American Vanguard Corporation — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. Unless noted otherwise, financial amounts are in millions of dollars; the filing presents them in thousands. The company reports one operating segment and specializes in agricultural, commercial, and consumer-use chemicals.
Financial performance and condition
| Metric | 2015 | 2014 |
|---|---|---|
| Net sales | $289.4 | $298.6 |
| Gross profit; gross margin | $111.9; 39% | $114.5; 38% |
| Operating income | $11.5 | $6.7 |
| Net income attributable to American Vanguard | $6.6 | $4.8 |
| Diluted earnings per share | $0.23 | $0.17 |
| Cash from operating activities | $78.6 | $(34.1) |
| Cash and cash equivalents at year-end | $5.5 | $4.9 |
| Working capital at year-end | $160.5 | $205.8 |
| Inventory at year-end | $136.5 | $165.6 |
| Revolving credit borrowings at year-end | $69.0 | $99.4 |
Net sales declined about 3% year over year. Crop sales fell about 3% to $258.1 million; non-crop sales edged up about 1% to $31.3 million. Insecticide sales declined 14% to $117.2 million, while herbicide, soil fumigant, and fungicide sales increased 10% to $111.9 million. International sales rose 5% to $77.3 million, or 26.7% of total sales.
Cost of sales declined to 61% of sales from 62%, and gross margin improved by about one percentage point, chiefly from better factory cost recovery. Operating expenses fell $7.4 million to $100.4 million, including lower selling, research and regulatory, and freight costs; general and administrative expense increased. Net income attributable to the company rose despite lower revenue. The filing reports net income of $6.3 million before adding back $0.3 million attributable to non-controlling interests.
Operating cash flow improved substantially, principally with inventory reduction and collections, including early customer payments. Investing activities used $43.7 million, including $36.7 million for product-line acquisitions and $6.9 million for capital expenditures. Financing activities used cash, including a $30.5 million net repayment on the credit line. The company reported compliance with credit covenants and up to $67.6 million of additional borrowing capacity under the facility at year-end. The $200 million revolving facility matures June 17, 2018; substantially all company assets secure the debt.
Material changes and business developments
- The 2015 results followed a steep 2014 decline from 2013: sales were $381.0 million in 2013, $298.6 million in 2014, and $289.4 million in 2015. Management attributed the ongoing weakness principally to Midwest corn-product channel inventory accumulated after adverse 2013 weather and cautious grower purchasing amid low corn prices.
- Channel inventories declined significantly during 2015 and approached more normal levels, according to management. Corn-product sales were essentially flat year over year. Management said stabilization in corn prices and lower channel inventories could support more normal purchasing, but gave no quantified forecast.
- The company acquired European Nemacur product-line assets from Adama and international bromacil assets from DuPont in 2015. It also acquired certain imazaquin product-line assets from BASF under a license and supply agreement. The two completed acquisitions were reported at a combined $36.7 million consideration.
- International sales grew, including stronger sales in Mexico and Asia; export sales increased to $77.3 million from $73.7 million. The company increased its Envance ownership from 60% to 87% in April 2015.
Outlook, risks, contingencies, and unusual items
- No formal financial guidance: The filing provides no quantified revenue, earnings, or cash-flow forecast. Management stated that operating cash flow, cash on hand, and credit-facility availability should meet working-capital and capital-expenditure needs for at least 12 months.
- Regulatory exposure: The U.S. EPA proposed applying an additional safety factor in draft assessments of four company organophosphate products—Bidrin, Counter, Folex, and Mocap. If finalized, some product uses could be restricted or cancelled, which the company said could materially harm future performance. Product registrations and manufacturing are also subject to continuing government requirements.
- Environmental uncertainty: Remediation planning continues for the Commerce, California facility. The company said the scope and cost could not yet be reasonably estimated and recorded no related loss contingency.
- Legal and regulatory matters: EPA matters concerning depleted Thimet containers and the Axis facility risk-management program could result in penalties, but the company said losses were not yet estimable and recorded no contingencies. The company recorded immaterial contingencies for a former employee claim and a Vapam crop-loss claim; the grower alleged $1.2 million in losses. Other disclosed DBCP and employment-related matters were not accrued because management did not consider losses probable and reasonably estimable.
- Operating and financial risks: The filing highlights seasonality and weather, concentrated customer exposure (three customers represented 38% of 2015 sales), competition and generic pricing, sole-source supply dependencies, manufacturing underutilization, and dependence on credit availability. EPA restrictions on older chemistries and elevated inventory or product impairment are additional risks.
- Unusual investment item: The company’s TyraTech investment had a $2.5 million carrying value versus a quoted market value of $1.9 million at year-end. Management concluded the decline was temporary and recorded no impairment charge.
Important facts for investors to verify
- Whether Midwest channel inventories and corn purchasing recovered, and whether low crop prices or weather continued to affect demand.
- The status and potential commercial impact of EPA organophosphate assessments, registrations, and the two EPA compliance matters.
- Progress, scope, timing, and eventual cost of Commerce facility remediation.
- Credit-facility covenant headroom, borrowing capacity, variable-rate exposure, and the 2018 maturity, particularly if earnings or cash flow weaken.
- Customer concentration, the quality and turnover of remaining inventory, and the performance and returns of the 2015 acquisitions and TyraTech investment.