American Vanguard Corporation — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. The company sells crop and non-crop agricultural products and reports one operating segment. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $152.1 | $147.3 | $449.6 | $398.1 |
| Gross profit / margin | $61.4 / 40% | $57.1 / 39% | $182.4 / 41% | $154.3 / 39% |
| Operating income | $11.2 | $8.9 | $36.8 | $21.6 |
| Net income | $6.7 | $5.5 | $23.5 | $13.7 |
| Diluted EPS | $0.23 | $0.18 | $0.78 | $0.45 |
| Operating cash flow | Not separately presented for the quarter | $(45.7) | $(0.2) |
- Sales mix: Q3 U.S. crop sales rose 4% to $69.1 million; U.S. non-crop fell 12% to $18.9 million; international sales increased 9% to $64.1 million. For the nine months, U.S. crop rose 20%, international rose 14%, and U.S. non-crop declined 11%.
- Profitability: Q3 gross profit grew 8% while sales grew 3%, supported by pricing, higher-margin product mix and improved factory performance. Nine-month gross profit increased 18%; operating expenses rose 9% to $145.6 million.
- Liquidity and working capital: Cash was $20.8 million at September 30, versus $16.3 million at year-end 2021. Current assets were $436.8 million and current liabilities $219.9 million. Operating cash use reflected substantial working-capital investment, including increases in receivables and inventories and the seasonal decline in customer prepayments.
- Debt: Net long-term debt was $148.4 million, up from $52.2 million at December 31, 2021; revolving borrowings were $149.3 million. The company reported $120.8 million of additional borrowing capacity, a 1.93 leverage ratio against a 3.5 maximum, and compliance with all credit covenants. The credit facility matures August 2026; its stated rate was 4.46% at quarter-end.
Material changes and notable items
- Nine-month revenue increased 13% and net income increased 71% year over year. The nine-month period included $1.785 million of proxy-defense costs; no comparable expense was recorded in 2021.
- Cash used in operations increased to $45.7 million from $0.2 million. Management attributed this chiefly to working-capital growth: receivables rose $46.3 million and inventories rose $39.0 million, while customer prepayments declined $62.8 million. Inventory was brought in earlier to secure materials for the balance of 2022 and the next growing season.
- The company spent $33.7 million on share repurchases, including $20 million under an accelerated share repurchase arrangement, and paid $2.1 million in dividends during the nine months.
- Nine-month income tax expense was $10.2 million, with a 30.2% effective tax rate, versus $5.3 million and 27.4% in 2021. Management cited stronger results and a different mix of income across jurisdictions.
Outlook, commentary and risks
- Management said high crop commodity prices, a strong farm economy, pricing actions and improved factory performance supported results. It reported improving supply-chain conditions overall, but noted continuing inflation, freight and logistics costs, foreign-exchange pressure and some supply constraints.
- The filing provides no specific earnings or revenue guidance. Management said cash flows, cash balances and available credit were expected to meet working-capital and cash needs for the next 12 months.
- Management identified inflation, higher interest rates, possible recession, weather, product demand, regulation, competition, foreign exchange and supply constraints as risks. The company does not hedge its foreign-currency exposure; variable-rate debt also exposes it to interest-rate changes.
- Regulatory/legal contingencies: DOJ and EPA investigations concerning alleged FIFRA, RCRA and related violations remained unresolved; the company had recorded no loss contingency and said an adverse outcome could materially affect the business. Separately, EPA proceedings concerning DCPA/Dacthal remained pending after the Environmental Appeals Board reversed an administrative ruling and remanded the matter; settlement discussions were also underway, and no loss contingency was recorded. The SmartBlock-related Canadian litigation was settled with the company’s contribution largely covered by existing reserves and described as immaterial.
- Management reported no material change in risk factors from its 2021 Form 10-K, except for increased inflation, interest-rate and recession risks. Disclosure controls were judged effective, with no material change in internal control over financial reporting reported.
Important facts for investors to verify
- Whether the company can convert its larger receivables and inventory balances into cash while meeting seasonal customer-program payments.
- Progress and potential financial or operational consequences of the unresolved DOJ/EPA investigation and DCPA suspension proceedings, including any eventual recorded contingency.
- Whether pricing and product mix can continue to offset inflation, foreign-exchange movements, freight costs and higher borrowing rates.
- Updated debt, borrowing capacity and covenant headroom, particularly as working-capital needs and repurchases affect borrowings.
- Whether non-crop softness, drought-related product volume pressure, and regional supply or logistics constraints persist or reverse.