American Vanguard Corporation — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparative period is Q1 2021. Unaudited consolidated results. Unless stated otherwise, financial amounts are in thousands of U.S. dollars.
Business context and performance
American Vanguard sells crop and non-crop agricultural products, including pesticides, and reports one business segment. Management attributed the stronger quarter to robust domestic crop demand, improved agricultural commodity prices, distributor purchasing, favorable product mix and pricing, and favorable foreign-exchange movements. The company said COVID-19 caused no significant disruption during the quarter, though supply-chain challenges continued.
Key financial metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net sales | $149,435 | $116,155 | +29% |
| Gross profit | $61,193 | $45,131 | +36% |
| Gross margin | 41% | 39% | +2 percentage points |
| Operating expenses | $46,444 | $41,444 | +12% |
| Operating income | $14,749 | $3,654 | More than quadrupled |
| Net income | $9,935 | $3,071 | More than tripled |
| Diluted EPS | $0.33 | $0.10 | Increased |
| Cash used in operations | $32,315 | $32,536 | Similar cash use |
U.S. crop sales rose 61% to $88,193; U.S. non-crop sales fell 23% to $13,396, mainly reflecting $3,000 less in Envance royalty and license fees compared with the prior-year quarter, which included an upfront license payment. International sales increased 9% to $47,846. U.S. crop gross margin was 46% versus 39%; U.S. non-crop margin declined to 45% from 54%; international margin was 31% versus 33%.
Operating expenses rose by $5,000, including higher general and administrative costs and freight, delivery and warehousing costs. Cost of sales increased 24%, less than sales growth, reflecting favorable product mix, despite higher raw-material and freight costs. Net interest expense declined to $398 from $946, with average debt lower year over year and a lower borrowing rate. Income tax expense was $4,499; the effective tax rate was 31.2%, compared with 30.6%.
Cash flow, debt and liquidity
Operating cash outflow was $32,315, primarily reflecting working-capital needs: receivables increased $33,660, inventories increased $11,738, and customer prepayments declined $44,528, partly offset by increases in accrued program costs and accounts payable. Investing cash outflow was $4,250, including $3,294 of capital expenditures and a $1,000 payment to Clean Seed to amend a license agreement. Financing provided $37,449, including $46,000 of net revolver borrowings. Cash ended the quarter at $17,841.
Long-term debt, net of deferred loan fees, was $98,309 at March 31, 2022, up from $52,240 at year-end 2021; there was no short-term debt. The revolving facility permits borrowing up to $275 million, with an accordion feature of up to $150 million, and matures August 5, 2026. The reported interest rate at quarter-end was 1.83%. The company reported compliance with all covenants and up to $166,165 of additional borrowing capacity. Management said cash, expected operating cash flows and available credit should meet liquidity needs for the next 12 months.
Cash dividends were $0.025 per share, declared during the quarter. The company repurchased 332,404 shares for $6,219 at an average $18.71 per share under a one-year authorization for up to one million shares at no more than $20 per share.
Material changes, outlook and risks
- Management described the agricultural industry as entering a second year of an upcycle. Higher crop commodity prices, including amid the war in Ukraine and concerns about fertilizer supply, supported farm economics and demand. The filing provides no numerical earnings or revenue guidance.
- Management cited continued supply-chain disruption, higher input and freight costs, foreign-exchange volatility, weather and commodity-price sensitivity, and dependence on certain suppliers and large customers as risks. It does not hedge foreign-currency exposures.
- The company expects the U.S. tax-law change requiring research and development costs to be capitalized and amortized to increase tax payments; whether legislation postpones the change was uncertain.
- EPA/DOJ investigation: The company is under investigation concerning alleged FIFRA, RCRA, obstruction and false-statement violations. Discussions regarding possible resolution were ongoing; the company could not predict timing or outcome and recorded no loss contingency. The filing says potential penalties or other relief could materially adversely affect the business, financial condition or cash flows.
- Other litigation: In the Reed matter concerning a 2014 fire during SmartBlock application, the company said it believes a loss is probable and reasonably estimable and recorded a contingency it considers immaterial. A further mediation was scheduled for August 2022.
- Post-quarter regulatory development: The filing reports that, in April 2022, EPA issued a notice of intent to suspend use of DCPA. The company anticipated submitting additional test results in June 2022 and said loss of U.S. permit authority would not, in its view, pose a material risk, while noting possible operational and administrative burdens.
- A proxy contest involving activist Cruiser Capital was scheduled for the June 1, 2022 annual meeting. The company warned of potential management distraction, added costs, business disruption and share-price volatility.
Important facts for investors to verify
- Whether the strong domestic crop demand and improved margins persisted, and how higher input, freight and supply-chain costs affected subsequent quarters.
- Working-capital conversion, especially receivables, inventory, customer prepayments and accrued program costs, given the quarter’s substantial operating cash outflow.
- Debt levels, covenant headroom and available borrowing capacity as seasonal working-capital needs change.
- Developments and potential financial or operational consequences of the EPA/DOJ investigation, Reed litigation and DCPA regulatory action.
- Whether the R&D tax amortization requirement increased cash taxes, and the status of any legislative deferral.
- Actual repurchases and dividends, and the outcome and costs of the Cruiser Capital proxy contest.