American Vanguard Corporation (NYSE: AVD) — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Unaudited consolidated results; amounts below are in millions of dollars except per-share data. The company reports one segment.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $132.8 | $148.2 | $257.7 | $297.8 |
| Gross profit / margin | $42.9 / 32% | $49.3 / 33% | $81.4 / 32% | $100.7 / 34% |
| Operating income | $3.8 | $10.8 | $7.0 | $25.6 |
| Net income (loss) | $(1.1) | $6.8 | $0.9 | $16.8 |
| Diluted EPS | $(0.04) | $0.23 | $0.03 | $0.55 |
| Net cash from operating activities | Not separately provided for quarter | $(96.6) | $(27.2) |
Q2 interest expense, net, rose to $3.2 million from $0.8 million; for the first half it rose to $4.9 million from $1.2 million. The effective tax rate was unusually high: 315.4% for Q2 and 57.7% for the first half, versus 28.5% and 30.1%, respectively, in 2022.
Balance sheet and liquidity
- At June 30, cash was $14.6 million, current assets $438.2 million, and current liabilities $205.3 million. Inventories were $237.6 million, up from $184.2 million at year-end 2022.
- Revolver borrowings were $160.8 million, compared with $52.3 million at December 31, 2022. The debt note reports $159.9 million net of deferred loan fees. The facility has a $275 million commitment, with maturity in August 2026; the reported interest rate at June 30 was 6.83%.
- Cash declined $5.7 million during the first half. Financing provided $98.1 million, including $108.5 million of net revolver borrowings; investing used $7.2 million. Operating cash use was largely driven by a $50.9 million inventory build and an $83.2 million decrease in customer prepayments.
- The company says cash, expected operating cash flow and available facility borrowings should meet working-capital and cash requirements for the next 12 months. Remaining borrowing capacity under the most restrictive covenant was $22.9 million at June 30, versus $200.4 million at year-end.
Changes versus prior period and management commentary
- Q2 sales fell 10%; first-half sales fell 13%. U.S. sales declined 14% in Q2 and 20% in the first half, while international sales declined 6% and 3%, respectively. U.S. crop sales were particularly weak in the first half, down 22%.
- Management attributed lower demand to distributors and retailers reducing inventories and delaying orders amid higher interest rates and working-capital costs. International sales also faced low-priced Asian generic competition; drought affected Panama.
- Q2 gross margin declined one percentage point to 32%; first-half margin fell two points to 32%. Operating expenses were slightly higher in Q2, but 1% lower for the first half. Research, product development and regulatory costs increased, including spending on SIMPAS and product defense.
- Management cited the unavailability of a high-margin herbicide ingredient, DCPA, as a factor in lower sales; the company reported no Q2 sales of Dacthal because of supply unavailability. Management also described supply constraints affecting other products and noted that Folex sales were expected to shift later in 2023.
- Warehousing, handling and outbound freight costs were reclassified from operating expenses to cost of sales, retrospectively. The change affects reported gross profit and margins but not operating income, net income or EPS.
- The company repurchased 408,201 shares for $7.2 million in the first half and paid $1.7 million in dividends. A new $15 million repurchase plan began in May; $8.3 million remained available at June 30.
Debt covenant, risks and contingencies
- The company was in compliance with its leverage covenant but not its fixed-charge coverage ratio at June 30. The shortfall was attributed to lower trailing EBITDA and share repurchases. Lenders granted a waiver on August 3, 2023; management said the impact of most repurchases would leave the covenant calculation in Q3.
- An ongoing U.S. Department of Justice investigation concerns potential environmental-law violations related to pesticide-container reimportation. The company is discussing a possible resolution; the timing and outcome are uncertain, and no loss contingency was recorded. The filing states potential penalties or other relief could materially affect the business, financial condition and cash flows.
- The EPA issued preliminary findings in June 2023 raising human-health concerns regarding DCPA/Dacthal. The company is discussing mitigation measures with the agency; restrictions or cancellation could materially affect performance. Separately, proceedings over an EPA notice of intent to suspend DCPA continued, with settlement discussions underway; the company had not recorded a loss contingency.
- A Quebec strawberry grower seeks approximately $5 million in damages alleging crop damage from Vapam. The company said available information was insufficient to assess probability or amount of loss and recorded no contingency.
- Other disclosed risks include supply-chain disruption and reliance on limited suppliers, loss of customer early-payment programs, variable interest rates, foreign-exchange exposure without hedging, product demand, weather, competition and regulation.
Investor items to verify
- Progress in restoring DCPA supply and the outcome of EPA review, mitigation discussions and suspension proceedings.
- Compliance with the fixed-charge covenant after the August 3 waiver, and the company’s reduced borrowing headroom.
- Whether customer ordering and early-payment patterns normalize, and whether elevated inventory converts to sales without further discounting or cash strain.
- Developments, potential financial exposure and any eventual accrual related to the DOJ investigation and Quebec claim.
- The filing’s debt presentation: the balance sheet lists $160.8 million of long-term debt, while the debt note reports $159.9 million net of deferred loan fees.