American Vanguard Corporation (NYSE: AVD) — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. Unaudited consolidated results; dollar amounts below are in thousands unless stated otherwise. The company reports one operating segment, agricultural and non-crop chemicals.
Financial performance
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Net sales | $66,565 | $81,095 |
| Gross profit / gross margin | $24,650 / 37% | $28,905 / 36% |
| Operating income | $306 | $3,706 |
| Net income (loss), consolidated | $(43) | $2,005 |
| Net income attributable to American Vanguard | $51 | $2,159 |
| Diluted EPS | $0.00 | $0.07 |
| Cash from operating activities | $19,842 | $(41,890) |
Sales fell 18% year over year. Crop sales declined 19% to $59,521; non-crop sales declined 11% to $7,044. Insecticide sales dropped 26% to $34,359, herbicide/soil fumigant/fungicide sales fell 5% to $21,840, and other crop-product sales fell 13% to $3,322. U.S. sales were $49,222, down 15%; international sales were $17,343, down 25%.
Cost of sales declined to $41,915 from $52,190, and gross margin improved to 37% from 36%. Operating expenses were $24,344 in the income statement, versus $25,199 a year earlier; operating income consequently fell to $306. Net interest cost was $641, compared with $613. The 2015 income-tax benefit was $292, versus tax expense of $1,016; the reported effective tax rate was 87.2%, reflecting projected U.S. losses and a greater contribution from lower-tax international earnings. The rate is based on the projected full-year result and remains subject to revision.
Cash, debt and liquidity
At March 31, 2015, cash was $6,870, current assets were $288,302, and current liabilities were $93,896. Total indebtedness was $85,308, principally $85,000 drawn on the revolving credit facility, down from $99,526 at December 31, 2014. Total stockholders’ equity was $260,603. Operating cash flow improved from a $41,890 use in Q1 2014 to $19,842 provided in Q1 2015; the filing attributes cash generation in part to lower receivables and increases in accounts payable, accrued expenses and deferred revenue. Capital expenditures were $1,522. Financing activities used $16,084, including a $14,400 net repayment on the credit line.
The company reported compliance with its credit-facility covenants at quarter-end and borrowing capacity of up to $22,710, compared with $87,814 a year earlier. Management stated that expected operating cash flow, cash balances and available credit should meet working-capital and cash needs for the next 12 months. Substantially all company assets are pledged as collateral. A quarterly dividend of $0.02 per share was declared; the filing reports $569 of cash dividends paid during the quarter.
Changes, outlook and key risks
- Management attributed weak sales chiefly to soft Midwest corn markets: distributor inventories accumulated in 2013, restocking remained subdued, and low corn prices led growers to delay or reduce purchases. Reduced cotton acreage weakened Bidrin sales; a lost Costa Rica banana-plantation bid and euro-dollar movements also reduced international sales. Dibrom sales fell following channel inventory buildup after a light Gulf Coast hurricane season.
- Management said elevated channel inventories had been reduced and expected more normal buying as 2015 progressed into the 2016 growing season. This outlook is subject to demand, commodity prices, weather, regulation, competition, foreign exchange, product development, supply and capital-availability risks. The filing provides no quantified earnings or sales guidance.
- Subsequent to quarter-end, the company increased its Envance Technologies ownership from 60% to 87% under an April 1 agreement; acquired the Nemacur E.U. product line on April 2; and completed the Bromacil product-line acquisition outside the U.S. and Canada on April 29. Following the Bromacil purchase, an April 28 credit-agreement amendment increased the leverage covenant for the last three quarters of 2015 and added a fixed-charge coverage covenant.
- On March 24, the EPA issued AMVAC a show-cause notice concerning potential RCRA noncompliance in handling used Lock’N Load containers with residual Thimet. AMVAC disputed the alleged noncompliance and requested a meeting. The company said it was too early to determine whether a loss was probable or estimable and recorded no contingency.
- Other unusual items include a $248 foreign-currency translation loss and no TyraTech equity-method gain or loss in Q1 2015 (versus a $72 net loss in the comparative income statement). The company had terminated its interest-rate swap at year-end 2014.
Important facts for investors to verify
- Assess whether the sales decline, particularly in corn-related products, and the reduction in credit headroom persist; borrowing capacity was substantially lower than a year earlier.
- Monitor inventory levels, customer-program accruals and cash conversion. Inventory was $166,981 at quarter-end, while accrued program costs were $57,996.
- Track the EPA matter and any potential penalties or resulting financial exposure; no loss amount was estimable in this filing.
- Review the impact and financing of the Nemacur and Bromacil acquisitions, the increased Envance ownership, and the amended credit covenants.
- Reconcile the operating-expense comparison: the income statement reports Q1 2014 operating expenses of $25,199, while the MD&A departmental table shows $24,943. The filing text does not explain this difference.