American Vanguard Corporation — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014; unaudited. American Vanguard manufactures and sells agricultural and non-crop chemicals. Amounts below are in millions of dollars, except per-share data.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $71.6 | $97.2 | $221.0 | $305.5 |
| Gross profit | $28.3 | $43.2 | $83.3 | $139.0 |
| Gross margin | 40% | 44% | 38% | 45% |
| Operating income | $1.6 | $15.1 | $6.3 | $54.2 |
| Net income attributable to American Vanguard | $0.7 | $8.9 | $3.0 | $34.2 |
| Diluted EPS | $0.03 | $0.31 | $0.11 | $1.18 |
- Sales declined 26% in the quarter and 28% year to date. The main driver was lower insecticide sales, particularly granular soil insecticides, as customers reduced channel inventories following excess buying in 2013. U.S. sales fell while nine-month international sales increased.
- Operating expenses fell 5% in Q3 and 9% year to date, but lower sales and increased under-absorbed factory costs reduced gross profit and margins. Management attributed most of the gross-profit decline to lower sales.
- Operating cash flow was negative $33.8 million for the nine months, versus positive $7.2 million in 2013. Working-capital needs included a $31.7 million inventory increase and higher receivables; operating cash flow also reflected lower earnings and reduced accounts payable.
Liquidity, debt and other key items
- At September 30, cash was $5.0 million, current assets $291.5 million, and current liabilities $100.6 million. Inventory was $171.5 million, up $31.7 million from year-end 2013.
- Total debt was $95.1 million, up from $51.7 million at December 31, 2013, primarily reflecting increased revolving-credit borrowings. The company reported $51.2 million of additional borrowing capacity under its covenants and compliance with all covenants at quarter-end.
- The July 2014 credit-facility amendment increased the permitted consolidated funded-debt ratio for specified quarters and allowed cash dividends in the first two quarters of 2015 notwithstanding prior net income levels. Management said available cash, operating cash flow and credit availability should meet liquidity needs for the next 12 months.
- Capital expenditures were $5.9 million year to date. Financing cash flow was positive $38.5 million, including $43.5 million of net line-of-credit borrowings; dividends paid were $4.3 million.
- Q3 income tax expense was zero; nine-month expense was $0.9 million, compared with $18.5 million in 2013. Management cited the projected mix of domestic and foreign income and a $0.3 million reserve release following expiration of a tax examination period.
Management commentary, risks and unusual items
- Management linked weaker corn-product demand to 2013 weather-related purchasing patterns and subsequent customer inventory drawdown. It said channel inventory was closer to historical levels by quarter-end, but company inventory remained elevated and manufacturing activity was reduced.
- Management warned that continued weak demand or inability to reduce inventory could prolong under-absorbed manufacturing costs and pressure profitability. Corn commodity prices, weather, product demand, regulation, competition, foreign exchange and supply constraints are also identified risks.
- TyraTech share issuances diluted American Vanguard’s ownership to 19.28% at September 30; the company recognized a $0.954 million dilution gain and a $0.633 million equity-method loss year to date. On October 1, it exercised $0.5 million of warrants, increasing ownership to 21.18%.
- Approximately 100 DBCP-related lawsuits were pending, including cases brought by former banana workers. Plaintiffs appealed the judgment in the remaining Hendler-Delaware cases; the company said it would oppose the appeal. A separate Delaware state case was dismissed, and another was dismissed with prejudice. An asbestos case was dismissed and concluded.
- The company had one interest-rate swap with a $31.1 million notional amount, scheduled to terminate December 31, 2014. The filing reports expected swap losses of $0.087 million to be reclassified into earnings over the next 12 months.
- No specific full-year financial guidance was provided. The filing notes that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether elevated inventory and reduced manufacturing continue to weigh on gross margins, operating cash flow and future profitability.
- Sales and restocking trends in granular soil insecticides, including how quickly channel and company inventories normalize.
- Working-capital funding needs, further revolver usage, covenant headroom and the terms and implications of the July credit amendment.
- Progress and potential financial exposure in the DBCP litigation, including the appeal.
- The filing contains an apparent Q3 cost-of-sales inconsistency: the financial statements report $43.342 million, while the MD&A narrative states $42.342 million. Confirm the correct figure against the filed statements.