American Vanguard Corporation — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited. American Vanguard develops and sells agricultural and non-crop chemical products. It reports one operating segment. Amounts below are in millions of dollars except per-share data.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $70.673 | $69.474 | +2% |
| Gross profit / gross margin | $30.084 / 43% | $27.503 / 40% | +9%; +3 percentage points |
| Operating expenses | $24.951 | $22.873 | +9% |
| Operating income | $5.133 | $4.630 | +11% |
| Net income attributable to American Vanguard | $3.452 | $2.794 | +24% |
| Diluted EPS | $0.12 | $0.10 | +20% |
| Cash from operating activities | $17.170 | $9.590 | +$7.580 |
Net sales by product group: insecticides rose 15% to $37.942 million; herbicides, soil fumigants and fungicides fell 19% to $20.021 million; other crop products rose 4% to $3.392 million; and non-crop sales rose 11% to $9.318 million. U.S. sales increased 5% to $52.244 million, while international sales declined 6% to $18.429 million.
Gross margin improved as cost of sales fell to 57% of revenue from 60%. Management cited lower raw-material costs, improved manufacturing performance, inventory management and favorable sales mix. Operating expenses rose, particularly research, product development and regulatory costs (+28%), including product defense, business development and investment in the SIMPAS delivery system. Selling and G&A costs also increased, partly due to marketing, foreign-currency losses, incentive compensation and legal costs.
Cash, debt and liquidity
- Cash and cash equivalents were $10.792 million at March 31, 2017, compared with $7.869 million at December 31, 2016. Net cash increased $2.804 million during the quarter.
- Operating cash flow was $17.170 million. Investing activities used $3.380 million, including $3.080 million of capital expenditures and a $0.300 million investment. Financing activities used $10.986 million, including a net $11.000 million repayment on the revolving credit facility.
- Revolving credit debt was $30.400 million gross, or $29.993 million net of deferred loan fees, versus $41.400 million gross ($40.951 million net) at year-end. The filing reports no short-term debt. The facility matures June 17, 2018.
- Working capital was $126.023 million, down from $130.001 million at December 31, 2016. Inventories were $122.279 million, up $1.703 million from year-end but below the $144.415 million reported a year earlier. Trade receivables declined from $83.777 million at year-end to $72.758 million.
- The company was in compliance with its credit covenants and reported capacity for up to $119.994 million in additional borrowing under covenant terms. Management said cash, operating cash flows and available facility borrowings should cover liquidity needs for the next 12 months. Substantially all company assets are pledged as collateral.
Material changes, outlook and risks
Management attributed sales gains to stronger cotton and other crop-product demand and higher commercial pest-control and mosquito-adulticide sales. These were partly offset by lower corn herbicide sales amid competition and rain-delayed planting, weather-related delays to fumigant applications, and weaker international sales. The quarter’s higher profit reflected improved gross margin and lower interest expense, partly offset by higher operating costs and income taxes.
The filing provides no specific full-year earnings or revenue guidance. Management noted that first-quarter results are not necessarily indicative of full-year results. It identified demand and market acceptance, weather, regulation, competition and pricing, foreign exchange, product development and commercialization, supply and capacity, and capital availability among relevant risks. The company uses natural hedges and, when appropriate, forward exchange contracts; management estimated that a 10% currency movement would have an immaterial effect on financial position and cash flows. Variable-rate borrowings expose the company to interest-rate risk.
The effective tax rate was 28.5%, versus 25.9% a year earlier. The IRS was examining tax years 2013 and 2014, and the 2015 federal return was also subject to examination. The company reported paying the IRS $11.580 million on April 3, 2017. Two sets of claims related to a 2014 fire during application of SmartBlock, and a separate patent/confidential-information lawsuit served in April 2017, were described as too early for loss probability or amount to be estimated; no loss contingency was recorded. The company said it intends to defend the claims vigorously.
TyraTech, in which American Vanguard held approximately 15.11%, had a carrying value of $2.142 million versus quoted market value of $1.127 million. Management concluded the decrease was not other-than-temporary and recorded no impairment. No material change to the risk factors in the 2016 Form 10-K was reported.
Investor verification points
- Track whether gross-margin improvement and sales mix persist, particularly given weaker herbicide and international sales and weather-sensitive demand.
- Assess working-capital needs, inventory levels and seasonal customer-program accruals and payments; accrued program costs were $49.542 million at quarter-end.
- Verify the cash and tax effects of the April 3 IRS payment and the outcome of the ongoing tax examinations.
- Monitor revolving-credit repayment, covenant headroom and the June 2018 facility maturity.
- Follow the fire-related claims and the Walker lawsuit; the filing states potential losses were not yet estimable and records no contingency.
- Review progress and spending on SIMPAS and other product-development efforts, and the eventual impact of new accounting standards, including revenue recognition expected to be adopted in 2018.