American Vanguard Corporation (10-Q): Quarter ended June 30, 2017
American Vanguard reported second-quarter and first-half 2017 results for its single reportable segment, agricultural and related chemical products. Dollar amounts below are in millions unless stated otherwise.
Financial results
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $77.9 | $72.7 | $148.6 | $142.2 |
| Gross profit / margin | $34.3 / 44% | $31.4 / 43% | $64.4 / 43% | $58.9 / 41% |
| Operating income | $6.7 | $5.1 | $11.8 | $9.8 |
| Net income attributable to American Vanguard | $4.3 | $3.2 | $7.8 | $6.0 |
| Diluted EPS | $0.15 | $0.11 | $0.26 | $0.21 |
| Net cash from operating activities | Not provided quarterly | $34.1 | $25.5 |
Consolidated net income, before income attributable to non-controlling interests, was $4.5 million for Q2 and $7.9 million for the first half. Operating expenses were $27.7 million in Q2 and $52.6 million year to date. First-half investing cash outflow was $18.5 million, including $13.4 million for acquired product lines; financing cash outflow was $16.0 million, principally reflecting debt repayments. Cash declined to $7.6 million from $7.9 million at year-end 2016.
At June 30, working capital was $116.1 million, down from $130.0 million at December 31, 2016. Current assets were $214.3 million and current liabilities $98.1 million. Net long-term debt, after deferred loan fees, was $26.3 million, compared with $41.0 million at year-end; gross revolver borrowings were $27.4 million. The company reported no short-term debt and said its U.S. business was debt-free. It had up to $143.2 million of additional borrowing capacity under its facility, subject to performance and covenants.
Changes and operating drivers
- Q2 sales increased 7% and first-half sales increased 4.5% year over year. Crop sales rose 12% in Q2 and 6% for the first half; non-crop sales fell 14% and 4%, respectively. First-half U.S. sales rose 6%, while international sales were essentially flat.
- Insecticide sales grew 28% in Q2 and 21% year to date, helped by cotton acreage and demand for granular soil insecticides. Other crop products also advanced. These gains were offset in part by weaker herbicide, fumigant and fungicide sales, including competitive pressure on the corn herbicide Impact and wet weather that delayed fumigant applications.
- Non-crop sales were affected by unusually strong prior-year pharmaceutical demand. Management attributed improved gross margins to purchasing, inventory management, manufacturing output and product mix. First-half operating expenses rose 7%, with higher general and administrative costs, including legal costs, and increased research and regulatory spending.
- On June 6, the company acquired assets relating to abamectin, chlorothalonil and paraquat product lines. Purchase consideration was paid in cash and initially allocated to inventory and intangible assets; allocation was expected to be finalized in Q3. The company said the purchase price and pro forma impact were not material.
Outlook, risks and unusual items
No specific earnings or sales guidance was provided. Management stated that operating cash flow, cash on hand and available credit were expected to be sufficient for working capital and cash needs over the next 12 months. Results remain exposed to seasonal demand, weather, competition and pricing, regulation, supply and capacity constraints, foreign exchange movements, and variable interest rates. The revolver matures June 30, 2022, is secured, and includes a maximum funded-debt ratio of 3.25-to-1 and a minimum fixed-charge ratio of 1.25-to-1.
- Legal matters: Federal authorities are seeking documents concerning re-importation of depleted Thimet containers; the company is cooperating, has incurred significant legal costs, and has recorded no contingency because a loss was not yet probable or estimable. In DBCP litigation, 57 plaintiffs remained, with proceedings effectively stayed pending a Delaware Supreme Court question. A separate patent-related suit was contested; no loss contingency was recorded.
- Other items: The company paid the IRS $11.6 million in April after effectively settling examinations for tax years 2013 and 2014; the 2015 federal return and certain state returns remained subject to examination. TyraTech’s carrying value was $2.1 million versus a quoted market value of $0.8 million; management concluded the decline was not other than temporary and recorded no impairment.
- Accounting and controls: Management was evaluating the effect of the revenue-recognition standard expected to be adopted in 2018, including possible timing changes for certain products. It reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether insecticide and other crop-product growth can persist while herbicides and fumigants remain pressured by competition and weather.
- The timing and collectability of customer program accruals, which were $61.7 million at quarter-end, and the seasonal buildup in inventory to $126.9 million.
- The final allocation and ongoing sales contribution of the acquired product lines, and the details of the July 2017 joint-venture acquisition of Profeng Australia for $1.9 million.
- Developments in the federal Thimet investigation and the DBCP and Walker litigation, including potential costs or liabilities not currently accrued.
- Revolver covenant headroom, variable-rate exposure, and the effect of revenue-recognition adoption on reported results.