AMERICAN VANGUARD CORP - Quarter Report: 2015 June (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED June 30, 2015

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  x    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—29,201,607 shares as of July 23, 2015.

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AMERICAN VANGUARD CORPORATION

INDEX

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PART I. FINANCIAL INFORMATION

AMERICAN VANGUARD CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(In thousands, except per share data)

(Unaudited)

See notes to the condensed consolidated financial statements.

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AMERICAN VANGUARD CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

(Unaudited)

ASSETS

See notes to the condensed consolidated financial statements.

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AMERICAN VANGUARD CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands, except per share data)

For The Three Months Ended March 31, 2015 and June 30, 2015

(Unaudited)

See notes to the condensed consolidated financial statements.

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AMERICAN VANGUARD CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

For The Six Months Ended June 30, 2015 and 2014

(Unaudited)

See notes to the condensed consolidated financial statements

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AMERICAN VANGUARD CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(In thousands, except per share data)

(Unaudited)

1. The accompanying unaudited condensed consolidated financial statements of American Vanguard Corporation and Subsidiaries (“AVD”) have been prepared in accordance with generally accepted accounting principles in the United States of America 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 in the United States of America 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 six months ended June 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

2. Property, plant and equipment at June 30, 2015 and December 31, 2014 consists of the following:

During the six months ended June 30, 2015, the Company eliminated from assets and accumulated depreciation of $231 of fully depreciated assets.

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

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:

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

5. Accrued Program Costs - In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 605, the Company classifies certain payments to its customers as a reduction of sales revenues. The Company describes these payments as “Programs.” Programs are a critical part of doing business in the agricultural chemicals business market place. For accounting purposes, Programs are recorded as a reduction in gross sales and include market pricing adjustments, volume take up or other key performance indicator driven payments, made to distributors, retailers or growers at the end of a growing season. Each quarter management compares individual sale transactions with published programs to determine what program liability has been incurred. Once this initial calculation is made for the specific quarter, sales and marketing management, along with executive and financial management, review the accumulated program balance and make assessments of whether or not customers are tracking in a manner that indicates that they will meet the requirements set out in the terms and conditions attached to each Program. If management believes that customers are falling short of or exceeding their annual goals, then periodic adjustments will be made to the accumulated accrual to properly reflect the Company’s best estimate of the liability at the balance sheet date. The majority of adjustments are made at the end of the crop season, at which time customer performance can be fully assessed. Programs are paid out predominantly on an annual basis, usually in the final quarter of the financial year or the first quarter of the following year.

6. The Company declared the following cash dividends in the period covered by this Form 10-Q:

7. ASC 260 Earnings Per Share (“EPS”) requires dual presentation of basic EPS and diluted EPS on the face of our condensed consolidated statements of operations and comprehensive income. 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, consist of options to purchase shares of the Company’s common stock, are exercised.

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

For the three months and six months ended June 30, 2015, no stock options were excluded from the computation of diluted earnings per share. The Company excluded 2,385 stock options from the computation of diluted earnings per share for the three months ended June 30, 2014 and 4,591 stock options from the computation of diluted earnings per share for the six months ended June 30, 2014, because they were anti-dilutive.

8. The Company has a revolving line of credit and various notes payable that together constitute the short-term and long-term loan balances shown in the condensed consolidated balance sheets at June 30, 2015 and December 31, 2014. These are summarized in the following table:

On June 17, 2013, AMVAC Chemical Corporation (“AMVAC”), the Company’s principal operating subsidiary, as borrower, and affiliates (including the Company), as guarantors and/or borrowers, entered into a Second Amended and Restated Credit Agreement (the “New Credit Agreement”) with a group of commercial lenders led by Bank of the West (AMVAC’s primary bank) as agent, swing line lender and L/C issuer. The new facility also includes both AMVAC C.V. and AMVAC Netherlands B.V. (both Dutch subsidiaries) as borrowers. The New Credit Agreement supersedes the Amended and Restated Credit Agreement (“First Amendment”) dated as of January 10, 2011. The New Credit Agreement is a senior secured lending facility with a five year term and consists of a revolving line of credit with a maximum limit of $200 million and an accordion feature with a maximum limit of $100 million. The actual borrowing capacity under this facility depends upon its compliance with the key covenants described below. In connection with AMVAC’s entering into the New Credit Agreement, all outstanding indebtedness under the First Amendment was rolled over into the New Credit Agreement, including the conversion of term loans into revolving debt.

On July 18, 2014, AMVAC, as borrower, and affiliates (including the Company), as guarantors and/or borrowers, entered into a First Amendment to Second Amended and Restated Credit Agreement (the “First Amendment”) with a group of commercial lenders led by Bank of the West (AMVAC’s primary bank) as agent, swing line lender and L/C issuer. Under the First Amendment, the Consolidated Funded Debt Ratio was increased for the third and fourth quarters of 2014 and the first quarter of 2015, and, further, borrowers are permitted to pay cash dividends to stockholders during the first and second quarters of 2015 notwithstanding prior net income levels.

On April 28, 2015, AMVAC and affiliates (including the Company), as guarantors and/or borrowers, entered into a Second Amendment to Second Amended and Restated Credit Agreement (the “Second Amendment”) with a group of commercial lenders led by Bank of the West (AMVAC’s primary bank) as agent, swing line lender and L/C issuer. Under the Second Amendment, the Consolidated Funded Debt Ratio was increased for the second, third and fourth quarters of 2015.

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The Company has three 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 (taking into account the Company’s twelve month trailing EBITDA), (2) the Company has a limitation on its annual spending on the acquisition of fixed asset capital additions, and (3) the Company must maintain a certain consolidated fixed charge coverage ratio. As of June 30, 2015 the Company met all covenants in that credit facility.

At June 30, 2015, based on its performance against the most restrictive covenants listed above, the Company had the capacity to increase its borrowings by up to $27,101 under the credit facility agreement. This compares to an available borrowing capacity of $64,057 as of June 30, 2014. This decrease in borrowing availability arises from reduced financial performance (as measured in EBITDA) for the trailing twelve month period and increased borrowings associated with product line acquisitions.

During the three month and six month periods ended June 30, 2014 (and throughout the balance of 2014, terminating on December 31, 2014), the Company had in place one interest rate swap contract. While in place, the interest rate swap contract was accounted for under FASB ASC 815 as a cash flow hedge. The effective portion of the gains or losses on the interest rate swap were reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transactions affected earnings. As a result of the termination of the swap contract, there were no gains or losses in other comprehensive income (“OCI”) related to interest rate swap contracts that were expected to be reclassified to earnings in the coming 12 months.

The following tables illustrate the impact of derivatives on the Company’s statements of operations and comprehensive income for the three months and six months ended June 30, 2015 and 2014.

The Effect of Derivative Instruments on the Statement of Financial Performance

For the three months ended June 30, 2015 and 2014

For the six months ended June 30, 2015 and 2014

9. Reclassification—Certain items may have been reclassified in the prior period condensed consolidated financial statements to conform with the June 30, 2015 presentation.

10. Total comprehensive income includes, in addition to net income, changes in equity that are excluded from the condensed consolidated statements of operations and are recorded directly into a separate section of stockholders’ equity on the condensed consolidated balance sheets. For the three month and six month periods ended June 30, 2015, total comprehensive income consisted of net income attributable to American Vanguard and foreign currency translation adjustments.

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11. Stock Based Compensation—The Company accounts for stock-based awards to employees and directors in accordance with FASB ASC 718, “Share-Based Payment,” which requires the measurement and recognition of compensation 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.

The below tables illustrate the Company’s stock based compensation, unamortized stock-based compensation, and remaining weighted average period for the three months and six months ended June 30, 2015 and 2014.

Stock Options—During the six months ended June 30, 2015, the Company did not grant any employees options to acquire shares of common stock.

Option activity within each plan is as follows:

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Information relating to stock options at June 30, 2015 summarized by exercise price is as follows:

The weighted average exercise prices for options granted and exercisable and the weighted average remaining contractual life for options outstanding as of June 30, 2015 was as follows:

During the three months ended June 30, 2015 and 2014, the Company recognized stock-based compensation related to stock options of $116 and $10, respectively.

During the six months ended June 30, 2015 and 2014, the Company recognized stock-based compensation related to stock options of $231 and $21, respectively.

As of June 30, 2015, the Company had approximately $1,204 of unamortized stock-based compensation related to unvested stock options outstanding. This amount will be recognized over the weighted-average period of 2.5 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—A status summary of non-vested shares as of and for the six months ended June 30, 2015 is presented below:

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Restricted stock grants — During the six months ended June 30, 2015, the Company granted a total of 51,005 shares of common stock. Of these, 21,005 shares vest immediately, 7,500 shares will vest after 90 days and the balance will cliff vest after three years of service. The shares granted in 2015 were average fair valued at $12.60 per share. The fair value was determined by using the publicly traded share price as of the date of grant. The Company is recognizing as expense the value of restricted shares over the required service period.

During the six months ended June 30, 2014, the Company granted a total of 240,724 shares of common stock. Of these, 23,478 shares vest immediately, and the balance will cliff vest after three years of service. The shares granted in 2014 were average fair valued at $14.81 per share. The fair value was determined by using the publicly traded share price as of the date of grant. The Company is recognizing as expense the value of restricted shares over the required service period.

During the three months ended June 30, 2015 and 2014, the Company recognized stock-based compensation related to restricted shares of $790 and $985, respectively.

During the six months ended June 30, 2015 and 2014, the Company recognized stock-based compensation related to restricted shares of $1,962 and $1,819, respectively.

As of June 30, 2015, the Company had approximately $3,521 of unamortized stock-based compensation related to unvested restricted shares. This amount will be recognized over the weighted-average period of 1.5 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.

Performance Based Shares—A summary of non-vested performance based shares as of and for the six months ended June 30, 2015 is presented below:

Performance Based Shares — During the six months ended June 30, 2015, the Company granted a total of 7,500 performance based shares that will cliff vest on January 5, 2018, provided that the recipient is continuously employed by the Company during the vesting period. Eighty percent of these performance based shares are based upon financial performance of the Company, specifically, an earnings before income tax (“EBIT”) goal weighted at 50% and a net sales goal weighted at 30% for the period commencing January 1, 2015 and ending December 31, 2017. The remaining 20% of performance based shares are based upon AVD stock price appreciation over the same performance measurement period. The EBIT and net sales goals measure the relative growth of the Company’s EBIT and net sales for the performance measurement period, as compared to the median growth of EBIT and net sales for an identified peer group. The stockholder return goal measures the relative growth of the fair market value of the Company’s stock price over the performance measurement period, as compared to that of the Russell 2000 Index and the median fair market value of the common stock of the comparator companies, identified in the Company’s 2015 Proxy Statement. All parts of these awards vest in three years, but are subject to reduction to a minimum (or even zero) for meeting less than the targeted performance and to increase to a maximum of 200% for meeting in excess of the targeted performance. The Company did not grant any performance based shares during the comparable period last year.

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As of June 30, 2015, performance based shares related to net income and net sales have an average fair value of $11.42 per share. The fair value was determined by using the publicly traded share price as of the date of grant. The performance based shares related to the Company’s stock price have an average fair value of $9.13 per share. The fair value was determined by using the Monte Carlo valuation method. For awards with performance conditions, the Company recognizes share-based compensation cost on a straight-line basis for each performance criteria over the implied service period when the Company believes it is probable that the performance targets, as defined in the agreements, will be achieved.

During the three months ended June 30, 2015 and 2014, the Company recognized stock-based compensation related to performance based shares of $107 and $43, respectively.

During the six months ended June 30, 2015, the Company recognized stock-based compensation related to performance based shares of $205. During the six months ended June 30, 2014, the Company recognized a reduction in stock-based compensation related to performance based shares of $34.

As of June 30, 2015, the Company had approximately $811 of unamortized stock-based compensation related to unvested performance based shares. This amount will be recognized over the weighted-average period of 2.0 years. This projected expense will change if any performance based shares are granted or cancelled prior to the respective reporting periods or if there are any changes required to be made for estimated forfeitures.

Performance Incentive Stock Options—During the six months ended June 30, 2015 and 2014, the Company did not grant any employees performance incentive stock options to acquire shares of common stock.

Performance option activity is as follows:

Information relating to outstanding stock options at June 30, 2015 summarized by exercise price is as follows:

The weighted average exercise prices for options granted and exercisable and the weighted average remaining contractual life for options outstanding as of June 30, 2015 are as follows:

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During the three months ended June 30, 2015 the Company recognized stock-based compensation related to performance stock options of $45. There were no performance incentive stock options issued by the Company prior to those issued during the quarter ended December 31, 2014.

During the six months ended June 30, 2015 the Company recognized stock-based compensation related to performance stock options of $87. There were no performance incentive stock options issued by the Company prior to those issued during the quarter ended December 31, 2014.

As of June 30, 2015, the Company had approximately $454 of unamortized stock-based compensation related to unvested performance incentive stock options outstanding. This amount will be recognized over the weighted-average period of 2.5 years. This projected expense will change if any performance incentive 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.

12. Legal proceedings—During the reporting period, there have been no material developments in the legal proceedings that were reported in the Company’s Form 10-K for the period ended December 31, 2014, other than as discussed below:

Sanchez v. Agro Logistics. AMVAC has been named as one of 27 defendants in an action entitled Sanchez v. Agro Logistic Systems, Inc. et al which was filed on April 14, 2014 with the Superior Court for the State of California for the County of Los Angeles as case number BC542612. In this matter, two individuals seek unspecified damages from defendants for negligence, strict liability and other causes of action allegedly leading to physical injury (myelogenous leukemia) arising from exposure to dozens of registered products, from the multiple manufacturers, over the course of their employment as laborers from 1989 through 2012. A fair amount of discovery, including plaintiff’s deposition, has been completed. Plaintiffs are unable to confirm whether they used or were exposed to any of the Company’s products. The Company intends to defend the matter vigorously, believes that the claims have no merit, and has entered into a joint defense arrangement with certain other defendants. The Company will continue to defend this matter and does not believe that a loss is either probable or reasonably estimable. Accordingly, the Company has not recorded a loss contingency for this matter.

Galvan v. AMVAC. On April 7, 2014, an action entitled Graciela Galvan v. AMVAC Chemical Corp. was filed with the Superior Court for the State of California for the County of Orange as case number 00716103CXC. This is a putative class action brought under California Labor Code Section 2698 under which claimant, an inactive employee currently on leave, seeks civil penalties on behalf of herself and other allegedly “similarly aggrieved employees” under various Labor Code sections relating to overtime compensation, minimum wages, meal periods, and rest periods among other things. After having taken discovery against plaintiff, the Company believes that the claims have no merit and intends to defend the matter vigorously. At this stage in the proceedings, the Company does not believe that a loss is probable or reasonably estimable; accordingly, the Company has not recorded a loss contingency for the matter.

USEPA RCRA Matter. On or about March 24, 2015, Region 4 of the United States Environmental Protection Agency (USEPA) issued to registrant’s principal operating subsidiary (AMVAC Chemical Corporation) an Opportunity to Show Cause why USEPA should not take formal action under Section 3008(a) of the Resource Conservation and Recovery Act (RCRA) for potential noncompliance arising from AMVAC’s importation, transportation and storage of used, depleted Lock‘N Load containers having residual amounts of its product Thimet. AMVAC believes that these containers were properly handled and stored under, among others, the applicable provisions of the Federal Insecticide, Fungicide and Rodenticide Act relating to recycling and disposal of depleted, refillable containers (and their contents). AMVAC responded to the substance of the show cause letter on April 10, 2015 and has engaged in multiple discussions with USEPA on the matter. While violations of RCRA, if any, may carry civil penalties, it is too early in the matter to determine whether a loss is probable or reasonably estimable. Accordingly, registrant has not recorded a loss contingency on this matter.

USEPA TSCA Matter. On or about May 13, 2015, Region 9 of the United States Environmental Protection Agency (USEPA) issued a notice of violation of the Toxic Substances Control Act (“TSCA”) in which it alleged that the Company had failed to submit a Form U to the agency during the 2012 submission period for four chemical substances imported for commercial purposes at two of its facilities. The Company responded to the allegations by not only providing documentation but also filing the subject Form U. After discussion with USEPA regarding mitigation measures, the parties agreed to a civil penalty in the amount of $81. We expect that settlement documents will be completed in the near term. Accordingly, the Company has recorded a loss contingency in the amount of $81.

Schiemer Farms Matter. On or about May 12, 2015, Farmers Supply Co-op made a written claim against the Company for losses from the alleged failure of the Company’s soil fumigant, Vapam, to control weeds on an onion crop that was harvested in late 2014. The grower alleges a loss of yield in the amount of $1.2 million. The Company has been in informal discussion with claimant (which applied the product) and grower and does not believe that claimant is entitled to the relief that it seeks. Based upon its understanding of the facts at this stage, the Company does not believe that a loss is either probable or reasonably estimable and has not recorded a loss contingency on the matter.

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13. Recently Issued Accounting Guidance—In April 2015, The Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-03, Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. This ASU requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this update. ASU 2015-03 is effective for financials statement issued for fiscal years beginning after December 15, 2015, with early adoption permitted. The Company evaluated the impact and has elected an early adoption of this update in the quarter ended June 30, 2015. This change was immaterial to the condensed consolidated financial statements.

In August 2014, FASB issued ASU 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. This ASU requires that management of an entity assesses whether there is substantial doubt about the ability of the entity to continue as a going concern and for making the appropriate disclosures. The assessment must be performed at each annual and interim reporting period, and there is substantial doubt about an entity’s ability to continue as a going concern if it is probable that the entity will be unable to meet its obligations as they become due within 12 months of the date of the financial statements are issued. In the assessment, management must consider the information available at the date of issuance of the financial statements, as well as mitigating factors and plans to alleviate the substantial doubt. ASU 2014-15 is effective for annual period ending after December 15, 2016 and interim periods thereafter. Early application is permitted. Upon adoption, the Company will follow the guidance in this ASU when assessing going concern.

In June 2014, The Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-12, Compensation—Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period, a consensus of the FASB Emerging Issues Task Force. ASU 2014-12 requires that a performance target that affects vesting of share-based payment awards and that could be achieved after the requisite service period be treated as a performance condition. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the periods for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award if the performance target is achieved. ASU 2014-12 is effective for all entities for interim and annual periods beginning after December 15, 2015, with early adoption permitted. An entity may apply the amendments in ASU 2014-12 either (i) prospectively to all awards granted or modified after the effective date or (ii) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. The adoption of ASU 2014-12 is not expected to have a material impact on the Company’s consolidated financial condition or results of operations.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. ASU 2014-09 outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. This new revenue recognition model provides a five-step analysis in determining when and how revenue is recognized. The new model will require revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration a company expects to receive in exchange for those goods or services. The standard is effective for annual periods beginning after December 15, 2016, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). In April 2015, the FASB voted to defer the effective date of this update to December 15, 2017. We are currently evaluating the impact of our pending adoption of ASU 2014-09 on our consolidated financial statements and have not yet determined the method by which we will adopt the standard in 2018 or its impact on our consolidated financial statements.

14. Fair Value of Financial Instruments—The carrying values of cash, receivables and accounts payable approximate their fair values because of the short maturity of these instruments. The fair value of the Company’s long-term debt and note payable to bank is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. Such fair value approximates the respective carrying values of the Company’s long-term debt and note payable to bank.

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15. Accumulated Other Comprehensive Income (“AOCI”)—

The following table lists the beginning balance, annual activity and ending balance of accumulated other comprehensive loss, which consists of foreign currency translation adjustments:

16. On March 25, 2013, the Company made a $3,687 equity investment in TyraTech Inc. (“TyraTech”), a Delaware corporation that specializes in developing, marketing and selling pesticide products containing essential oils and other natural ingredients, to acquire an ownership position of approximately 29.27%. In February 2014, TyraTech issued 37,391,763 shares and raised approximately £1,870 ($3,100). Due to the share issuance, the Company recognized a $256 gain from the dilution of the Company’s ownership position. As of June 30, 2015, the Company’s ownership position in TyraTech was approximately 21.18%. The Company utilizes the equity method of accounting with respect to this investment. As a result, our net income includes losses from equity method investments, which represents our proportionate share of TyraTech’s estimated net losses for the current accounting period. For the six months ended June 30, 2015, the Company recognized a loss of $191 as a result of the Company’s ownership position in TyraTech.

The Company’s investment in TyraTech is included in other assets on the condensed consolidated balance sheet. At June 30, 2015, the carrying value of the Company’s investment in TyraTech was $2,981 and the quoted market value of its shareholding was $4,148 based on the London Stock Exchange, Alternative Investment Market (“AIM”).

17. Income Taxes – Income tax benefit was $685 for the six months ended June 30, 2015 as compared to an income tax expense of $856 for the six months ended June 30, 2014. The effective tax rate was a benefit of (339.1%) in 2015 and an expense of 27.0% in 2014. Income tax benefit was $393 for the three months ended June 30, 2015 and $160 for the three months ended June 30, 2014.

The effective tax rate for the six months ended June 30, 2015 is based on the financial statements for the six months ended June 30, 2015. It became increasingly difficult to estimate a reliable annual effective tax rate for the 2015 financial year because of the uncertainty in forecasting taxable income or loss for the remainder of the year for each of our domestic and international operations. Significant changes in our estimated annual effective tax rate could result from changes in forecasts or actual results for either our domestic or international operations. Since an estimated annual effective tax rate under these circumstances would not provide a meaningful estimate, an actual year-to-date effective tax rate is the best estimate of the annual tax rate.

18. Product Acquisitions – On April 6, 2015, the Company completed the acquisition of a nematicide product line, Nemacur, in Europe from Adama Agricultural Solutions Ltd. Further on April 29, 2015, the Company completed the acquisition of the global herbicide product line, Hyvar/Krovar from DuPont. These product acquisitions were immaterial to the Company’s condensed consolidated financial statements.

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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 1A., Risk factors and Item 7A., Quantitative and Qualitative Disclosures about Market Risk, in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

RESULTS OF OPERATIONS

Quarter Ended June 30:

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Financial performance for the quarter ended June 30, 2015 included net sales of $66,523, which were down approximately 3% as compared to net sales of $68,313 for the second quarter of 2014. Our gross profit performance ended at $25,121 or 38% of net sales as compared $26,060 or 38% of net sales for the comparable quarter last year.

With respect to sales performance by category, net sales for our crop business remained flat at $57,792, as compared to $57,379 for the same period of the prior year, while net sales for non-crop products were down 20% at $8,731, as compared to $10,934 last year. From a geographic perspective, our domestic sales were down 12% and our international sales were up 24% during the comparable period. Included in international sales were immaterial revenues associated with the product lines acquired during the second quarter of 2015. A more detailed discussion of general market conditions and sales performance by category of products appears below.

Second quarter 2015 financial performance was influenced by several factors, including weak re-stocking activity from distributors in the Midwest United States, and lower commodity price of corn causing some growers to minimize costs of their crop inputs. In addition to these factors in the corn market, reduced planted acres in cotton (as compared to the prior year) affected the sales of our cotton insecticide, Bidrin. Notwithstanding these factors, we saw improved sales performance in our Herbicide and Soil Fumigant product lines and higher year-over-year toll manufacturing activity, which contributed to improved manufacturing utilization and lower unabsorbed costs.

Net sales of our insecticide group for crop applications were down about 20%, to $27,586 as compared to $34,524 during the second quarter of 2014. Within this group, net sales of our granular soil insecticides (“GSIs”) were down approximately 9%, as compared to the comparable quarter in 2014. A significant portion of this sales performance was driven by a shift in the timing of sales for our Thimet^® product used in sugar cane (from the second quarter in 2014 to the third quarter this year). Partially offsetting this drop was a significant increase in our Nemacur^® product sold into a number of international markets. In our non-granular insecticide products, demand for our Bidrin^® foliar insecticide used primarily for general plant bugs and particularly stink bugs defense in cotton, declined in line with the significant reduction in acres of U.S. cotton planted this year.

Within the group of herbicides/fungicides/fumigants, net sales for the second quarter of 2015 increased by approximately 25% to $17,451 from $13,926 in the same period of 2014. Net sales of our herbicide products rose significantly on the strength of our post-emergent corn herbicide, Impact^®. Our soil fumigant sales were also significantly higher this year, driven in part by increased sales into U.S. vegetables markets, as compared to the prior period in 2014.

Within the group of other products (which includes plant growth regulators, molluscicides and tolling activity), our net sales increased by about 43% to $12,755, as compared to $8,929 in the second quarter of 2014. This performance was due largely to a quarterly sales increase in Folex^® (our cotton defoliant / harvest aid) despite reduced cotton acres reflecting low customer inventory position, and finally a significant increase in toll manufacturing during the quarter.

Our non-crop sales ended the second quarter of 2015 at $8,731, which was 20% below net sales of $10,934 for the same period of the prior year. Despite strong net sales from our mosquito adulticide product, Dibrom^® , we saw declines in our pest strip, pharmaceutical and Envance consumer pest spray product lines attributed to weather conditions.

Our cost of sales for the second quarter of 2015 was $41,402 or 62% of net sales. This compared to $42,253 or 62% of net sales for 2014. The Company aggregates a number of key variable, semi-variable and fixed cost components within reported cost of sales. During the three month periods ended June 30, 2015 and 2014, raw material purchase prices remained flat. As a percentage of sales, raw materials increased from 37.5% in 2014 to 40.0% in 2015. This increase was driven by the increased proportion of international sales, which represented 34.0% of sales in the quarter ended June 30, 2015 and 27.0% in the comparable quarter of prior year. Labor and burden costs also increase from 14.0% in 2014 to 16.5% in 2015. This effect was driven by the significant shift from domestic to international sales and also higher levels of tolling product sales (both international and tolling product sales have higher cost of goods when compare to domestic sales).

For the three months ended June 30, 2015, the cost of running our U.S. factories was about 7.0% higher than costs in 2014. A primary driver for the increase is associated with the tolling activity. Offsetting this increase, factory output and associated overhead recovery was 61% higher than the same period of 2014. The overall factory performance added $3,017 or 4.5% to the gross margin performance for the quarter of 2015 and offset the adverse mix impacts described above. As a result, our gross profit ended at 38% of sales, which was flat as compared to the same period of the prior year.

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.

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Operating expenses decreased by $1,415 to $23,922 for the three months ended June 30, 2015, as compared to the same period in 2014. The differences in operating expenses by department are as follows: