American Vanguard Corporation (NYSE: AVD) — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Unaudited consolidated results; dollar amounts below are in millions unless noted. American Vanguard sells crop-protection and non-crop products and reports as one segment.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Net sales | $113.1 | $107.0 | $212.8 | $211.2 |
| Gross profit / margin | $41.7 / 37% | $43.3 / 40% | $83.4 / 39% | $84.3 / 40% |
| Operating income | $6.3 | $8.6 | $13.2 | $15.9 |
| Interest expense, net | $1.9 | $1.0 | $3.5 | $1.8 |
| Net income attributable to American Vanguard | $3.1 | $5.6 | $7.0 | $10.3 |
| Diluted EPS | $0.11 | $0.19 | $0.24 | $0.34 |
Cash flow: Operating activities used $32.1 in the first half of 2019, versus $3.7 provided in the comparable 2018 period, per the cash-flow statement. Investing activities used $31.5, including $24.3 for acquisitions and $7.2 for capital expenditures. Financing activities provided $63.5, principally reflecting net revolving-credit borrowings. Cash ended the period at $6.3.
Balance sheet and liquidity: At June 30, 2019, current assets were $342.9 and current liabilities were $129.3; working capital was $213.6. Inventory was $193.4. Revolver borrowings were $165.2 ($164.6 net of deferred fees), compared with $97.4 at December 31, 2018. The company reported $30.6 of additional borrowing capacity under its facility, down from $137.0 at June 30, 2018, and compliance with debt covenants. The $250.0 senior secured facility matures June 30, 2022; substantially all company assets are pledged as collateral. Lease liabilities recognized under the new lease standard totaled $12.5.
Material changes and management commentary
- Q2 sales rose 6%, but gross profit fell 4% and attributable net income fell about 45%. For the first half, sales were up 1%, while attributable net income declined about 32%.
- International sales grew 14% in Q2 and 13% in the first half, aided by the Brazilian Defensive and Agrovant businesses acquired in January and products acquired in late 2018. U.S. sales were flat in Q2 and down 6% in the first half. U.S. crop sales were particularly weak.
- Management cited unusually wet and cold U.S. weather, which delayed or prevented planting and reduced demand for some crop products. Non-crop sales increased, supported by mosquito-control products and pest strips; international growth also contributed.
- Management attributed lower gross margins mainly to reduced factory utilization and product mix, including acquired distribution businesses with comparatively lower margins. Lower production was also intended to manage inventories of Thimet and Counter. Q2 cost of sales rose to 63% of sales from 60%; first-half cost of sales rose to 61% from 60%.
- Higher acquisition-related borrowing and higher interest rates drove interest expense upward. Average revolving debt and the effective rate were $178.6 and 4.3% in Q2 2019, versus $100.9 and 3.5% in Q2 2018.
- Operating cash use reflected working-capital needs, including a $27.6 inventory increase and a $19.4 decline in deferred revenue. Management said anticipated operating cash flow, cash balances and available credit should meet working-capital and cash requirements for the next 12 months.
Outlook, risks and unusual items
- The filing provides no quantified revenue or earnings guidance. Management cautioned that first-half results are not necessarily indicative of full-year results.
- Risks discussed include weather and product demand, regulatory changes, competition and pricing, supply constraints, foreign exchange, variable-rate borrowing, and product development and commercialization. The company added risks from potential product-liability claims based on glyphosate litigation theories and pesticide-ban legislation, although it does not sell glyphosate or chlorpyrifos domestically.
- A Department of Justice investigation concerning reimportation of depleted Thimet containers remained unresolved; the DOJ had not clarified its theory or potential enforcement. The company said a loss was not yet probable or reasonably estimable and recorded no contingency.
- The company’s PCNB takings lawsuit against the EPA was dismissed without prejudice after the court ruled for the government; the company elected not to appeal and recorded no gain or loss.
- Q2 and first-half operating expenses benefited from reductions in estimated deferred consideration for prior acquisitions; the first half also included a $0.5 breakup fee related to a potential acquisition. January’s Defensive and Agrovant acquisition had a preliminary total allocation of $40.4. On July 1, 2019, the company acquired certain product-line rights from Raymat for an immaterial purchase price.
- ASC 842 adoption on January 1, 2019 added $12.9 of operating lease assets and liabilities at adoption and did not materially affect the income statement or cash flows.
Key facts for investors to verify
- Whether crop demand recovers after weather-related planting disruption, and whether lower production supports inventory reduction without further margin pressure.
- Acquired-business contributions to sales, margins, cash generation and debt, particularly in Brazil.
- Working-capital and operating-cash-flow trends, including inventory, deferred revenue and accrued program costs.
- Remaining revolver availability and covenant headroom as debt rises and borrowing capacity depends on EBITDA and leverage.
- Developments in the DOJ matter and any future product-liability or pesticide-regulation actions.
- The filing’s cash-flow statement reports $3.7 of operating cash provided in the first half of 2018, while MD&A cites $3.8; verify the underlying filed statements and any subsequent presentation.