American Vanguard Corporation (NYSE: AVD) — 2020 Form 10-K
Business context and reporting period. The company manufactures and markets specialty chemicals and biological products for agriculture, commercial pest control, and consumer uses. It reports one operating segment. This filing covers the year ended December 31, 2020; financial amounts below are in U.S. dollars, rounded to millions unless stated otherwise.
Key financial results
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Net sales | $458.7 million | $468.2 million | Down 2% |
| Gross profit / margin | $172.6 million / 38% | $177.4 million / 38% | Profit down 3%; margin flat |
| Operating income | $22.9 million | $26.2 million | Down 13% |
| Net income attributable to AVD | $15.2 million | $13.6 million | Up 12% |
| Diluted earnings per share | $0.51 | $0.46 | Up $0.05 |
| Cash from operating activities | $89.2 million | $9.4 million | Higher, largely reflecting working-capital changes |
- Revenue mix: U.S. crop sales rose 1% to $223.2 million; U.S. non-crop sales fell 21% to $48.6 million; international sales rose 1% to $187.0 million, or 40.8% of total sales.
- Expenses and taxes: Operating expenses increased 2% to $154.3 million. Interest expense declined to $5.2 million from $7.2 million. The effective tax rate fell to 16.7% from 27.4%; tax expense included a $2.1 million benefit from releases of uncertain tax position liabilities.
- Cash flow: Investing activities used $35.8 million, including $11.2 million of capital expenditures and acquisition spending. Financing activities used $43.2 million, including $41.6 million of net credit-facility repayments. Cash and equivalents ended the year at $15.9 million, up from $6.6 million.
- Liquidity and debt: Working capital was $160.4 million. The balance sheet reports long-term debt, net of loan fees, of $107.4 million at year-end, versus $148.8 million in 2019; gross revolver borrowings were $107.9 million. Additional borrowing capacity was $86.7 million, compared with $27.0 million a year earlier. The company reported compliance with debt covenants.
Material changes and unusual items
- Net income increased despite lower operating income, helped by a $4.7 million preliminary bargain-purchase gain on the Agrinos acquisition, a $0.7 million gain on a Clean Seed equity investment, lower interest expense, and the lower tax provision.
- AVD acquired Agrinos, a biological crop-input business, and Australian distributor AgNova in October 2020. The acquisition purchase-price allocations remained preliminary. AgNova contributed $3.1 million of revenue and $0.5 million of net income after acquisition; Agrinos’ operating results were described as immaterial.
- Operating cash flow benefited materially from working-capital movements, including a $36.8 million increase in deferred revenue as customers made advance payments through incentive programs. These payments are not recognized as revenue until the related goods are shipped and control transfers.
- Customer concentration remained significant: the three largest customers represented 39% of 2020 sales (17%, 12%, and 10%).
Outlook, commentary, and principal risks
- Management provided no specific sales or earnings guidance. It stated that cash from operations, cash on hand, and available credit were expected to support working capital and capital spending for at least 12 months from the filing date.
- Management said the pandemic caused minimal operational disruption but likely reduced sales opportunities by several million dollars, with an indeterminate impact on profitability. Factors included curtailed customer meetings, lower demand tied to restaurant closures, and currency weakness in Brazil, Mexico, and Australia.
- Management cited stronger U.S. crop sales late in the year as corn and soybean prices improved; weaker U.S. non-crop sales reflected lower mosquito-control inventory demand and pandemic-related closures. International results included acquired-business contributions, offset partly by softness in Central America and Brazil and regulatory phase-out of a product in the EU.
- Key risks include pesticide registration and regulatory restrictions, weather and climate variability, competition and generic products, customer and supplier concentration, foreign-exchange exposure, acquisition integration and valuation, and environmental liabilities. The company does not hedge its foreign-currency exposure.
- Material contingency: In January 2021, the DOJ and EPA informed AMVAC that they were investigating potential violations involving FIFRA, RCRA, and obstruction and false-statement statutes, and identified the company and an employee as investigation targets. The company was discussing possible resolution and said the outcome could materially affect operations, financial condition, and cash flow; it could not predict the timing or outcome.
- Other disclosed matters include DBCP litigation, an Alberta product-liability case, and an EPA risk-management matter in Alabama. The company recorded immaterial loss contingencies for the latter two. It reported no recorded loss contingency for the DBCP matters, stating a loss was not probable or reasonably estimable.
Important facts for investors to verify
- Review the DOJ/EPA investigation’s subsequent developments, potential remedies, and any resulting financial or operational exposure.
- Assess whether the Agrinos and AgNova acquisitions meet expectations; the purchase accounting was preliminary, and Agrinos generated a bargain-purchase gain.
- Evaluate the sustainability of 2020 operating cash flow, given the substantial contribution from customer prepayments and other working-capital movements.
- Review the $45.4 million accrued program-cost balance and related estimates. The auditor identified program-cost variable consideration as a critical audit matter.
- Reconcile apparent inconsistencies in the filing’s selected financial data: it lists 2020 long-term debt of $171.3 million and stockholders’ equity of negative $18.2 million, while the balance sheet and debt note report net long-term debt of $107.4 million and total stockholders’ equity of $360.7 million. The cash-flow statement reports 2019 operating cash flow of $9.4 million, while MD&A contains a different comparison figure.
Audit and controls: The auditor issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting. Management and the auditor excluded Agrinos and AgNova from the 2020 internal-control assessment because they were acquired in the fourth quarter.