Business context and reporting period
American Vanguard Corporation’s unaudited Form 10-Q covers the three months ended March 31, 2016, compared with the three months ended March 31, 2015. The company operates as one reportable segment, selling crop-protection and non-crop products.
Financial performance and liquidity
Amounts are in millions, except per-share data. Balance-sheet comparisons are March 31, 2016 versus December 31, 2015.
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Net sales | $69.5 | $66.6 |
| Gross profit / margin | $27.5 / 40% | $24.7 / 37% |
| Operating income | $4.6 | $0.3 |
| Interest expense | $0.5 | $0.6 |
| Net income attributable to American Vanguard | $2.8 | $0.1 |
| Basic and diluted EPS | $0.10 | $0.00 |
| Cash from operating activities | $9.6 | $19.8 |
- Sales increased 4%. Crop sales rose 3% and non-crop sales rose 19%; international sales increased 12% to $19.5 million.
- Herbicide, soil fumigant and fungicide sales grew 13% to $24.7 million, largely reflecting acquired products. Insecticide sales declined 4% to $33.1 million, while non-crop sales reached $8.4 million.
- Gross margin improved as a share of sales, supported by lower labor and factory overhead costs and improved factory cost recovery. Operating expenses fell $1.5 million to $22.9 million; lower selling and freight costs more than offset higher general and administrative expense.
- Operating cash flow fell by $10.3 million year over year. Higher receivables and inventory absorbed cash, partly offset by increases in accounts payable and accrued costs. Capital expenditures were $0.7 million; investing cash outflow also included a $3.3 million investment in Bi-PA.
- Cash was $7.9 million, up from $5.5 million. Current assets were $258.4 million and current liabilities $95.6 million, versus $236.8 million and $76.3 million, respectively, at year-end.
- Total indebtedness was $65.8 million, down from $68.4 million. The $200 million revolving facility matures June 2018; the company reported covenant compliance and up to $65.4 million of additional borrowing capacity. Its variable-rate debt exposes it to interest-rate changes.
- Management said cash from operations, cash balances and available credit should cover working-capital and cash needs for the next 12 months.
Material changes versus the prior period
Profitability improved substantially from near break-even attributable earnings in Q1 2015. Sales growth, improved gross margin and lower operating expenses contributed. The effective tax rate was 25.9%, compared with an 87.2% tax benefit rate in the prior-year quarter; management attributed the change mainly to stronger results in higher-tax jurisdictions. Operating cash generation was lower, despite increased earnings, primarily reflecting working-capital movements. Debt and average borrowings were lower, although the average interest rate on the revolving credit line rose to 2.5% from 2.0%.
Outlook, commentary, risks and contingencies
- No specific revenue or earnings guidance was provided. Management noted that quarterly results are not necessarily indicative of full-year results.
- Demand and sales can be affected by weather, crop and pest conditions, product acceptance, competition and pricing, regulation, foreign exchange, product development, supply constraints and access to capital.
- The EPA issued a March 2016 stop-sale/use/removal order concerning certain U.S., Canadian and Australian Thimet products. AMVAC disputes the agency’s position and obtained limited relief covering specified production and inventory. Management believed available inventory would meet 2016 customer needs; the EPA had not issued a final position on past conduct, and the company recorded no loss contingency because likelihood and amount could not yet be assessed.
- A court certified a class in the Galvan wage-and-hour case; the company said loss was not probable or reasonably estimable and recorded no contingency. Other employee and product-related claims were expected to be settled on terms described as immaterial.
- The IRS notified the company of an intended examination of its 2012–2014 federal returns; the outcome was not determinable because the audit was at an early stage.
- The company recognized an $82,000 loss on its TyraTech equity-method investment. It also invested in Bi-PA, holding a 15% interest, and reported no impairment of either investment at quarter-end.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the EPA’s Thimet matter results in sales restrictions, penalties, or other costs beyond the limited relief disclosed.
- Whether the working-capital build—particularly receivables and inventory—converts to cash in subsequent quarters.
- Whether margin gains and operating-expense reductions persist, given product mix, seasonality, weather and supply conditions.
- Whether credit-facility covenant headroom and liquidity remain adequate as borrowing needs and variable interest rates change.
- Developments in the Galvan class action, IRS examination and other disclosed contingencies, and the eventual impact of new accounting standards.