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VIA FACSIMILE AND U.S. MAIL
May 25, 2005
Tony M. Shelby
Executive Vice President of Finance and Chief Financial Officer
LSB Industries, Inc.
16 South Pennsylvania Avenue
Oklahoma City, Oklahoma 73107
RE: Form 10-K for the fiscal year ended December 31, 2004
Form 10-Q for the period ended March 31, 2005
File No. 1-07677
Dear Mr. Shelby:
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 DECEMBER 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. With the exception of the
comments below that specifically request an amendment, all other
revisions may be included in your future filings.
Management`s Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations, page 34
2. Please discuss the business reasons for the changes between
periods in the gross profit and operating income (loss) of each of
your segments discussed in Note 18 of your financial statements,
along with the amounts shown in the general corporate expenses and
other business operations, net line item. In doing so, please
disclose the amount of each significant change in line items
between
periods and the business reasons for it. In circumstances where
there is more than one business reason for the change, attempt to
quantify the incremental impact of each individual business reason
discussed on the overall change in the line item. Please show us
what your revised MD&A for 2004 as compared to 2003 will look
like.
See Item 303(a)(3) of Regulation S-K and Financial Reporting
Codification 501.04 and 501.06.
Item 9A - Controls and Procedures, page 44
3. Your chief executive officer and your chief financial officer
have
concluded that your disclosure controls and procedures do not
contain
material weaknesses. We remind you that Item 307 of Regulation S-
K
requires you to disclose your conclusions regarding the
effectiveness
of your disclosure controls and procedures as of the end of the
period covered by the report. Please file an amendment to your
Form
10-K to disclose your conclusions regarding the effectiveness of
your
disclosure controls and procedures as of December 31, 2004.
4. Disclosure controls and procedures are now defined in Exchange
Act
Rules 13a-15(e) and 15d-15(e). See SEC Release 33-8238, which
became
effective August 14, 2003. Please refer to the appropriate
locations
for the definitions.
5. Please disclose any changes in your internal controls over
financial reporting during the quarter ended December 31, 2004
that
materially affected, or are reasonably likely to materially affect
your internal controls over financial reporting. Refer to Item
308(c) of Regulation S-K.
Financial Statements
Balance Sheets, page F-3
6. Please present your goodwill and your intangible assets as
separate line items on your balance sheet. See paragraphs 42 and
43
of SFAS 142.
Statements of Income, page F-5
7. Please separately present on your income statements or disclose
in
a note to the financial statements the components and related
amounts included in the other income (expense), net line item for
each period your statement of operations is presented. See Rules
5-
03(7) and (9) of Regulation S-X.
Statements of Shareholders` Equity, page F-6
8. Please disclose the accumulated balances for each
classification
of accumulated other comprehensive income (loss) on the face of
the
balance sheet or in a footnote to the financial statements as
required by paragraph 26 of SFAS 130.
9. Please disclose for all periods presented the amounts of the
reclassification adjustments and the income tax provisions for
each
classification of other comprehensive income. See paragraphs 20
and
25 of SFAS 130.
Statement of Cash Flows, page F-7
10. You indicated on page 36 of your MD&A that other income for
2004
includes a gain of $2.1 million from the sale of non-operating
assets
by a non-ThermaClime subsidiary. Please clarify where this gain
of
$2.1 million is located on your statement of cash flows for the
year
ended December 31, 2004. In your statement of cash flows, you
also
indicate that you had gains of $340,000 on sales of property and
equipment. Given the guidance of paragraph 45 of SFAS 144, please
tell us how you determined your income statement classification of
the $2.1 million and $340,000 gains is appropriate.
11. Please explain to us how your netting of cash flows related to
drafts payable and revolving debt facilities meets the
requirements
of paragraph 13 of SFAS 95. Otherwise, please present the gross
changes in drafts payable and revolving debt facilities.
12. Please disclose the facts and circumstances leading to the
impairment of $737,000 in accordance with paragraph 26 of SFAS
144.
Given the guidance of paragraph 25 of SFAS 144, please tell us how
you determined it was appropriate to not include the impairment
expense in operating income.
Note 2 - Summary of Significant Accounting Policies, page F-9
13. 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 profit, including them
instead
in a line item, such as selling, general and administrative
expenses.
14. In your critical accounting policies, you indicate that you
may
be required to continue to operate equipment relating to discharge
water, the cost and timing of which is presently unknown. Please
tell us more about these retirement obligations including the
following:
* Nature of these retirement obligations,
* How you determined that these obligations have an indeterminate
life, and
* When you expect to initially recognize a liability.
See paragraphs A14 and A16 of SFAS 143.
Inventories, page F-10
15. In your Form 10-K for the year ended December 31, 2003, you
indicated that you had approximately $7.1 million of inventory
with
costs being determined using the LIFO method. Please tell us
whether
this inventory still exists at December 31, 2004 as well what
method
you are using to determine the cost of this inventory. If you
continue to use the LIFO method, please provide the disclosures
required by Rule 5-03(6) of Regulation S-X. If you have changed
the
method used to determine the cost of this inventory, please tell
us
how you are in compliance with the requirements of APB 20.
Shipping and Handling Costs, page F-14
16. You indicate that the Chemical business records its shipping
costs in net sales. Please clarify your disclosure to state
whether
these shipping costs represent amounts billed to customers. If
not,
please tell us how your classification of these amounts complies
with
EITF 00-10.
Raw Materials Price Risk Management, page F-14
17. Please disclose how you account for exchange-traded futures
including where mark-to-market adjustments are recorded in your
financial statements and the accounting literature used to
determine
the appropriate accounting.
Recently Issued Pronouncements, page F-16
18. Please tell us more about your accounting of the agreements
with
MultiClima. Specifically address the following:
* Tell us the specific facts and circumstances that led you to
conclude that the note receivable was not collectible during the
quarter ended September 30, 2004;
* Tell us how you determined you no longer had a variable interest
in
this entity at July 1, 2004 in accordance with FIN 46; and
* Tell us the terms of the option to acquire 100% of MultiClima`s
outstanding stock as well as how you account for this option.
Please
refer to the accounting literature used to determine the
appropriate
accounting.
Note 5 - Property, Plant & Equipment, page F-19
19. The range of useful lives for your machinery, equipment and
automotive of 3 to 25 years is very broad. Please separately
discuss
and disclose the types of assets that fall in each part of the
range.
Note 6 - Long-term Debt, page F-20
20. Please explain how you accounted for the debt restructuring
that
resulted in a gain on extinguishment of $4.4 million. Refer to
the
accounting literature that supports your accounting. If you
accounted
for this transaction as a troubled debt restructuring, please tell
us
how you qualified for troubled debt restructuring under SFAS 15.
Note 9 - Commitments and Contingencies, page F-34
21. For each matter listed, please provide the disclosures
required
by paragraphs 9 and 10 of SFAS 5. Specifically, if it is
reasonably
possible that a loss or an additional loss may have been incurred
in
excess of amounts accrued, please estimate the additional possible
loss or range of loss or state that such an estimate cannot be
made.
Note 13 - Deferred Compensation and Employee Benefit Plans, page
F-48
22. Please disclose the nature and terms of your life insurance
policies, including the cash surrender values as of each balance
sheet date and any gains or losses recorded in your statements of
operations during each period presented. Please also disclose the
statement of cash flow line item(s) that you include life
insurance
payments in and the related amounts included in each line item for
each period presented. Please also disclose when you include
amounts
in each line item, such as increases in the cash value of the life
insurance. Please tell us how you considered paragraph .13 of
Section 1300.13 to the AICPA Technical Practice Aids in reaching
the
classification conclusions you did.
Note 18 - Segment Information, page F-51
23. Please disclose and quantify the components of the general
corporate expense and other business operations line item for all
periods presented. Please also disclose what identifiable assets
are
included in the Corporate assets and other line item of your
identifiable assets section as of each balance sheet date. Refer
to
paragraphs 31 and 32 of SFAS 131.
FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 2005
Comment applicable to your overall filing
24. Please address the comments above in your interim filings as
well.
Statements of operations, page 4
25. You indicated in MD&A that other income for the first quarter
of
2005 includes a gain of $0.4 million from the sale of non-
operating
corporate assets. Given the guidance of paragraph 45 of SFAS 144,
please tell us how you determined it was appropriate to not
include
this gain in operating income.
26. Please tell us more about the $1.1 million gain recorded as
other
income for proceeds receivable from certain key life insurance
policies in excess of the present value of your obligations. Tell
us
how you determined it was appropriate to record this gain during
the
quarter ended March 31, 2005 as well as how you determined it was
appropriate to not include this gain in operating income. Please
refer to the accounting literature used to determine the
appropriate
accounting.
Note 4 - Long-Term Debt, page 9
27. Please disclose how you account for the interest rate cap
which
sets a maximum three- month LIBOR base rate of 4.59% on $30
million
and mature on March 29, 2009. Please refer to the accounting
literature used to determine the appropriate accounting and
provide
any corresponding disclosures.
Note 5 - Contingencies, page 16
28. You indicated that you established a liability of $358,000 for
estimated investigation and remediation costs. We remind you that
SAB Topic 5:Y states that environmental liabilities are of such
significance that detailed disclosures regarding the judgments and
assumptions underlying the recognition and measurement of the
liabilities are necessary to inform readers fully regarding the
range
of reasonably possible outcomes that could have a material effect
on
your financial condition, results of operations, or liquidity.
Please disclose the changes in facts and circumstances that
occurred
from December 31, 2004 to March 31, 2005 that resulted in the
increase of $225,000 in your investigation and remediation costs
related to the nitric contaminates at your El Dorado facility.
Please also provide the additional disclosures called for by SAB
Topic 5:Y for all environmental matters.
* * * *
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 filing to be certain that the
filing includes all information required under the Securities
Exchange Act of 1934 and that they have provided all information
investors require for an informed investment 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.
You may contact Ernest Greene, Staff Accountant, at (202)
551-
3733, or in his absence, Nudrat Salik, at (202) 551-3692, if you
have
questions regarding comments on the financial statements and
related
matters.
Sincerely,
Rufus Decker
Accounting Branch Chief
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Mr. Tony M. Shelby
May 25, 2005
Page 1 of 8
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-0510
DIVISION OF
CORPORATION FINANCE