American Vanguard Corporation (NYSE: AVD) — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Unaudited consolidated results; financial amounts below are in millions of dollars unless otherwise noted. American Vanguard sells crop and non-crop protection products and reports one operating segment.
Financial results and liquidity
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Net sales | $104.6 | $113.1 | $200.5 | $212.8 |
| Gross profit / margin | $40.3 / 39% | $41.7 / 37% | $78.7 / 39% | $83.4 / 39% |
| Operating income | $6.8 | $6.3 | $8.6 | $13.2 |
| Net income | $3.9 | $3.1 | $4.4 | $7.0 |
| Diluted EPS | $0.13 | $0.11 | $0.15 | $0.24 |
- Q2 operating expenses were $33.6 million, down 5%; net interest expense was $1.3 million, compared with $1.9 million. Q2 effective tax rate was 28.6%, versus 28.0%.
- First-half operating expenses were essentially flat at $70.1 million. The effective tax rate was 23.4%, versus 26.8%; 2020 benefited from CARES Act-related and stock-vesting tax items.
- First-half operating cash flow was positive $5.7 million, compared with cash use of $32.1 million in 2019. Investing activities used $11.5 million; financing activities provided $7.2 million. Cash ended at $8.6 million.
- At June 30, 2020, current assets were $336.8 million and current liabilities $131.8 million. Inventory was $181.0 million, up from $163.3 million at year-end 2019.
- Gross revolving credit borrowings were $160.0 million; reported long-term debt, net of loan fees, was $159.4 million. The company reported $49.4 million of additional borrowing capacity and compliance with its covenants. The facility matures June 30, 2022.
Material changes versus comparable periods
- Q2 sales fell 8%, but gross profit declined only 3% and net income rose 25%. Improved factory utilization and product mix lifted gross margin to 39% from 37%.
- Q2 U.S. crop gross profit increased 16%, supported by recently acquired and newer products and better factory performance. International gross profit fell 20%, with margin down to 25% from 30%; currency weakness and lower sales of certain higher-margin products weighed on results.
- First-half sales declined 6% and gross profit declined 6%; net income fell to $4.4 million from $7.0 million. Operating income decreased partly because 2019 included a $2.9 million benefit from a revision to deferred acquisition consideration, which did not recur. First-half 2019 cost of sales was $129.4 million.
- First-half sales were down 5% in the U.S. and 7% internationally. U.S. crop gross profit improved 9%, while international gross profit declined 20%; U.S. non-crop gross profit declined 21%, largely due to lower Dibrom mosquito adulticide sales.
- Foreign currency translation reduced first-half comprehensive income by $8.7 million; the Brazilian real and Mexican peso weakened materially. First-half foreign-currency transaction losses were $1.1 million.
Outlook, commentary, risks and unusual items
- Management reported no significant operational disruption from COVID-19 through June 30, as the company was generally treated as an essential business. It estimated that pandemic-related limits on product promotion, weaker demand tied to restaurant closures, and currency effects may have constrained sales opportunities by up to several million dollars, with an indeterminate profitability impact. Future effects remain uncertain; no numerical earnings or sales guidance was provided.
- Management said operating cash flow, cash on hand and available borrowing capacity should meet working-capital and cash needs for the next 12 months. It expected additional Envance royalties and said Dibrom demand could strengthen during the rest of 2020, citing forecast tropical-storm activity.
- Key operating exposures include cautious customer procurement, commodity prices and crop acreage, weather and pest pressure, foreign exchange, competition, product registrations, supply and manufacturing issues, and pandemic-related demand or operating restrictions. The company does not hedge its foreign-currency exposure.
- The credit agreement was amended in April 2020 to temporarily raise the maximum leverage covenant: to 4.00-to-1 through September 2020, then stepping down to 3.75-to-1, 3.50-to-1 and 3.25-to-1 on the stated schedule. Acquisitions may allow specified temporary step-ups, subject to conditions.
- A Department of Justice investigation concerning reimportation of depleted Thimet containers remains unresolved. The government has not stated its theory or potential enforcement position; the company has not accrued a loss because probability and amount cannot yet be determined. No material developments were reported in the period.
- Other notable items: EU registration cancellation is driving a phase-out of Mocap; a regional toll manufacturer’s production difficulties affected some Mexico sales; and a $1.2 million investment in Clean Seed Capital was made in April. Management said disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether pandemic-related sales constraints, crop-market weakness and currency depreciation persist or intensify, and how they affect margins and cash generation.
- Whether elevated seasonal inventory converts to sales and collections, and whether working-capital needs increase borrowing.
- Actual covenant headroom and borrowing availability under the amended facility, including the scheduled leverage-covenant step-downs and 2022 maturity.
- Progress and potential financial exposure from the DOJ matter, and developments in product registrations, manufacturing and other legal or regulatory contingencies.
- Whether expected royalty income and any recovery in Dibrom demand materialize; the filing provides no formal quantified full-year guidance.