American Vanguard Corporation — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Dollar amounts are in thousands, except per-share data. The company reports one business segment.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $82,447 | $72,486 | $224,645 | $205,574 |
| Gross profit | $32,986 | $31,433 | $91,884 | $81,204 |
| Gross margin | 40% | 43% | 41% | 40% |
| Operating income | $4,731 | $5,374 | $14,455 | $6,879 |
| Net income attributable to American Vanguard | $2,877 | $2,772 | $8,917 | $3,604 |
| Diluted EPS | $0.10 | $0.09 | $0.30 | $0.12 |
- Q3 sales rose 13.7%; gross profit increased 4.9%, while operating income decreased 12.0%. Nine-month sales increased 9.3%, gross profit 13.2%, and operating income more than doubled.
- Q3 interest expense was $301, down from $638; nine-month expense was $1,304, down from $1,941. The nine-month effective tax rate rose to 27.9% from 19.4%, primarily reflecting improved earnings in higher-tax jurisdictions.
- Nine-month operating cash flow was $36,200, versus $51,807. Receivables increased $19,202, inventories increased $5,201, and program payables increased $30,536. Investing cash use was $9,629; financing cash use was $24,544. Cash ended at $6,594.
- At September 30, current assets were $263,234 and current liabilities $109,768. Inventory was $141,678, compared with $136,477 at year-end 2015 and $161,496 at September 2015.
- Debt, net of deferred loan fees, was $44,488, compared with $68,321 at December 31, 2015 and $92,731 at September 2015. The $200 million revolving facility matures June 17, 2018; the company reported covenant compliance and up to $95,985 of additional borrowing capacity.
Business trends and changes
- Q3 crop sales increased 14.8% and non-crop sales 6.3%. Growth reflected stronger cotton-product demand, soil fumigant sales, and toll manufacturing activity recorded in Q3 rather than Q2 as in 2015. “Other” product sales rose 79.6%, partly due to that timing shift and higher Folex purchases.
- Q3 gross margin declined to 40% from 43%. Management attributed the decrease to toll-manufacturing timing and a temporary raw-material price increase for an international product line. The company expects to work through the higher-cost material and return to more normal margins by the end of Q2 2017.
- Nine-month non-crop sales rose 29.9%, led by pest strips, pharmaceutical products and Envance licensing revenue. Crop sales rose 6.5%; stronger corn herbicide, acquired product and license sales contributed. International sales were affected by a formulation-capacity delay for Dacthal, which management expected to resolve in Q4.
- Nine-month operating expenses increased 4.2%, including higher G&A, product development and regulatory spending; selling expense decreased. Research and development/regulatory spending included field trials and the SIMPAS development project.
- Management said inventory was in line with 2016 plans, channel inventories were improving, and the company remained on track for its forecast at December 31, 2016. It provided no specific full-year financial guidance in the supplied filing text.
Risks, contingencies and other notable items
- EPA matter: EPA issued a stop-sale/use/removal order affecting certain Thimet products and is considering enforcement relating to alleged importation, handling and formulation issues. Amendments to the order allowed the company to meet 2016 customer needs. The company had not received EPA’s final position and said any loss was not yet probable or reasonably estimable; no contingency was recorded.
- DBCP litigation: The Third Circuit reversed the dismissal with prejudice of the Hendler-Delaware case and remanded it. The company considers the case without merit and said a loss was neither probable nor reasonably estimable; no contingency was recorded.
- Other claims: The company recorded immaterial loss contingencies for a wage-and-hour class claim and a potential grower claim concerning Mocap and potato crops.
- Risks identified include product demand and acceptance, weather, regulation, competition and pricing, foreign exchange, product development, supply constraints and capital availability. The company noted variable-rate debt and foreign-currency exposure; it characterized the effect of a 10% currency move as immaterial.
- The company declared a $0.01-per-share dividend on October 11, payable November 11, 2016. Management said operating cash flow, cash balances and available credit should meet liquidity needs for the next 12 months.
Important facts for investors to verify
- Whether reported sales growth and margin trends persist after the toll-manufacturing timing shift and temporary raw-material cost pressure.
- Collection of receivables and seasonal settlement of accrued program costs, which were $74,907 at quarter-end.
- Whether Dacthal formulation capacity normalizes as expected and pharmaceutical supply risks emerge in 2017.
- Developments in the EPA matter and litigation, including potential financial or operating consequences not yet estimable.
- Debt reduction, covenant headroom and liquidity needs under the seasonal working-capital cycle.