American Vanguard Corporation — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. American Vanguard is an agricultural chemicals company reporting as one business segment. Unless otherwise noted, amounts below are in millions of dollars.
Key financial results
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Net sales | $81.1 | $121.5 | Down 33% |
| Gross profit / margin | $28.9 / 35.6% | $53.8 / 44.2% | Down $24.9; margin down about 8.6 points |
| Operating income | $4.0 | $26.2 | Down 85% |
| Net income attributable to American Vanguard | $2.2 | $16.9 | Down 87% |
| Diluted EPS | $0.07 | $0.59 | Down $0.52 |
| Cash from operating activities | $(41.9) | $(18.1) | Greater cash use |
Cost of sales was $52.2 million, or 64% of sales, versus $67.8 million, or 56%, a year earlier. Operating expenses declined to $24.9 million from $27.6 million, primarily due to lower incentive compensation and legal costs; selling expenses increased. Interest expense net of capitalized interest was $0.6 million versus $0.4 million. The effective tax rate was 30.0%, compared with 34.8%.
Business performance and changes
- Crop sales fell 37% to $73.2 million; non-crop sales rose 32% to $7.9 million. U.S. sales declined to $58.0 million from $103.1 million, while international sales increased to $23.1 million from $18.4 million.
- Insecticide sales fell 41% to $46.4 million, and herbicide, soil fumigant and fungicide sales fell 30% to $22.9 million. Non-crop growth was led by Dibrom mosquito adulticide; the company also cited SmartBlock sales.
- Management attributed the crop downturn mainly to excess distributor inventory of corn products following wet 2013 weather, severe winter weather delaying 2014 planting, and uncertainty from lower crop commodity prices. Reduced factory output left costs under-absorbed, contributing about two-thirds of the gross-margin decline; product mix and relatively lower-margin international sales also weighed on margin.
Cash, liquidity and debt
Cash was $8.4 million at March 31, versus $6.7 million at year-end. Current assets were $301.4 million and current liabilities $112.1 million. Receivables were $105.9 million, including trade receivables of $103.4 million; inventory increased to $158.5 million from $139.8 million. Management said crop-term customer payments were largely due later in Q2 and expected inventory to rise further before channel inventories normalized.
Operating cash outflow of $41.9 million reflected working-capital demands, including increases in receivables and inventory. Financing provided $45.4 million, including $47.5 million of net revolving-credit borrowings. Total debt rose to $99.2 million from $51.7 million at December 31, 2013. The senior secured revolving facility has a $200 million limit and a $100 million accordion feature. The company reported compliance with its covenants and $87.8 million of additional borrowing capacity at quarter-end, but said lower earnings could reduce capacity and that it may seek a short-term credit-facility amendment.
Outlook, risks and unusual items
- No quantified earnings or sales guidance was provided. Management said it would adjust manufacturing and inventory plans as conditions evolve over the next two to four quarters, and anticipated that channel inventory reductions could eventually allow on-hand finished goods to decline.
- TyraTech issued shares in February, reducing American Vanguard’s ownership from about 29.27% to 23.96%. The company recorded a $0.3 million equity-method loss and a $0.3 million dilution gain; its investment carrying value was $2.6 million versus a quoted market value of $9.6 million.
- Substantially all assets are pledged as bank collateral. Interest-rate, foreign-exchange, product-demand, weather, regulatory, competitive, supply and capital-availability risks are discussed. The company said a 10% currency movement would have an immaterial effect on its financial position and cash flows.
- About 100 DBCP exposure lawsuits remain pending, with no material developments reported. Two additional matters filed in April 2014 involve alleged product-exposure injuries and wage-and-hour claims. The company said losses were not yet probable and estimable and recorded no reserves for these new matters.
- The quarterly report states that disclosure controls were effective and that there were no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether distributor inventory and delayed planting recover as management anticipated, and the resulting effect on crop sales and factory utilization.
- Receivables collection timing, further inventory growth or reductions, and operating cash flow in subsequent quarters.
- Debt covenant headroom and whether a short-term credit-facility amendment becomes necessary.
- Developments in the DBCP litigation and the two new legal matters, including whether any loss estimates or reserves become appropriate.
- TyraTech’s operating performance, reported investment losses, and the difference between the investment’s carrying and quoted market values.