American Vanguard Corporation — Q3 2011 Form 10-Q
Business context and period. The company sells agricultural and non-crop chemical products and reports one operating segment. This filing covers the quarter and nine months ended September 30, 2011; amounts below are in millions of dollars except per-share data. Management cautions that nine-month results are not necessarily indicative of full-year results.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $73.8 | $68.3 | $221.6 | $167.1 |
| Gross profit | $30.8 | $25.4 | $91.0 | $63.5 |
| Operating income | $8.2 | $6.5 | $28.0 | $14.0 |
| Net income | $4.6 | $3.6 | $15.6 | $7.1 |
| Diluted EPS | $0.16 | $0.13 | $0.56 | $0.26 |
| Operating cash flow | Not separately presented | Not separately presented | $2.1 | $8.9 |
- Q3 sales increased 8.2% and nine-month sales increased 32.6% year over year. Nine-month growth reflected acquired product lines, including Mocap and Nemacur, along with stronger demand and market conditions.
- Gross margin improved to approximately 42% from 37% in Q3, and to 41% from 38% for the nine-month period. Management cited product mix and improved manufacturing performance; higher raw-material costs weighed on some fumigant margins.
- Q3 net income rose about 28%; nine-month net income more than doubled. Nine-month diluted EPS was $0.56 versus $0.26.
- Operating expenses rose 19.7% in Q3 and 27.0% year to date, reflecting higher research, product-development and regulatory spending, G&A and freight costs, among other items.
Financial position, cash flow and debt
- At September 30, cash was $3.8; trade receivables were $96.8 and inventory was $80.8. Current assets were $184.3 versus current liabilities of $93.9. Total debt was $68.4, including $14.5 current and $53.9 long-term; stockholders’ equity was $179.8.
- Nine-month operating cash flow was $2.1, down from $8.9 despite higher earnings. A $62.9 increase in receivables and a $6.8 increase in inventory absorbed cash; increases in other liabilities partly offset this use. Cash ended the period at $3.8.
- The company entered a new $137.0 million senior secured credit facility in January, including a $75.0 million revolver and $62.0 million initial term commitment, maturing January 2016. It reported compliance with covenants and up to $75.0 million of additional borrowing capacity under the facility based on covenant performance. Substantially all assets are pledged as collateral.
- A required interest-rate swap covers $45.0 million, or 75%, of term-loan debt. Its reported fair-value loss was $1.6 at quarter-end. The company also reported foreign-exchange exposure and uses hedging measures.
Material changes and management commentary
- Q3 non-crop sales increased 74.8%, chiefly on mosquito-control demand for Naled/Dibrom. Insecticide sales increased 26.6%; herbicides and other crop products declined 3.4% and 13.8%, respectively.
- For the nine months, acquired products and stronger soil-insecticide sales contributed to 49.3% insecticide growth. International sales increased 27% year to date.
- PCNB sales were sharply lower because the EPA’s stop-sale order prevented domestic sales during Q3. A federal court vacated that order in August 2011, but the company was still working with EPA on amended product formulas and labels and had not resumed domestic sales by quarter-end.
- The January refinancing resulted in a one-time, non-cash $0.546 million debt-extinguishment charge. Final purchase-accounting entries for 2010 product-line acquisitions added $6.802 million to intangible assets and a related liability, with no current-period cash impact.
- Cash dividends declared during 2011 were $0.03 per share in March and $0.05 per share in September. The September dividend was paid after quarter-end.
Outlook, risks and contingencies
- The filing provides no specific revenue, earnings or other numerical guidance. Management described positive demand and sales trends but noted risks including weather, product demand, regulation, competition and pricing, foreign exchange, supply constraints and capital availability.
- For Canadian PCNB, about $1.3 million of inventory in the distribution channel was unpaid and could be returned. The company considered a loss of $0.5–$1.0 million probable and recorded a $0.5 million contingency.
- For U.S. PCNB, the company held approximately $19.4 million of inventory and about $5.1 million of related intangible assets. It had not recorded a loss contingency, but cancellation of registrations could require asset write-downs.
- Approximately 100 DBCP-related lawsuits are pending, including a California action involving 2,444 plaintiffs and a Delaware case. The company said losses were not probable or reasonably estimable and recorded no contingency for these matters.
- Management reported disclosure controls as effective and no material changes to internal control over financial reporting during the quarter. The filing stated that risk factors were not materially changed from the 2010 Form 10-K.
Key facts for investors to verify
- Whether PCNB registrations and labels are amended and domestic sales resume, and whether the inventory and intangible-asset values remain recoverable.
- Receivables, customer payment terms, inventory levels and program-cost accruals, given their effect on operating cash flow.
- Progress and potential exposure in the Canadian PCNB contingency and DBCP litigation.
- Credit-facility covenant compliance, actual borrowing availability and the impact of pledged collateral and interest-rate hedging.
- How much sales and earnings growth is recurring versus attributable to acquisitions, seasonality, weather and unusual product demand.