AMERICAN VANGUARD CORP - Quarter Report: 2010 September (Form 10-Q)

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2010

FOR THE TRANSITION PERIOD FROM                     TO                    

Commission file number 001-13795

AMERICAN VANGUARD CORPORATION

(949) 260-1200

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock, $.10 Par Value—27,452,493 shares as of November 1, 2010.

Table of Contents

AMERICAN VANGUARD CORPORATION

INDEX

Table of Contents

PART I. FINANCIAL INFORMATION

AMERICAN VANGUARD CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Number in thousands except per share data)

(Unaudited)

See notes to consolidated financial statements.

3

Table of Contents

AMERICAN VANGUARD CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Number in thousands, except per share data)

ASSETS (note 7)

Note: The balance sheet at December 31, 2009 has been derived from the audited financial statements at that date.

See notes to consolidated financial statements.

4

Table of Contents

AMERICAN VANGUARD CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

(Numbers in thousands, except share data)

For The Three Months Ended March 31, 2010, June 30, 2010, and September 30, 2010

(Unaudited)

See notes to consolidated financial statements.

5

Table of Contents

AMERICAN VANGUARD CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Numbers in thousands, except share data)

For The Nine Months Ended September 30, 2010 and 2009

(Unaudited)

See notes to consolidated financial statements.

6

Table of Contents

AMERICAN VANGUARD CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Numbers in thousands, except share data)

(Unaudited)

1. The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation, have been included. Operating results for the three and nine months ended September 30, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

2. Property, plant and equipment at September 30, 2010 and December 31, 2009 consists of the following:

3. Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. The components of inventories consist of the following:

4. Based on similar economic and operational characteristics, the Company’s business is aggregated into one reportable segment. Selective enterprise information is as follows:

7

Table of Contents

AMERICAN VANGUARD CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

(Numbers in thousands, except share data)

5. On September 14, 2010, the Company announced that the Board of Directors declared a cash dividend of $0.02 per share. The dividend was distributed on October 14, 2010, to stockholders of record at the close of business on September 24, 2010. Cash dividends paid October 14, 2010 totaled approximately $548.

On March 4, 2010, the Board of Directors declared a cash dividend of $0.01 per share. The dividend was distributed on April 16, 2010 to stockholders of record at the close of business on April 2, 2010. Cash dividends paid April 16, 2010 totaled $271.

On March 9, 2009, the Board of Directors declared a cash dividend of $0.05 per share. The dividend was distributed on April 15, 2009, to stockholders of record at the close of business on March 31, 2009. Cash dividends paid April 15, 2009 totaled $1,341.

6. FASB ASC 260 (SFAS No. 128), Earnings Per Share (“EPS”) requires dual presentation of basic EPS and diluted EPS on the face of all income statements. Basic EPS is computed as net income divided by the weighted average number of shares of common stock outstanding during the period. Diluted EPS reflects potential dilution that could occur if securities or other contracts, which, for the Company, consists of options to purchase shares of the Company’s common stock are exercised.

The components of basic and diluted earnings per share were as follows:

7. Substantially all of the Company’s assets are pledged as collateral with its banks.

The Company has various different loans in place that together constitute the short-term and long-term loan balances shown in the balance sheet at September 30, 2010 and December 31, 2009. These are summarized in the following table:

8

Table of Contents

AMERICAN VANGUARD CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

(Numbers in thousands, except share data)

The Company has four key covenants to its senior, secured credit facility with its banking syndicate. The covenants are as follows: (1) the Company must maintain its borrowings below a certain consolidated funded debt ratio, (2) the Company must limit its annual spending on the acquisition of fixed asset capital additions, (3) the Company must maintain a certain consolidated fixed charge coverage ratio, and (4) the Company must maintain a certain modified current ratio which compares the on hand value of receivables plus inventory with the level of its working capital revolver debt. As of September 30, 2010 the Company met all covenants in that credit facility¹.

At September 30, 2010, based on its performance against the covenants listed above, the Company had the capacity to increase its’ borrowings by up to $41,633 under the credit facility agreement.

For further information, refer to the consolidated financial statements and footnotes thereto (specifically note 2) included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

8. Reclassification—Certain items may have been reclassified (if appropriate), in the prior period consolidated financial statements to conform with the September 30, 2010 presentation.

9. Total comprehensive income includes, in addition to net income, changes in equity that are excluded from the consolidated statements of operations and are recorded directly into a separate section of stockholders’ equity on the consolidated balance sheets.

Comprehensive income and its components consist of the following:

10. Stock Based Compensation Expense—The Company accounts for stock-based awards to employees and directors in accordance with FASB ASC 718 [SFAS No. 123 (revised 2004)], “Share-Based Payment,” which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including shares of common stock granted for services, employee stock options, and employee stock purchases related to the Employee Stock Purchase Plan (“employee stock purchases”) based on estimated fair values.

9

Table of Contents

AMERICAN VANGUARD CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

(Numbers in thousands, except share data)

Stock Options—During the nine months ended September 30, 2010, the Company amended an option to extend the expiration date for a terminated employee to purchase 72,000 shares of common stock. The award would have expired 3 months after termination. The Company extended the expiration date to one year and recognized an award-based compensation expense of $8 for the modification.

During the nine months ended September 30, 2009, employees and non-executive directors exercised options to acquire 60,000 shares of common stock. Cash received upon exercise was $213 or $3.55 per share. At the time of exercise, total intrinsic value of the options exercised was approximately $326 (or $5.44 per share).

There were options to acquire 30,000 shares that were forfeited during the nine months ended September 30, 2010, which had an average exercise price of $4.93. There were options to acquire 48,400 shares that were forfeited during the nine months ended September 30, 2009, which had an average exercise price of $14.45. The options were vested when terminated.

During the nine months ended September 30, 2010 and 2009, the Company recognized stock-based compensation expense, excluding expense related to modifications, related to stock options of approximately $4 each quarter. As of September 30, 2010, the Company had approximately $7 of unamortized stock-based compensation expenses related to unvested stock options outstanding. This amount will be recognized over the weighted-average period of 0.4 years. This projected expense will change if any stock options are granted or cancelled prior to the respective reporting periods or if there are any changes required to be made for estimated forfeitures.

Restricted Shares—During the nine months ended September 30, 2010, the Company granted a total of 5,000 shares of common stock. The shares will cliff vest after three years of service. The shares were valued at $8.32 per share (or $42 in total), which was the publicly traded share price as of the close of trading on the date of grant. During the nine months ended September 30, 2009, the Company granted employees a total of 101,188 shares of common stock. The shares will cliff vest after three years of service. The shares were valued at $11.75 per share (or $1,189 in total), which was the publicly traded share price as of the close of trading on the date of grant. The Company is recognizing as expense the value of restricted shares over the required service period of three years.

During the nine months ended September 30, 2010, the Company granted non-executive board members a total of 40,877 shares of common stock. The shares were immediately vested on the date of grant. The shares were valued at $7.95 per share, which was the publicly traded share price as of the close of trading on the date of grant, and the Company is recognizing a corresponding expense of $325 over the service period, which is the non-executive board member’s term of office.

During the nine months ended September 30, 2009, the Company granted non-executive board members a total of 33,845 shares of common stock. The shares were immediately vested on the date of grant. The shares were valued at $10.34 per share, which was the publicly traded share price as of the close of trading on the date of grant, and the Company is recognizing a corresponding expense of $350 over the service period, which is the non-executive board member’s term of office.

There were 22,008 restricted shares of common stock that were forfeited during the nine months ended September 30, 2010, which had an average grant-date value of $12.21 per share. There were 14,426 restricted shares of common stock that were forfeited during the nine months ended September 30, 2009, which had an average grant-date value of $14.74 per share. Forfeited shares were not vested when terminated.

10

Table of Contents

AMERICAN VANGUARD CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

(Numbers in thousands, except share data)

During the nine months ended September 30, 2010, there were 40,783 restricted shares that vested, which had an average grant-date value of $13.01 per share and an average vest-date value of $7.62 per share. The Company received a tax deduction equal to the shares’ vest-date values.

During the nine months ended September 30, 2010 and 2009, the Company recognized stock-based compensation expense related to restricted shares of $534 and $644, respectively.

As of September 30, 2010, the Company had approximately $868 of unamortized stock-based compensation expenses related to unvested restricted shares. This amount will be recognized over the weighted-average period of 1.2 years. This projected expense will change if any restricted shares are granted or cancelled prior to the respective reporting periods or if there are any changes required to be made for estimated forfeitures.

11. Legal Proceedings—Summarized below are litigation matters in which there has been material activity or developments since the filing of the Company’s Form 10-Q for the period ended June 30, 2010.

A. DBCP Cases

From time to time over the past three decades, the company has been sued as a defendant both in the United States and abroad for claims relating to physical injuries to, for the most part, plantation workers and applicators in foreign countries, allegedly arising from exposure to dibromochloropropane (“DBCP”), a nematicidal compound that the company stopped selling nearly 30 years ago. Pending actions are more fully described in the company’s Form 10K for the period ended December 31, 2009. There have been no material developments in any of these matters during the quarter ended September 30, 2010.

B. Other Matters including PCNB

On or about April 6, 2010, the Pest Management Regulatory Agency (“PMRA”) notified the Company of its intention to cancel the Canadian registration for the compound, pentachloronitrobenzene (PCNB) in that country, citing as a reason the Company’s failure to provide certain manufacturing data to the agency in a timely fashion. The Company has subsequently provided the agency with the required data, and PMRA has extended its notice to permit continued registration through at least the end of the calendar year. We continue to work with PMRA in order to retain some or all uses for the compound in that country and, at this stage, cannot say whether adverse action is probable. Thus, we cannot conclude that a loss is either probable or reasonably estimable and accordingly have not set up a loss contingency.

In August 2010, the United States Environmental Protection Agency (“USEPA”) issued a Stop Sale, Use and Removal Order (“SSURO”) relating to the Company’s USEPA-registered pentachloronitrobenzene (PCNB) product line. The Company sells PCNB primarily for use on turf with the bulk of sales occurring in September and October. In issuing the SSURO, the USEPA alleged that the Company’s product did not comply with the confidential statement of formula (“CSF”) due to the presence of trace impurities that are not listed on the CSF. The SSURO was issued by the agency without either i) a specific finding of risk, ii) providing the Company an opportunity to present a technical case, or iii) any forewarning. Despite its efforts, the Company was unable to obtain informal resolution of the matter with the agency and, in an effort to protect its business, filed an action against USEPA with the United States District Court for the District of Columbia in late August in which it sought emergency and permanent injunctive relief.

On September 2, 2010, that court denied the Company’s motion for emergency relief, finding in effect that while it was concerned about questions of unfairness in EPA’s actions, the agency was empowered to take those

11

Table of Contents

AMERICAN VANGUARD CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

(Numbers in thousands, except share data)

actions. Following the court’s denial, the Company filed an amended CSF with the agency and is currently in discussion with USEPA on technical matters relating to the CSF. At the same time, the Company continues to pursue a preliminary injunction through the litigation pending against USEPA. At September 30, 2010, the Company held inventories in the amount of $16,362 and associated intangible assets of $5,300 relating to this product line. It is too early in the process to predict with any certainty how long the review at USEPA may take, or what the agency’s final conclusions will likely be with respect to either the CSF or the SSURO. Accordingly, the Company believes that a loss is neither reasonably probable nor estimable, and has not set up a loss contingency or recorded any impairment with respect thereto.

12. Recently Issued Accounting Guidance—In August 2010, Financial Accounting Standards Board (FASB) issued Update No. 21, Accounting for Technical Amendments to Various SEC Rules and Schedules. This Update amends various SEC paragraphs pursuant to the issuance of Release No. 33-9026: Technical Amendments to Rules, Forms, Schedules, and Codification of Financial Reporting Policies. Under SEC Regulation S-X Rule 3-04, Changes to Other Stockholders’ Equity, companies are required to present an analysis of the changes to stockholders’ equity in the notes or in a separate statement. This amendment now requires changes in noncontrolling interests be included in the analysis of changes to stockholders’ equity. Currently, the Company does not have any noncontrolling interests but will adopt this amendment when applicable.

12

Table of Contents

FORWARD-LOOKING STATEMENTS/RISK FACTORS:

The Company, from time-to-time, may discuss forward-looking statements including assumptions concerning the Company’s operations, future results and prospects. These forward-looking statements are based on current expectations and are subject to a number of risks, uncertainties and other factors. In connection with the Private Securities Litigation Reform Act of 1995, the Company provides the following cautionary statements identifying important factors which, among other things, could cause the actual results and events to differ materially from those set forth in or implied by the forward-looking statements and related assumptions contained in the entire Report. Such factors include, but are not limited to: product demand and market acceptance risks; the effect of economic conditions; weather conditions; changes in regulatory policy; the impact of competitive products and pricing; changes in foreign exchange rates; product development and commercialization difficulties; capacity and supply constraints or difficulties; availability of capital resources; general business regulations, including taxes and other risks as detailed from time-to-time in the Company’s reports and filings filed with the U.S. Securities and Exchange Commission (the “SEC”). It is not possible to foresee or identify all such factors. For more detailed information, refer to Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operation, Risk Factors, in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

RESULTS OF OPERATIONS

Quarter Ended September 30

Overall financial performance (including net sales and net income) for the quarter ended September 30, 2010 improved as compared to the same period in 2009. Our net sales for the period are up approximately 3% to $68,256, compared to $66,371 for the third quarter of 2009. Net sales for our crop business were $62,413 which is up 9% over the comparable period in 2009 when net sales were $57,154. Net sales for non-crop products during the third quarter of 2010 were $5,843 which was down 37% from $9,217 in the comparable period of 2009.

In the crop sector, market conditions were mixed and, to some degree, crop dependent. While we experienced strong sales from our cotton products (due, among other things, to increased cotton acres), our corn-related products experienced a decline in sales, as customers continue to push their procurement activity past third quarter and closer to time of use. The non-crop sector suffered a setback for two primary reasons: first, a stop sale order remains in effect with respect to our lawn/golf course PCNB products, and drought conditions have obviated the need for our vector borne disease control products. A more detailed discussion of sales performance by group and product line appears below.

13

Table of Contents

Net sales of our insecticides in the third quarter of 2010 were down by approximately 16% to $17,075 as compared to $20,437 for the comparable period in 2009. Within this segment, net sales of our cotton insectide, Bidrin, were up by nearly 46% as compared to the comparable quarter in 2009 due to increased cotton acres and stable cotton pricing. Similarly, net sales of Thimet were up about 22% quarter-over-quarter due largely to a resurgence in the use of the product for nematicidal pest control in sugar cane. However, these gains were offset by a 25% drop in net sales of our corn soil insecticides, due to the fact that customers have continued to focus on working capital levels and are electing to schedule purchases closer to the planting season. We believe that we are well positioned to place these corn-related products within the distribution chain later in the year and early in 2011. We also experienced a 40% drop in net sales of lower margin products having significant generic competition (Orthene^®, permethrin and bifenthrin); this arose, in part, from a conscious decision to promote higher margin products during the period.

Within the product group of herbicides/fungicides/fumigants, we experienced a drop in net sales in the third quarter of 2010 of about 6% ($28,198 v. $30,054). Net sales of our herbicides were down approximately 18% with the bulk of that drop arising from deferral of purchases of our post-emergent corn herbicide, Impact. On a brighter note, our wide-spectrum herbicide, Dacthal, performed well due to the fact that watering restrictions in the Western United States have been eased during the past few quarters, thus enabling growers to plant more acres of vegetables.

Within the product group of other products (which includes plant growth regulators, molluscicides and tolling), our net sales more than doubled during the third quarter of 2010 as compared to the same period in 2009 ($17,140 vs. $6,663). This rise was due largely to strong net sales of our cotton harvest aid, Folex, which rose for three reasons: first, our customary second quarter sales were deferred until the third quarter (as we were unable to obtain supply of that product earlier in the year); second, we completed the acquisition of that product line from Bayer CropScience in late July 2010; and third, cotton acres are up over last year. We also experienced a significant increase in tolling sales which was due largely to a shift from the second quarter.

With respect to non-crop products, while pest strip product sales were essentially constant over the three quarters in 2010, we experienced a setback in net sales of our mosquito adulticide (down by about 37%) due to a persistent drought in the Midwest and Western states; the consequent reduction in pest pressure led to a drop in demand. Furthermore, net sales of our fungicides, were down sharply from the comparable quarter in 2009, led by PCNB, which experienced a drop of approximately 86% quarter over quarter; this decline was a direct result of the Stop Sale, Use & Removal Order (“SSURO”) that was issued by the US Environmental Protection Agency in August 2010, just before the start of our sales season for the product on golf courses. As the company has reported in other filings, we continue to negotiate with USEPA to revoke the SSURO.

Cost of sales for the quarter ended at $42,880 or about 63% of net sales compared to $45,007 or about 68% of net sales for the same period of 2009. Total gross margin for the quarter was up (to 37% from 32%) for the comparable period. With respect to our crop products, gross margin for the period was 37%, up over the 32% gross margin in the comparable period of 2009. Our non-crop products had a gross margin of about 39% for the third quarter of 2010, which was significantly improved as compared to 33% from the comparable period of 2009. While we experienced improved margins on overall product lines when compared to the comparable quarter (42% in Q3 2010 vs. 35% in Q3 2009), underabsorption of overhead costs in our Axis facility reduced overall the gross margin by approximately 5%.

It should be noted that, when making comparisons with other companies’ financial statements, the Company reports distribution costs in operating expenses and not as part of cost of sales.

14

Table of Contents

Operating expenses for the third quarter of 2010 increased by $1,506 to end at $18,976 as compared to last year’s expense of $17,470 during the comparable period. The differences in operating expenses by department are as follows: