American Vanguard Corporation — 2013 Form 10-K
Reporting period: Year ended December 31, 2013. Unless otherwise indicated, financial amounts are in thousands of dollars. The filing also reports fourth-quarter results.
Business context
American Vanguard develops, manufactures, formulates and markets specialty chemicals, primarily crop-protection products, with additional commercial, consumer and other non-crop products. It reports one operating segment. Crop sales accounted for $346.5 million of 2013 net sales; international export sales were $69.8 million, or 18.3% of sales.
Financial performance and liquidity
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Net sales | $381.0 million | $366.2 million | +4.1% |
| Gross profit / gross margin | $171.3 million / 45% | $161.1 million / 44% | +6.3%; +1 percentage point |
| Operating income | $55.7 million | $59.3 million | -6.0% |
| Net income attributable to American Vanguard | $34.4 million | $36.9 million | -6.6% |
| Diluted earnings per share | $1.19 | $1.28 | -7.0% |
| Cash from operating activities | -$6.2 million | $40.4 million | Decreased $46.6 million |
| Cash and working capital at year-end | $6.7 million / $139.0 million | $38.5 million / $108.6 million | Cash declined; working capital increased |
| Total indebtedness at year-end | $51.7 million | $52.4 million | Down $0.7 million |
Operating cash flow was pressured chiefly by a $51.9 million increase in inventories and a $19.7 million increase in prepaid expenses and other assets. Inventory rose to $139.8 million from $88.0 million, mainly finished goods. Capital expenditures were $15.3 million; investing activities also included a $3.7 million TyraTech investment. The company reported no off-balance-sheet arrangements.
At December 31, 2013, the current ratio was approximately 2.3, based on current assets of $249.5 million and current liabilities of $110.5 million. The $200 million secured revolving credit facility matured in 2018; the company reported up to $148.5 million of additional borrowing capacity under its covenants and compliance with those covenants. A $36.75 million interest-rate swap hedged part of variable-rate debt and was scheduled to terminate December 31, 2014.
Material changes versus 2012
- Crop sales increased 5%, while non-crop sales declined 6%. Herbicides, soil fumigants and fungicides rose 35%, led by strong demand and supply availability for the corn herbicide Impact. Insecticide sales were essentially flat; the “other” product group fell 30%, principally due to lower Folex sales.
- Persistently wet spring weather disrupted planting, shifted some acreage from corn to soybeans, and left estimated channel carryover inventory above 30% of annual sales, versus a historical 20%–25%. Distributor purchasing constraints and excess channel stocks weighed on late-year demand and results.
- Gross margin improved, helped by a more favorable product mix and average selling prices up 4.7%, partly offset by approximately 3.7% higher raw-material and manufacturing costs. Operating expenses increased 13.6% to $115.6 million, including higher selling, administrative and freight costs.
- Fourth-quarter sales were $75.5 million versus $104.3 million in 2012; net income attributable to American Vanguard was $0.3 million versus $11.3 million. The filing attributes the difficult year-end environment to channel inventory and procurement constraints.
- Operating cash flow swung from positive $40.4 million to negative $6.2 million. Cash declined by $31.8 million during 2013, while net indebtedness was broadly stable. The company converted term loans into revolving debt under a new five-year credit agreement.
Outlook, commentary, risks and contingencies
- Management stated that cash flows, cash on hand and credit-facility availability were expected to meet working-capital and capital-expenditure needs for at least the next 12 months. No numerical sales or earnings guidance is provided in the supplied filing text.
- Management expected raw-material prices and inflationary pressures to continue into 2014 and 2015. It characterized elevated channel inventory as temporary, while acknowledging there was no assurance market conditions would normalize.
- Key risks include weather and agricultural cycles; regulatory approval and re-registration of pesticides; competition from generic products and GMO or other technologies; reliance on major distributors and a small number of customers; and potential interruption, cost increases or shortages from sole-source suppliers. Three customers represented 38% of 2013 sales.
- Environmental remediation at the Commerce, California facility remained uncertain: the remedial action plan was being prepared for submission in 2014, and the company said it could not determine whether remediation costs would be material or reasonably estimate them. No loss contingency was recorded for this matter.
- Approximately 100 DBCP-related lawsuits were reported, including matters pending in the United States and Nicaragua. The company said losses were not probable or reasonably estimable for the described cases and recorded no contingency for them. Separately, it recorded a $200,000 contingency for a Brazilian regulatory citation; it estimated a probable loss range of $200,000–$300,000.
- The company’s 29.27% TyraTech investment had a $2.7 million carrying value and a $4.1 million quoted market value at year-end; a $986,000 equity-method loss was recognized in 2013. Envance, in which the company owns 60%, also recorded losses attributable in part to non-controlling interests.
Investor verification priorities
- Track inventory levels and sell-through at distributors, including whether channel carryover returns toward the historical range and how inventory is valued.
- Assess the drivers of negative operating cash flow, including inventory, customer-program accruals and the increase in other assets; compare cash generation with earnings in subsequent periods.
- Verify the timing and financial impact of the Commerce facility remediation plan, and monitor developments in DBCP litigation and the Brazilian citation.
- Review customer and supplier concentration, pesticide registrations, regulatory developments and competitive pressures in major crop markets.
- Monitor revolving-facility borrowings, covenant headroom and variable-rate exposure, including the interest-rate swap’s scheduled 2014 expiration.
The independent auditor issued an unqualified opinion on the consolidated financial statements and on internal control over financial reporting as of December 31, 2013.