American Vanguard Corporation — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Amounts below are in millions of dollars unless otherwise stated. The company reports one operating segment.
Business context and financial performance
American Vanguard develops and sells agricultural and non-crop chemical products. Results improved year over year, supported by acquired product sales, cotton-related demand, and post-hurricane demand for mosquito-control products.
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Net sales | $90.0, up 9% from $82.4 | $238.6, up 6% from $224.6 |
| Gross profit / margin | $38.0 / 42%, versus $33.0 / 40% | $102.5 / 43%, versus $91.9 / 41% |
| Operating income | $6.5, versus $4.7 | $18.3, versus $14.5 |
| Net income attributable to American Vanguard | $4.1, versus $2.9 | $11.8, versus $8.9 |
| Diluted EPS | $0.14, versus $0.10 | $0.40, versus $0.30 |
| Interest expense, net | $0.4, versus $0.3 | $1.1, versus $1.3 |
Consolidated net income was $4.0 million for Q3 and $12.0 million year to date; income attributable to American Vanguard differs because of non-controlling interests. The company attributed improved gross margins to favorable sales mix, production planning, and lower factory under-absorption. For the nine months, cost of sales declined to 57% of sales from 59%.
Cash flow, debt, and liquidity
- Operating cash flow was $18.2 million for the first nine months, down from $36.2 million. Management cited an $11.6 million IRS payment relating to back taxes as a principal factor, alongside working-capital movements.
- Investing cash outflow was $32.2 million, including $25.9 million for product-line acquisitions and $5.3 million of capital expenditures. Financing provided $15.0 million, primarily through net borrowings.
- Cash was $9.0 million at September 30, 2017. Net working capital was $144.1 million, compared with $130.0 million at December 31, 2016.
- Net long-term debt was $57.4 million, compared with $41.0 million at year-end 2016; gross revolver borrowings were $58.4 million. The company had no short-term debt and reported up to $124.7 million of additional borrowing capacity under its covenant-based facility.
- The senior secured revolving facility provides up to $250 million, with a $100 million accordion feature, and matures June 30, 2022. It has leverage and fixed-charge covenants and variable interest rates. Management said cash flow, cash balances, and available facility borrowings should cover liquidity needs for the next 12 months.
Material changes and management commentary
- Q3 non-crop sales increased 62%, principally from Dibrom mosquito-control demand following Hurricanes Harvey and Irma. Cotton defoliant Folex also benefited from higher U.S. cotton acreage. These drivers may not indicate recurring demand.
- Crop sales increased 2% in Q3 and 5% year to date. Year-to-date insecticide sales rose 14%, while herbicide, soil fumigant, and fungicide sales fell 14%, reflecting competitive pressure on Impact and weather-related interruptions to fumigant applications.
- Management recorded an approximately $2.1 million reduction to sales for Impact channel-inventory program accruals in response to anticipated competition and lower selling prices.
- Operating expenses rose 12% in Q3 and 9% year to date. Increases included acquisition-related diligence, regulatory and product-development work, legal defense costs, and investment in SIMPAS technology. Year-to-date general and administrative expense included approximately $2.2 million of legal costs associated with the criminal investigation.
- Two product-line asset acquisitions were completed during the first nine months, with combined consideration of $25.1 million. After quarter-end, the company acquired OHP, Inc. on October 2 and Grupo Agricenter on October 27; the latter involved approximately $41.8 million in cash consideration, plus inventory and other deferred performance-driven payments. These subsequent acquisitions were funded with credit-facility borrowings.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific earnings or revenue guidance. Management’s liquidity statement covers the next 12 months; interim results are not necessarily indicative of full-year results.
- The DOJ is investigating the company’s reimportation of depleted Thimet containers. The company received a request for interviews; DOJ had not disclosed its theory or potential enforcement position. The company said loss was not yet probable or reasonably estimable and recorded no contingency.
- Several Canadian claims relate to a 2014 fire during application of SmartBlock. The company disputes the claims; it had not recorded a loss contingency because the outcome was not yet estimable.
- California’s DTSC approved the company’s remedial action plan for its Los Angeles manufacturing site on September 29, 2017. The company expects related costs to be immaterial and recorded no contingency; financial-assurance obligations still require clarification.
- Revenue standard Topic 606 was expected to be adopted in 2018 using the modified retrospective method. The company said certain products may shift from point-in-time to over-time revenue recognition, but it had not determined whether the overall effect would be material.
- Other disclosed risks include agricultural demand and weather, competition and pricing, regulation, foreign exchange, product development, supply constraints, and variable-rate borrowing exposure. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether hurricane-related Dibrom demand and cotton-driven sales persist, and how product mix affects margins after these temporary factors.
- The impact of competitive pricing and the $2.1 million Impact program accrual on subsequent sales, channel inventory, and customer incentives.
- Cash conversion and working-capital trends, particularly receivables, accrued program costs, and seasonal inventory.
- Borrowings, variable interest costs, covenant headroom, and financing for the OHP and Grupo Agricenter acquisitions.
- Developments in the DOJ investigation, Canadian product-liability litigation, and the environmental site’s financial-assurance requirements.
- The final effect of Topic 606 adoption on revenue timing and reported results.