American Vanguard Corporation — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2013; comparative figures are for the periods ended June 30, 2012. Amounts are in thousands of dollars except per-share data. The company reports one business segment.
Financial performance
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Net sales | $86,761 | $84,837 | $208,298 | $172,092 |
| Gross profit | $42,066 | $38,346 | $95,847 | $75,724 |
| Gross margin | About 49% | About 45% | About 46% | About 44% |
| Operating income | $12,897 | $14,242 | $39,049 | $28,644 |
| Net income attributable to American Vanguard | $8,386 | $8,744 | $25,301 | $17,478 |
| Diluted EPS | $0.29 | $0.30 | $0.88 | $0.61 |
| Cash from operating activities | Not presented quarterly | $20,045 | $36,668 |
Q2 sales increased 2.3%, but operating income and attributable net income declined year over year as operating expenses rose $5,065 to $29,169. Higher selling and G&A expenses reflected business expansion, stewardship and promotion activity, support costs, and legal and consulting expenses; the company also cited significant one-time costs. The effective Q2 tax rate fell to 32.40% from 35.86%.
For the first half, sales rose about 21% and attributable net income rose about 45%. Operating expenses increased $9,718 to $56,798, but remained approximately 27% of sales, according to management. The effective tax rate declined to 34.03% from 36.06%.
Sales trends and operating context
- Q2 crop sales increased modestly overall. Herbicide sales rose to $24,699 from $13,656, driven largely by Impact; insecticide sales fell to $39,218 from $45,432, while “other” product sales also declined. Non-crop sales were nearly flat at $9,616.
- First-half growth was led by herbicides, up to $57,685 from $33,332, and insecticides, up to $118,085 from $101,266. Non-crop sales declined to $15,609 from $16,911.
- Management said unusually wet U.S. weather delayed planting, shortened growing seasons, shifted some acreage from cotton to soybeans, and caused growers to skip some crop-protection applications. This contributed to higher-than-normal channel inventories. Reduced peanut acreage also weighed on some product sales.
- Q2 gross margin improved as cost of sales declined as a share of revenue. Management attributed results to sales mix and volume; it also reported increased factory operating costs and production ending up in inventory because of weather-related demand conditions.
Cash, liquidity and debt
- Cash was $32,414 at June 30, 2013, down from $38,476 at year-end 2012. First-half operating cash flow was $20,045, compared with $36,668 a year earlier. The filing attributes the lower cash generation in part to inventory growth, prepaid and other asset increases, lower deferred revenue, and accounts payable reductions, partly offset by increased accrued program costs and other payables.
- Inventory increased to $127,150 from $87,951 at December 31, 2012, principally finished products. Accrued program costs rose to $88,508 from $32,335; management said these accruals follow the growing season and are generally paid later in the year or early the following year.
- Total indebtedness was $40,981, versus $52,443 at year-end. On June 17, the company entered a five-year senior secured credit agreement with a $200 million revolving facility and an accordion feature of up to $100 million; prior term loans were converted into revolving debt. Borrowings under the revolver were $40,750 at June 30. Substantially all assets are pledged as collateral.
- The company reported compliance with its credit covenants and capacity to increase borrowings by up to $159,250 under the facility based on the most restrictive covenant. It had a $40,500 interest-rate swap; $616 of losses in accumulated other comprehensive income were expected to be reclassified to earnings in the next 12 months.
- Investing activities used $12,047, including $8,360 of capital expenditures and a $3,687 equity investment in TyraTech. Financing activities used $14,034. The board changed the dividend schedule from semiannual to quarterly; a $0.05-per-share quarterly dividend was distributed in July 2013.
Outlook, risks and unusual items
- The filing provides no numerical full-year earnings or sales guidance. Management described ongoing investment in capacity and resources to support growth, while noting that first-half sales included strong first-quarter demand followed by roughly flat second-quarter sales and elevated channel inventories.
- Risks identified include weather, product demand and acceptance, regulation, competition and pricing, foreign exchange, product development, supply and capacity constraints, and availability of capital. Management stated that risk factors were not materially changed from the 2012 Form 10-K.
- Two Delaware DBCP matters, Blanco and Chaverri, remain pending after the state Supreme Court upheld the application of cross-jurisdictional class-action tolling. The company intends to defend them and said losses were not probable or reasonably estimable; no loss contingency was recorded for those matters.
- Management reported disclosure controls were effective and no material quarterly change in internal control over financial reporting.
Most important facts for investors to verify
- Reconcile the Q2 sales figure: the financial statements report $86,761, while one MD&A sentence states $87,761. The financial-statement and segment tables report $86,761.
- Track whether elevated finished-goods inventories and channel stocks convert into subsequent sales and cash collections, and monitor accrued program costs and their payment timing.
- Assess whether first-half gross-margin gains persist while operating expenses, including selling and G&A costs, remain elevated.
- Review borrowing levels, covenant headroom, variable-rate exposure, and the impact of the new secured revolving facility and interest-rate swap.
- Monitor developments and potential financial exposure in the pending DBCP litigation; the filing does not quantify a potential loss.