American Vanguard Corporation (NYSE: AVD) — Q1 2019 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless otherwise noted. American Vanguard sells crop-protection products and related products, including insecticides, herbicides, soil fumigants and fungicides. The company reports one operating segment. Financial amounts below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net sales | $99.7 | $104.1 |
| Gross profit / margin | $41.7 / 41.8% | $41.1 / 39.4% |
| Operating expenses | $34.8 | $33.7 |
| Operating income | $6.9 | $7.4 |
| Interest expense, net | $1.6 | $0.8 |
| Net income attributable to American Vanguard | $3.9 | $4.7 |
| Basic and diluted EPS | $0.13 | $0.16 |
| Cash from operating activities | $(20.3) | $(9.2) |
| Cash from investing activities | $(27.6) | $(2.4) |
| Cash from financing activities | $48.9 | $13.2 |
At March 31, 2019, cash was $6.7 million; current assets were $340.5 million and current liabilities $147.5 million. Inventories totaled $189.5 million, up from $159.9 million at year-end 2018. Long-term debt, net of deferred loan fees, was $149.3 million, versus $96.7 million at December 31, 2018. Stockholders’ equity was $329.1 million. The revolving facility had a $250 million commitment; covenant-based additional borrowing capacity was $56.7 million at quarter-end.
Changes and operating drivers
- Sales fell 4% overall. U.S. sales declined 11%, including a 12% decline in U.S. crop and 5% decline in U.S. non-crop; international sales increased 9%.
- Management attributed weaker domestic demand largely to wet, flooding, freezing and rainy weather that disrupted product application and demand. International growth benefited in part from the January acquisition of Brazilian businesses Agrovant and Defensive.
- Gross profit increased slightly despite lower sales, and gross margin improved to about 42% from 39%. Management cited improved product mix, reduced factory underabsorption expense and stronger margins in domestic and international businesses.
- Operating expenses rose 3%, principally from higher selling costs associated with acquired businesses and expanded international operations. Net income fell about 16%, reflecting lower domestic sales, higher operating costs and higher interest expense.
- Average debt increased to $143.1 million from $88.9 million; the reported average revolving-credit interest rate rose to 4.4% from 3.1%.
Cash, debt and capital allocation
Operating cash use increased year over year, with working-capital needs including a $23.8 million inventory increase and a $16.0 million decrease in deferred revenue. Investing cash use included $24.2 million for acquisitions and $3.4 million in capital expenditures. Financing cash inflow primarily reflected $76.0 million of facility borrowings, partly offset by $23.4 million of repayments. The company repurchased 158,048 shares for $2.6 million in January; its repurchase program expired March 8, 2019. It paid a quarterly dividend of $0.02 per share.
Management stated that expected operating cash flow, cash on hand and available facility borrowings should meet working-capital and cash requirements for the next 12 months. The facility is senior secured, matures June 30, 2022, bears variable-rate interest and is subject to financial covenants. Substantially all company assets are pledged as collateral.
Outlook, risks and notable items
- No specific revenue or earnings guidance was provided. Management cautioned that first-quarter results are not necessarily indicative of full-year results; some weather-delayed applications could shift to the second quarter or fall.
- Key stated risks include weather and product demand, regulatory policy, competition and pricing, foreign exchange, product development and commercialization, supply or capacity constraints, and access to capital. The company also faces variable-rate debt exposure; it reported that a 10% currency change would have an immaterial effect on financial position and cash flows.
- The January 2019 Brazilian acquisition had a preliminary total value of $40.4 million, including $20.7 million cash consideration net of acquired cash, $2.6 million deferred consideration and liabilities assumed. The purchase-price allocation included $14.2 million of goodwill and $3.4 million of indemnification assets.
- Management recorded a $1.5 million reduction in general and administrative expense from revising deferred-compensation estimates tied to earlier acquisitions. The quarter also included a $1.0 million provision for doubtful accounts, primarily related to Central and South American receivables.
- The company adopted ASC 842 on January 1, 2019, recognizing operating-lease right-of-use assets and liabilities of $11.1 million on adoption. Q1 operating lease expense was $1.2 million.
- A Department of Justice investigation concerns reimportation of depleted Thimet containers from Canada and Australia. The government had identified additional individuals for interviews; its enforcement theory and potential outcome remained unclear, and no loss contingency was recorded because a loss was not yet probable or estimable.
- The company’s approximately $30 million takings claim against the EPA was dismissed without prejudice after the court ruled for the government and denied reconsideration. The company was considering an appeal; it recorded no loss contingency as claimant.
Investor verification points
- Whether weather-delayed U.S. demand recovers, and the extent to which weather-related weakness persists into later quarters.
- How much international growth and margin improvement is attributable to acquisitions, and the acquired businesses’ integration, working-capital and cash-generation performance.
- Inventory levels, deferred-revenue movements and operating cash conversion, given the quarter’s $20.3 million operating cash outflow.
- Debt, variable interest costs, covenant headroom and the remaining $56.7 million borrowing capacity.
- Developments in the DOJ investigation, potential financial exposure and any appeal of the EPA takings-case ruling.