Mail Stop 0510
March 31, 2005
Via U.S. mail and facsimile
Mr. David L. Hatcher
President and Chief Executive Officer, KMG Chemicals, Inc.
10611 Harwin Drive, Suite 402
Houston, TX 77036
RE: Form 10-K for the fiscal year ended July 31, 2004
Form 10-Q for the period ended January 31, 2005
File No. 0-29278
Dear Mr. Hatcher:
We have reviewed these filings and have the following
comments. If you disagree with a comment, we will consider your
explanation as to why our comment is inapplicable or a revision is
unnecessary. Please be as detailed as necessary in your
explanation.
In some of our comments, we may ask you to provide us with
supplemental information so we may better understand your
disclosure.
After reviewing this information, we may or may not raise
additional
comments.
Please understand that the purpose of our review process is
to
assist you in your compliance with the applicable disclosure
requirements and to enhance the overall disclosure in your filing.
We look forward to working with you in these respects. We welcome
any questions you may have about our comments or on any other
aspect
of our review. Feel free to call us at the telephone numbers
listed
at the end of this letter.
FORM 10-K FOR THE YEAR ENDED JULY 31, 2004
Comment applicable to your overall filing
1. Where a comment below requests additional disclosures or other
revisions to be made, please show us in your supplemental response
what the revisions will look like. These revisions should be
included in your future filings.
Management`s Discussion and Analysis
2. We note that you summarize quarterly financial information in
Note
14. Please discuss any seasonal aspects of your business which
have
had a material effect on your financial condition or results of
operation. See instruction 5 to Item 303(b) of Regulation S-K and
paragraph 30(c) of APB 28.
Results of Operations, page 14
3. Please disclose the extent to which acquisitions, changes in
prices, amounts of shipments, or the introduction of new products
contributed to fluctuations in revenues. Refer to Item
303(a)(3)(iii) of Regulation S-K.
4. Please quantify the impact of each factor when multiple factors
contribute to material fluctuations. For example, selling,
general
and administrative expenses increased in fiscal 2004 due to the
acquisition of the Wood Protection Products distribution business,
increased amortization of the cost of your animal health and penta
acquisitions, and compensation of new personnel to support those
acquisitions; please quantify each of these factors. Refer to
Item
303(a)(3)(i) of Regulation S-K and Financial Reporting
Codification
501.04.
5. Your discussion of gross profit on page 15 indicates that you
starting reselling penta blocks in December 2003 after signing a
long
term supply agreement. Please disclose how you report these
revenues
and corresponding costs of sales given the provisions of EITF 99-
19.
Liquidity and Capital Resources
Contractual Obligations, page 19
6. Please revise your table of contractual obligations to include
the
following:
* Estimated interest payments on your debt;
* Estimated payments under interest rate swap agreements; and
* Planned funding of pension and other postretirement benefit
obligations.
Because the table is aimed at increasing transparency of cash
flow,
we believe these payments should be included in the table. Please
also disclose any assumptions you made to derive these amounts.
Financial Statements
7. Please display comprehensive income and its components in a
financial statement, which should have the same prominence as
other
financial statements. Refer to paragraph 22 of SFAS 130.
Note 1. Summary of Significant Accounting Policies, page 29
8. Please disclose the types of expenses that you include in the
cost
of sales line item and the types of expenses that you include in
the
selling, general and administrative expenses line item. Please
tell
us whether you include inbound freight charges, purchasing and
receiving costs, inspection costs, warehousing costs, internal
transfer costs, and the other costs of your distribution network
in
the cost of sales line item. With the exception of warehousing
costs, if you currently exclude a portion of these costs from cost
of
sales, please disclose:
* in a footnote the line items that these excluded costs are
included
in and the amounts included in each line item for each period
presented, and
* in MD&A that your gross margins may not be comparable to those
of
other entities, since some entities include all of the costs
related
to their distribution network in cost of sales and others like you
exclude a portion of them from gross margin, including them
instead
in a line item, such as selling, general and administrative
expenses.
Foreign Currency Translation, page 30
9. Given the guidance provided in paragraphs 5 through 8 of SFAS
52,
tell us how you determined it is appropriate to use the U.S.
dollar
as the functional currency for each of your foreign operations.
Also, please tell us how your accounting of KMEX, which is
discussed
in Note 5, complies with SFAS 52.
Segment Reporting, page 31
10. Given the manner you present yourself in Item 1 (Business) in
which you discuss entering into three different types of
businesses
(wood preserving chemicals, animal health pesticides, and
agricultural chemicals) through acquisitions, it appears that you
may
have aggregated certain operating segments in arriving at your
reportable segment. If you have aggregated operating segments,
please explain to us how these operating segments met the
aggregation
criteria of paragraph 17 of SFAS 131. Please help us understand
how
you determined you have one reportable segment under SFAS 131.
Note 2. Acquisitions, page 32
11. Given the purchase price of the Wood Protection Products
acquisition was $7.2 million, which represents approximately 22%
of
your total assets at July 31, 2003, please help us understand how
you
determined you did not need to provide any financial statements of
businesses acquired pursuant to Rule 3-05 of Regulation S-X.
12. In June 2004, you purchased creosote product registrations as
well as the Ravap tradename and inventory. Tell us how you
accounted
for these transactions. Your explanation should refer to the
accounting guidance used to determine the appropriate accounting.
Note 7. Intangible and Other Assets, page 36
13. For each of the intangible assets not subject to amortization,
please address the following:
* Tell us how you determined they have an indefinite life;
* Tell us what life was being used for amortization purposes prior
to
the adoption of SFAS 142; and
* Disclose how you assess your indefinite-lived assets for
impairment
in accordance with paragraph 17 of SFAS 142 and EITF 02-7.
Note 13. Stockholders` Equity, page 40
14. You state that the numerators and denominators of basic and
diluted earnings per share computations take into account vested
stock options whose strike price is less than the market price in
accordance with SFAS No. 128. We remind you that paragraph 17 of
SFAS 128 states that equivalents of options and warrants, which
should be included in the calculation of diluted earnings per
share
amounts, include nonvested stock granted to employees, stock
purchase
contracts, and partially paid stock subscriptions. Please tell us
how your calculation of diluted earnings per share complies with
paragraphs 11 through 35 of SFAS 128. Please also confirm that
all
warrants and options, including those issued to nonemployees, were
included in your calculation of diluted earnings per share. For
example, we would expect the options issued as part of the
consideration for the Wood Protection Products acquisition to be
included in your calculation of diluted earnings per share.
Note 14. Selected Quarterly Financial Data, page 44
15. Please disclose in a footnote to the quarterly financial data
the
nature of any adjustments that are material to the results of a
particular quarter. In this regard, we note that you incurred an
operating loss in the second quarter of fiscal 2004. See Item
302(a)(3) of Regulation S-K.
Schedule II - Valuation and Qualifying Accounts, page 48
16. Please describe the column entitled "Deductions" in a footnote
to
the schedule or in the column heading as appropriate. See Rule
12-09
of Regulation S-X for guidance.
FORM 10-Q FOR THE PERIOD ENDED JANUARY 31, 2005
Comment applicable to your overall filing
17. Please address the comments above in your interim filings as
well.
Management`s Discussion and Analysis
Results of Operations, page 8
18. In your discussion of gross profit on page 9, you state that
you
received calendar year end volume incentives from one supplier.
Disclose how you account for these incentives based on the
guidance
provided by EITF 02-16.
Exhibit 31.1 and 31.2
19. Please ensure that Item 4(c) refers to the changes in your
internal control over financial reporting that occurred during the
most recent quarter. Refer to Item 601(b)(31) of Regulation S-K.
* * * *
Please respond to these comments within 10 business
days,
or tell us when you will provide us with a response. Please
provide
us with a supplemental response letter that keys your responses to
our comments and provides any requested supplemental information.
Detailed letters greatly facilitate our review. Please file your
supplemental response on EDGAR as a correspondence file. Please
understand that we may have additional comments after reviewing
your
responses to our comments.
We urge all persons who are responsible for the accuracy and
adequacy of the disclosure in the filings reviewed by the staff to
be
certain that they have provided all information investors require
for
an informed decision. Since the company and its management are in
possession of all facts relating to a company`s disclosure, they
are
responsible for the accuracy and adequacy of the disclosures they
have made.
In connection with responding to our comments, please
provide,
in writing, a statement from the company acknowledging that:
* the company is responsible for the adequacy and accuracy of the
disclosure in their filings;
* staff comments or changes to disclosure in response to staff
comments do not foreclose the Commission from taking any action
with
respect to the filing; and
* the company may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
In addition, please be advised that the Division of
Enforcement
has access to all information you provide to the staff of the
Division of Corporation Finance in our review of your filing or in
response to our comments on your filing.
If you have any questions regarding these comments, please
direct them to Marie Trimeloni, Staff Accountant, at (202) 942-
1860,
or Nudrat Salik, Review Accountant, at (202) 942-7769, or in their
absence, to the undersigned at (202) 942-1774.
Sincerely,
Rufus Decker
Accounting Branch Chief
??
??
??
??
Mr. David L Hatcher
March 31, 2005
Page 6 of 6
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-0510
DIVISION OF
CORPORATION FINANCE