American Vanguard Corporation — Q1 2020 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2020, compared with Q1 2019. The company sells crop and non-crop products, principally agricultural chemicals, in the U.S. and internationally; it reports one operating segment. Amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $96.0 | $99.7 | Down 4% |
| Gross profit / margin | $38.4 / 40% | $41.7 / 42% | Down 8%; margin down 2 percentage points |
| Operating income | $1.8 | $6.9 | Down about $5.1 |
| Net income | $0.5 | $3.9 | Down 87% |
| Diluted EPS | $0.02 | $0.13 | Down $0.11 |
| Operating cash flow | $(13.9) | $(20.3) | Cash use decreased |
| Cash and equivalents, quarter-end | $5.5 | $6.7 | Down $1.1 year over year |
| Long-term debt, net | $168.2 | $148.8 at Dec. 31, 2019 | Up $19.5 during quarter |
Operating expenses increased 5% to $36.5 million, including higher general and administrative, research and development, and freight costs. Net interest expense declined to $1.5 million from $1.6 million. The company recorded an income tax benefit of $0.2 million, versus $1.4 million expense a year earlier; discrete benefits related to the CARES Act and vesting of stock awards contributed.
Revenue trends and material changes
- U.S. sales were nearly flat at $61.4 million. U.S. crop sales were steady; U.S. non-crop sales declined 2% to $11.0 million.
- International sales fell 9% to $34.6 million. Management cited, among other factors, the EU phase-out of Mocap, weaker Brazilian demand and currency depreciation; Mexico performed better.
- International gross profit declined 22%, and U.S. non-crop gross profit declined 19%. Product mix, lower sales of certain higher-margin products, and increased costs weighed on consolidated gross margin.
- Foreign-currency transaction losses were $0.8 million and foreign-currency translation reduced comprehensive income by $9.1 million. Comprehensive loss was $8.5 million, compared with comprehensive income of $2.1 million in Q1 2019.
Cash, debt and liquidity
Operating cash use reflected seasonal working-capital needs, including a $16.4 million inventory increase and a $5.5 million increase in receivables; accrued program costs rose $6.0 million. Investing cash use was $3.0 million, primarily capital expenditures. Financing provided $16.6 million, principally from $19.4 million of net credit-line borrowings; dividends paid were $0.6 million.
At March 31, the company reported $168.7 million drawn on its revolving facility, with $168.2 million presented as long-term debt net of fees. It was compliant with facility covenants and reported capacity to increase borrowings by up to $39.6 million under the then-applicable terms. On April 22, 2020, the facility was amended to temporarily raise the maximum consolidated funded debt ratio, stepping down to the prior limit by 2021. Management said cash, operating cash flows and available borrowings should be sufficient for the next 12 months.
Outlook, risks and notable items
- Guidance: The filing provides no specific financial guidance. Management said it could not predict the pandemic’s future effects on financial condition, results or cash flows.
- COVID-19: The company said it operated as an essential business and experienced no significant disruption in Q1. It highlighted continuing uncertainty around demand, supply chains, logistics, foreign exchange and employee-safety costs, and noted that future disruption or material adverse effects could not be ruled out.
- Legal matter: The company finalized an EPA consent order in February 2020 concerning depleted Thimet container reimportation; the civil penalty was described as immaterial. A related Department of Justice investigation remained unresolved, and the company said a loss was not yet probable or reasonably estimable; no contingency was recorded.
- Subsequent event: On April 1, the company paid $2.5 million for an approximately 8% Clean Seed Capital Group interest and separately entered a license agreement with a $2.5 million upfront royalty payment, plus ongoing royalties on SIMPAS system sales beginning in 2021.
- Other: No acquisitions or share repurchases occurred in Q1 2020. The company paid a $0.02-per-share dividend. It identified no material changes to previously disclosed risk factors other than COVID-19 and stated disclosure controls were effective.
Important facts for investors to verify
- Whether international demand, product mix and currency movements continue to pressure sales and gross margins.
- How the COVID-19 pandemic affects customers, operations, supply chains and working-capital needs after quarter-end.
- Debt covenant headroom and borrowing availability under the April 22 credit amendment, including the scheduled covenant step-downs.
- Collection of receivables, inventory levels and the timing and amount of accrued customer program payments.
- Developments in the DOJ investigation and any potential financial exposure not estimable at filing.
- The costs, commercial progress and future royalty economics of the Clean Seed investment and SIMPAS license.