Mail Stop 7010
July 13, 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
File No. 0-29278
Dear Mr. Hatcher:
We have reviewed your letter dated July 1, 2005 in
response
to our prior comment letter 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
Note 1. Summary of Significant Accounting Policies
Segment Reporting, page 31
1. We note your response to prior comment 1. We remind you that
paragraph 10 of SFAS 131 defines an operating segment as a
component
of an enterprise that engages in business activities from which it
may earn revenues and incur expenses, whose operating results are
regularly reviewed by the enterprise`s chief operating decision
maker
to make decisions about resources to be allocated to the segment
and
assess its performance, and for which discrete financial
information
is available. Given that your response to prior comment 10 in
your
letter dated May 6, 2005 states that the results of the three
product
lines are evaluated regularly by the chief operating decision
maker
in deciding how to allocate resources and assessing performance as
well as it appears that your product lines earn revenues and incur
expenses, and discrete financial information is available, it is
not
clear how each of these product lines would not represent an
operating segment.
It appears that gross profit margins are the strongest indicator
of
your product lines` economic characteristics, particularly in
light
of the fact that indirect general overhead expenses were not
allocated to the product lines. For the period from August 1,
2001
through January 31, 2005, the gross profit margins of the wood
treating chemicals product line ranged from 28% to 40%, with an
average of 33%. For this same period, the gross profit margins of
the rabon product line ranged from 37% to 45%, with an average of
42%, and the gross profit margins of the MSMA product line ranged
from 1% to 59%, with an average of 16%. Also, during this period,
different product lines exhibited differing gross profit margin
trends from period to period. For example, from fiscal 2002 to
fiscal 2003, the gross profit margin of the wood treating chemical
products line decreased by 8%, whereas the gross profit margin of
the
MSMA product line decreased by 45%. From fiscal 2003 to fiscal
2004,
the gross profit margin of the wood treating chemical products
line
decreased by 11%, the gross profit margin of the rabon product
line
increased by 3%, and the gross profit margin of the MSMA product
line
decreased by 7%. It appears that the margins of these product
lines
and the trends they depict are sufficiently varied as to preclude
these product lines from being considered economically similar.
It
is not clear how you determined that these three product lines
have
similar economic characteristics.
We remind you that the objective of requiring disclosures about
segments of an enterprise and related information is to provide
information about the different types of business activities in
which
an enterprise engages and the different economic environments in
which it operates to help users of financial statements (a) better
understand the enterprise`s performance, (b) better assess its
prospects for future net cash flows and (c) make more informed
judgments about the enterprise as a whole. Based on this stated
objective and the requirements set forth in paragraph 17 of SFAS
131,
it appears to us that you should present disaggregated information
for your three product lines.
Note 2. Acquisitions, page 32
2. We note your response to prior comments 2 and 3. It appears
that
the primary reason you used SFAS 141 to account for these
acquisitions is that the purchase price exceeded the estimated
fair
value of the assets acquired.
In your response to prior comment 11 in your letter dated May 6,
2005, for the Wood Protections Products acquisition, you stated
that
you primarily acquired WPP`s pesticide registrations for penta
products and a non-compete agreement from WPP and its principal
owner. Also in your response to prior comment 12 in this letter,
you
stated that for the Trenton Sales, Inc. acquisition you did not
acquire any physical assets in this transaction; you identified
the
product registration and non-compete agreements as the only
intangible assets that had been acquired.
We remind you that paragraph 6 of EITF 98-3 states that a business
consists of (a) inputs, (b) processes applied to those inputs, and
(c) resulting outputs that are used to generate revenues. In
order
for a transferred set of activities and assets to be a business,
it
must contain all of the inputs and processes necessary for it to
continue to conduct normal operations after the transferred set is
separated from the transferor, which includes the ability to
sustain
a revenue stream by providing its outputs to customers. Your
response indicates that the transferred assets contain no
processes
necessary to continue to conduct normal operations as well as no
outputs. Aside from the product registrations, the remaining
inputs
obtained appear to be minor. Given this, it remains unclear how
you
determined you acquired a business pursuant to EITF 98-3.
Note 7. Intangible and Other Assets, page 36
3. We note your response to prior comment 4. Generally, it would
appear that all assets determined to be indefinite-lived under
SFAS
142 would previously have had a useful life of 40 years under APB
17.
Given that you state that the facts and circumstances did not
change
upon your adoption of SFAS 142, it remains unclear how you went
from
a useful life of 15 years to an indefinite useful life. Tell us
how
each of these product registrations qualifies as an indefinite-
lived
asset by addressing all of the factors in paragraph 11 of SFAS 142
as
well as the guidance in Appendix A of SFAS 142.
You state that test data in support of a product registration
could
be cited by a third party in support of their registration effort
without paying compensation after the test data has been on file
with
the EPA for at least 15 years. Please specifically address in
your
explanation how this impacts your estimated useful life, including
how it impacts your evaluation of competitive factors.
Given that the MSMA product registration appears to be amortized,
please xplain to us how you differentiate between those product
registrations that should and should not be amortized. Tell us
what
period is used to amortize the MSMA product registration, and how
you
determined this was the appropriate estimated useful life.
FORM 10-Q FOR THE PERIOD ENDED APRIL 30, 2005
Note 7. Subsequent Events
4. Please tell us how you accounted for the purchase of certain
penta
assets from Basic Chemicals Company, LLC in June 2005. Your
explanation should refer to the accounting guidance used to
determine
the appropriate accounting as well as how you determined this was
the
appropriate accounting guidance to use.
* * * *
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.
If you have any questions regarding these comments, please
direct them to Marie Trimeloni, Staff Accountant, at (202) 551-
3734,
or Nudrat Salik, Review Accountant, at (202) 551-3692.
Sincerely,
Rufus Decker
Accounting Branch Chief
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Mr. David L Hatcher
July 13, 2005
Page 4 of 4
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-7010
DIVISION OF
CORPORATION FINANCE