American Vanguard Corporation (NYSE: AVD) — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Unaudited consolidated results; amounts below are in millions unless noted. The company reports one operating segment and sells crop and non-crop products, as well as licensing rights.
Financial results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $134.6 | $104.6 | $250.8 | $200.5 |
| Gross profit / margin | $52.1 / 39% | $40.3 / 39% | $97.3 / 39% | $78.7 / 39% |
| Operating income | $9.0 | $6.7 | $12.6 | $8.6 |
| Net income | $5.1 | $3.9 | $8.2 | $4.4 |
| Diluted EPS | $0.17 | $0.13 | $0.27 | $0.15 |
| Operating cash flow | Not separately reported | Not separately reported | $(18.9) | $6.9 |
- Q2 sales increased 29%; domestic sales grew 44% and international sales 10%. U.S. non-crop sales rose 55%, U.S. crop sales 40%, and international sales 10%.
- For the first half, sales grew 25% and net income rose 86%. Operating expenses increased 21% to $84.5 million, but decreased as a share of sales to 34% from 35%. Gross margin remained 39%.
- Q2 operating expenses rose 28% to $43.1 million, remaining 32% of sales. Management cited acquired-business costs, higher incentive compensation, legal expenses, bad debt, inflation and freight. Some freight delivery charges increased by more than 500%.
- First-half operating cash use reflected working-capital investment, including a $25.3 million increase in receivables and a $30.4 million decrease in deferred revenue; inventory rose $11.5 million. Investing used $15.5 million, including $5.1 million of capital expenditures and a $10.0 million product-line payment. Financing provided $37.9 million, principally from increased revolving-credit borrowings.
Liquidity and debt
- At June 30, cash was $19.6 million; current assets were $373.1 million and current liabilities $165.9 million.
- Net long-term debt was $149.4 million, up from $107.4 million at December 31, 2020. The revolving credit balance was $149.7 million; the reported June 30 interest rate was 2.50%.
- The company reported $56.9 million of additional borrowing capacity and a 2.54 leverage ratio against a maximum of 3.5; it was compliant with its then-current credit covenants. Management said cash, expected operating cash flow and available borrowing capacity should fund requirements for the next 12 months.
- On August 5, 2021, after quarter-end, the company amended and extended its secured credit facility to August 2026, with a $275 million line and a potential $150 million accordion, subject to terms and covenants.
Management commentary, outlook and risks
- Management attributed sales growth to stronger commodity prices, market recovery, product demand and recent acquisitions. Factory performance weakened in the first half; higher volume, mix and acquired biological manufacturing operations affected costs. Management reported that consolidated gross margin was nevertheless unchanged.
- No specific full-year earnings or revenue guidance is provided. The company said the pandemic had had minimal operational impact through June, but it cannot predict future effects. Risks include renewed COVID-19 disruption, supply-chain constraints, demand, weather, regulation, competition, foreign exchange, and interest-rate changes. It does not hedge foreign-exchange exposure.
- A DOJ/EPA investigation concerns alleged FIFRA and RCRA violations and alleged obstruction and false statements. The company is cooperating and discussing possible resolution; it says the government’s allegations do not include harm to human health or the environment. Outcomes, penalties and timing are uncertain, could materially adversely affect the business, and no loss contingency was recorded.
- Unusual and other notable items: $0.7 million of Agrinos PPP loan principal and interest forgiveness was recorded as other income in the first half; a $1.0 million contingent-consideration fair-value adjustment increased operating expenses. A $10.0 million payment for a product line was made in June, but control transferred July 1, 2021, so it is expected to be accounted for as an asset acquisition in Q3.
- The six-month effective tax rate increased to 31.4% from 23.4%, reflecting income mix and the prior-year benefit of discrete tax items. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting reported.
Important facts for investors to verify
- Whether sales growth and stable 39% gross margin can be sustained as input, factory and freight costs evolve.
- Cash conversion and working-capital trends, particularly receivables, deferred revenue, inventory and accrued customer programs.
- Debt capacity, covenant headroom and interest-rate sensitivity under the amended credit agreement.
- Developments and potential financial or operational consequences of the DOJ/EPA investigation; no contingency has been accrued.
- Acquisition integration and performance, including the product line transferred on July 1 and the acquired Agrinos and AgNova businesses.
- Whether the pandemic, regulatory changes, weather, foreign-exchange movements or product competition materially affect future results; the filing provides no quantified outlook.