American Vanguard Corporation (NYSE: AVD) — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2020. Unaudited results; dollar amounts are in thousands except per-share data. The company sells crop and non-crop protection products and reports as one operating segment.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $117,439 | $124,884 | $317,956 | $337,664 |
| Gross profit / margin | $43,265 / 37% | $47,463 / 38% | $121,952 / 38% | $130,818 / 39% |
| Operating income | $4,483 | $6,786 | $13,070 | $19,979 |
| Interest expense, net | $1,022 | $2,070 | $3,804 | $5,606 |
| Net income | $2,927 | $3,153 | $7,334 | $10,165 |
| Diluted EPS | $0.10 | $0.11 | $0.25 | $0.34 |
- Quarterly trends: Sales fell 6%; U.S. sales declined 10%, while international sales were essentially flat. Gross profit fell 9%. Operating expenses decreased 5%, but operating income declined 34%. Net income was down about 7%.
- Nine-month trends: Sales fell 6%, including a 7% decline in U.S. sales and a 4% decline internationally. Gross profit fell 7%, operating income 35%, and net income 28%.
- Cash flow: Operating activities provided $19,197 in the first nine months, versus $21,053 used in the prior-year period. Investing used $14,120, including $8,988 of capital expenditures; financing used $1,855. Cash increased $3,000 from year-end to $9,581.
- Margins and expenses: Nine-month operating expenses were $108,882, or 34% of sales versus 33% a year earlier. Freight, delivery and warehousing costs rose to 8.0% of sales from 7.2%.
Balance sheet and liquidity
At September 30, 2020, cash was $9,581, current assets $353,016 and current liabilities $150,505. Working capital was approximately $202.5 million. Inventory was $176,287, up from $163,313 at December 31, 2019; trade receivables were $145,374, up from $136,075.
- Revolving credit borrowings were $149,900, or $149,362 net of deferred loan fees; there was no short-term debt. Cash less gross borrowings was approximately $140.3 million.
- The senior secured facility provides up to $250 million, matures June 30, 2022, and is subject to financial covenants. The company reported covenant compliance and $44.5 million of additional borrowing capacity at quarter-end.
- Management said operating cash flow, cash balances and available credit were expected to meet working-capital and cash requirements for the next 12 months.
Business developments, outlook and risks
- Management commentary: The company operated with minimal disruption as an essential business during the pandemic. Management attributed lost sales opportunities of several million dollars, with an indeterminate profit impact, to constrained customer meetings, weaker demand for products used on restaurant-related crops, and currency weakness in Brazil, Mexico and Australia. Future pandemic effects remain uncertain.
- Drivers of performance: U.S. crop sales were pressured by cautious distributor procurement, commodity prices, reduced cotton acreage and adverse weather, including drought and hurricanes. International results included foreign-exchange effects, weak Brazilian market conditions and the EU phase-out of Mocap. Stronger soil fumigant and recently acquired product sales partly offset declines; Mexico, Central America and Australia showed areas of growth.
- Unusual items: Q3 G&A included a $1,050 reduction in environmental reserves following an updated assessment of the Brazilian businesses. Lower tax expense reflected a more favorable income mix and discrete benefits, including stock-grant vesting and release of an uncertain tax position. The nine-month tax rate also benefited from the CARES Act. These factors supported earnings despite weaker sales and operating income.
- Acquisitions after quarter-end: The company completed the Agrinos and AgNova acquisitions in October 2020 for approximately $22 million in total consideration, plus potential earn-outs and net-asset adjustments. Accounting was still in an early stage at filing.
- Legal and other contingencies: A Department of Justice investigation concerning reimportation of depleted Thimet containers remained unresolved; the company had not recorded a loss contingency because probability and amount could not be determined. A remaining Canadian SmartBlock-related claim was also unresolved, with mediation scheduled for December 2020; no loss contingency was recorded.
- Other risks: The company cited uncertainty from COVID-19, weather, commodity demand and prices, regulation and product phase-outs, competition, supply constraints, foreign exchange and variable interest rates. It does not hedge foreign-currency exposure. No specific financial guidance was provided.
Key facts for investors to verify
- Whether sales and margins recover from U.S. crop and non-crop weakness, and whether new products and soil fumigants sustain growth.
- Inventory levels, receivables and accrued program costs, and their effect on cash conversion and seasonal working-capital needs.
- Debt, covenant headroom and borrowing capacity after the October acquisitions; assess the facility’s 2022 maturity and variable-rate exposure.
- How much reported earnings benefited from discrete tax benefits and the environmental reserve reduction, and whether those benefits recur.
- Acquisition performance, final purchase accounting and any earn-out obligations for Agrinos and AgNova.
- Developments in the DOJ matter and the SmartBlock litigation, including whether either becomes probable or estimable.