American Vanguard Corporation (NYSE: AVD) — FY 2017 Form 10-K
Reporting period: Year ended December 31, 2017. The filing reports quarterly data, including the fourth quarter, but is an annual report. Figures below are in millions of dollars unless otherwise stated.
Business context
American Vanguard develops, manufactures, formulates and distributes specialty chemicals for agricultural, commercial and consumer uses. It reports one business segment. Its products include insecticides, herbicides, fungicides and soil fumigants. Business is seasonal and affected by growing cycles and weather.
Financial performance and liquidity
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Net sales | $355.0 | $312.1 |
| Gross profit / gross margin | $147.4 / 42% | $128.3 / 41% |
| Operating income | $26.8 | $20.5 |
| Net income attributable to AVD | $20.3 | $12.8 |
| Diluted EPS | $0.68 | $0.44 |
| Operating cash flow | $59.0 | $46.4 |
| Cash and cash equivalents at year-end | $11.3 | $7.9 |
| Working capital | $128.7 | $130.0 |
| Long-term debt, excluding current installments | $77.5 | $41.0 |
Operating expenses were $120.6 million, or 34% of sales, versus $107.7 million, or 35%. Net interest expense rose to $1.9 million from $1.6 million. Investing activities used $89.5 million, including $81.9 million for acquisitions and $6.7 million for capital expenditures; financing activities provided $33.9 million. Inventory ended at $123.1 million, up from $120.6 million.
The senior secured revolver had $78.4 million outstanding at year-end, with up to $139.2 million of additional borrowing capacity under the facility’s covenant-based limit. The credit agreement provides for a $250 million line, an accordion feature of up to $100 million and maturity on June 30, 2022. AVD reported compliance with its debt covenants. Management said cash flows, cash on hand and facility availability should cover working capital and capital needs for at least 12 months.
Material changes versus 2016
- Sales increased 14%; attributable net income rose 58%. Crop sales grew 11% and non-crop sales 34%; international sales grew 19% to $98.9 million.
- Growth reflected existing cotton and vector-control products, improved manufacturing performance and four 2017 acquisitions. New acquisitions contributed $21.978 million of incremental domestic sales, while the two late-year distribution acquisitions expanded U.S. ornamental and Central American reach.
- Sales by category increased for insecticides (11%) and other products (62%), while herbicides, soil fumigants and fungicides declined 2%. Management cited competitive pricing pressure on the Impact corn herbicide and wet weather affecting fumigant applications.
- Debt increased following acquisition spending. Gross margin improved one percentage point, helped by factory performance, but was partly offset by competitive pricing and lower-margin acquired distribution sales.
Outlook, risks and unusual items
- Guidance: The filing gives no specific revenue or earnings guidance. Management expects adequate liquidity for anticipated needs but says growth may require use of credit availability or additional financing.
- Tax reform: The 2017 tax provision included a $3.433 million net benefit related to the Tax Cuts and Jobs Act, including a $4.683 million provisional deferred-tax benefit and a $1.250 million provisional repatriation-tax charge. The effective tax rate fell to 18% from 30%; the tax accounting remained subject to further analysis.
- Regulatory and product risks: Registrations and permitted uses of pesticide products may be restricted or canceled. EPA’s proposed additional safety factor for certain organophosphate products could limit or cancel uses and materially affect future results. Compliance and product-development spending was $14.2 million in 2017.
- Supply, market and operating risks: Management cited Chinese manufacturing restrictions and possible shortages, sole-source suppliers, weather-driven demand, generic and larger-company competition, customer concentration, industry consolidation, and the risk that acquisitions or SIMPAS technology may not deliver expected returns. Three customers represented 33% of 2017 sales.
- Legal and environmental contingencies: The DOJ was investigating the company’s reimportation of depleted Thimet containers; the government had not disclosed its theory or potential enforcement, and no loss accrual was recorded. DBCP litigation and other claims, including a fire-related product case and a patent-related suit, also remained unresolved; management said losses were not probable or estimable at the time. The Commerce, California site remediation plan was approved, and the company did not consider related future costs material. The Galvan wage-and-hour class settlement received final court approval in February 2018 and was described as immaterial.
- Acquisition accounting: Combined 2017 acquisition consideration was $92.9 million, including $11.0 million deferred. Purchase-price allocations for OHP and AgriCenter were preliminary at year-end and subject to change.
Most important facts for investors to verify
- How much of the sales and earnings improvement is organic versus attributable to acquired businesses, and whether acquired operations meet expected returns.
- Whether the provisional tax-reform accounting changes after the company completes its analysis.
- Developments in the DOJ matter, pesticide registrations and litigation, including whether any potential losses become estimable.
- Debt, covenant headroom and refinancing or borrowing needs as acquisition-related obligations and seasonal working-capital needs develop.
- Customer concentration, availability of key raw materials, and the durability of margins amid competition and weather variability.