equipment and system upgrades and purchases across our different locations. The expenditures in the prior year period were primarily in our electronic chemicals segment.

Net cash used in financing activities was $7.1 million in the first six months of fiscal year 2011 as compared to $3.2 million in the comparable prior year period. In the first six months of fiscal year 2011, we made principal payments of $4.0 million on the term loan indebtedness we incurred when we purchased the electronic chemicals business in December 2007. We additionally made payments of $3.0 million on our revolving credit line in the six month period which reflects amounts borrowed to fund our March 2010 acquisition. In the first six months of fiscal year 2010, we made principal payments of $3.0 million on the term loan indebtedness.

We paid dividends of $452,000 and $445,000 in the first six months of fiscal years 2011 and 2010, respectively. On February 24, 2011, we announced an increase in our quarterly dividend rate to $0.025 per share from $0.020 per share, a 25% increase. It is our policy to pay dividends from available cash after taking into consideration our profitability, capital requirements, financial condition, growth, business opportunities and other factors which our board of directors may deem relevant, and the increase in the quarterly dividend reflects that analysis.

Working Capital

We have a revolving line of credit under an amended and restated credit agreement. At January 31, 2011, we had $17.0 million outstanding under that revolving facility, and our net borrowing base availability was $18.2 million. 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 a 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 new credit facility included a revolving loan facility of $35.0 million and a term loan facility of $35.0 million. We amended those facilities in March 2010 to increase the amount that may be borrowed under the revolving loan facility to $50.0 million. Advances under the revolving loan and the term loan mature December 31, 2012. They each bear 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	%

As of February 28, 2011, advances bear interest at 2.26% per year (LIBOR plus 2.00%). For the first 24 months of the term facility, principal payments were $458,333 per month, and then beginning January 2010 principal payments became $666,667 per month for the balance of the term prior to maturity. The purchase of the electronic chemicals assets from General Chemical on March 29, 2010 was funded with available cash and borrowings under the revolving loan. At January 31, 2011, $17.0 million was outstanding on the revolving facility and $15.3 million was outstanding on the term loan.

The financing for the acquisition of the electronic chemicals business in fiscal year 2008 included a $20.0 million note purchase agreement 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 January 31, 2011, $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, and a ratio of funded debt to EBITDA of 3.0 to 1.0. We are also obligated to maintain a debt to capitalization ratio of not more than 50%. For purposes of calculating these financial covenant ratios, we use a pro forma EBITDA. On January 31, 2011, we were in compliance with all of our debt covenants.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements, such as financing or unconsolidated variable interest entities.

Recent Accounting Standards

We have considered all recently issued accounting standards updates and SEC rules and interpretive releases, and believe that only the following item could have a material impact on our consolidated financial statements.

In December 2010, the Financial Accounting Standards Board issued new accounting guidance for the disclosure of supplementary pro forma information for business combinations. The guidance clarifies the acquisition date that should be used for reporting the pro forma financial information disclosures when comparative financial statements are presented and specifies that the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The guidance also expands the supplemental pro forma disclosure requirements to include a description of the nature and amount of material, non recurring pro forma adjustments directly attributable to the business combination included in the reported pro forma information. The new guidance is effective prospectively for business combinations with an acquisition date on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. We do not expect the new guidance to have a material impact on its consolidated financial statements.

Critical Accounting Policies and Estimates

Our condensed consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. The preparation of these condensed consolidated financial statements requires the use of estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the periods presented. There were no significant changes in our critical accounting policies as described in our Annual Report on Form 10-K for the fiscal year ended July 31, 2010.

Disclosure Regarding Forward Looking Statements

We are including the following discussion to inform our existing and potential security holders generally of some of the risks and uncertainties that can affect us and to take advantage of the “safe harbor” protection for forward-looking statements that applicable federal securities law affords. From time to time, our management or persons acting on our behalf make forward-looking statements to inform existing and potential security holders about our company. These forward-looking statements include information about possible or assumed future results of our operations. All statements, other than statements of historical facts, included or incorporated by reference in this report that address activities, events or developments that we expect or anticipate may occur in the future, including such things as future capital expenditures, business strategy, competitive strengths, goals, growth of our business and operations, plans and references to future successes may be considered forward-looking statements. Also, when we use words such as “anticipate,” “believe,” “estimate,” “intend,” “plan,” “project,” “forecast,” “may,” “should,” “budget,” “goal,” “expect,” “probably” or similar expressions, we are making forward-looking statements. Many risks and uncertainties may impact the matters addressed in these forward-looking statements. Our forward-looking statements speak only as of the date made and we will not update forward-looking statements unless the securities laws require us to do so.

Some of the key factors which could cause our future financial results and performance to vary from those expected include:

	•		the loss of primary customers;
	•		our ability to implement productivity improvements, cost reduction initiatives or facilities expansions;
	•		market developments affecting, and other changes in, the demand for our products and the introduction of new competing products;
	•		availability or increases in the price of our primary raw materials or active ingredients;
	•		the timing of planned capital expenditures;
	•		our ability to identify, develop or acquire, and market additional product lines and businesses necessary to implement our business strategy and our ability to finance such acquisitions and development;
	•		the condition of the capital markets generally, which will be affected by interest rates, foreign currency fluctuations and general economic conditions;
	•		cost and other effects of legal and administrative proceedings, settlements, investigations and claims, including environmental liabilities which may not be covered by indemnity or insurance;
	•		the effects of weather, earthquakes, other natural disasters and terrorist attacks;
	•		the ability to obtain registration and re-registration of our products under applicable law;
	•		the political and economic climate in the foreign or domestic jurisdictions in which we conduct business; and
	•		other United States or foreign regulatory or legislative developments which affect the demand for our products generally or increase the environmental compliance cost for our products or impose liabilities on the manufacturers and distributors of such products.