American Vanguard Corporation — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Unaudited consolidated results; amounts below are in millions of dollars unless stated otherwise. The company operates as one reportable segment, selling crop and non-crop agricultural and related chemical products.
Financial results
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net sales | $107.0 | $77.9 | $211.2 | $148.6 |
| Gross profit | $43.3 | $34.3 | $84.3 | $64.4 |
| Gross margin | 40% | 44% | 40% | 43% |
| Operating income | $8.6 | $6.7 | $15.9 | $11.8 |
| Net income attributable to American Vanguard | $5.6 | $4.3 | $10.3 | $7.8 |
| Diluted EPS | $0.19 | $0.15 | $0.34 | $0.26 |
| Net cash from operating activities | Not separately provided for the quarter | $3.7 | $34.1 |
- Revenue drivers: Q2 sales increased 37%; first-half sales increased 42%. Growth was led by products and businesses acquired in 2017, including paraquat, chlorothalonil, abamectin, OHP horticultural products, and AgriCenter distribution. International sales rose 93% in Q2 and 90% in the first half. Performance of legacy products was mixed.
- Profitability and costs: Gross profit rose, but margins narrowed as acquired products and distribution businesses generally carry lower margins. Management said factory performance improved; first-half net factory costs were below 0.5% of sales versus 4% a year earlier. Operating expenses rose 26% in Q2 and 30% in the first half, but declined as a proportion of sales.
- Interest and taxes: Q2 net interest expense was $1.0 million versus $0.4 million; first-half expense was $1.8 million versus $0.7 million. Higher average borrowings and rates contributed. Effective tax rates were 23.0% for Q2 and 24.4% for the first half, down from 26.8% and 27.5%, respectively; management cited the Tax Cuts and Jobs Act and excess stock-option tax benefits.
- Cash flow and working capital: First-half operating cash flow fell to $3.7 million from $34.1 million, primarily reflecting a $40.2 million inventory increase and other working-capital movements. Investing used $4.9 million, including $3.2 million of capital expenditures and purchases related to product lines and acquisitions. Financing used $3.0 million. Cash declined to $7.1 million from $11.3 million at year-end.
- Balance sheet and liquidity: Total assets were $562.0 million and stockholders’ equity $320.2 million at June 30. Revolving credit debt was $75.1 million gross ($74.3 million net of deferred loan fees), down from $78.4 million gross at year-end. The company reported $137.0 million of additional borrowing capacity, covenant compliance, and no short-term debt. Its secured credit facility matures June 30, 2022. Management expects operating cash flow, cash balances, and available credit to cover needs for the next 12 months.
Changes, outlook, and notable items
- Despite substantial sales and earnings growth, gross margin fell four percentage points in Q2 and three points for the first half, reflecting sales mix and acquired lower-margin businesses.
- The company adopted ASC 606 using the modified retrospective method. Adoption reduced reported sales by $0.03 million in Q2 and $0.06 million in the first half; management said the amount is expected to be recognized in later quarters. Remaining performance obligations were $34.6 million, with approximately all expected to be recognized in fiscal 2018.
- No formal full-year earnings or revenue guidance is provided. Management’s liquidity outlook is stated above; it also cautioned that interim results are not necessarily indicative of full-year results.
- TyraTech ownership increased to approximately 34.38%; the company recorded equity-method investment losses of $0.35 million in Q2 and $0.44 million in the first half. The filing also reports a $1.47 million reduction in deferred consideration associated with 2017 acquisitions, reflected in Q2 other income.
- Contingencies: The company seeks approximately $25 million from the EPA in a takings lawsuit concerning a 2010 stop-sale order; discovery was substantially complete, with remaining discovery expected in Q3 2018. A separate DOJ investigation concerning reimported Thimet containers remained unresolved; the company had not recorded a loss contingency because probability and amount could not be determined. In a patent-related lawsuit, venue was transferred to California and mediation was being discussed; no loss contingency was recorded.
- Risks: Management identified exposure to demand, weather, regulation, competition, foreign exchange, product development, supply constraints, and capital availability. U.S.-China tariffs had not materially affected the company as of the filing, but future tariffs could disrupt customers’ markets or increase costs. Variable-rate debt exposes the company to interest-rate changes; it also conducts business in foreign currencies.
- Management reported disclosure controls were effective as of June 30, 2018, with no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much future growth depends on acquired businesses and lower-margin distribution sales, and whether gross margins stabilize or recover.
- Whether inventory converts to sales and cash as seasonal demand progresses, given the sharp year-over-year decline in operating cash flow.
- Debt levels, variable-rate interest costs, borrowing availability, and continued compliance with credit-facility covenants.
- Developments and potential financial exposure in the EPA/DOJ matters and the Walker litigation; the filing states that some outcomes cannot yet be estimated.
- Whether management achieves expected fiscal 2018 recognition of remaining performance obligations and the anticipated later recognition of revenue deferred under ASC 606.