American Vanguard Corporation — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018; comparisons are with the corresponding 2017 periods unless noted. Unaudited consolidated results. The company reports one business segment.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $111.8 million | $90.0 million | $322.9 million | $238.6 million |
| Gross profit / margin | $45.3 million / 41% | $38.0 million / 42% | $129.6 million / 40% | $102.5 million / 43% |
| Operating income | $11.7 million | $6.5 million | $27.6 million | $18.3 million |
| Net income attributable to American Vanguard | $6.5 million | $4.1 million | $16.8 million | $11.8 million |
| Diluted EPS | $0.22 | $0.14 | $0.56 | $0.40 |
| Interest expense, net | $1.1 million | $0.4 million | $3.0 million | $1.1 million |
- Quarterly sales rose 24%; nine-month sales rose 35%. Acquired businesses and products, especially AgriCenter and OHP, were major contributors. Management described legacy-product performance as broadly stable, though some products had weaker sales.
- Gross margin declined as acquired distribution activity and other lower-margin sales expanded. Management cited improved factory performance as a partial offset; factory costs were fully absorbed in Q3 and were less than 0.5% of sales year to date.
- Operating expenses increased in dollars but fell as a share of sales: 30% versus 35% in Q3 and 32% versus 35% for the nine-month period.
Cash flow, balance sheet and liquidity
- For the first nine months, operating activities used $15.1 million of cash, versus $18.2 million provided in 2017. Working-capital investment was substantial, including increases in receivables of $24.4 million and inventories of $39.3 million; accrued program costs increased $22.9 million and deferred revenue fell $14.0 million.
- Investing activities used $6.8 million, including $5.2 million of capital expenditures and spending on product-line acquisitions. Financing activities provided $19.8 million, primarily reflecting net revolving-credit borrowings. Cash ended the period at $9.4 million, down from $11.3 million at year-end 2017.
- At September 30, 2018, net long-term debt was $97.3 million, up from $77.5 million at December 31, 2017; the revolving line balance was $98.1 million. The company reported capacity to increase borrowings by up to $105.1 million under its credit agreement, down from $124.7 million at September 30, 2017.
- Current assets were $320.8 million and current liabilities $137.9 million. The senior secured credit facility matures June 30, 2022, has a $250 million line plus an accordion feature, and includes leverage and fixed-charge covenants. Substantially all company assets are pledged as collateral.
Outlook, risks and notable items
- Management said cash flows from operations, cash on hand and available credit were expected to be sufficient for working-capital and cash needs over the next 12 months. The filing provides no specific sales or earnings guidance.
- Q3 and year-to-date tax expense included a $1.1 million one-time adjustment for the Tax Cuts and Jobs Act transition tax. Excluding it, management reported effective tax rates of 23.1% for Q3 and 23.8% for the nine-month period.
- Reassessment of acquisition-related deferred consideration reduced general and administrative expense by $4.0 million in Q3 and $5.4 million year to date. A $0.7 million inventory-reserve release also benefited income.
- Risks identified include agricultural demand and weather, regulation, competition and pricing, product development, supply constraints, foreign exchange and variable interest rates. Management said tariffs had not materially affected the company to date but could disrupt markets or increase costs. A 10% currency movement was estimated to have an immaterial effect on financial position and cash flows.
- Legal matters include a claim seeking approximately $30 million from the USEPA; recovery is uncertain and no amount was recorded. A federal investigation concerning depleted Thimet containers remained unresolved, with no loss contingency recorded because probability and amount could not be estimated. The company also reported DBCP-related litigation involving 287 remaining plaintiffs. A separate patent-related case had a settlement agreed in principle, with payment described as not material.
- Subsequent events: shareholders approved the company’s planned purchase of the remaining 65.62% of TyraTech for approximately $4.3 million, expected to close November 8, 2018. The board authorized up to $20 million of share repurchases, subject to market conditions. Envance announced an exclusive global development and license agreement with Procter & Gamble; financial terms were not disclosed.
Important facts for investors to verify
- Whether acquired-business growth translates into sustained organic sales growth and whether gross margins recover from the lower product mix.
- Receivables, inventory and accrued-program-cost trends, and the company’s ability to convert earnings into operating cash flow.
- Debt levels, borrowing availability and compliance with credit-facility covenants as working-capital needs evolve.
- The final impact of the transition tax and other tax estimates, and the recurring nature of acquisition-related expense reductions and inventory-reserve releases.
- Developments in the USEPA takings claim, the Thimet investigation and DBCP litigation; none of the possible recoveries or losses is reflected as a clear quantified outcome in the filing.