American Vanguard Corporation (NYSE: AVD) — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Amounts below are in $ millions unless otherwise indicated. The company sells crop and non-crop products in the U.S. and internationally and reports one operating segment.
Financial performance and liquidity
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $149.5 | $152.3 | $407.2 | $450.1 |
| Gross profit / margin | $43.1 / 29% | $49.6 / 33% | $124.5 / 31% | $150.4 / 33% |
| Operating income | $4.2 | $11.2 | $11.2 | $36.8 |
| Interest expense, net | $3.4 | $1.1 | $8.3 | $2.3 |
| Net income (loss) | $(0.3) | $6.7 | $0.5 | $23.5 |
| Diluted EPS | $(0.01) | $0.23 | $0.02 | $0.78 |
- Sales and margins: Q3 sales declined 2% year over year; nine-month sales declined 10%. U.S. crop sales were the largest source of the year-to-date decrease, down 16%; international sales fell 3%. The nine-month gross margin contracted by 2 percentage points.
- Cash flow: Operating activities used $145.9 in the first nine months, versus $45.7 used in the prior-year period. Investing activities used $9.1, including $8.6 of capital expenditures. Financing activities provided $146.7, principally reflecting $165.7 of net borrowings. Cash declined to $11.5 from $20.3 at year-end 2022.
- Working capital: Receivables were $197.5 and inventories were $247.9 at September 30, compared with $166.3 and $184.2, respectively, at December 31, 2022. Customer prepayments fell to $6.0 from $110.6. Management attributed cash use to inventory growth, slower customer purchasing and reduced customer prepayments.
- Debt and liquidity: Revolving credit debt was $218.0 at September 30, versus $52.3 at year-end 2022; reported net long-term debt was $217.1. The facility has a $275.0 commitment, with up to a $150.0 accordion, and matures August 5, 2026. Available additional borrowing capacity was $28.8 at September 30, down from $200.4 at year-end 2022. Current assets were $471.6 and current liabilities $189.5.
- Capital returns: The company repurchased 885,290 shares for $15.5 during the first nine months and paid $2.6 in dividends. Quarterly dividends in 2023 were $0.03 per share.
Material changes and management commentary
- Management cited customer inventory destocking to reduce carrying costs, purchasing closer to time of use, supply-chain constraints affecting a key herbicide, low-priced generic competition from China, a strong U.S. dollar and relatively stable commodity prices. Management said end-customer demand for some crop products remained strong despite low distribution-channel inventories.
- Q3 cost of sales rose 4% despite lower sales, and gross profit fell 13%. Management cited higher freight and manufacturing costs, reduced factory efficiency and weaker margins. Operating expenses were broadly flat, with higher research, product-development and regulatory spending offset by lower general and administrative costs.
- Interest expense rose sharply as average debt and borrowing rates increased: the reported effective rate on the revolving line was 7.1% in Q3 2023 versus 3.5% in Q3 2022. For the nine-month periods, the rates were 7.0% and 2.7%, respectively.
- The company retrospectively reclassified warehousing, handling and outbound freight costs from operating expenses to cost of sales. This changed reported gross profit and gross margin presentation but did not affect operating income, net income or EPS.
- No quantitative earnings guidance was provided. Management cautioned that interim results are not necessarily indicative of full-year results.
Outlook, risks, contingencies and unusual items
- Credit covenant amendment: On November 7, 2023, after quarter-end, the company amended its credit agreement to temporarily ease financial covenants. Maximum leverage limits were set at 5.5 through September 30, 2023, 4.5 through March 31, 2024, 4.0 through June 30, 2024, and then step down to 3.5 and 3.25. Minimum fixed-charge coverage was reduced from 1.25 to 1.0 through March 31, 2024, returning to 1.25 from June 30, 2024. The company said it was deemed compliant at September 30 under the amendment. During the modification period, share repurchases are prohibited and borrowing/letter-of-credit margins increase. The company may end the modification period early if it meets the specified leverage condition after year-end 2023 reporting.
- Dacthal/DCPA registration: The company reported no Dacthal sales in Q3 while awaiting reinstatement of its registration. Under an August 2023 settlement, the company accepted suspension and submitted the final study around August 18; the EPA’s stated reinstatement process remained subject to its assessment of study adequacy. The company recorded no loss reserve, stating a loss was neither probable nor estimable.
- Government investigation: The Department of Justice investigation concerns potential environmental and related violations tied to pesticide-container handling. The company said it was cooperating and anticipated further resolution discussions, but could not predict timing or outcome. Potential consequences could materially affect operations, financial condition or cash flows; no loss contingency was recorded.
- Other legal matter: A former employee filed a putative California wage-and-hour class action. The company said it intends to defend the case and recorded no loss contingency.
- Other risks: Management highlighted reliance on limited or sole-source suppliers, continuing supply-chain disruption, dependence on customer early-payment programs for working capital, regulatory review of products, foreign-exchange exposure and variable-rate debt. The company does not hedge its foreign-currency exposure.
- Subsequent acquisition: On October 9, 2023, the company acquired Ecuadorian distributor Punto Verde for approximately $4.8 to strengthen Latin American product access.
Key facts for investors to verify
- Whether the EPA reinstated Dacthal’s registration following review of the submitted study, and the implications for product sales and regulatory risk.
- Compliance with the amended credit covenants, the path back to original covenant terms, borrowing capacity and the effect of higher interest costs.
- Whether customer destocking reverses, and whether elevated inventory and receivables convert into cash as customer prepayments remain lower.
- Progress and potential financial or operational consequences of the DOJ investigation and the California wage-and-hour case.
- Reconciliation of figures in the filing: the nine-month non-crop sales discussion gives $49.791 million, while the revenue table reports U.S. non-crop sales of $50.041 million; the MD&A also cites prior-year nine-month total sales of $450.036 million, while the financial statements report $450.063 million.