American Vanguard Corporation — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Amounts are in thousands of dollars, except per-share data. The company reports one business segment.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $72,486 | $71,635 | $205,574 | $221,043 |
| Gross profit | $31,433 | $28,293 | $81,204 | $83,258 |
| Gross margin | 43% | 40% | 40% | 38% |
| Operating income | $5,374 | $926 | $6,879 | $5,355 |
| Net income attributable to American Vanguard | $2,772 | $732 | $3,604 | $3,036 |
| Diluted EPS | $0.09 | $0.03 | $0.12 | $0.11 |
| Operating cash flow | Not presented by quarter | Not presented by quarter | $51,807 | $(33,836) |
For Q3, sales increased about 1%, while attributable net income rose to $2.8 million from $0.7 million. For the first nine months, sales fell about 7%, but attributable net income increased about 19%. Interest expense, net of capitalized interest, was $638 in Q3 and $1,941 year to date, compared with $779 and $2,236, respectively, in 2014.
Balance sheet, debt and liquidity
- At September 30, cash was $5.4 million; current assets were $283.6 million and current liabilities were $114.7 million.
- Inventory was $161.5 million, down from $165.6 million at December 31, 2014. Trade receivables were $89.7 million, up from $86.0 million.
- Total indebtedness was $92.7 million, comprising $83.4 million drawn on the revolving credit line and $10.1 million of notes payable, net of deferred loan fees. Debt was $98.7 million at December 31, 2014.
- The company met its credit-facility covenants and reported up to $40.2 million of additional borrowing capacity under the most restrictive covenant, compared with $51.2 million at September 30, 2014.
- Management said operating cash flow, cash on hand and available credit were expected to fund working-capital and cash needs for the next 12 months.
Changes and management commentary
- Q3 gross profit improved by $3.1 million. Management attributed much of the improvement to lower unabsorbed factory costs, which were 2% of sales versus 8% a year earlier, and said cost controls and factory activity contributed $4.2 million to year-over-year gross profit improvement. Product-acquisition royalties also raised reported Q3 gross margin by approximately 1%.
- Q3 operating expenses declined $1.3 million to $26.1 million, mainly reflecting lower selling, general and administrative, and research/product-development/regulatory costs; freight and warehousing costs increased.
- Year-to-date sales declined primarily in insecticides, down about 19%, amid continued Midwest distribution-channel inventory drawdown for corn products and weaker cotton acreage and pest pressure. Herbicide, fumigant and fungicide sales increased about 9%; non-crop sales declined about 5%.
- Year-to-date gross profit decreased $2.1 million despite a higher gross-margin percentage. Management cited lower sales and product mix, partly offset by reduced unabsorbed factory costs, which contributed $9.7 million to gross profit versus the prior-year period.
- Operating cash flow improved from a $33.8 million use to a $51.8 million source. The filing cites lower inventory investment, changes in receivables and payables, and increased other payables and accrued expenses among the working-capital effects. Investing used $41.8 million, including $36.4 million for product-line and intangible-asset acquisitions; financing used $8.3 million.
- The company acquired the European Nemacur product line and global Hyvar/Krovar herbicide product line in April 2015. Management described the acquisitions as immaterial to the financial statements.
Outlook, risks and unusual items
- No specific revenue or earnings guidance was provided. Management noted that results for the nine months are not necessarily indicative of full-year results.
- Key business risks cited include product demand and acceptance, weather, economic conditions, regulation, competition and pricing, foreign exchange, product development, supply and capacity constraints, and access to capital.
- A prominent new risk is EPA draft human-health assessments for four organophosphate products—Bidrin, Counter, Folex and Mocap—proposing a 10-times safety factor. The company disputed the basis and said it would defend its registrations; if the position becomes final, some product uses could be limited or cancelled, potentially harming future results.
- In the DBCP cases, the Third Circuit set a rehearing en banc for February 2016 after vacating its prior ruling upholding dismissal. The company said loss was neither probable nor reasonably estimable and recorded no contingency. AMVAC also agreed to an immaterial settlement in the Sanchez matter, expected to be dismissed with prejudice.
- The company agreed to an $82 civil penalty resolving an EPA notice concerning a late TSCA Form U filing. Foreign-currency translation reduced comprehensive income by $1.5 million year to date.
- The quarterly tax expense was $1.6 million, with a 34.7% effective rate; management attributed the higher quarterly rate to improved domestic performance and said the full-year estimate remained subject to review.
Important facts for investors to verify
- Whether Midwest channel inventories continue to normalize and how that affects corn-product orders and sales.
- The outcome of EPA’s organophosphate review process, including any changes to registrations, labeled uses or product demand.
- Whether the company sustains improved factory utilization, gross margins and operating cash flow, especially given seasonal working-capital requirements and customer program accruals.
- Available borrowing capacity and covenant compliance, particularly as the company integrates acquisitions and meets debt obligations.
- Subsequent developments in the DBCP appeal and confirmation that the Sanchez settlement is dismissed as expected.