American Vanguard Corporation — Q2 2016 Form 10-Q
Business context and reporting period. American Vanguard manufactures and markets agricultural and non-crop chemical products. This unaudited filing covers the quarter and six months ended June 30, 2016; financial statement amounts below are in millions of dollars unless otherwise noted. The company reports one operating segment.
Financial results and liquidity
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $72.7 | $66.5 | $142.2 | $133.1 |
| Gross profit / margin | $31.4 / 43% | $25.1 / 38% | $58.9 / 41% | $49.8 / 37% |
| Operating income | $5.1 | $1.2 | $9.7 | $1.5 |
| Interest expense | $0.5 | $0.7 | $1.0 | $1.3 |
| Net income attributable to American Vanguard | $3.2 | $0.8 | $6.0 | $0.8 |
| Diluted EPS | $0.11 | $0.03 | $0.21 | $0.03 |
- Six-month operating cash flow was $25.5, versus $43.8 a year earlier. Working-capital movements included a $14.6 increase in inventory and a $4.2 increase in receivables, partly offset by higher accounts payable and program payables.
- Cash was $5.8 at June 30. Current assets were $258.5 and current liabilities $104.7. Inventory was $151.1, up $14.6 from year-end but down $14.1 from June 2015.
- Total indebtedness was $49.6, down from $68.4 at December 31, 2015. The revolving facility had $50.2 outstanding; the company reported up to $92.6 of additional borrowing capacity and compliance with its covenants. The facility matures June 2018.
- Six-month investing cash outflow was $5.2, including $1.7 of capital expenditures and a $3.3 investment. Financing cash outflow was $19.5, principally reflecting repayment of revolving debt.
Material changes and management commentary
- Q2 sales rose 9%; first-half sales rose 7%. Improved product mix and factory-cost absorption helped raise gross margin by 5 percentage points in Q2 and 4 points for the first half.
- Non-crop sales increased 65% in Q2 and 43% year to date. Crop sales were nearly flat in Q2 and up about 2% year to date. U.S. sales grew while international sales fell 8% in Q2; first-half international sales were slightly higher.
- Growth in insecticides and herbicides/fungicides, including Impact, Bromacil and acquired products, was partly offset by lower “Other” sales. Management attributed those declines principally to delayed toll-manufacturing activity and customers shifting Folex cotton-defoliant purchases to Q3.
- Wet weather delayed soil-fumigant applications; management expected some deferred spring sales to recover in Q3 and Q4. Reduced Counter demand in some international markets reflected drought and customer inventory management.
- Operating expenses rose $2.4 in Q2, including higher incentive compensation, research and regulatory spending, and freight. First-half operating expenses increased $0.9, with higher G&A and regulatory costs partly offset by lower selling expenses.
Outlook, risks and unusual items
- No quantified full-year earnings or revenue guidance is provided. Management said operating cash flow, cash on hand and available facility borrowings should cover working-capital and cash needs for the next 12 months.
- Key stated risks include demand and product acceptance, weather, regulation, competition and pricing, foreign exchange, product development, supply constraints, and access to capital. The company said its 2015 Form 10-K risk factors had no material changes.
- The EPA issued a stop-sale/use/removal order concerning Thimet products and container imports. Amendments provided relief that management believed would allow adequate 2016-season inventory; the agency had not issued a final position. A potential loss was not considered probable or reasonably estimable, so no contingency was accrued.
- Other disclosed matters include a wage-and-hour class claim the company intends to defend, a Canadian personal-injury claim for which no loss was accrued, and settlements of two other claims described as immaterial. The company also reported an IRS examination of its 2012–2014 federal returns; the outcome was undetermined.
- On August 2, 2016, after quarter-end, a Netherlands subsidiary formed a 50%-owned Hong Kong joint venture with Huifeng Agrochemical, intended to pursue market access and technology transfer.
Important facts for investors to verify
- Whether deferred fumigant, Folex and toll-manufacturing sales were realized in the second half, and whether demand and margins were sustained.
- Whether inventory levels, receivables and accrued program costs convert to cash as expected; accrued program costs were $62.3 at June 30, up from $44.4 at year-end.
- Developments in the EPA matter and the potential financial or product-availability consequences; no loss estimate was recorded.
- Debt repayment, borrowing capacity and covenant compliance, alongside variable-rate and seasonal working-capital exposure.
- The filing reports effective disclosure controls and no material change in internal controls over financial reporting during the quarter.