American Vanguard Corporation (NYSE: AVD) — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Unaudited consolidated results. Unless stated otherwise, figures below are in U.S. dollars; financial amounts are in millions.
Business context
American Vanguard sells crop-protection products, including insecticides, herbicides, fumigants and fungicides, as well as non-crop products and third-party products. It reports one operating segment. International sales growth, including contributions from recent acquisitions, offset weaker U.S. crop sales.
Key financial metrics
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $124.9 | $111.8 | $337.7 | $322.9 |
| Gross profit | $47.5 | $45.3 | $130.8 | $129.6 |
| Gross margin | 38% | 41% | 39% | 40% |
| Operating income | $6.8 | $11.7 | $20.0 | $27.6 |
| Net income attributable to American Vanguard | $3.2 | $6.5 | $10.2 | $16.8 |
| Diluted earnings per share | $0.11 | $0.22 | $0.34 | $0.56 |
| Cash used in operating activities | Not separately presented | Not separately presented | $21.7 | $15.1 |
Q3 sales rose 12%, but attributable net income fell 52%. For the first nine months, sales increased 5%, while attributable net income declined 39%. Operating expenses increased 21% in Q3 and 9% year to date; interest expense was $2.1 million for Q3 and $5.6 million year to date.
At September 30, cash was $5.9 million; current assets were $357.0 million and current liabilities were $143.2 million. Working capital was $213.8 million, up $49.2 million from December 31, 2018. Revolver borrowings were $165.6 million ($165.0 million net of fees), compared with $97.4 million at year-end. Covenant-based additional borrowing capacity was $30.4 million, down from $105.1 million at September 30, 2018. The credit facility provides up to $250 million, matures June 30, 2022, and has financial covenants. Management said existing cash, expected operating cash flows and available facility borrowings should meet liquidity needs for the next 12 months.
Year-to-date investing cash outflow was $42.4 million, including $31.8 million for acquisitions and $10.5 million of capital expenditures. Financing provided $63.8 million, principally from $68.2 million of net revolver borrowings. Cash ended the period at $5.9 million, down from $6.2 million at year-end.
Material changes and drivers
- International expansion: Q3 international sales increased 27% and year-to-date sales increased 18%; international markets supplied 41% of sales versus 36% in the comparable 2018 periods. Growth included acquisitions in Brazil and Australia, Assure II products, and Central American operations.
- U.S. conditions: U.S. sales rose 3% in Q3 but fell 3% year to date. Wet, cold planting-season weather reduced demand for fumigants and burn-down herbicides; later extreme heat and dryness reduced Folex cotton-defoliant demand. Management cited an approximately $10 million Q3 Folex sales decline.
- Margin and expense pressure: Management attributed lower margins to product mix, including lower-margin international and acquired products, and reduced factory utilization while managing inventory. Operating costs also reflected acquired businesses, marketing activity and amortization. Q3 general and administrative expense benefited less from deferred-consideration remeasurements than in 2018.
- Debt and interest: Higher borrowings associated with acquisitions and working-capital needs increased average debt and interest expense. The company’s variable-rate debt also exposes it to interest-rate changes.
- Acquisitions: In January 2019, the company acquired Brazilian businesses Defensive and Agrovant for a stated preliminary total value of $40.4 million, including assumed liabilities and deferred consideration. It also acquired a product on July 1 for $7.3 million cash plus an assumed liability.
Outlook, risks and unusual items
The filing provides no specific revenue, earnings or margin guidance. Management’s liquidity assessment covers the next 12 months. It cited weather, demand and market acceptance, regulation, competitive products and pricing, foreign exchange, product development, supply or capacity constraints, and capital availability as risks. A phase-out of Mocap in the EU following non-renewal of its registration and supply shortages affecting bromacil were also noted.
The company adopted lease accounting standard ASC 842 on January 1, 2019, recognizing $12.9 million of operating lease assets and liabilities at adoption; management said the standard did not materially affect operations or cash flows. A one-time $1.1 million transition-tax adjustment affected the 2018 comparison. A U.S. Department of Justice investigation concerning reimportation of depleted Thimet containers remains unresolved; the company said it could not determine whether a loss was probable or estimable and recorded no contingency.
Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter. The company paid a $0.02 per-share quarterly dividend and repurchased 158,048 shares for $2.6 million in January 2019.
Important facts for investors to verify
- Whether international growth and acquired-business contributions can offset continued weather-related weakness in U.S. crop sales, and how sustainable the resulting product mix is.
- Whether gross margins recover as factory utilization and inventory levels normalize, and whether operating expenses remain elevated as acquisitions are integrated.
- Working-capital requirements, particularly receivables, inventories and accrued customer programs, and the resulting cash conversion.
- Debt covenant headroom and borrowing availability: the reported $30.4 million capacity was materially lower than a year earlier, while debt and interest expense had increased.
- Developments in the Thimet-related DOJ matter, EU product-registration changes, bromacil supply constraints and other regulatory or litigation exposures.