American Vanguard Corporation — FY 2018 Form 10-K
Business context and period. American Vanguard (AVD) develops, manufactures, formulates and distributes specialty chemicals for agricultural, commercial and consumer uses. It reports one operating segment. This summary covers the fiscal year ended December 31, 2018; fourth-quarter figures are included where available. Unless stated otherwise, dollar amounts are in millions, converted from the filing’s thousands.
Financial performance
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Net sales | $454.3 | $355.0 |
| Gross profit / margin | $182.6 / 40% | $147.4 / 42% |
| Operating income | $39.0 | $26.8 |
| Net income attributable to AVD | $24.2 | $20.3 |
| Diluted earnings per share | $0.81 | $0.68 |
| Cash from operating activities | $11.3 | $59.0 |
| Capital expenditures | $8.1 | $6.7 |
- Fourth-quarter 2018 sales were $131.3 million and attributable net income was $7.4 million, or $0.25 per diluted share. Fourth-quarter 2017 figures were $116.5 million, $8.4 million and $0.28, respectively.
- Year-end cash was $6.2 million; working capital was $164.7 million. Inventory was $159.9 million, up $36.8 million year over year, and trade receivables were $123.3 million.
- Long-term debt, net of issuance costs, was $96.7 million; gross revolver borrowings were $97.4 million. The company had up to $112.2 million of additional borrowing capacity and was in compliance with its debt covenants. The secured revolving facility matures June 30, 2022.
Changes versus the prior year
- Sales rose 28% and attributable net income rose 19%. Growth primarily reflected a full year of sales from businesses acquired in 2017; international sales increased 56% to $154.0 million and represented 33.9% of sales.
- Gross margin declined from 42% to 40%, reflecting a greater share of lower-margin acquired distribution sales and competitive pricing pressure, partly offset by improved factory performance. Operating expenses increased 19% in dollars but fell from 34% to 32% of sales.
- Operating cash flow fell to $11.3 million from $59.0 million, principally as working capital absorbed cash: receivables and inventories increased, with inventory also reflecting acquisition-related goods and precautionary purchases ahead of possible tariffs.
- Net interest expense rose to $4.0 million from $1.9 million as average debt increased and borrowing rates rose. The effective tax rate was 27.2%, versus 17.9% in 2017; the prior year included a $3.4 million net benefit from U.S. tax reform.
Outlook, commentary and material items
- Management said cash flows, cash on hand and credit availability should meet working-capital and capital-spending needs for at least the 12 months following issuance. No quantified revenue or earnings guidance was provided.
- In 2018, AVD acquired TyraTech and product-line assets related to quizalofop, trichlorfon and bromacil. These acquisitions had a preliminary total value of $27.3 million; one product-line agreement includes potential milestone payments of up to $12.5 million. In January 2019, AVD acquired Brazilian businesses Agrovant and Defensive for approximately $22.1 million plus potential earn-outs.
- Unusual items included a $1.4 million loss on a foreign-exchange forward contract associated with the planned Brazilian acquisition, a $1.1 million tax-reform transition-tax adjustment, and a $6.1 million reduction in estimated deferred acquisition consideration that benefited general and administrative expense. TyraTech’s acquisition also resulted in a $1.5 million gain on remeasurement of AVD’s prior investment.
- AVD adopted ASC 606 in 2018 using the modified retrospective method. Prior-year results were not restated. The company reported that adoption reduced 2018 sales by $43,000 compared with the former method and changed the timing of recognition for certain sales and royalties.
- Key risks include pesticide registration and regulatory restrictions (including potential limits on organophosphate uses), customer and distributor concentration, seasonal and weather-driven demand, competition and pricing, reliance on some sole-source suppliers, acquisition integration and returns, variable-rate debt, and environmental and cyber risks.
- Contingencies include DBCP litigation, a DOJ investigation concerning reimported depleted Thimet containers, and Canadian claims related to a fire during application of SmartBlock. The company said losses in these matters were not considered probable or reasonably estimable and recorded no loss contingency. Its claim against the EPA concerning the PCNB product line was decided against AVD in January 2019; AVD planned to seek reconsideration. For the Commerce, California site, regulators approved AVD’s remedial action plan; management did not expect related costs to be material.
Important facts for investors to verify
- How much of sales and earnings growth is recurring and organic versus attributable to acquired businesses, and whether acquired sales can improve margins.
- Whether working-capital levels, particularly inventory and receivables, convert to cash as expected; operating cash flow weakened substantially in 2018.
- Debt capacity and covenant headroom under the secured facility, including exposure to variable interest rates and acquisition funding needs.
- Regulatory outcomes for key products, supplier availability, and the status or financial exposure of the disclosed legal and environmental matters.
- Final purchase-price allocations and performance of 2018 acquisitions, potential milestone or earn-out payments, and integration of the January 2019 Brazil acquisition.