American Vanguard Corporation — FY 2014 Form 10-K
Reporting period: Year ended December 31, 2014. The filing also presents unaudited fourth-quarter results. Unless otherwise noted, financial amounts below are in millions of dollars; the filing reports amounts in thousands.
Business context
American Vanguard develops, manufactures, formulates and markets specialty chemicals for agricultural, commercial and consumer uses. It reports one operating segment. Crop-protection products are its primary business, and sales are seasonal and sensitive to weather, growing cycles and distribution-channel inventory.
Financial performance and liquidity
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Net sales | $298.6 | $381.0 |
| Gross profit / margin | $114.5 / 38% | $171.3 / 45% |
| Operating income | $6.7 | $55.7 |
| Net income attributable to American Vanguard | $4.8 | $34.4 |
| Diluted earnings per share | $0.17 | $1.19 |
| Cash used in operating activities | $34.1 | $6.2 |
| Cash and cash equivalents at year-end | $4.9 | $6.7 |
| Working capital at year-end | $205.8 | $139.0 |
| Long-term debt, excluding current portion | $99.5 | $51.7 |
FY 2014 cost of sales was $184.1, or 62% of sales, versus 55% in 2013. Management attributed the lower gross margin chiefly to under-absorption of factory costs amid reduced production and sales, plus product mix and cost inflation. Operating expenses fell to $107.8 from $115.6, but remained higher as a share of sales (36% versus 30%). Net interest expense increased to $3.1 from $1.9.
Operating cash outflow reflected working-capital demands, including a $25.8 increase in inventory, a $13.5 increase in receivables and a $20.0 decrease in accounts payable. Investing activities used $7.7, including $7.2 of capital expenditures. Financing activities provided $41.2, primarily through increased credit-facility borrowings. Year-end inventory was $165.6, up from $139.8; receivables were $88.4, up from $75.0.
Total indebtedness was $99.5 at year-end, predominantly variable-rate revolver borrowings, compared with $51.7 a year earlier. The $200 million senior secured revolving facility matures June 17, 2018; the company reported compliance with its covenants and $26.1 of additional borrowing capacity under the most restrictive covenant. Substantially all assets are pledged as collateral. The interest-rate swap expired December 31, 2014, leaving no swap in place at year-end.
Material changes and fourth-quarter results
- Sales declined 22% year over year, with crop sales down 23% and non-crop sales down 10%. Insecticide sales fell 30%; herbicide, soil fumigant and fungicide sales fell 16%.
- The principal cause was continued distributor and customer drawdown of excess Midwest corn-product inventory following heavy 2012–early 2013 procurement and wet 2013 planting conditions. Corn herbicide and granular soil insecticide sales together declined more than 55%; corn products were 18% of 2014 sales, versus about 38% in 2013.
- Fourth-quarter sales were $77.6 versus $75.5 in Q4 2013. Net income attributable to American Vanguard was $1.8 versus $0.3; diluted EPS was $0.06 versus $0.01.
- Year-end working capital increased, largely because of higher inventory, while cash remained low and debt increased. The company also reduced headcount to 382 from 499 a year earlier.
Outlook, risks and unusual items
- Outlook: Management said channel inventory had declined significantly and expected it to support more normal buying in 2015. Raw-material prices were essentially flat in 2014 and not expected to increase significantly in 2015; management cited possible broader inflationary pressures in 2016–2017. No specific revenue or earnings guidance is provided.
- Tax and investment items: The company recorded a $0.5 income-tax benefit in 2014, versus $18.9 of tax expense in 2013, including a $0.3 benefit from release of a tax reserve. Its TyraTech investment generated a $1.0 equity-method loss, partly offset by a $1.0 dilution gain; year-end ownership was approximately 21.18%. A $0.3 intangible-asset impairment was recorded.
- Environmental contingency: Remedial planning continued for the Commerce, California facility. The remediation scope and cost could not be reasonably estimated, so no loss contingency was recorded; a remedial action plan was expected to be submitted in early 2015.
- Litigation: The company reported pending DBCP-related lawsuits, including approximately 85 Nicaraguan actions (only two served on AMVAC) and domestic cases on appeal. It considered losses neither probable nor reasonably estimable and recorded no related contingency. A 2014 California product-exposure case and employee wage-and-hour putative class action also had no reserves recorded; the company said outcomes were not yet estimable. A Brazilian regulatory citation was settled for $168,000.
- Key business risks: pesticide registration and re-registration requirements, activist challenges, weather and seasonality, customer concentration, generic and technology competition, sole-source supply arrangements, manufacturing under-utilization, environmental exposure, and dependence on credit availability. Three customers represented 39% of 2014 sales.
- Management stated that operating cash, cash on hand and credit-facility availability should be sufficient for working capital and capital expenditure needs for at least 12 months. Reduced financial performance could nevertheless constrain borrowing and acquisition capacity.
Important facts for investors to verify
- Whether distributor inventory normalization translated into stronger 2015 corn-product orders and improved factory utilization and gross margins.
- Cash conversion and inventory quality, including the rise in inventory reserves to $3.9 million from $2.6 million and the amount of finished goods held.
- Credit-facility covenant headroom, variable-rate exposure after the swap expired, and the ability to service or refinance debt due at facility maturity.
- Potential costs and timing of Commerce-site remediation, and developments in the DBCP and other litigation matters for which no loss contingencies were recorded.
- Customer concentration, sole-source supply continuity, and the status of product registrations and regulatory challenges.