American Vanguard Corporation — Q2 2014 Form 10-Q
Business context and period: The company manufactures and sells agricultural and non-crop chemicals. This unaudited report covers the three and six months ended June 30, 2014; amounts below are in millions of dollars unless otherwise stated.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $68.3 | $86.8 | $149.4 | $208.3 |
| Gross profit / margin | $26.1 / 38% | $42.1 / 48% | $55.0 / 37% | $95.8 / 46% |
| Operating income | $0.7 | $12.9 | $4.7 | $39.0 |
| Net income attributable to AVD | $0.1 | $8.4 | $2.3 | $25.3 |
| Diluted EPS | $0.01 | $0.29 | $0.08 | $0.88 |
For Q2 2014, consolidated net loss was $0.03 million, while net income attributable to AVD was $0.145 million after adding back the non-controlling-interest loss. Six-month consolidated net income was $1.976 million.
- Cash flow: Operating activities used $29.1 million in the first half, versus providing $20.0 million a year earlier. Investing activities used $4.0 million, including $4.0 million of capital expenditures. Financing activities provided $30.4 million, including $34.5 million of net credit-line borrowings. Cash ended at $4.2 million, down from $6.7 million at year-end 2013.
- Liquidity and debt: Current assets were $286.2 million and current liabilities $107.3 million at June 30. Total debt was $86.2 million, up from $51.7 million at December 31, 2013; substantially all assets were pledged as collateral. The company was compliant with credit covenants and reported capacity for up to $64.1 million of additional borrowing under the facility.
- Inventory: Inventory rose to $175.2 million from $139.8 million at year-end, mainly reflecting soft sales, long-lead-time supplies and lower manufacturing output.
Material changes and management commentary
- Q2 sales fell 21%; first-half sales fell 28%. The decline was concentrated in crop products, particularly corn insecticides and herbicides. Management attributed weak demand to distributors and growers using surplus inventory carried over from the weather-disrupted 2013 planting season.
- Non-crop sales rose 14% in Q2 and 21% for the first half; crop sales fell approximately 26% and 32%, respectively. First-half U.S. sales declined to $108.1 million from $170.9 million, while international sales increased to $41.4 million from $37.4 million.
- Gross margin contracted as lower factory activity increased unabsorbed manufacturing costs, alongside product and geographic mix effects. Management said approximately one-third of the Q2 gross-profit reduction and one-quarter of the first-half reduction reflected higher unabsorbed factory costs.
- Operating expenses declined 13% in Q2 and 11% in the first half, chiefly due to lower incentive compensation, legal and prior-year consulting costs. Expenses nevertheless rose as a share of sales because of lower revenue and substantially fixed costs.
- Interest expense, net of capitalized interest, was $0.8 million in Q2 and $1.5 million for the first half. Average debt increased to $111.9 million in Q2 and $93.9 million for the first half, primarily to fund working capital; the effective bank interest rate was lower than in the comparable periods.
Outlook, risks and unusual items
- No specific sales or earnings guidance was provided. Management expected operating cash flow, cash balances and available credit to meet liquidity needs for the next 12 months, while emphasizing close control of spending.
- On July 18, 2014, the company amended its credit agreement, increasing the permitted consolidated funded-debt ratio for Q3 and Q4 2014 and Q1 2015, and allowing cash dividends in Q1 and Q2 2015 notwithstanding prior net-income levels.
- The company temporarily placed share repurchases on hold to control cash flow. It paid dividends of $0.10 per share during the first half.
- Key risks include continued excess inventory and reduced plant utilization, corn commodity prices and growers’ planting decisions, weather, demand, competition, regulation, supply constraints and foreign exchange. Management warned that profitability may remain adversely affected if demand and inventory levels do not improve.
- Legal matters include approximately 100 DBCP exposure lawsuits. A court dismissed the remaining Hendler-Delaware cases without prejudice on statute-of-limitations grounds, while leaving a possibility for plaintiffs to present further evidence. A new asbestos-related claim names AMVAC among 46 defendants; the company denies knowledge of asbestos-containing products, intends to defend the case, and recorded no contingency because a loss was considered neither probable nor reasonably estimable.
- The company recognized a $0.4 million first-half loss on its TyraTech equity-method investment, partly offset by a $0.3 million gain from dilution; its ownership was approximately 24% at June 30. A $33 million interest-rate swap hedged variable-rate debt and was scheduled to terminate December 31, 2014.
Investor verification priorities
- Track distributor and customer inventory levels, corn-product demand, and whether sales recover as the 2013 carryover is worked through.
- Monitor inventory valuation, production levels and unabsorbed factory costs for evidence of margin recovery.
- Review operating cash flow, working-capital requirements, credit-line usage, covenant headroom and the amended credit terms.
- Verify the outcome and potential exposure of the DBCP litigation and the new asbestos-related claim, as well as developments in the TyraTech investment.
- Assess whether management’s liquidity expectation and expense-control plans remain achievable; the filing provides no quantified earnings or revenue forecast.