American Vanguard Corporation (NYSE: AVD) — 2019 Form 10-K
Reporting period: Year ended December 31, 2019; filed March 10, 2020. The company develops, manufactures and distributes specialty agricultural, commercial and consumer chemicals. It reports one operating segment. Amounts below are in millions of dollars unless noted; the filing presents financial statement amounts in thousands.
Financial performance
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net sales | $468.2 | $454.3 | +3% |
| Gross profit / margin | $177.4 / 38% | $182.6 / 40% | −3% |
| Operating income | $26.2 | $39.0 | −33% |
| Net income attributable to AVD | $13.6 | $24.2 | −44% |
| Diluted EPS | $0.46 | $0.81 | −43% |
| Net interest expense | $7.2 | $4.0 | +$3.2 |
| Cash from operating activities | $9.4 | $11.3 | −17% |
| Capital expenditures | $13.0 | $8.1 | +$4.9 |
Revenue growth was largely acquisition-driven: international sales rose 21% to $186.0 million, while U.S. sales fell 6% to $282.2 million. Crop sales increased 3%; non-crop sales increased 6%. The effective tax rate was 27.4%, versus 27.2% in 2018. Fourth-quarter sales were $130.5 million versus $131.3 million; quarterly net income attributable to AVD was $3.4 million versus $7.4 million.
Liquidity, debt and cash flows
- At year-end, cash was $6.6 million, working capital was $197.6 million, and total assets were $670.1 million. Inventory was $163.3 million, up $3.4 million year over year.
- Long-term debt, net of fees, was $148.8 million, compared with $96.7 million in 2018; gross revolving borrowings were $149.3 million. The company had $27.0 million of additional borrowing capacity, down from $112.2 million.
- The senior secured credit facility provides up to $250 million, with a further $100 million accordion feature, and matures June 30, 2022. The year-end interest rate was 3.74%. AVD reported compliance with its debt covenants at year-end.
- Operating cash flow of $9.4 million was below investing cash outflow of $54.8 million, including $41.9 million for acquisitions and product assets. Financing activities provided $46.4 million, principally from net credit-facility borrowings.
- Management stated that cash on hand, expected operating cash flow and available credit should meet anticipated operating and capital needs for at least 12 months from issuance of the report.
Material changes and management commentary
- 2019 acquisitions included Brazilian distributors Defensive and Agrovant, three U.S. crop-protection products acquired from Raymat, and four herbicide product assets acquired from Corteva/Dow. These contributed to revenue growth but also increased debt and added lower-margin distribution sales.
- Gross margin contracted as factory utilization returned from 2018’s record output to a more typical level and sales mix shifted toward lower-margin products. Management cited adverse weather, including heavy rain and cold, as a factor in weaker U.S. demand and lower sales of certain products.
- Operating expenses rose 5% to $151.1 million, principally from acquisitions, amortization and selling costs; expenses remained 32% of sales. Research, product development and regulatory expenses decreased 9% to $24.1 million.
- Management reported operating cash flow was affected by working-capital movements, including higher receivables and tax receivables, lower accounts payable and deferred revenue, and increased program-cost accruals. Accrued program costs were $47.7 million at year-end, compared with $37.3 million.
- The company paid $0.08 per share in 2019 dividends. Its share-repurchase program expired in March 2019; 158,048 shares were repurchased during 2019 for $2.6 million.
Outlook, risks and contingencies
The filing provides no quantified sales or earnings guidance. Management cautioned that weather, crop cycles, product mix and customer ordering patterns make quarterly results volatile. Principal risks include pesticide registration and regulatory restrictions, litigation and product-liability exposure, adverse weather and climate variability, dependence on key customers and suppliers, competition, acquisition integration and performance, foreign-market and currency exposure, variable-rate debt and limited remaining borrowing capacity.
- COVID-19: The report noted the emerging outbreak and possible disruption to Chinese supply chains; the extent of any impact was uncertain at filing.
- Environmental matters: The company continues groundwater monitoring and site maintenance at its Commerce, California facility; management did not consider likely related costs material. A December 2019 assessment at a leased Brazilian facility indicated possible localized subsurface contamination and recommended confirmatory investigation.
- Legal matters: The company disclosed DBCP-related lawsuits and other claims, including litigation in Nicaragua, Delaware and Hawaii, and Canadian claims related to a fire involving SmartBlock. It stated that losses were not probable or reasonably estimable and recorded no contingencies for these matters. A separate EPA consent order concerning reimported Thimet containers included a civil penalty described as not material; a related Department of Justice inquiry remained unresolved.
- Accounting and audit: AVD adopted the lease accounting standard in 2019, recording $12.9 million of lease assets and liabilities at adoption, with no material operating-results impact. The auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether acquired Brazilian and other international businesses can sustain growth and improve margins, and how much of reported growth is organic.
- Whether gross-margin pressure, lower factory utilization and weather-related demand weakness persist.
- Debt covenant headroom, borrowing availability, variable-rate exposure and the 2022 facility maturity, especially given the sharp decline in available capacity.
- Receivable quality, customer concentration (the three largest customers represented 39% of 2019 sales) and the elevated program-cost accrual.
- Developments in pesticide registrations, environmental investigations, DBCP litigation, the Thimet matter and any COVID-related supply interruption.