American Vanguard Corporation (NYSE: AVD) — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited. American Vanguard sells crop and non-crop agricultural and other products, and reports one segment.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net sales | $124.9 million | $149.6 million | Down 17% |
| Gross profit / margin | $38.5 million / 31% | $51.4 million / 34% | Profit down 25%; margin down 3 points |
| Operating expenses | $35.3 million | $36.6 million | Down 4% |
| Operating income | $3.3 million | $14.7 million | Down 78% |
| Net income | $1.9 million | $9.9 million | Down 81% |
| Diluted EPS | $0.07 | $0.33 | Down $0.26 |
| Operating cash flow | $(41.5) million | $(32.3) million | Cash use increased |
Sales declined primarily because U.S. crop sales fell 30% to $61.9 million, including reduced availability of key inputs used to produce Aztec corn soil insecticide. Total U.S. sales fell 25%; international sales increased 2% to $49.1 million and non-crop sales increased 4% to $13.9 million. Management also cited earlier herbicide procurement, distributor inventory levels, lower factory absorption, and higher manufacturing costs. Higher interest expense—$1.7 million versus $0.4 million—also pressured earnings. The company reported a $0.4 million income tax benefit, compared with $4.5 million of tax expense in Q1 2022.
Liquidity, debt and cash flow
- Cash was $19.6 million at March 31, 2023, versus $20.3 million at year-end 2022.
- Operating cash use was driven in part by a $33.7 million increase in inventories, an $8.8 million increase in receivables, and a $22.8 million decrease in customer prepayments. Investing cash use was $3.3 million, including $2.6 million of capital expenditures and $0.7 million for a product-line acquisition.
- Revolving credit borrowings were $97.0 million gross ($96.2 million net of deferred loan fees), compared with $52.3 million gross at December 31, 2022. The March 31 interest rate was 6.53%; the facility matures August 5, 2026.
- The company had up to $111.9 million of additional borrowing capacity at March 31, down from $200.4 million at year-end. Management said cash, expected operating cash flows and facility availability should fund requirements for the next 12 months.
Material changes, outlook and risks
- Credit covenant: At March 31, the company was noncompliant with its Fixed Charge Coverage Ratio covenant, while compliant with its leverage ratio. The company attributed the shortfall mainly to share repurchases and also to reduced trailing-twelve-month EBITDA. It obtained a waiver on May 8, 2023, and an adjustment to the covenant terms for the period ending June 30, 2023. Management expected most of the share-repurchase impact to fall out of the calculation in Q3. The filing provides no formal earnings or sales guidance.
- Supply and demand: Management reported significant delays obtaining intermediate compounds for Aztec and said it manufactured and sold about one-third of forecast volume. It highlighted continuing dependence on limited or sole-source suppliers and uncertainty about future supply-chain conditions.
- Legal and regulatory contingencies: The company disclosed a continuing DOJ/EPA investigation concerning pesticide-container reimportation and potential environmental or related violations; it could not predict the outcome and recorded no loss contingency. Other matters include a roughly $5 million Canadian crop-damage claim, a pesticide-injury suit, and EPA proceedings concerning DCPA/Dacthal. The company recorded no loss contingency for these matters, citing insufficient information or that loss was not considered probable and estimable. It said it remained free to sell DCPA products unless and until adverse rulings at trial and appellate levels.
- Accounting presentation: Effective January 1, 2023, warehousing, handling and outbound freight costs were moved from operating expenses to cost of sales, with prior periods retrospectively reclassified. This reduced reported gross profit relative to the former presentation but did not change operating income, net income or EPS. A separate $158,000 commission classification correction for Q1 2022 also did not affect operating income, net income or EPS.
- Other risks cited include variable interest rates, foreign-exchange exposure without hedging, and possible changes in customer early-pay programs that support working capital. Management reported disclosure controls were effective and no material change in internal controls during the quarter.
Important facts for investors to verify
- Whether supply of key raw materials and intermediates improves and whether crop-product sales recover after Q1’s shortfall.
- Compliance with the amended Fixed Charge Coverage Ratio terms, borrowing availability and the effect of higher variable-rate interest costs.
- Inventory levels, customer prepayments and operating cash conversion as seasonal working-capital needs develop.
- Developments and potential financial or operating consequences of the DOJ/EPA investigation and DCPA/Dacthal proceedings, as well as the other disclosed litigation.
- The cash-flow statement reports net cash used in operating activities of $41.452 million, while MD&A says $41.447 million; verify the reported amount against the filed financial statements.