American Vanguard Corporation — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. American Vanguard sells agricultural and non-crop chemicals and reports one operating segment. Unless noted otherwise, amounts below are in millions of dollars; the filing presents financial statements in thousands.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $97.2 | $89.8 | $305.5 | $261.9 |
| Gross profit | $43.2 | $39.6 | $139.0 | $115.3 |
| Gross margin | 44% | 44% | 45% | 44% |
| Operating income | $15.1 | $13.2 | $54.2 | $41.8 |
| Net income attributable to American Vanguard | $8.9 | $8.1 | $34.2 | $25.6 |
| Diluted EPS | $0.31 | $0.28 | $1.18 | $0.89 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $7.2 | $13.1 |
- Q3 sales rose 8% and attributable net income rose 10%. Nine-month sales increased 17% and attributable net income increased 34%.
- Crop sales were the principal growth driver: up 11% in Q3 and 20% year to date. Insecticide and herbicide sales increased; “Other” and non-crop sales declined.
- Nine-month operating expenses increased to $84.8 million from $73.5 million, notably from higher selling and administrative costs. Interest expense, net of capitalized interest, declined to $1.5 million from $1.8 million.
- Cash and cash equivalents were $12.3 million at September 30, down from $38.5 million at year-end 2012. Current assets were $268.6 million and current liabilities $142.6 million.
- Total debt was $39.0 million, down from $52.4 million at December 31, 2012. The company reported $7.2 million of operating cash flow, $16.0 million used in investing, and $17.2 million used in financing during the first nine months.
Material changes and financial position
- Receivables rose to $109.3 million from $76.1 million at year-end; inventories rose to $127.2 million from $88.0 million. Management attributed working-capital needs to the growing season and product demand, and said inventory was flat versus the prior quarter as it balanced stock to demand.
- Accrued program costs increased to $95.7 million from $32.3 million. These customer programs reduce reported revenue and are generally paid in the fourth quarter or first quarter of the following year. The company accrued $74.7 million and paid $9.8 million in program costs in the first nine months.
- In June, the company refinanced its senior secured facility with a five-year revolving credit line of $200 million and an accordion feature of up to $100 million. At September 30, it reported $161.3 million of additional borrowing capacity under the facility and compliance with its covenants. Substantially all assets are pledged as collateral.
- Investing outflows included $12.3 million of capital expenditures and a $3.7 million equity-method investment in TyraTech; the company owned approximately 29.3% of TyraTech at quarter-end.
- The company changed its dividend frequency from semiannual to quarterly in June 2013. Dividends declared during 2013 included $0.07 per share in March and $0.05 per share in June and September.
Outlook, commentary, risks and contingencies
- No specific full-year revenue or earnings guidance is provided. Management said momentum was building for the 2014 growing season and described continued investment in SmartBox delivery equipment.
- Management cited strong demand for granular soil insecticides and the Impact herbicide. Results were also affected by late planting, excessive rainfall, crop-acreage shifts, and lower cotton acreage; late crop maturity pushed some Folex sales into Q4. Weather and water availability also affected fumigant applications, while limited hurricane activity reduced seasonal demand for mosquito-control products.
- Risks identified include product demand and acceptance, weather, regulatory changes, competition and pricing, foreign exchange, product development, supply or capacity constraints, and capital availability. The company reported no material changes to the risk factors in its 2012 Form 10-K.
- Approximately 100 DBCP-related lawsuits are pending, including 15 in the United States and the remainder in Nicaragua. The company said it could not estimate whether a loss was probable or reasonably estimable in the Marquinez matter and recorded no contingency for it. A Brazilian regulatory citation carries a stated probable-loss range of $0.2–$0.3 million; the company recorded a $0.2 million contingency.
- A variable-rate borrowing facility exposes the company to interest-rate risk; it maintained a $38.6 million interest-rate swap notional amount. Management stated a 10% foreign-currency move would have an immaterial effect on financial position and cash flows.
- Management concluded disclosure controls were effective and reported no material quarterly change in internal controls over financial reporting.
Investor verification points
- Verify the nine-month diluted EPS: the financial statements report $1.18, while MD&A states $1.19.
- Assess whether seasonal receivables, inventory, and the $95.7 million accrued program-cost balance convert to cash and are settled as expected.
- Review the drivers of lower operating cash flow despite higher earnings, and the company’s cash needs for the 2014 season and capital spending.
- Confirm borrowing capacity and covenant headroom under the secured revolving facility, including the effect of seasonal working-capital needs.
- Monitor the DBCP litigation and Brazilian citation for changes in exposure, estimates, or recorded contingencies.