American Vanguard Corporation — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. Unaudited consolidated results; financial amounts below are in millions of dollars unless stated otherwise. The company reports one business segment.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $90.8 | $73.8 | $262.8 | $219.9 |
| Gross profit / margin | $39.6 / 43.7% | $30.6 / 41.4% | $115.3 / 43.9% | $89.2 / 40.5% |
| Operating income / margin | $13.2 / 14.5% | $8.2 / 11.1% | $41.8 / 15.9% | $28.0 / 12.8% |
| Net income | $8.1 | $4.6 | $25.6 | $15.6 |
| Diluted EPS | $0.28 | $0.16 | $0.89 | $0.56 |
| Operating cash flow | Not separately stated | Not separately stated | $13.1 | $2.1 |
- Q3 sales rose 23%; nine-month sales rose 20%. Insecticides drove growth, while herbicide sales declined.
- Gross margin improved year over year, which management attributed to insecticide price increases, favorable branded-product mix and improved factory performance. Operating expenses increased to $26.5 million in Q3 and $73.5 million year to date, including higher selling, administrative, research and freight costs.
- At September 30, cash was $23.6 million, total debt was $54.1 million and net debt was approximately $30.5 million. Total debt was down from $66.4 million at December 31, 2011. Current assets of $230.8 million compared with current liabilities of $123.2 million (current ratio approximately 1.87).
- Nine-month capital expenditures were $14.9 million, versus $4.5 million in 2011. Cash declined by $11.9 million from year-end, to $23.6 million.
Material changes and operating drivers
- Q3 insecticide sales increased about 60%, including strong granular soil insecticide demand and $4.1 million of Smartbox system sales, with no comparable Smartbox sales in 2011. Herbicide, fungicide and fumigant sales declined about 9% in the quarter, partly because Impact inventory had sold out and customer orders for Dacthal came earlier.
- For the first nine months, insecticide sales increased about 43%; herbicide sales were lower, particularly because Impact supply was unavailable after early demand. Non-crop sales increased about 10% year to date.
- Management cited favorable growing-season conditions and strong crop demand, tempered by mid-year drought and delayed soil-fumigant applications. Third-party supply constraints limited international Nemacur sales.
- Operating cash flow was supported by earnings and higher other liabilities, principally customer-program accruals. Receivables and inventory increased $36.5 million and $21.7 million, respectively; management said the inventory build was intended to support shipments in the final quarter and early 2013.
Outlook, risks and unusual items
- No quantified full-year earnings or sales guidance is provided. Management expected fourth-quarter pre-winter or first-quarter 2013 post-thaw applications to make up for delayed third-quarter soil-fumigant sales.
- The company had not drawn on its working-capital revolver during the periods discussed. It was in compliance with credit-facility covenants and reported up to $75 million of additional borrowing capacity, subject to facility terms. Substantially all assets are pledged as collateral.
- Regulatory uncertainty remains around PCNB. EPA authorized sales of certain compliant existing stocks in October 2012; discussions continued over minor-use labels and other stock disposition. At quarter-end, PCNB inventory was $20.4 million and associated intangible assets were $4.8 million; management did not consider a related loss probable or reasonably estimable.
- Approximately 100 DBCP-related lawsuits were pending. The company reported no loss contingency for the matters discussed, stating losses were not considered probable or reasonably estimable. In October 2012, a Louisiana court dismissed related cases on statute-of-limitations grounds; other proceedings remained stayed, pending or under investigation.
- A September 5 earthquake significantly damaged the Costa Rica subsidiary office; no employees were injured and business resumed at a temporary facility within three days.
- Other stated risks include product demand and acceptance, weather, regulation, competition, supply and capacity constraints, foreign exchange, product development and access to capital. Management reported disclosure controls were effective and no material change in internal controls during the quarter.
Important facts for investors to verify
- Whether growth and improved margins persist after strong crop demand, price changes and the 2012 product mix.
- Whether planned fourth-quarter and early-2013 fumigant shipments occur, and how inventory, receivables and customer-program accruals convert to cash.
- Progress on PCNB labels and disposition of existing stocks, given the inventory and intangible-asset balances exposed to regulatory outcomes.
- Developments and potential financial exposure from DBCP litigation, despite the company’s current view that losses are not estimable or probable.
- Capital spending, debt reduction, covenant headroom and the effect of interest-rate and foreign-currency exposures.