American Vanguard Corporation — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Amounts are in millions of dollars unless otherwise noted; the filing presents most financial data in thousands. The unaudited statements consolidate the company and subsidiaries, which report as one segment.
Financial results and key metrics
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $66.5 | $68.3 | $133.1 | $149.4 |
| Gross profit / margin | $25.1 / 38% | $26.1 / 38% | $49.8 / 37% | $55.0 / 37% |
| Operating income | $1.2 | $0.7 | $1.5 | $4.4 |
| Net income attributable to American Vanguard | $0.8 | $0.1 | $0.8 | $2.3 |
| Diluted EPS | $0.03 | $0.01 | $0.03 | $0.08 |
| Operating cash flow | Not stated for the quarter | $43.8 | $(29.0) |
- Q2 sales declined about 3%; first-half sales fell about 11%. First-half operating income decreased despite lower operating expenses, reflecting lower sales and gross profit dollars.
- Q2 crop sales were nearly flat, while non-crop sales declined 20%. Insecticide sales fell 20% in the quarter and 23% in the first half; herbicide, soil fumigant and fungicide sales rose about 25% in Q2 and 7% in the first half.
- For the six months, cash generated from operations was supported by lower receivables and inventory, higher accrued payables and deferred revenue. Investing used $40.0 million, including $36.4 million for product-line acquisitions; financing used $3.2 million. Cash ended at $5.1 million.
Liquidity, debt and balance sheet
- At June 30, current assets were $278.5 million and current liabilities $111.4 million, a current ratio of approximately 2.5. Cash was $5.1 million; inventories were $165.2 million.
- Total indebtedness was $97.7 million, compared with $98.7 million at December 31, 2014. This included $88.4 million drawn on the revolving credit facility and $10.1 million of current notes payable. Total liabilities were $230.1 million; stockholders’ equity was $262.9 million.
- The company met its credit-facility covenants. Covenant-based additional borrowing capacity was $27.1 million, down from $64.1 million at June 30, 2014, which management attributed to lower trailing EBITDA and acquisition-related borrowing. Substantially all assets were pledged as collateral.
- Management stated that operating cash flow, cash on hand and available credit were expected to meet working-capital and cash needs for the next 12 months.
Material changes and management commentary
- Management cited weak Midwest distributor restocking, lower corn prices and reduced U.S. cotton acreage as pressures on demand, including for insecticides. Sugar-cane Thimet sales shifted from Q2 to Q3 year over year.
- Stronger herbicide and soil fumigant sales, increased toll manufacturing, and higher factory output partly offset the weaker categories. The company reported improved factory efficiency and overhead recovery. Gross margin percentage held steady, but gross profit dollars declined.
- Operating expenses fell $1.4 million in Q2 and $2.3 million in the first half, mainly from lower selling and promotional costs. General and administrative expense increased, including acquisition-related amortization and stock compensation.
- Two product-line acquisitions closed in April: Nemacur in Europe and Hyvar/Krovar globally. The filing describes their financial-statement impact as immaterial, although acquisition cash spending was approximately $36 million.
- The company increased its ownership in Envance by reducing TyraTech’s minority share from 40% to 13%. First-half equity-method losses from TyraTech were $0.2 million.
Outlook, risks and contingencies
- No specific earnings or revenue guidance was provided. Management cautioned that interim results are not necessarily indicative of full-year results and noted uncertainty in forecasting taxable income for the remainder of 2015.
- The first-half income-tax benefit was $0.7 million, versus tax expense of $0.9 million in the prior-year period. Management said the tax-rate estimate was affected by uncertainty around domestic and international results; the reported first-half effective benefit rate was unusually high.
- Key stated risks include demand and market acceptance, weather, commodity economics, regulation, competition and pricing, foreign exchange, product development, supply constraints, and access to capital. A 10% move in foreign currencies was estimated to have an immaterial effect on financial position and cash flows. The company has variable-rate debt exposure.
- Legal matters include an EPA RCRA inquiry for which potential loss was not considered probable or estimable; an EPA TSCA matter with an agreed $81,000 penalty recorded; and a Vapam-related claim alleging $1.2 million of crop losses, for which no loss accrual was recorded. The company also reported employment and product-exposure litigation, with no loss considered probable or reasonably estimable.
- The company early-adopted debt-issuance-cost presentation guidance, with an immaterial impact. It had not yet determined the effect or adoption method for the forthcoming revenue-recognition standard.
Important facts for investors to verify
- Whether the anticipated Q3 Thimet timing shift and Midwest distributor inventory correction materialized, and how demand and sales mix affected later-period margins.
- Whether acquisition benefits support returns on the approximately $36 million spent, and how acquisition-related notes, amortization and borrowing capacity develop.
- Whether operating cash flow remains strong after seasonal working-capital movements and program payments; accrued program costs were $69.6 million at quarter-end.
- How the uncertain 2015 tax outlook affects reported earnings and cash taxes, and whether the disclosed legal and regulatory matters require additional accruals.
- Whether covenant headroom remains adequate given reduced borrowing availability and performance-linked debt covenants.