American Vanguard Corporation (10-Q): Q1 2018
Reporting period: Three months ended March 31, 2018; comparisons are with Q1 2017 unless stated otherwise. American Vanguard sells crop and non-crop agricultural and pest-control products, plus related distribution and intellectual-property products. It reports one operating segment. Financial amounts below are in millions of dollars unless otherwise noted.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $104.1 | $70.7 | +47% |
| Gross profit / margin | $41.1 / 39% | $30.1 / 43% | Profit +36%; margin down 4 percentage points |
| Operating income | $7.4 | $5.1 | +43% |
| Net income attributable to American Vanguard | $4.7 | $3.5 | +35% |
| Basic and diluted EPS | $0.16 | $0.12 | Up $0.04 |
| Net interest expense | $0.8 | $0.3 | Increased with higher borrowings and rates |
| Cash from operating activities | $(9.2) | $17.2 | Cash use versus cash generation |
| Capital expenditures | $1.6 | $3.1 | — |
Sales growth included about $29 million from businesses and products acquired in 2017. Crop sales rose 49% to $91.3 million; non-crop sales rose 37% to $12.8 million. U.S. sales increased 34% to $69.8 million and international sales increased 86% to $34.3 million. Management also cited growth in granular insecticides, fumigants and vector-control products.
Gross margin fell mainly because acquired distribution businesses contributed strong sales at lower margins. Management said factory performance continued to improve, including approximately $1.1 million less in under-absorbed factory costs. Operating expenses rose 35% to $33.7 million, but declined as a share of sales to 32% from 35%; increases reflected acquired businesses, product maintenance and development, and regulatory and product-defense costs.
Balance sheet, liquidity and capital
- At March 31, cash was $13.0 million, total assets $566.8 million, and stockholders’ equity $314.2 million.
- Long-term debt, net of deferred fees, was $90.3 million, up $12.8 million from December 31, 2017. The company reported no short-term debt. The revolving credit balance was $91.2 million.
- Working-capital investment drove the operating cash outflow, notably a $19.6 million inventory increase and a $9.3 million increase in net receivables. Financing provided $13.2 million, including $12.8 million in net credit-facility borrowings.
- The senior secured revolving facility has a $250 million commitment, a $100 million accordion feature and a June 2022 maturity. The company reported up to $124.9 million of additional borrowing capacity at quarter-end and said it expected operating cash flow, cash on hand and available borrowing capacity to meet requirements for the next 12 months.
- The facility includes a maximum consolidated funded-debt ratio of 3.25-to-1 and a minimum fixed-charge coverage ratio of 1.25-to-1. Borrowings carry variable interest rates.
Material changes, outlook and risks
- Acquisitions and mix: Acquired product lines and businesses from 2017 materially expanded revenue and international reach, while increasing operating costs, working-capital needs and debt.
- Revenue recognition: The company adopted ASC 606 using the modified retrospective method. Adoption reduced Q1 sales by $24, shifted certain product revenue to recognition over time, and increased opening retained earnings by $2.2 million, net of tax. It reported $44.1 million of remaining performance obligations and expected approximately all to be recognized in fiscal 2018.
- Tax: The effective tax rate was 26.0%, down from 28.5%, primarily due to the Tax Cuts and Jobs Act. The company had not completed its analysis of certain tax effects and said later adjustments could affect 2018 tax expense.
- Investments: The company’s TyraTech ownership increased to approximately 34.38%; it also recognized losses on TyraTech and its 50%-owned Hong Kong joint venture. Total equity-method investment loss was $0.2 million.
- Legal matters: DBCP-related litigation involving Abad Castillo/Marquinez and Chavez could proceed following a Delaware Supreme Court ruling on class-action tolling. A patent-related case was transferred to California but not dismissed. A DOJ investigation concerning reimportation of depleted Thimet containers remained unresolved; the DOJ had not stated its enforcement position. The company recorded no loss contingencies for these matters, citing uncertainty about probability and estimability.
- Business risks: Management identified product demand and acceptance, weather, regulation, competition and pricing, foreign exchange, product development, supply and capacity, capital availability, and taxes as risks. The company reported exposure to variable interest rates and foreign currencies; it said a 10% currency move would have an immaterial effect on financial position and cash flows.
- Guidance: The filing provides no specific earnings or revenue guidance. Management cautioned that first-quarter results are not necessarily indicative of full-year results. It cited more favorable western U.S. spring weather for fumigant sales, while weather delayed some Southeast cotton-product sales.
Important facts for investors to verify
- How much of the 47% sales increase and future growth is attributable to acquisitions versus existing products, and whether acquired distribution sales dilute margins.
- Whether seasonal inventory and receivables convert to cash, given the $9.2 million operating cash outflow and inventory build.
- Debt levels, variable-rate interest exposure, covenant headroom and borrowing capacity as working-capital needs evolve.
- Progress and potential outcomes of the DBCP litigation, Walker case and DOJ investigation, including any change in contingency estimates.
- Final tax accounting under the Tax Cuts and Jobs Act and the effects of revenue-recognition estimates and remaining performance obligations.