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AMERICAN VANGUARD CORP - Quarter Report: 2019 September (Form 10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2019

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM                      TO                      

Commission file number 001-13795

 

AMERICAN VANGUARD CORPORATION

 

 

Delaware

95-2588080

(State or other jurisdiction of

Incorporation or organization)

(I.R.S. Employer

Identification Number)

 

 

4695 MacArthur Court, Newport Beach, California

92660

(Address of principal executive offices)

(Zip Code)

(949) 260-1200

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock, $.10 par value

 

AVD

 

New York Stock Exchange

 

 

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      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

Emerging growth company

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

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

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—30,186,844 shares as of October 29, 2019.

 

 

 

 


 

AMERICAN VANGUARD CORPORATION

INDEX

 

 

 

 

Page Number

PART I—FINANCIAL INFORMATION

 

3

 

 

 

 

Item 1.

Financial Statements (unaudited)

 

3

 

 

 

 

 

Condensed Consolidated Statements of Operations for the three months and nine months ended September 30, 2019 and 2018

 

3

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the three months and nine months ended September 30, 2019 and 2018

 

4

 

 

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018

 

5

 

 

 

 

 

Condensed Consolidated Statement of Stockholders’ Equity for the three months and nine months ended September 30, 2019 and 2018

 

6

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and 2018

 

8

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

9

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

21

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

31

 

 

 

 

Item 4.

Controls and Procedures

 

31

 

 

 

PART II—OTHER INFORMATION

 

32

 

 

 

 

Item 1.

Legal Proceedings

 

32

 

Item 1A.

Risk Factors

 

32

 

 

 

 

Item 6.

Exhibits

 

33

 

 

 

SIGNATURES

 

34

 

 

2


 

PART I. FINANCIAL INFORMATION

Item 1.

FINANCIAL STATEMENTS

 

AMERICAN VANGUARD CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

 

 

 

For the Three Months

Ended September 30,

 

 

For the Nine Months Ended September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Net sales

 

$

124,884

 

 

$

111,780

 

 

$

337,664

 

 

$

322,934

 

Cost of sales

 

 

77,421

 

 

 

66,480

 

 

 

206,846

 

 

 

193,286

 

Gross profit

 

 

47,463

 

 

 

45,300

 

 

 

130,818

 

 

 

129,648

 

Operating expenses

 

 

40,677

 

 

 

33,635

 

 

 

110,839

 

 

 

102,011

 

Operating income

 

 

6,786

 

 

 

11,665

 

 

 

19,979

 

 

 

27,637

 

Interest expense, net

 

 

2,070

 

 

 

1,116

 

 

 

5,606

 

 

 

2,961

 

Income before provision for income taxes and loss on equity

   method investments

 

 

4,716

 

 

 

10,549

 

 

 

14,373

 

 

 

24,676

 

Income tax expense

 

 

1,474

 

 

 

3,526

 

 

 

4,059

 

 

 

6,966

 

Income before loss on equity method investments

 

 

3,242

 

 

 

7,023

 

 

 

10,314

 

 

 

17,710

 

Loss from equity method investments

 

 

89

 

 

 

533

 

 

 

149

 

 

 

1,051

 

Net income

 

 

3,153

 

 

 

6,490

 

 

 

10,165

 

 

 

16,659

 

Net loss attributable to non-controlling interest

 

 

 

 

 

35

 

 

 

 

 

 

120

 

Net income attributable to American Vanguard

 

$

3,153

 

 

$

6,525

 

 

$

10,165

 

 

$

16,779

 

Earnings per common share—basic

 

$

.11

 

 

$

.22

 

 

$

.35

 

 

$

.57

 

Earnings per common share—assuming dilution

 

$

.11

 

 

$

.22

 

 

$

.34

 

 

$

.56

 

Weighted average shares outstanding—basic

 

 

29,057

 

 

 

29,399

 

 

 

29,013

 

 

 

29,340

 

Weighted average shares outstanding—assuming dilution

 

 

29,650

 

 

 

30,209

 

 

 

29,591

 

 

 

30,146

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to the condensed consolidated financial statements.

 

3


 

AMERICAN VANGUARD CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

 

 

 

For the Three Months

Ended September 30,

 

 

For the Nine Months Ended September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Net income

 

$

3,153

 

 

$

6,490

 

 

$

10,165

 

 

$

16,659

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

(1,080

)

 

 

638

 

 

 

(2,192

)

 

 

412

 

Comprehensive income

 

 

2,073

 

 

 

7,128

 

 

 

7,973

 

 

 

17,071

 

Net loss attributable to non-controlling interest

 

 

 

 

 

35

 

 

 

 

 

 

120

 

Comprehensive income attributable to American Vanguard

 

$

2,073

 

 

$

7,163

 

 

$

7,973

 

 

$

17,191

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to the condensed consolidated financial statements.

 

 

 

4


 

AMERICAN VANGUARD CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(Unaudited)

 

ASSETS

 

 

 

September 30,

2019

 

 

December 31,

2018

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

5,887

 

 

$

6,168

 

Receivables:

 

 

 

 

 

 

 

 

Trade, net of allowance for doubtful accounts of $1,988 and $1,263, respectively

 

 

140,220

 

 

 

123,320

 

Other

 

 

13,783

 

 

 

10,709

 

Total receivables, net

 

 

154,003

 

 

 

134,029

 

Inventories, net

 

 

186,285

 

 

 

159,895

 

Prepaid expenses

 

 

10,731

 

 

 

10,096

 

Income tax receivable

 

 

88

 

 

 

 

Total current assets

 

 

356,994

 

 

 

310,188

 

Property, plant and equipment, net

 

 

55,330

 

 

 

49,252

 

Operating lease right-of-use assets

 

 

12,186

 

 

 

 

Intangible assets, net of amortization

 

 

196,542

 

 

 

186,583

 

Goodwill

 

 

38,435

 

 

 

25,790

 

Other assets

 

 

21,810

 

 

 

21,774

 

Total assets

 

$

681,297

 

 

$

593,587

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

Current liabilities:

 

 

 

 

 

 

 

 

Current installments of other liabilities

 

$

1,305

 

 

$

1,609

 

Accounts payable

 

 

67,188

 

 

 

66,535

 

Deferred revenue

 

 

368

 

 

 

20,043

 

Accrued program costs

 

 

57,512

 

 

 

37,349

 

Accrued expenses and other payables

 

 

11,912

 

 

 

15,962

 

Operating lease liabilities, current

 

 

4,889

 

 

 

 

Income taxes payable

 

 

 

 

 

4,030

 

Total current liabilities

 

 

143,174

 

 

 

145,528

 

Long-term debt, net of deferred loan fees

 

 

165,008

 

 

 

96,671

 

Other liabilities, excluding current installments

 

 

9,808

 

 

 

6,795

 

Operating lease liabilities, long-term

 

 

7,414

 

 

 

 

Deferred income tax liabilities

 

 

17,907

 

 

 

15,363

 

Total liabilities

 

 

343,311

 

 

 

264,357

 

Commitments and contingent liabilities

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Preferred stock, $.10 par value per share; authorized 400,000 shares; none issued

 

 

 

 

 

 

Common stock, $.10 par value per share; authorized 40,000,000 shares; issued

   33,235,938 shares at September 30, 2019 and 32,752,827

   shares at December 31, 2018

 

 

3,325

 

 

 

3,276

 

Additional paid-in capital

 

 

88,257

 

 

 

83,177

 

Accumulated other comprehensive loss

 

 

(6,699

)

 

 

(4,507

)

Retained earnings

 

 

271,263

 

 

 

262,840

 

 

 

 

356,146

 

 

 

344,786

 

Less treasury stock at cost, 3,061,040 shares at September 30, 2019 and

   2,902,992 shares at December 31, 2018

 

 

(18,160

)

 

 

(15,556

)

Total stockholders’ equity

 

 

337,986

 

 

 

329,230

 

Total liabilities and stockholders' equity

 

$

681,297

 

 

$

593,587

 

See notes to the condensed consolidated financial statements.

 

 

 

5


 

 

AMERICAN VANGUARD CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

For The Three and Nine Months Ended September 30, 2019

(In thousands, except share data)

(Unaudited)

 

 

Common Stock

 

 

Additional

 

 

Accumulated

Other

 

 

 

 

 

 

Treasury Stock

 

 

 

 

 

 

Non-

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Paid-in

Capital

 

 

Comprehensive

Loss

 

 

Retained

Earnings

 

 

Shares

 

 

Amount

 

 

AVD

Total

 

 

Controlling

Interest

 

 

Total

 

Balance, December 31, 2018

 

32,752,827

 

 

$

3,276

 

 

$

83,177

 

 

$

(4,507

)

 

$

262,840

 

 

 

2,902,992

 

 

$

(15,556

)

 

$

329,230

 

 

$

 

 

$

329,230

 

Common stock issued under ESPP

 

22,441

 

 

 

2

 

 

 

336

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

338

 

 

 

 

 

 

338

 

Cash dividends on common stock

   ($0.02 per share)

 

 

 

 

 

 

 

 

 

 

 

 

 

(580

)

 

 

 

 

 

 

 

 

(580

)

 

 

 

 

 

(580

)

Foreign currency translation adjustment,

   net

 

 

 

 

 

 

 

 

 

 

(1,769

)

 

 

 

 

 

 

 

 

 

 

 

(1,769

)

 

 

 

 

 

(1,769

)

Stock based compensation

 

 

 

 

 

 

 

1,485

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,485

 

 

 

 

 

 

1,485

 

Stock options exercised; grants,

   termination and vesting of

   restricted stock units (net of

   shares in lieu of taxes)

 

419,295

 

 

 

42

 

 

 

(930

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(888

)

 

 

 

 

 

(888

)

Shares repurchased

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

158,048

 

 

 

(2,604

)

 

 

(2,604

)

 

 

 

 

 

(2,604

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

3,906

 

 

 

 

 

 

 

 

 

3,906

 

 

 

 

 

 

3,906

 

Balance, March 31, 2019

 

33,194,563

 

 

 

3,320

 

 

 

84,068

 

 

 

(6,276

)

 

 

266,166

 

 

 

3,061,040

 

 

 

(18,160

)

 

 

329,118

 

 

 

 

 

 

329,118

 

Cash dividends on common stock

   ($0.02 per share)

 

 

 

 

 

 

 

 

 

 

 

 

 

(580

)

 

 

 

 

 

 

 

 

(580

)

 

 

 

 

 

(580

)

Foreign currency translation

   adjustment, net

 

 

 

 

 

 

 

 

 

 

657

 

 

 

 

 

 

 

 

 

 

 

 

657

 

 

 

 

 

 

657

 

Stock based compensation

 

 

 

 

 

 

 

1,510

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,510

 

 

 

 

 

 

1,510

 

Stock options exercised; grants,

   termination and vesting of

   restricted stock units (net of

   shares in lieu of taxes)

 

9,628

 

 

 

1

 

 

 

36

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

37

 

 

 

 

 

 

37

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

3,106

 

 

 

 

 

 

 

 

 

3,106

 

 

 

 

 

 

3,106

 

Balance, June 30, 2019

 

33,204,191

 

 

 

3,321

 

 

 

85,614

 

 

 

(5,619

)

 

 

268,692

 

 

 

3,061,040

 

 

 

(18,160

)

 

 

333,848

 

 

 

 

 

 

333,848

 

Common stock issued under ESPP

 

24,788

 

 

 

3

 

 

 

375

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

378

 

 

 

 

 

 

378

 

Cash dividends on common stock

   ($0.02 per share)

 

 

 

 

 

 

 

 

 

 

 

 

 

(582

)

 

 

 

 

 

 

 

 

(582

)

 

 

 

 

 

(582

)

Foreign currency translation

   adjustment, net

 

 

 

 

 

 

 

 

 

 

(1,080

)

 

 

 

 

 

 

 

 

 

 

 

(1,080

)

 

 

 

 

 

(1,080

)

Stock based compensation

 

 

 

 

 

 

 

2,164

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,164

 

 

 

 

 

 

2,164

 

Stock options exercised; grants,

   termination and vesting of

   restricted stock units (net of

   shares in lieu of taxes)

 

6,959

 

 

 

1

 

 

 

104

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

105

 

 

 

 

 

 

105

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

3,153

 

 

 

 

 

 

 

 

 

3,153

 

 

 

 

 

 

3,153

 

Balance, September 30, 2019

 

33,235,938

 

 

$

3,325

 

 

$

88,257

 

 

$

(6,699

)

 

$

271,263

 

 

 

3,061,040

 

 

$

(18,160

)

 

$

337,986

 

 

$

 

 

$

337,986

 

 

See notes to the condensed consolidated financial statements.

 

6


 

AMERICAN VANGUARD CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

For The Three and Nine Months Ended September 30, 2018

(In thousands, except share data)

(Unaudited)

 

 

Common Stock

 

 

Additional

 

 

Accumulated

Other

 

 

 

 

 

 

Treasury Stock

 

 

 

 

 

 

Non-

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Paid-in

Capital

 

 

Comprehensive

Loss

 

 

Retained

Earnings

 

 

Shares

 

 

Amount

 

 

AVD

Total

 

 

Controlling

Interest

 

 

Total

 

Balance, December 31, 2017

 

32,241,866

 

 

$

3,225

 

 

$

75,658

 

 

$

(4,507

)

 

$

238,953

 

 

 

2,450,634

 

 

$

(8,269

)

 

$

305,060

 

 

$

254

 

 

$

305,314

 

Adjustment to recognize new revenue

   recognition standard, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

2,214

 

 

 

 

 

 

 

 

 

2,214

 

 

 

 

 

 

2,214

 

Adjustment to recognize new standard

   on taxes on foreign asset transfers

 

 

 

 

 

 

 

 

 

 

 

 

 

(180

)

 

 

 

 

 

 

 

 

(180

)

 

 

 

 

 

(180

)

Common stock issued under ESPP

 

17,078

 

 

 

1

 

 

 

298

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

299

 

 

 

 

 

 

299

 

Cash dividends on common stock ($0.02

   per share)

 

 

 

 

 

 

 

 

 

 

 

 

 

(586

)

 

 

 

 

 

 

 

 

(586

)

 

 

 

 

 

(586

)

Foreign currency translation adjustment,

   net

 

 

 

 

 

 

 

 

 

 

672

 

 

 

 

 

 

 

 

 

 

 

 

672

 

 

 

 

 

 

672

 

Stock based compensation

 

 

 

 

 

 

 

1,309

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,309

 

 

 

 

 

 

1,309

 

Stock options exercised; grants, termination

   and vesting of restricted stock units

   (net of shares in lieu of taxes)

 

409,979

 

 

 

41

 

 

 

470

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

511

 

 

 

 

 

 

511

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

4,655

 

 

 

 

 

 

 

 

 

4,655

 

 

 

(50

)

 

 

4,605

 

Balance, March 31, 2018

 

32,668,923

 

 

 

3,267

 

 

 

77,735

 

 

 

(3,835

)

 

 

245,056

 

 

 

2,450,634

 

 

 

(8,269

)

 

 

313,954

 

 

 

204

 

 

 

314,158

 

Cash dividends on common stock ($0.02

   per share)

 

 

 

 

 

 

 

 

 

 

 

 

 

(587

)

 

 

 

 

 

 

 

 

(587

)

 

 

 

 

 

(587

)

Foreign currency translation adjustment,

   net

 

 

 

 

 

 

 

 

 

 

(898

)

 

 

 

 

 

 

 

 

 

 

 

(898

)

 

 

 

 

 

(898

)

Stock based compensation

 

 

 

 

 

 

 

1,469

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,469

 

 

 

 

 

 

1,469

 

Stock options exercised; grants,

   termination and vesting of restricted

   stock units (net of shares in lieu of

   taxes)

 

74,581

 

 

 

8

 

 

 

517

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

525

 

 

 

 

 

 

525

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

5,599

 

 

 

 

 

 

 

 

 

5,599

 

 

 

(35

)

 

 

5,564

 

Balance, June 30, 2018

 

32,743,504

 

 

 

3,275

 

 

 

79,721

 

 

 

(4,733

)

 

 

250,068

 

 

 

2,450,634

 

 

 

(8,269

)

 

 

320,062

 

 

 

169

 

 

 

320,231

 

Stocks issued under ESPP

 

18,872

 

 

 

1

 

 

 

370

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

371

 

 

 

 

 

 

371

 

Cash dividends on common stock ($0.02

   per share)

 

 

 

 

 

 

 

 

 

 

 

 

 

(588

)

 

 

 

 

 

 

 

 

(588

)

 

 

 

 

 

(588

)

Foreign currency translation adjustment,

   net

 

 

 

 

 

 

 

 

 

 

638

 

 

 

 

 

 

 

 

 

 

 

 

638

 

 

 

 

 

 

638

 

Stock based compensation

 

 

 

 

 

 

 

1,457

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,457

 

 

 

 

 

 

1,457

 

Stock options exercised; grants, termination

   and vesting of restricted stock units

   (net of shares in lieu of taxes)

 

(5,278

)

 

 

 

 

 

25

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

25

 

 

 

 

 

 

25

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

$

6,525

 

 

 

 

 

 

 

 

$

6,525

 

 

$

(35

)

 

$

6,490

 

Balance, September 30, 2018

 

32,757,098

 

 

$

3,276

 

 

$

81,573

 

 

$

(4,095

)

 

$

256,005

 

 

 

2,450,634

 

 

$

(8,269

)

 

$

328,490

 

 

$

134

 

 

$

328,624

 

 

See notes to the condensed consolidated financial statements.

 

 

 

7


 

AMERICAN VANGUARD CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

For the Nine Months Ended September 30,

 

 

 

2019

 

 

2018

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

10,165

 

 

$

16,659

 

Adjustments to reconcile net income to net cash used in operating

   activities:

 

 

 

 

 

 

 

 

Depreciation and amortization of property, plant and equipment and intangible assets

 

 

13,892

 

 

 

14,233

 

Amortization of other long term assets

 

 

3,174

 

 

 

3,630

 

Amortization of discounted liabilities

 

 

41

 

 

 

314

 

Provision for bad debts

 

 

728

 

 

 

540

 

Reassessment of deferred consideration

 

 

(3,539

)

 

 

(5,437

)

Stock-based compensation

 

 

5,159

 

 

 

4,235

 

Deferred income taxes

 

 

(459

)

 

 

(34

)

Loss from equity method investments

 

 

149

 

 

 

1,051

 

Changes in assets and liabilities associated with operations:

 

 

 

 

 

 

 

 

Increase in net receivables

 

 

(15,983

)

 

 

(24,922

)

Increase in inventories

 

 

(19,713

)

 

 

(39,305

)

Increase in prepaid expenses and other assets

 

 

(849

)

 

 

(959

)

Increase in net operating lease liability

 

 

117

 

 

 

 

(Decrease) increase in income tax receivable/payable, net

 

 

(4,477

)

 

 

2,069

 

(Decrease) increase in accounts payable

 

 

(5,516

)

 

 

5,711

 

Decrease in deferred revenue

 

 

(19,800

)

 

 

(13,965

)

Increase in accrued program costs

 

 

20,163

 

 

 

22,882

 

Decrease in other payables and accrued expenses

 

 

(4,936

)

 

 

(1,792

)

Net cash used in operating activities

 

 

(21,684

)

 

 

(15,090

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(10,546

)

 

 

(5,154

)

Acquisition of business, product lines, and intangible assets

 

 

(31,836

)

 

 

(1,634

)

Net cash used in investing activities

 

 

(42,382

)

 

 

(6,788

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Net borrowings under line of credit agreement

 

 

68,200

 

 

 

19,675

 

Net payments from the issuance of common stock (sale of stock under ESPP,

   exercise of stock options, and shares purchased for tax withholding)

 

 

(30

)

 

 

1,731

 

Repurchase of common stock

 

 

(2,604

)

 

 

 

Payment of cash dividends

 

 

(1,741

)

 

 

(1,611

)

Net cash provided by financing activities

 

 

63,825

 

 

 

19,795

 

Net decrease in cash and cash equivalents

 

 

(241

)

 

 

(2,083

)

Effect of exchange rate changes on cash and cash equivalents

 

 

(40

)

 

 

114

 

Cash and cash equivalents at beginning of period

 

 

6,168

 

 

 

11,337

 

Cash and cash equivalents at end of period

 

$

5,887

 

 

$

9,368

 

 

 

See notes to the condensed consolidated financial statements.

 

8


 

AMERICAN VANGUARD CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(In thousands, except 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 (“US GAAP”) 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 notes required by US GAAP 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 nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. 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, 2018.

 

2. Leases— The Company has operating leases for warehouses, manufacturing facilities, offices, cars, railcars and certain equipment. On January 1, 2019, the Company adopted the accounting and adoption guidance in Accounting Standards Codification (“ASC”) 842, Leases, for its operating leases resulting in the recognition of operating lease right-of-use (ROU) assets and lease liabilities on the effective date. The Company measures ROU assets throughout the lease term at the carrying amount of the lease liability, plus initial direct costs, plus (minus) any prepaid (accrued) lease payments, less the unamortized balance of lease incentives received. The lease liabilities are measured at the present value of the unpaid lease payments at the lease commencement date. Leases that include both lease and non-lease components are accounted for as a single lease component for each asset class.

 

The minimum payments under operating leases are recognized on a straight-line basis over the lease term in the condensed consolidated statements of operations. Operating lease expenses related to variable lease payments are recognized in cost of sales or as operating expenses in a manner consistent with the nature of the underlying lease and as the events, activities, or circumstances in the lease agreement occur. Leases with a term of less than 12 months are not recognized on the condensed consolidated balance sheets, and the related lease expenses are recognized in the condensed consolidated statements of operations on a straight-line basis over the lease term.

The accounting for leases requires management to exercise judgment and make estimates in determining the applicable discount rate, lease term and payments due under a lease. Most of our leases do not provide an implicit interest rate, nor is it available to us from our lessors. As an alternative, we use our estimated incremental borrowing rate, which is derived from information available at the lease commencement date, including publicly available data, in determining the present value of lease payments. We also estimated the fair value of the lease and non-lease components for some of our warehouse leases based on market data and cost data.

 

The lease term includes the non-cancellable period of the lease plus any additional periods covered by either an option to extend (or not terminate) that the Company is reasonably certain to exercise. The Company has leases with a lease term ranging from 1 year to 15 years.

 

The operating leases of the Company do not contain major restrictions or covenants such as those relating to dividends or additional financial obligations. Finance leases are immaterial to the condensed consolidated financial statements. There were no lease transactions with related parties as of September 30, 2019.

 

The operating lease expense for the three and nine months ended September 30, 2019 was $1,387 and $4,145, respectively. Lease expenses related to variable lease payments and short-term leases were immaterial. Additional information related to operating leases are as follows:

 

 

 

Three months

ended

September 30, 2019

 

 

Nine months

ended

September 30, 2019

 

Cash paid for amounts included in the measurement of

   lease liabilities

 

$

1,343

 

 

$

4,029

 

ROU assets obtained in exchange for new liabilities

 

$

1,066

 

 

$

3,119

 

 

The weighted-average remaining lease term and discount rate related to the operating leases as of September 30, 2019 were as follows:

 

Weighted-average remaining lease term (in years)

 

 

3.43

 

Weighted-average discount rate

 

 

3.69

%

 

 

9


 

Future minimum lease payments under non-cancellable operating leases as of September 30, 2019 were as follows:

 

 

 

September 30, 2019

 

Remainder of 2019

 

$

1,352

 

2020

 

 

5,024

 

2021

 

 

3,243

 

2022

 

 

1,679

 

2023

 

 

697

 

Thereafter

 

 

1,179

 

Total lease payments

 

$

13,174

 

Less: imputed interest

 

 

871

 

Total

 

$

12,303

 

 

 

 

 

 

Amounts recognized in the condensed consolidated balance sheet:

 

 

 

 

Operating lease liabilities, current

 

$

4,889

 

Operating lease liabilities, long term

 

$

7,414

 

 

3.  Revenue Recognition—The Company recognizes revenue from the sale of its products, which include insecticides, herbicides, soil fumigants, fungicides and others, including growth regulators and distribution of third-party products. The Company sells its products to customers, which include distributors and retailers. In addition, the Company recognizes royalty income from the sale of intellectual property. Based on similar economic and operational characteristics, the Company’s business is aggregated into one reportable segment. Selective enterprise information of sales disaggregated by category and geographic region is as follows:

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Crop:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Insecticides

 

$

35,847

 

 

$

31,048

 

 

$

112,539

 

 

$

115,702

 

Herbicides/soil fumigants/fungicides

 

 

46,772

 

 

 

41,882

 

 

 

115,510

 

 

 

113,144

 

Other, including plant growth regulators and

   distribution

 

 

22,887

 

 

 

22,424

 

 

 

60,730

 

 

 

52,269

 

 

 

 

105,506

 

 

 

95,354

 

 

 

288,779

 

 

 

281,115

 

Non-crop, including distribution of third party products

 

 

19,378

 

 

 

16,426

 

 

 

48,885

 

 

 

41,819

 

Total net sales:

 

$

124,884

 

 

$

111,780

 

 

$

337,664

 

 

$

322,934

 

Net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US

 

$

73,988

 

 

$

71,711

 

 

$

200,055

 

 

$

205,889

 

International

 

 

50,896

 

 

 

40,069

 

 

 

137,609

 

 

 

117,045

 

Total net sales:

 

$

124,884

 

 

$

111,780

 

 

$

337,664

 

 

$

322,934

 

Timing of revenue recognition:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goods transferred at a point in time

 

$

124,884

 

 

$

111,675

 

 

$

337,285

 

 

$

322,266

 

Goods and services transferred over time

 

 

 

 

 

105

 

 

 

379

 

 

 

668

 

Total net sales:

 

$

124,884

 

 

$

111,780

 

 

$

337,664

 

 

$

322,934

 

 

Performance ObligationsA performance obligation is a promise in a contract or sales order to transfer a distinct good or service to the customer and is the unit of account in ASC 606. A transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Certain of the Company’s sales orders have multiple performance obligations, as the promise to transfer individual goods or services is separately identifiable from other promises in the sales orders. For sales orders with multiple performance obligations, the Company allocates the sales order’s transaction price to each performance obligation based on its relative stand-alone selling price. The stand-alone selling prices are determined based on the prices at which the Company separately sells these products. The Company’s performance obligations are satisfied either at a point in time or over time as work progresses.

 

10


 

At September 30, 2019, the Company had $368 of remaining performance obligations, which is comprised of services and goods not yet delivered. The Company expects to recognize all remaining performance obligations as revenue in fiscal 2019.

Contract BalancesThe timing of revenue recognition, billings and cash collections may result in deferred revenue in the condensed consolidated balance sheets. The Company sometimes receives payments from its customers in advance of goods and services being provided in return for early cash incentive programs, resulting in deferred revenue. These liabilities are reported on the condensed consolidated balance sheet at the end of each reporting period.

 

 

 

September 30,

2019

 

 

December 31,

2018

 

Trade

 

$

140,220

 

 

$

123,320

 

Contract assets

 

 

3,435

 

 

 

3,000

 

Other receivables

 

 

10,348

 

 

 

7,709

 

Total receivables, net

 

$

154,003

 

 

$

134,029

 

Deferred revenue

 

 

368

 

 

 

20,043

 

 

Revenue recognized for the three and nine months ended September 30, 2019, that was included in the deferred revenue balance at the beginning of 2019 was $383 and $19,675 respectively.

4. Property, plant and equipment at September 30, 2019 and December 31, 2018 consists of the following:

 

                    

 

September 30,

2019

 

 

December 31,

2018

 

Land

 

$

2,706

 

 

$

2,548

 

Buildings and improvements

 

 

18,080

 

 

 

17,555

 

Machinery and equipment

 

 

111,859

 

 

 

109,064

 

Office furniture, fixtures and equipment

 

 

6,203

 

 

 

5,655

 

Automotive equipment

 

 

1,775

 

 

 

1,116

 

Construction in progress

 

 

7,984

 

 

 

2,513

 

Total gross value

 

 

148,607

 

 

 

138,451

 

Less accumulated depreciation

 

 

(93,277

)

 

 

(89,199

)

Total net value

 

$

55,330

 

 

$

49,252

 

 

The Company recognized depreciation expense related to property, plant and equipment of $1,571 and $2,020 for the three months ended September 30, 2019 and 2018, respectively. During the three months ended September 30, 2019 and 2018, the Company eliminated from assets and accumulated depreciation $8 and $249, respectively, of fully depreciated assets.

The Company recognized depreciation expense related to property, plant and equipment of $4,796 and $6,166 for the nine months ended September 30, 2019 and 2018, respectively. During the nine months ended September 30, 2019 and 2018, the Company eliminated from assets and accumulated depreciation $718 and $3,596, respectively, of fully depreciated assets.

 

 

5. Inventories are stated at the lower of cost or net realizable value. Cost is determined using the first-in, first-out or average cost method. The components of inventories consist of the following:

 

 

 

September 30,

2019

 

 

December 31,

2018

 

Finished products

 

$

173,167

 

 

$

147,297

 

Raw materials

 

 

13,118

 

 

 

12,598

 

 

 

$

186,285

 

 

$

159,895

 

 

 

 

11


 

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

 

 

 

For the three months ended

September 30,

 

 

 

 

 

 

 

 

 

 

 

2019

 

 

2018

 

 

Change

 

 

% Change

 

Net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US crop

 

$

55,952

 

 

$

55,285

 

 

$

667

 

 

 

1

%

US non-crop

 

 

18,036

 

 

 

16,426

 

 

 

1,610

 

 

 

10

%

US total

 

 

73,988

 

 

 

71,711

 

 

 

2,277

 

 

 

3

%

International

 

 

50,896

 

 

 

40,069

 

 

 

10,827

 

 

 

27

%

Net sales:

 

$

124,884

 

 

$

111,780

 

 

$

13,104

 

 

 

12

%

Gross profit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US crop

 

$

23,926

 

 

$

27,106

 

 

$

(3,180

)

 

 

-12

%

US non-crop

 

 

9,491

 

 

 

7,991

 

 

 

1,500

 

 

 

19

%

US total

 

 

33,417

 

 

 

35,097

 

 

 

(1,680

)

 

 

-5

%

International

 

 

14,046

 

 

 

10,203

 

 

 

3,843

 

 

 

38

%

Total gross profit:

 

$

47,463

 

 

$

45,300

 

 

$

2,163

 

 

 

5

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross margin domestic

 

 

45

%

 

 

49

%

 

 

 

 

 

 

 

 

Gross margin international

 

 

28

%

 

 

25

%

 

 

 

 

 

 

 

 

Gross margin total

 

 

38

%

 

 

41

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended

September 30,

 

 

 

 

 

 

 

 

 

 

 

2019

 

 

2018

 

 

Change

 

 

% Change

 

Net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US crop

 

$

152,512

 

 

$

166,397

 

 

$

(13,885

)

 

 

-8

%

US non-crop

 

 

47,543

 

 

 

39,492

 

 

 

8,051

 

 

 

20

%

US total

 

 

200,055

 

 

 

205,889

 

 

 

(5,834

)

 

 

-3

%

International

 

 

137,609

 

 

 

117,045

 

 

 

20,564

 

 

 

18

%

Net sales:

 

$

337,664

 

 

$

322,934

 

 

$

14,730

 

 

 

5

%

Gross profit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US crop

 

$

66,140

 

 

$

78,439

 

 

$

(12,299

)

 

 

-16

%

US non-crop

 

 

24,363

 

 

 

19,843

 

 

 

4,520

 

 

 

23

%

US total

 

 

90,503

 

 

 

98,282

 

 

 

(7,779

)

 

 

-8

%

International

 

 

40,315

 

 

 

31,366

 

 

 

8,949

 

 

 

29

%

Total gross profit:

 

$

130,818

 

 

$

129,648

 

 

$

1,170

 

 

 

1

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross margin domestic

 

 

45

%

 

 

48

%

 

 

 

 

 

 

 

 

Gross margin international

 

 

29

%

 

 

27

%

 

 

 

 

 

 

 

 

Gross margin total

 

 

39

%

 

 

40

%

 

 

 

 

 

 

 

 

 

7. Accrued Program Costs Accrued Program Costs— The Company offers various discounts to customers based on the volume purchased within a defined time period, other pricing adjustments, some grower volume incentives or other key performance indicator driven payments made to distributors, retailers or growers, at the end of a growing season.  The Company describes these payments as “programs.” Programs are a critical part of doing business in both the US crop and non-crop markets. These discount programs represent variable consideration. Revenue from sales is recorded at the net sales price, which is the transaction price, and includes estimates of variable consideration. Variable consideration includes amounts expected to be paid to its customers estimated using the expected value method. Each quarter management compares individual sale transactions with programs to determine what, if any, estimated 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, for volume driven payments, make assessments of whether or not customers are tracking in a manner that indicates that they will meet the requirements set out in agreed upon terms and conditions attached to each program. Following this assessment, management adjusts the accumulated accrual to properly reflect the Company’s best estimate of the liability at the balance sheet date. The majority of the adjustments are made at, or close to, the end of the crop season, at which time customer performance can be more 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. No significant changes relating to prior period estimates were made during the three and nine months ended September 30, 2019 and 2018, respectively. 

 

12


 

8. The Company has declared and/or paid the following cash dividends in the periods covered by this Form 10-Q:

 

Declaration Date

 

Record Date

 

Distribution Date

 

Dividend

Per Share

 

 

Total

Paid

 

September 16, 2019

 

October 3, 2019

 

October 17, 2019

 

$

0.020

 

 

$

582

 

June 10, 2019

 

June 28, 2019

 

July 12, 2019

 

$

0.020

 

 

$

580

 

March 6, 2019

 

March 27, 2019

 

April 10, 2019

 

$

0.020

 

 

$

580

 

December 10, 2018

 

December 27, 2018

 

January 10, 2019

 

$

0.020

 

 

$

581

 

 

9. ASC 260 Earnings Per Share (“EPS”) requires dual presentation of basic EPS and diluted EPS on the face of the condensed consolidated statements of operations. 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:

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to AVD

 

$

3,153

 

 

$

6,525

 

 

$

10,165

 

 

$

16,779

 

Denominator: (in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding-basic

 

 

29,057

 

 

 

29,399

 

 

 

29,013

 

 

 

29,340

 

Dilutive effect of stock options and grants

 

 

593

 

 

 

810

 

 

 

578

 

 

 

806

 

 

 

 

29,650

 

 

 

30,209

 

 

 

29,591

 

 

 

30,146

 

 

For the three and nine months ended September 30, 2019 and 2018, no stock options were excluded from the computation of diluted earnings per share.

 

 

10. The Company has a revolving line of credit that is shown as long-term debt in the condensed consolidated balance sheets at September 30, 2019 and December 31, 2018. The Company has no short-term debt as of September 30, 2019 and December 31, 2018. The revolving line of credit is summarized in the following table:

 

Long-term indebtedness ($000's)

 

September 30,

2019

 

 

December 31, 2018

 

Revolving line of credit

 

$

165,600

 

 

$

97,400

 

Deferred loan fees

 

 

(592

)

 

 

(729

)

Net long-term debt

 

$

165,008

 

 

$

96,671

 

 

As of June 30, 2017, AMVAC Chemical Corporation (“AMVAC”), the Company’s principal operating subsidiary, as borrower, and affiliates (including the Company, AMVAC CV and AMVAC BV), as guarantors and/or borrowers, entered into a Third Amendment to Second Amended and Restated Credit Agreement (the “Credit Agreement”) with a group of commercial lenders led by Bank of the West (AMVAC’s primary bank) as agent, swing line lender and Letter of Credit (“L/C”) issuer. The Credit Agreement is a senior secured lending facility, consisting of a line of credit of up to $250,000, an accordion feature of up to $100,000 and a maturity date of June 30, 2022. The Credit Agreement contains two key financial covenants; namely, borrowers are required to maintain a Consolidated Funded Debt Ratio of no more than 3.25-to-1 and a Consolidated Fixed Charge Covenant Ratio of at least 1.25-to-1.   The Company’s borrowing capacity varies with its financial performance, measured in terms of EBITDA as defined in the Credit Agreement, for the trailing twelve month period. Under the Credit Agreement, revolving loans bear interest at a variable rate based, at borrower’s election with proper notice, on either (i) LIBOR plus the “Applicable Rate” which is based upon the Consolidated Funded Debt Ratio (“Eurocurrency Rate Loan”) or (ii) the greater of (x) the Prime Rate, (y) the Federal Funds Rate plus 0.5%, and (z) the Daily One-Month LIBOR Rate plus 1.00%, plus, in the case of (x), (y) or (z) the Applicable Rate (“Alternate Base Rate Loan”). Interest payments for Eurocurrency Rate Loans are payable on the last day of each interest period (either one, two, three or six months, as selected by the borrower) and the maturity date, while interest payments for Alternate Base Rate Loans are payable on the last business day of each month and the maturity date. Substantially all the Company’s assets are pledged as collateral for the revolving line of credit.

At September 30, 2019, according to the terms of the Credit Agreement and based on its performance against the most restrictive covenants listed above, the Company had the capacity to increase its borrowings by up to $30,435. This compares to an available borrowing capacity of $105,111 as of September 30, 2018. The level of borrowing capacity is driven by three factors: (1) our financial performance, as measured in EBITDA for the trailing twelve month period, which has declined, (2) net borrowings, which

 

13


 

have increased due to recent acquisitions and to expansion of working capital needs for our growing international business, and (3) the leverage covenant (being the number of times EBITDA the Company may borrow under its credit facility agreement).

 

 

11. Reclassification—Certain items may have been reclassified in the prior period condensed consolidated financial statements to conform with the September 30, 2019 presentation.

 

 

12. 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 and nine-month periods ended September 30, 2019 and 2018, total comprehensive income consisted of net income attributable to American Vanguard and foreign currency translation adjustments.

 

 

13. 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 following tables illustrate the Company’s stock-based compensation, unamortized stock-based compensation, and remaining weighted average period for the three and nine months ended September 30, 2019 and 2018.

 

 

 

Stock-Based

Compensation

for the Three

months ended

 

 

Stock-Based

Compensation

for the Nine

months ended

 

 

Unamortized

Stock-Based

Compensation

 

 

Remaining

Weighted

Average

Period (years)

 

September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted Stock

 

$

1,082

 

 

$

2,751

 

 

$

6,849

 

 

 

2.0

 

Unrestricted Stock

 

 

105

 

 

 

300

 

 

 

280

 

 

 

0.7

 

Performance Based Restricted Stock

 

 

977

 

 

 

2,108

 

 

 

3,320

 

 

 

2.0

 

Total

 

$

2,164

 

 

$

5,159

 

 

$

10,449

 

 

 

 

 

September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted Stock

 

$

870

 

 

$

2,427

 

 

$

5,949

 

 

 

2.0

 

Unrestricted Stock

 

 

96

 

 

 

289

 

 

 

257

 

 

 

0.7

 

Performance Based Restricted Stock

 

 

491

 

 

 

1,519

 

 

 

2,814

 

 

 

2.0

 

Total

 

$

1,457

 

 

$

4,235

 

 

$

9,020

 

 

 

 

 

 

Stock Options—During the three and nine-months ended September 30, 2019, the Company did not grant any employees options to acquire shares of common stock.

Option activity within each plan is as follows:

 

 

 

Incentive

Stock Option

Plans

 

 

Weighted

Average Price

Per Share

 

 

Exercisable

Weighted

Average Price

Per Share

 

Balance outstanding, December 31, 2018

 

 

384,064

 

 

$

9.10

 

 

$

9.10

 

Options exercised

 

 

(14,677

)

 

 

9.18

 

 

 

 

Balance outstanding, March 31, 2019

 

 

369,387

 

 

 

9.10

 

 

 

9.10

 

Options exercised

 

 

(4,313

)

 

 

8.71

 

 

 

 

Balance outstanding, June 30, 2019

 

 

365,074

 

 

 

9.10

 

 

 

9.10

 

Options exercised

 

 

(15,800

)

 

 

7.55

 

 

 

 

Balance outstanding, September 30, 2019

 

 

349,274

 

 

$

9.17

 

 

$

9.17

 

 

 

14


 

Information relating to stock options at September 30, 2019, summarized by exercise price is as follows:

 

 

 

Outstanding Weighted

Average

 

 

Exercisable Weighted

Average

 

Exercise Price Per Share

 

Shares

 

 

Remaining

Life

(Months)

 

 

Exercise

Price

 

 

Shares

 

 

Exercise

Price

 

Incentive Stock Option Plan:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$7.50

 

 

202,445

 

 

 

14

 

 

$

7.50

 

 

 

202,445

 

 

$

7.50

 

$11.32—$14.49

 

 

146,829

 

 

 

61

 

 

 

11.48

 

 

 

146,829

 

 

 

11.48

 

 

 

 

349,274

 

 

 

 

 

 

$

9.17

 

 

 

349,274

 

 

$

9.17

 

 

The weighted average exercise prices for options granted, and exercisable, and the weighted average remaining contractual life for options outstanding as of September 30, 2019, were as follows:

 

As of September 30, 2019

 

Number

of

Shares

 

 

Weighted

Average

Exercise

Price

 

 

Weighted

Average

Remaining

Contractual

Life

(Months)

 

 

Intrinsic

Value

(thousands)

 

Incentive Stock Option Plan:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding

 

 

349,274

 

 

$

9.17

 

 

 

33

 

 

$

2,279

 

Exercisable

 

 

349,274

 

 

$

9.17

 

 

 

33

 

 

$

2,279

 

 

Common stock grants A summary of non-vested shares as of, and for, the three and nine-months ended September 30, 2019 and 2018 is presented below:

 

 

 

Nine Months Ended

September 30, 2019

 

 

Nine Months Ended

September 30, 2018

 

 

 

Number

of Shares

 

 

Weighted

Average

Grant

Date Fair

Value

 

 

Number

of Shares

 

 

Weighted

Average

Grant

Date Fair

Value

 

Nonvested shares at December 31st

 

 

587,210

 

 

$

17.59

 

 

 

391,753

 

 

$

15.61

 

Granted

 

 

297,679

 

 

 

17.34

 

 

 

254,972

 

 

 

19.97

 

Vested

 

 

(105,582

)

 

 

15.21

 

 

 

(8,800

)

 

 

12.07

 

Forfeited

 

 

(6,589

)

 

 

17.69

 

 

 

(5,265

)

 

 

16.51

 

Nonvested shares at March 31st

 

 

772,718

 

 

 

17.77

 

 

 

632,660

 

 

 

17.41

 

Granted

 

 

40,522

 

 

 

13.34

 

 

 

22,308

 

 

 

23.66

 

Vested

 

 

(32,771

)

 

 

13.35

 

 

 

(20,313

)

 

 

22.82

 

Forfeited

 

 

(21,184

)

 

 

17.77

 

 

 

(6,424

)

 

 

17.25

 

Nonvested shares at June 30th

 

 

759,285

 

 

 

17.72

 

 

 

628,231

 

 

 

17.40

 

Granted

 

 

 

 

 

 

 

 

 

 

 

 

Vested

 

 

(3,685

)

 

 

17.84

 

 

 

(17,591

)

 

 

13.51

 

Forfeited

 

 

(8,595

)

 

 

17.89

 

 

 

(13,659

)

 

 

17.35

 

Nonvested shares at September 30th

 

 

747,005

 

 

$

17.72

 

 

 

596,981

 

 

$

17.51

 

 

Common stock grants — During the nine-months ended September 30, 2019, the Company issued a total of 338,201 shares of common stock to employees and directors of which 31,771 shares vested immediately, 9,000 shares will vest between a range of 95 days to 1,115 days, 6,751 shares will vest in three equal tranches on the employee’s anniversary, and the remaining shares will cliff vest after three years of service. The shares granted in 2019 were average fair valued at $16.86 per share. The fair value was determined by using the publicly traded share price as of the market close on the date of grant. The Company will recognize as expense the value of restricted shares over the required service period.

 

During the nine months ended September 30, 2018, the Company issued a total of 277,280 shares of common stock to employees and directors of which 19,313 shares vested immediately, 19,760 shares will vest between a range of 178 days to 1,060 days, and the remaining shares will cliff vest after three years of service. The shares granted in 2018 were average fair valued at $20.27 per share. The fair value was determined by using the publicly traded share price as of the market close on the date of grant. The Company will recognize as expense the value of restricted shares over the required service period.

 

15


 

During the three months ended September 30, 2019 and 2018, the Company recognized stock-based compensation related to restricted shares of $1,082 and $870, respectively. During the nine months ended September 30, 2019 and 2018, the Company recognized stock-based compensation related to restricted shares of $2,751 and $2,427 respectively.  

As of September 30, 2019, the Company had approximately $6,849 of unamortized stock-based compensation related to unvested restricted shares. This amount will be recognized over the weighted-average period of 2.0 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 SharesA summary of non-vested performance-based shares as of, and for, the nine months ended September 30, 2019 and 2018, respectively is presented below:

 

 

 

Nine Months Ended

September 30, 2019

 

 

Nine Months Ended

September 30, 2018

 

 

 

Number

of Shares

 

 

Weighted

Average

Grant

Date Fair

Value

 

 

Number

of Shares

 

 

Weighted

Average

Grant

Date Fair

Value

 

Nonvested shares at December 31st

 

 

287,077

 

 

$

16.87

 

 

 

186,057

 

 

$

14.93

 

Granted

 

 

137,557

 

 

 

16.96

 

 

 

122,446

 

 

 

18.79

 

Additional granted based on performance achievement

 

 

41,568

 

 

 

12.88

 

 

 

 

 

 

 

Vested

 

 

(90,872

)

 

 

14.73

 

 

 

(14,625

)

 

 

11.01

 

Forfeited

 

 

(3,543

)

 

 

15.98

 

 

 

(1,765

)

 

 

15.40

 

Nonvested shares at March 31st

 

 

371,787

 

 

 

16.99

 

 

 

292,113

 

 

 

16.74

 

Granted

 

 

 

 

 

 

 

 

3,850

 

 

 

22.69

 

Forfeited

 

 

(14,022

)

 

 

17.11

 

 

 

(2,179

)

 

 

17.67

 

Nonvested shares at June 30th

 

 

357,765

 

 

 

16.99

 

 

 

293,784

 

 

 

16.81

 

Additional granted based on performance achievement

 

 

800

 

 

 

17.50

 

 

 

4,036

 

 

 

13.53

 

Vested

 

 

(1,700

)

 

 

17.28

 

 

 

(8,232

)

 

 

13.47

 

Forfeited

 

 

(100

)

 

 

13.70

 

 

 

(1,870

)

 

 

15.67

 

Nonvested shares at September 30th

 

 

356,765

 

 

$

16.99

 

 

 

287,718

 

 

$

16.87

 

 

Performance-Based Shares — During the nine months ended September 30, 2019, the Company issued a total of 137,557 performance based shares to employees. The shares granted during the first nine months of 2019 have a weighted average fair value of $16.96.  The fair value was determined by using the publicly traded share price as of the market close on the date of grant. The Company will recognize as expense the value of the performance-based shares over the required service period from grant date. The shares will cliff vest on March 28, 2022 with a measurement period commencing January 1, 2019 and ending December 31, 2021. Eighty percent of these performance-based shares are based upon the financial performance of the Company, specifically, an earnings before income taxes (“EBIT”) goal weighted at 50% and a net sales goal weighted at 30%. 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 2018 Proxy Statement. All parts of these awards vest in three years but are subject to reduction to a minimum (or even zero) for recording less than the targeted performance and to increase to a maximum of 200% for achieving in excess of the targeted performance.

 

As of September 30, 2019, the Company has concluded that the performance measure based on EBIT and net sales for the performance based shares granted in 2016 and 2017, when compared to the peer group, were both met at 200% of targeted performance and all related additional expenses were recorded as of September 30, 2019. The performance shares based on market price was met at 125% and 100%, respectively, however, the market condition is reflected in the grant date fair value valuation and no additional expenses were recognized as of September 30, 2019. As a result, 42,368 additional shares were earned since the Company achieved performance targets when compared to the peer group.

 

 

16


 

During the nine months ended September 30, 2018, the Company issued a total of 130,332 performance-based shares to employees. The shares granted during the first nine months of 2018 have a weighted average fair value of $18.74. The fair value was determined by using the publicly traded share price as of the market close on the date of grant. The Company will recognize as expense the value of the performance-based shares over the required service period from grant date. The shares will cliff vest on March 9, 2021 with a measurement period commencing January 1, 2018 and ending December 31, 2020. Eighty percent of these performance-based shares are based upon the financial performance of the Company, specifically, an earnings before income taxes (“EBIT”) goal weighted at 50% and a net sales goal weighted at 30%. 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 2017 Proxy Statement. All parts of these awards vest in three years but are subject to reduction to a minimum (or even zero) for recording less than the targeted performance and to increase to a maximum of 200% for achieving in excess of the targeted performance.

As of September 30, 2019, performance-based shares related to EBIT and net sales have an average fair value of $17.34 per share. The fair value was determined by using the publicly traded share price as of the market close on the date of grant. The performance-based shares related to the Company’s stock price have an average fair value of $15.46 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.

During the three months ended September 30, 2019 and 2018, the Company recognized stock-based compensation related to performance-based shares of $977 and $491, respectively. During the nine months ended September 30, 2019 and 2018, the Company recognized stock-based compensation related to performance based shares of $2,108 and $1,519, respectively.  

As of September 30, 2019, the Company had approximately $3,320 of unamortized stock-based compensation expense 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 nine months ended September 30, 2019 and 2018, the Company did not grant any employees performance incentive stock options to acquire shares of common stock.

Performance option activity is as follows:

 

 

 

Incentive

Stock Option

Plans

 

 

Weighted

Average Price

Per Share

 

 

Exercisable

Weighted

Average Price

Per Share

 

Balance outstanding, December 31, 2018

 

 

140,411

 

 

$

11.49

 

 

$

11.49

 

Options exercised

 

 

(5,735

)

 

 

11.49

 

 

 

11.49

 

Balance outstanding, March 31, 2019, June 30, 2019 and September 30, 2019

 

 

134,676

 

 

$

11.49

 

 

$

11.49

 

 

Information relating to performance stock options at September 30, 2019 summarized by exercise price is as follows:

 

 

 

Outstanding Weighted

Average

 

 

Exercisable Weighted

Average

 

Exercise Price Per Share

 

Shares

 

 

Remaining

Life

(Months)

 

 

Exercise

Price

 

 

Shares

 

 

Exercise

Price

 

Performance Incentive Stock Option Plan:

 

 

134,676

 

 

 

63

 

 

$

11.49

 

 

 

134,676

 

 

$

11.49

 

 

 

17


 

The weighted average exercise prices for options granted and exercisable and the weighted average remaining contractual life for performance stock options outstanding as of September 30, 2019 are as follows:

 

As of September 30, 2019

 

Number

of

Shares

 

 

Weighted

Average

Exercise

Price

 

 

Weighted

Average

Remaining

Contractual

Life

(Months)

 

 

Intrinsic

Value

(thousands)

 

Performance Incentive Stock Option Plan:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding

 

 

134,676

 

 

$

11.49

 

 

 

63

 

 

$

567

 

Exercisable

 

 

134,676

 

 

$

11.49

 

 

 

63

 

 

$

567

 

 

 

14. Legal Proceedings— In accordance with US GAAP, the Company records a liability in its condensed consolidated financial statements for loss contingencies when a loss is known or considered probable and the amount can be reasonably estimated. These liabilities include those relating to threatened or pending litigation and government proceedings. To the extent that any such litigation or proceeding is material to the Company or its property, such matter (including any loss contingency associated therewith) is reported as per Item 103 of Regulation S-K in Item 1 of Part II of this Form 10Q.

15. Recently Issued Accounting Guidance:  

Accounting standards adopted in 2019:

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02 and subsequent amendments, collectively known as ASC 842, Leases. ASC 842 requires recognition of operating leases as lease assets and liabilities on the balance sheet and requires the disclosure of key information about leasing arrangements. The Company elected to adopt ASC 842 by applying the modified transition method and, in addition, elected to use the effective date of January 1, 2019 as the initial date of application. We elected to apply all relevant practical expedients permitted under the transition guidance within the new lease standard with the exception of the practical expedient allowing the use of hindsight in determining the lease term and in assessing impairment. The new standard also provides practical expedients for an entity’s ongoing accounting. We elected an accounting policy to keep leases with an initial term of 12 months or less off the balance sheet and to recognize those lease payments in the condensed consolidated statements of operations on a straight-line basis over the lease term. We also elected the practical expedient to not separate lease and non-lease components for all our leases, except for warehouse leases.

The adoption of ASC 842 resulted in the recognition of operating lease ROU assets of $12,936 and operating lease liabilities of $12,936 on the effective date as of January 1, 2019. The new guidance did not have a material impact on the condensed consolidated statement of operations or statement of cash flows. The accounting for finance leases under ASC 842 remained substantially unchanged from previous accounting guidance and are not material. See Note 2 for the disclosures required by ASC 842 and accounting policy information for leases.

In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (ASC 350). The FASB eliminated the Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Under this update, an entity should perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount that the carrying amount exceeds the reporting unit’s fair value. This update is effective for fiscal years beginning after December 15, 2019 with early adoption permitted after January 1, 2017. The Company adopted ASU 2017-04 as of January 1, 2019. The impact of the new standard will be dependent of the facts and circumstances of future individual impairments but did not have any immediate impact.

Accounting standards not yet adopted:

In June 2016, the FASB issued ASU 2016-13 "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss model, which requires the use of forward-looking information to calculate credit loss estimates. It also eliminates the concept of other-than-temporary impairment and requires credit losses related to available-for-sale debt securities to be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. These changes will result in earlier recognition of credit losses. The Company will adopt ASU 2016-13 effective January 1, 2020 with the cumulative effect of adoption recorded as an adjustment to retained earnings and is in the process of determining the impact on its operating results.

 

 

18


 

16. 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 payable to the 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 payable to bank.

As of September 30, 2019, the Company reassessed the fair value of the deferred consideration balances relating to the 2017 AgriCenter and OHP acquisitions, which resulted in a combined reduction of the deferred consideration balances in the amount of $651 and $3,539 for the three and nine months ended September 30, 2019. During the three and nine months ended September 30, 2018, the Company recognized $3,969 and $5,437, respectively, as reductions in deferred consideration balances related to the acquisitions. These amounts are reflected as reductions to the general and administrative expenses within operating expenses in the condensed consolidated statements of operations. With regard to the acquisitions of Defensive and Agrovant in Brazil (completed in January 2019), the Company made payments in the amount of $30 and $838 during the three months and nine months ended September 30, 2019, respectively. In addition, the Company recorded accretion and foreign exchange adjustments resulting in a reduction of $92 and $167 of the deferred consideration balance during the three months and nine months ended September 30, 2019, respectively. There was no fair value adjustment made to deferred consideration relating to Defensive and Agrovant acquisitions.

The total deferred consideration reflected in the condensed consolidated balance sheets as of September 30, 2019 and 2018 was $1,400 and $4,398, respectively.

17. Accumulated Other Comprehensive Loss (“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:

 

 

 

Total

 

Balance, December 31, 2018

 

$

(4,507

)

FX translation

 

 

(1,769

)

Balance, March 31, 2019

 

 

(6,276

)

FX translation

 

 

657

 

Balance, June 30, 2019

 

 

(5,619

)

FX translation

 

 

(1,080

)

Balance, September 30, 2019

 

$

(6,699

)

 

18. Investments — The Company utilized the equity method of accounting with respect to its investment in TyraTech Inc. (“TyraTech”), a Delaware corporation that specializes in developing, marketing and selling pesticide products containing essential oils and other natural ingredients, until the Company acquired all of TyraTech’s remaining outstanding shares as of November 8, 2018. The Company recognized losses of $352 and $795 on its equity method investment for the three and nine months ended September 30, 2018. The Company’s ownership position in TyraTech was approximately 34% prior to the November 8, 2018 acquisition.

On June 27, 2017, each of Amvac Netherlands BV and Huifeng Agrochemical Company, Ltd (“Huifeng”) made individual capital contributions of $950 to Huifeng Amvac Innovation Co. Ltd (“Hong Kong Joint Venture”). As of September 30, 2019, the Company’s ownership position in the Hong Kong Joint Venture was 50%. The Company utilizes the equity method of accounting with respect to this investment. On July 7, 2017, the Hong Kong Joint Venture purchased the shares of Profeng Australia, Pty Ltd.(“Profeng”), for a total consideration of $1,900. The purchase consists of Profeng Australia, Pty Ltd Trustee and Profeng Australia Unit Trust. Both Trust and Trustee were previously owned by Huifeng via its wholly owned subsidiary Shanghai Biological Focus center.  For the three and nine months ended September 30, 2019, the Company recognized losses of $89 and $149, respectively, as a result of the Company’s ownership position in the Hong Kong Joint Venture. For the three months and nine months ended September 30, 2018, the Company recognized losses of $181 and $256, respectively, as a result of the Company’s ownership position in the Hong Kong Joint Venture.

 

In February 2016, AMVAC Netherlands BV made an investment in Biological Products for Agriculture (“Bi-PA”). Bi-PA develops biological plant protection products that can be used for the control of pests and disease of agricultural crops. As of September 30, 2019, the Company’s ownership position in Bi-PA was 15%. The Company adopted the provisions of ASU 2016-01 on January 1, 2018 and has elected to measure its cost method investment without a readily determinable fair value at its cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. There were no observable price changes in the three and nine months ended September 30, 2019. There was no impairment on the investment as of September 30, 2019. The investment is not material and is recorded within other assets on the condensed consolidated balance sheets.

 

 

19


 

19. Income TaxesIncome tax expense decreased by $2,052 to end at an expense of $1,474 for the three months ended September 30, 2019, as compared to $3,526 for the comparable period in 2018. The tax charge for the quarter ended September 30, 2018 included a one-time adjustment in the amount of $1,089 related to the transition tax element of the Tax Cuts and Jobs Act that was signed into law in December 2017.

 

The effective tax rate for the quarter was 31.3%, as compared to 33.4% in the same period of the prior year. The tax rate for the quarter ended September 30, 2018 included the adjustment of $1,089 and, if excluded, the effective tax rate would have been 23.1%. Income tax expense was $4,059 for the nine months ended September 30, 2019, as compared to $6,966 for the nine months ended September 30, 2018. The effective tax rate for the nine months ended September 30, 2019 and 2018 was 28.2%. As with the quarter ended September 30, 2018, the nine month period is impacted by the transition tax adjustment of $1,089. Excluding that one-time charge, the Company’s tax rate would have been 23.8% for the nine months ended September 30, 2018. The effective tax rate is based on the projected income for the full year and is subject to ongoing review and adjustment by management.

 

20. Share Repurchase Program – On November 5, 2018, pursuant to a Board of Directors resolution, the Company announced its intention to repurchase an aggregate amount of shares with a total purchase price not to exceed $20,000 of its common stock, par value $0.10 per share, in the open market, depending upon market conditions over the short to mid-term. The Shares Repurchase Program expired on March 8, 2019. During January 2019, the Company purchased 158,048 shares for a total of $2,604 at an average price of $16.48 per share.  

 

21. Business and Asset Acquisitions – On January 10, 2019, the Company completed the acquisition of all of the outstanding shares of stock of two affiliated businesses, Defensive and Agrovant, which are located in Jaboticabal in the state of Sao Paul, Brazil. At closing the Company paid cash consideration of $20,679, which was net of cash acquired of $981, deferred consideration of $2,659 including contingent consideration dependent on certain financial results for 2019, and liabilities assumed of $17,083, including liabilities of $10,112 related to income tax matters. These companies were founded in 2000 and are suppliers of crop protection products and micronutrients with focus on the fruit and vegetable market segments. The acquisition was accounted for as a business combination and the total value of $40,424 has been preliminarily allocated as follows: product registrations and product rights $9,449, trade name $1,733, customer relationships $3,114, goodwill $14,268, working capital $8,072, fixed assets $404 and indemnification assets $3,384. The operating results of the acquired businesses are included in our condensed consolidated statement of operations from the date of acquisition.

On July 1, 2019, the Company completed a product acquisition for cash consideration in the amount of $7,293 and the assumption of a liability in the amount of $300, which was recorded at cost consisting of intangibles assets and inventory.                                                                                                                                                                                                                                                            

 

The Company paid E.I. DuPont et Nemours additional cash consideration in the amount of $3,564 related to one product line acquisition made at the end of 2018.

 

 

 

 

20


 

Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Numbers in thousands)

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 filed with the US 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, 2018 as well as in the Company’s Form 10-Q for the period ended September 30, 2019.

MANAGEMENT OVERVIEW

 

The Company’s top line showed growth during the third quarter of 2019, led by our international businesses, which recorded a 27% increase in net sales, a 36% increase in gross profit and improved profit margins. During the period, the domestic business generated a 3% increase in net sales, while posting a 5% decrease in gross profit and a decline in gross margin percentage. Our international business continued to grow as a percent of the global enterprise, accounting for 41% of total net sales during the quarter, which is up from 36% in 2018. Improved performance in Central America, Mexico and Brazil (as a result of businesses acquired earlier in 2019) led our international growth. By contrast, expansion of our domestic business was largely constrained by the effects of severe weather. The wet and cold conditions of the 2019 planting season served to reduce demand for both fumigants and burn-down herbicides post-plant, while record-setting heat in the southern US during the third quarter reduced demand for our cotton defoliant, Folex.

 

In spite of overall growth, the Company’s profitability declined during the three months ended September 30, 2019. This was due primarily to the following factors. First, quarterly gross margins dropped from 41% to 38%, arising largely from both comparatively higher sales of lower-margin international products and lower factory utilization during the period, as the Company endeavored to limit production reflecting weather related comparatively softer demand for certain product lines, in order to overall inventory levels. Second, operating expenses for the period rose by 21% primarily due to operating expenses and amortization costs for new businesses, increased selling expenses (from marketing and promotional efforts in our domestic markets) and a comparatively higher benefit for the reassessment of deferred purchase price consideration in the third quarter of 2018. Third, the Company incurred higher interest expense during the period, due to higher average indebtedness arising from product acquisitions that occurred since the comparable period in 2018. These factors, taken together, yielded a decrease in net income attributable to American Vanguard for the quarter.

 

Quarterly net sales were up over 12% ($124,884 vs. $111,780), and gross profit rose approximately 5% ($47,463 vs. $45,300). Gross margin declined to 38% from 41% of net sales, while operating expenses rose by approximately 21% ($40,677 vs. $33,635), increasing as a percent of net sales from 30% to 33%. Net income attributable to American Vanguard was down 52% ($3,153 vs. $6,525). 

 

 

 

21


 

The Company’s overview of sales and gross margin performance for the three months ended September 30, 2019 and 2018 is as follows:

 

 

 

For the three months ended

September 30,

 

 

 

 

 

 

 

 

 

 

 

2019

 

 

2018

 

 

Change

 

 

% Change

 

Net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US crop

 

$

55,952

 

 

$

55,285

 

 

$

667

 

 

 

1

%

US non-crop

 

 

18,036

 

 

 

16,426

 

 

 

1,610

 

 

 

10

%

US total

 

 

73,988

 

 

 

71,711

 

 

 

2,277

 

 

 

3

%

International

 

 

50,896

 

 

 

40,069

 

 

 

10,827

 

 

 

27

%

Net sales:

 

$

124,884

 

 

$

111,780

 

 

$

13,104

 

 

 

12

%

Gross profit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US crop

 

$

23,926

 

 

$

27,106

 

 

$

(3,180

)

 

 

-12

%

US non-crop

 

 

9,491

 

 

 

7,991

 

 

 

1,500

 

 

 

19

%

US total

 

 

33,417

 

 

 

35,097

 

 

 

(1,680

)

 

 

-5

%

International

 

 

14,046

 

 

 

10,203

 

 

 

3,843

 

 

 

38

%

Total gross profit:

 

$

47,463

 

 

$

45,300

 

 

$

2,163

 

 

 

5

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross margin domestic

 

 

45

%

 

 

49

%

 

 

 

 

 

 

 

 

Gross margin international

 

 

28

%

 

 

25

%

 

 

 

 

 

 

 

 

Gross margin total

 

 

38

%

 

 

41

%

 

 

 

 

 

 

 

 

 

Our domestic business grew slightly during the third quarter of 2019 with sales up 3% versus those of the same period in 2018. Within quarterly domestic sales, our US Crop business recorded 1% higher sales, while our US non-crop business grew its top line by 10% quarter over quarter. Growth of the US Crop business was primarily limited by record heat and dryness in the Southern region, which reduced the need for Folex. By contrast, within the US non-crop business, hurricane and storm activity spurred increased sales of our mosquito products.

 

Within our US Crop business, sales performance was mixed. We experienced strong demand for Aztec corn soil insecticide, Counter nematicide and Bidrin foliar cotton insecticide. Demand was also up for herbicides, Dacthal, which is used on high-value vegetable crops, and Parazone products, which are used for burn down applications. Our soil fumigant business was flat, in spite of wet late season weather in parts of the country, while our fungicide business benefitted from stronger demand for our Equus® and PCNB products. The most significant negative factor in the US Crop business during the quarter was, as mentioned above, the record-setting, extreme heat and dryness which affected demand for our Folex®, sales of which decreased approximately $10,000 in the period.

Net sales of our US non-crop business increased about 10% to $18,036 from $16,426, quarter-over-quarter. This result was due largely to increased sales of our aerially-applied mosquito adulticide, Dibrom®, as applicators restocked to address persistent wet weather conditions in the US and to prepare for potential hurricane activity later in 2019.  

Net sales of our international businesses were up 27% during the period ($50,896 vs. $40,069). A significant part of this increase was due to the addition of sales from our newly acquired Brazilian and Australian subsidiaries, and the addition of our Assure II herbicide products that were acquired in December 2018. We experienced improved sales performance from AgriCenter in Central America, despite some temporary usage declines in bananas, pineapples and citrus resulting from drought, and seasonal crop rotation in bananas that reduced nematicide applications in 2019 (that are expected to increase in 2020). Elsewhere in the international business, we posted decreased sales of Mocap insecticide (in light of the phase-out of that product in the EU associated with non-renewal of its registration) and bromacil herbicides (due to continuing supply shortages) during this period. Both Nemacur and Thimet posted small sales declines outside of the US, primarily as the result of various weather-related issues. A more detailed explanation of net sales, markets and factors affecting profitability appears below.

 

22


 

RESULTS OF OPERATIONS

Quarter Ended September 30, 2019 and 2018:

 

 

 

2019

 

 

2018

 

 

Change

 

 

% Change

 

Net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Insecticides

 

$

35,847

 

 

$

31,048

 

 

$

4,799

 

 

 

15

%

Herbicides/soil fumigants/fungicides

 

 

46,772

 

 

 

41,882

 

 

 

4,890

 

 

 

12

%

Other, including plant growth regulators

 

 

22,887

 

 

 

22,424

 

 

 

463

 

 

 

2

%

Total crop

 

 

105,506

 

 

 

95,354

 

 

 

10,152

 

 

 

11

%

Non-crop

 

 

19,378

 

 

 

16,426

 

 

 

2,952

 

 

 

18

%

Total net sales

 

$

124,884

 

 

$

111,780

 

 

$

13,104

 

 

 

12

%

Cost of sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Insecticides

 

$

23,071

 

 

$

20,940

 

 

$

2,131

 

 

 

10

%

Herbicides/soil fumigants/fungicides

 

 

29,414

 

 

 

24,814

 

 

 

4,600

 

 

 

19

%

Other, including plant growth regulators

 

 

15,648

 

 

 

12,291

 

 

 

3,357

 

 

 

27

%

Total crop

 

 

68,133

 

 

 

58,045

 

 

 

10,088

 

 

 

17

%

Non-crop

 

 

9,288

 

 

 

8,435

 

 

 

853

 

 

 

10

%

Total cost of sales

 

$

77,421

 

 

$

66,480

 

 

$

10,941

 

 

 

16

%

Gross profit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Insecticides

 

$

12,776

 

 

$

10,108

 

 

$

2,668

 

 

 

26

%

Herbicides/soil fumigants/fungicides

 

 

17,358

 

 

 

17,068

 

 

 

290

 

 

 

2

%

Other, including plant growth regulators

 

 

7,239

 

 

 

10,133

 

 

 

(2,894

)

 

 

-29

%

Gross profit crop

 

 

37,373

 

 

 

37,309

 

 

 

64

 

 

 

0

%

Gross profit non-crop

 

 

10,090

 

 

 

7,991

 

 

 

2,099

 

 

 

26

%

Total gross profit

 

$

47,463

 

 

$

45,300

 

 

$

2,163

 

 

 

5

%

Gross margin crop

 

 

35

%

 

 

39

%

 

 

 

 

 

 

 

 

Gross margin non-crop

 

 

52

%

 

 

49

%

 

 

 

 

 

 

 

 

Total gross margin

 

 

38

%

 

 

41

%

 

 

 

 

 

 

 

 

 

 

 

2019

 

 

2018

 

 

Change

 

 

% Change

 

Net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US

 

$

73,988

 

 

$

71,711

 

 

$

2,277

 

 

 

3

%

International

 

 

50,896

 

 

 

40,069

 

 

 

10,827

 

 

 

27

%

Net sales:

 

$

124,884

 

 

$

111,780

 

 

$

13,104

 

 

 

12

%

 

For the three months ended September 30, 2019, within our global crop business, net sales of our insecticides group were up approximately 15% to end at $35,847, as compared to $31,048 during the third quarter of 2018. Within this category, net sales of our granular insecticides were up approximately 8% due to strong demand for Aztec (corn soil insecticide), Counter (nematode control in corn and sugar beets), and Bidrin (a foliar insecticide for cotton), offset by modest declines in Thimet (for domestic sugarcane) and both Mocap and Nemacur (largely in our international markets).

 

Within the group of herbicides/fungicides/fumigants used in global crop applications, net sales for the third quarter of 2019 increased by approximately 12% to $46,772 from $41,882 in the comparable period of 2018. Net sales of our herbicide products increased approximately 18%, with sales of our Dacthal® herbicide (that is used on a wide variety of high-valued vegetable crops) relatively flat, our Paraquat burn-down product sales increased, and we also enjoyed incremental sales as a result of three newly acquired Raymat products, which were partially offset by lower sales of our bromacil products due to a supply shortage. In global fungicides, we posted significantly higher sales of Equus despite abnormally high in-channel supply, as a result of pre-tariff importation of large quantities by many competitive sellers. Global soil fumigant sales were relatively flat in the quarter.

 

Within the group of other products (which includes distribution of certain third party products in Central and South America, plant growth regulators, molluscicides and tolling activity), net sales increased 2%, to $22,887, as compared to $22,424 in the third quarter of 2018. Quarterly sales were impacted by substantially reduced demand for our Folex® cotton defoliant due to natural defoliation that occurred as a result of extremely hot and dry weather in the Southeast and Mid-south regions of the United States. However, this decline was more than offset by the positive incremental sales added to this category by our Defensive and Agrovant distribution businesses in Brazil, our new Australia business and quarter-over-quarter gains in our Central American AgriCenter subsidiary.  

 

23


 

Our global non-crop sales ended the third quarter of 2019 up 18% at $19,378, as compared to $16,426, for the same period of the prior year. This result was driven by a strong increase in quarterly sales of our aerially-applied Dibrom mosquito adulticide.

Our cost of sales for the third quarter of 2019 was $77,421 or 62% of sales. This compared to $66,480 or 59% of sales for the same period of 2018. The increase in cost of sales as a percentage of net sales in 2019 was driven by a reduction in factory output as we balanced softer weather driven demand for some products with the drive to reduce inventories during 2019. Furthermore, cost of goods was affected by a change in product mix, including the effect of acquired products and distribution businesses, which drive high sales at comparatively lower margins than our pre-existing business.

Gross profit for the third quarter of 2019 increased by $2,163, or 5%, to end at $47,463, as compared to $45,300 for the third quarter of 2018. Gross margin percentage ended at 38% in the three months ended September 30, 2019, as compared to 41% in the same period of the prior year. As previously noted, the change in performance is largely driven by decisions made to manage factory output and inventory levels and the significant growth of our international businesses including those acquired in late 2018 and early in 2019.     

As discussed below in detail by department, operating expenses increased by $7,042 (or 21%) to $40,677 for the three months ended September 30, 2019, as compared to the same period in 2018. The differences in operating expenses by department are as follows:

 

 

 

2019

 

 

2018

 

 

Change

 

 

% Change

 

Selling

 

$

11,961

 

 

$

9,637

 

 

$

2,324

 

 

 

24

%

General and administrative

 

 

13,406

 

 

 

8,686

 

 

 

4,720

 

 

 

54

%

Research, product development and regulatory

 

 

5,417

 

 

 

5,895

 

 

 

(478

)

 

 

-8

%

Freight, delivery and warehousing

 

 

9,893

 

 

 

9,417

 

 

 

476

 

 

 

5

%

 

 

$

40,677

 

 

$

33,635

 

 

$

7,042

 

 

 

21

%

 

 

Selling expenses increased by $2,324 to end at $11,961 for the three months ended September 30, 2019, as compared to the same period of 2018. The main drivers were increased promotional expenses directed at domestic markets and the addition of costs associated with the newly acquired products and distribution businesses.  

 

General and administrative expenses increased by $4,720 to end at $13,406 for the three months ended September 30, 2019, as compared to the same period of 2018. The increase was driven primarily by the quarterly reassessment of fair value associated with the reduction of deferred consideration for newly acquired businesses in the amount of $651, as compared to $3,969 in prior year and the increase in activities of businesses acquired at the end of 2018 and the beginning of 2019. These increases were partially offset by a decrease in legal costs of approximately $650.   

 

Research, product development costs and regulatory expenses decreased by $478 to end at $5,417 for the three months ended September 30, 2019, as compared to the same period of 2018. The decrease relates largely to the timing of regulatory studies necessary to defend our portfolio of products.  

 

Freight, delivery and warehousing costs for the three months ended September 30, 2019 were $9,893 or 8.8% of sales as compared to $9,417 or 8.4% of sales for the same period in 2018. As a percentage of sales, freight costs have remained flat, as compared to prior year.

Interest costs net of capitalized interest, were $2,070 in the three months ended September 30, 2019, as compared to $1,116 in the same period of 2018. Average indebtedness and interest costs are summarized in the following table:

 

 

 

Three months ended September 30, 2019

 

 

Three months ended September 30, 2018

 

 

 

Average

Debt

 

 

Interest

Expense

 

 

Interest

Rate

 

 

Average

Debt

 

 

Interest

Expense

 

 

Interest

Rate

 

Revolving line of credit (average)

 

$

178,886

 

 

$

2,045

 

 

 

4.6

%

 

$

80,001

 

 

$

822

 

 

 

4.1

%

Amortization of deferred loan fees

 

 

 

 

 

58

 

 

 

 

 

 

 

 

 

60

 

 

 

 

Amortization of other deferred liabilities

 

 

 

 

 

41

 

 

 

 

 

 

 

 

 

107

 

 

 

 

Other interest (income) expense

 

 

 

 

 

32

 

 

 

 

 

 

 

 

 

146

 

 

 

 

Subtotal

 

 

178,886

 

 

 

2,176

 

 

 

4.9

%

 

 

80,001

 

 

 

1,135

 

 

 

5.7

%

Capitalized interest

 

 

 

 

 

(106

)

 

 

 

 

 

 

 

 

(19

)

 

 

 

Total

 

$

178,886

 

 

$

2,070

 

 

 

4.6

%

 

$

80,001

 

 

$

1,116

 

 

 

5.6

%

 

 

24


 

The Company’s average overall debt for the three months ended September 30, 2019 was $178,886, as compared to $80,001 for the three months ended September 30, 2018. This increase arose primarily from borrowing activity required to fund acquisitions completed during the fall of 2018 and year to date in 2019. As can be seen from the table above, our effective bank interest rate on our revolving line of credit was 4.6% for the three months ended September 30, 2019, as compared to 5.6% in 2018.

Income tax expense decreased by $2,052 to end at an expense of $1,474 for the three months ended September 30, 2019, as compared to $3,526 for the comparable period in 2018. The effective tax rate for the quarter was 31.3%, as compared to 33.4% in the same period of the prior year. Our effective tax rate for 2018 included a one-time adjustment related to the implementation of the 2017 transition tax in the amount of $1,089. Excluding this one-time expense, the underlying effective tax rate for the quarter was 23.1%.  The increase in effective tax rate is primarily driven by the mix of our domestic and international income.  Furthermore, the effective tax rate for all interim periods is based on the projected income for the full year and is subject to ongoing review and adjustment by management.

During the three months ended September 30, 2019 and 2018, we recognized losses of $89 and $181, respectively, on our investment in the Hong Kong joint venture, which is a 50% owned equity investment. Furthermore, during the three months ended September 30, 2018, we recognized a loss of $352 on our investment in TyraTech, which became a wholly owned and consolidated subsidiary on November 9, 2018.

Non-controlling interest represents the share of net income or loss that is attributable to the minority stockholder of our majority owned subsidiary, Envance. During the three months ended September 30, 2018, a loss of $35 was attributed to non-controlling interest. Envance became a wholly owned subsidiary on November 9, 2018.

Our net income for the three months ended September 30, 2019 was $3,153 or $0.11 per basic and diluted share, as compared to $6,525 or $0.22 per basic and diluted share in the same period of 2018.

Nine Months Ended September 30 2019 and 2018:

 

Broadly speaking, the Company’s financial performance for the nine-month period ended September 30, 2019 was characterized by modest growth, on an overall basis, and reduced profitability, as compared to the same period in 2018. Net sales increased by 5%, due entirely to the expansion of our international business, which showed an 18% increase in net sales and a 29% increase in gross profit, partially offset by a decline in the US business, which recorded a 3% decrease in net sales and an 8% decrease in gross profit. Further, for the first nine months of 2019, international sales constituted 41% of overall sales, up from 36% for the same period in 2018. Growth in Central America, Brazil, and in Canada, where we sell our recently acquired Assure II fungicide, set the pace for international growth during the period. Domestically, sales were constrained by wet and cold conditions throughout the US during the first and second quarters; these conditions reduced demand not only during the planting season, but also in the aftermath, at which time soil fumigant and burn-down herbicide use was limited. In addition, exceptional heat and dryness during the third quarter reduced the need for our cotton defoliant, Folex in the Southern region.

 

Gross margin decreased by 1% during the first nine months of 2019 as a result of the strong growth of our international sales, which are generally at lower margins when compared to our US business, and by decisions taken to hold down factory output in order to drive down inventory levels during 2019. Operating expenses during the nine-month period increased primarily as a result of the addition of products and businesses acquired in late 2018 and year to date in 2019, including reductions to deferred liabilities for purchase consideration which were lower in 2019, as compared to 2018. Further, we recorded higher interest expense arising from borrowings due largely to acquisition activity in 2018 and 2019. These factors, together, resulted in a decrease in net income for the first nine months of the year. A more detailed explanation of net sales, markets and factors affecting profitability appears below.

 

The Company’s overall operating results for the first nine months of 2019 were mixed, as compared to those of the same period of 2018. Net sales for the first nine months of 2019 were up 5% ($337,664 vs. $322,934), gross profit was essentially flat ($130,818 vs. $129,648), and gross margin declined to 39% from 40% of net sales. Operating expenses rose by approximately 9% ($110,839 vs. $102,011) and increased as a percent of net sales to 33% from 32%. Net income attributable to American Vanguard was down 39% ($10,165 vs. $16,779).

 

 

25


 

The Company’s overview of sales and gross margin performance for the nine months ended September 30, 2019 and 2018 is as follows:

 

 

 

For the nine months ended

September 30,

 

 

 

 

 

 

 

 

 

 

 

2019

 

 

2018

 

 

Change

 

 

% Change

 

Net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US crop

 

$

152,512

 

 

$

166,397

 

 

$

(13,885

)

 

 

-8

%

US non-crop

 

 

47,543

 

 

 

39,492

 

 

 

8,051

 

 

 

20

%

US total

 

 

200,055

 

 

 

205,889

 

 

 

(5,834

)

 

 

-3

%

International

 

 

137,609

 

 

 

117,045

 

 

 

20,564

 

 

 

18

%

Net sales:

 

$

337,664

 

 

$

322,934

 

 

$

14,730

 

 

 

5

%

Gross profit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US crop

 

$

66,140

 

 

$

78,439

 

 

$

(12,299

)

 

 

-16

%

US non-crop

 

 

24,363

 

 

 

19,843

 

 

 

4,520

 

 

 

23

%

US total

 

 

90,503

 

 

 

98,282

 

 

 

(7,779

)

 

 

-8

%

International

 

 

40,315

 

 

 

31,366

 

 

 

8,949

 

 

 

29

%

Total gross profit:

 

$

130,818

 

 

$

129,648

 

 

$

1,170

 

 

 

1

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross margin domestic

 

 

45

%

 

 

48

%

 

 

 

 

 

 

 

 

Gross margin international

 

 

29

%

 

 

27

%

 

 

 

 

 

 

 

 

Gross margin total

 

 

39

%

 

 

40

%

 

 

 

 

 

 

 

 

 

Our US crop business recorded net sales that were about 8% below those of the first nine months of 2018 ($152,512 vs. $166,397). Insecticides sales were down period-over-period with strong demand for our Aztec (corn insecticide), Counter (nematicide) and Bidrin cotton products offset by decreased sales of Thimet, largely attributable to unfavorable weather conditions in the Midwest and Southeast regions of the United States. With respect to herbicides, Dacthal sales improved, while Impact was stable period-over-period.  Further, Parazone sales were down due to persistent wet weather in several key markets and higher than normal competitor inventory. Soil fumigant sales were down slightly in the first nine months this year due to wet weather in critical geographic regions that inhibited application of this liquid product. Fungicide sales were down due to an oversupply of Chinese-produced chlorothalonil arising from expedited purchases made by companies within our sector in order to minimize tariffs. Among growth regulators, we experienced a significant drop in demand for our Folex cotton harvest defoliant attributable to the natural defoliation that occurred in the southern United States, as the result of extreme hot and dry weather.

Net sales of our domestic non-crop business increased about 20% to $47,543 from $39,492, during the first nine months of 2019. This result was due largely to continued strong demand for our Dibrom® mosquito control adulticide (as applicators restocked this premium product), increased demand for our pest strips and from our Envance Technologies business.

Net sales of our international businesses were up approximately 18% during the period ($137,609 vs. $117,045). A significant part of this increase was due to the addition of sales from our newly acquired Brazilian subsidiaries, Defensive and Agrovant, our Australian acquisition, and the addition of our Assure II herbicide products that were acquired in December 2018. Additionally, we experienced improved sales performance from AgriCenter in Central America, with higher granular soil insecticide sales, steady demand for fungicides and miscellaneous products, and somewhat lower foliar insecticide sales. Elsewhere in the international sector, we posted reduced sales of our insecticides Mocap, Nemacur, Counter and Thimet, while bromacil sales were up slightly. A more detailed explanation of net sales, markets and factors affecting profitability appears below.

 

 

26


 

Nine Months Ended September 30, 2019 and 2018:

 

 

 

2019

 

 

2018

 

 

Change

 

 

% Change

 

Net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Insecticides

 

$

112,539

 

 

$

115,702

 

 

$

(3,163

)

 

 

-3

%

Herbicides/soil fumigants/fungicides

 

 

115,510

 

 

 

113,144

 

 

 

2,366

 

 

 

2

%

Other, including plant growth regulators

 

 

60,730

 

 

 

52,269

 

 

 

8,461

 

 

 

16

%

Total crop

 

 

288,779

 

 

 

281,115

 

 

 

7,664

 

 

 

3

%

Non-crop

 

 

48,885

 

 

 

41,819

 

 

 

7,066

 

 

 

17

%

Total net sales

 

$

337,664

 

 

$

322,934

 

 

$

14,730

 

 

 

5

%

Cost of sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Insecticides

 

$

68,401

 

 

$

73,441

 

 

$

(5,040

)

 

 

-7

%

Herbicides/soil fumigants/fungicides

 

 

72,478

 

 

 

66,990

 

 

 

5,488

 

 

 

8

%

Other, including plant growth regulators

 

 

42,044

 

 

 

31,459

 

 

 

10,585

 

 

 

34

%

Total crop

 

 

182,923

 

 

 

171,890

 

 

 

11,033

 

 

 

6

%

Non-crop

 

 

23,923

 

 

 

21,396

 

 

 

2,527

 

 

 

12

%

Total cost of sales

 

$

206,846

 

 

$

193,286

 

 

$

13,560

 

 

 

7

%

Gross profit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Insecticides

 

$

44,138

 

 

$

42,261

 

 

$

1,877

 

 

 

4

%

Herbicides/soil fumigants/fungicides

 

 

43,032

 

 

 

46,154

 

 

 

(3,122

)

 

 

-7

%

Other, including plant growth regulators

 

 

18,686

 

 

 

20,810

 

 

 

(2,124

)

 

 

-10

%

Gross profit crop

 

 

105,856

 

 

 

109,225

 

 

 

(3,369

)

 

 

-3

%

Gross profit non-crop

 

 

24,962

 

 

 

20,423

 

 

 

4,539

 

 

 

22

%

Total gross profit

 

$

130,818

 

 

$

129,648

 

 

$

1,170

 

 

 

1

%

Gross margin crop

 

 

37

%

 

 

39

%

 

 

 

 

 

 

 

 

Gross margin non-crop

 

 

51

%

 

 

49

%

 

 

 

 

 

 

 

 

Total gross margin

 

 

39

%

 

 

40

%

 

 

 

 

 

 

 

 

 

 

 

2019

 

 

2018

 

 

Change

 

 

% Change

 

Net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US

 

$

200,055

 

 

$

205,889

 

 

$

(5,834

)

 

 

-3

%

International

 

 

137,609

 

 

 

117,045

 

 

 

20,564

 

 

 

18

%

Total net sales

 

$

337,664

 

 

$

322,934

 

 

$

14,730

 

 

 

5

%

 

Across our global crop business, net sales of our insecticides group declined approximately 3% to end at $112,539, as compared to $115,702 during the nine months ended September 30, 2018. Within this category, net sales of our non-granular insecticides were driven by our cotton insecticide Bidrin®, which posted approximately a 50% sales gain due to increased cotton acres in 2019, as compared to the prior year. This increase more than offset sales declines of Abamectin resulting from regional weather issues and bifenthrin resulting from generic competitive pressures. Despite a 36% increase in net sales of our Aztec corn soil insecticide, granular soil insecticides were down about 9% due to lower Thimet sales in peanuts, lower sales of Counter in sugar beets, and lower sales internationally for Mocap and Nemacur, in part due to regulatory application limitations.

Within the group of herbicides/fungicides/fumigants used in global crop applications, net sales for the nine months ended September 30, 2019 increased by approximately 2% to $115,510 from $113,144, in the comparable period of 2018. While our Impact and Dacthal products continued to deliver strong and stable results, we experienced reduced sales of our chlorothalonil fungicide Equus due to abnormally high supply (from expedited, pre-tariff importation of large quantities by many sellers) and pricing pressure in the face of seasonally normal demand. Additionally, wet weather inhibited the application of our Parazone burn-down herbicide and Metam soil fumigants. Offsetting these declines were the addition of the Assure II herbicide acquired at the end of 2018 and a significant period-over-period increase in our bromacil herbicides; both of these factors impacted our international business performance for the period.

 

27


 

Within the group of other products (which includes distribution of certain third party products particularly in Central and South America, plant growth regulators, molluscicides and tolling activity), net sales were $60,730, up approximately 16%, as compared to $52,269 in the first nine months of 2018. This result benefitted from the inclusion of the Brazilian and Australian businesses, increased sales in the AgriCenter business and improved sales of our growth regulator NAA. These items were partially offset by significantly lower sales of our Folex® cotton defoliant resulting from extreme hot and dry weather in the southern United States during the cotton harvest season.

Our non-crop sales ended the first nine months of 2019 with net sales of $48,885 up 17%, as compared to $41,819 for the same period of the prior year. This category benefitted from continued strong sales of our aerially-applied mosquito adulticide Dibrom, commercial pest control products including pest strips, and our pharmaceutical products.    

International sales for the first nine months ended at $137,609, an 18% increase over the $117,045 in the same period of 2018. The main driver of this performance was the addition of the Defensive and Agrovant businesses in Brazil, the new Australian business, continuing growth of the AgriCenter Central American business, and the acquisition of the Assure II products at the end of 2018. Our traditional product portfolio (including Mocap, Nemacur) showed significant year-to-date sales declines resulting from various weather-related and regulatory influences.

Our cost of sales for the first nine months ended September 30, 2019 is $206,846 or 61% of net sales. This compares to $193,286 or 60% of net sales in the same period of 2018. The increase in cost of sales as a percentage of net sales in 2019 was driven in part by decisions made to reduce factory output as part of our 2019 manufacturing plan.

Gross profit for the nine months ended September 30, 2019 increased by $1,170 to end at $130,818, as compared to $129,648 for the first nine months of 2018. Gross margin percentage ended at 39% in the first nine months of 2019, as compared to 40% in the same period of the prior year. As previously noted, the change in performance is largely driven by the Company manufacturing plan for 2019, which responds to the weather related lower sales already discussed and the new businesses acquired in early 2019.

Operating expenses increased by $8,828 to $110,839 for the nine months ended September 30, 2019, as compared to the same period in 2018. The changes in operating expenses by department are as follows:

 

 

 

2019

 

 

2018

 

 

Change

 

 

% Change

 

Selling

 

$

34,646

 

 

$

29,617

 

 

$

5,029

 

 

 

17

%

General and administrative

 

 

33,890

 

 

 

29,410

 

 

 

4,480

 

 

 

15

%

Research, product development and regulatory

 

 

17,956

 

 

 

19,458

 

 

 

(1,502

)

 

 

-8

%

Freight, delivery and warehousing

 

 

24,347

 

 

 

23,526

 

 

 

821

 

 

 

3

%

 

 

$

110,839

 

 

$

102,011

 

 

$

8,828

 

 

 

9

%

 

 

Selling expenses increased by $5,029 to end at $34,646 for the nine months ended September 30, 2019, as compared to the same period of 2018. The main drivers were an increase in activities from the products and businesses acquired during the end of 2018 and during the first nine months of 2019, and increased advertising and marketing activities in both our domestic and international regions.

 

 

General and administrative expenses increased by $4,480 to end at $33,890 for the nine months ended September 30, 2019, as compared to the same period of 2018. The increase was driven by the administrative expenses associated with the activities of the newly acquired businesses and the reassessment of the fair value related to deferred consideration for the acquired businesses in the amount of $3,539, as compared to $5,437 in prior year. These increases were partially offset by decreases in legal costs of approximately $1,664.  

 

Research, product development costs and regulatory expenses decreased by $1,502 to end at $17,956 for the nine months ended September 30, 2019, as compared to the same period of 2018. The main drivers for the decrease were timings related to third party product defense studies which are running later in 2019 than in the prior year, and lower business development expenses as we have reached the commercialization phase of a key part of our SIMPAS project.

 

Freight, delivery and warehousing costs for the nine months ended September 30, 2019 were $24,347 or 7.2% of sales as compared to $23,526 or 7.3% of sales for the same period in 2018.

 

28


 

Interest costs net of capitalized interest were $5,606 in the first nine months of 2019, as compared to $2,961 in the same period of 2018. Average indebtedness and interest costs are summarized in the following table:

 

 

 

Nine months ended September 30, 2019

 

 

Nine months ended September 30, 2018

 

 

 

Average

Debt

 

 

Interest

Expense

 

 

Interest

Rate

 

 

Average

Debt

 

 

Interest

Expense

 

 

Interest

Rate

 

Revolving line of credit (average)

 

$

166,877

 

 

$

5,530

 

 

 

4.4

%

 

$

92,971

 

 

$

2,399

 

 

 

3.4

%

Amortization of deferred loan fees

 

 

 

 

 

161

 

 

 

 

 

 

 

 

 

177

 

 

 

 

Amortization of other deferred liabilities

 

 

 

 

 

41

 

 

 

 

 

 

 

 

 

261

 

 

 

 

Other interest (income) expense

 

 

 

 

 

102

 

 

 

 

 

 

 

 

 

178

 

 

 

 

Subtotal

 

 

166,877

 

 

 

5,834

 

 

 

4.7

%

 

 

92,971

 

 

 

3,015

 

 

 

4.3

%

Capitalized interest

 

 

 

 

 

(228

)

 

 

 

 

 

 

 

 

(54

)

 

 

 

Total

 

$

166,877

 

 

$

5,606

 

 

 

4.5

%

 

$

92,971

 

 

$

2,961

 

 

 

4.2

%

 

The Company’s average overall debt for the nine months ended September 30, 2019 was $166,877, as compared to $92,971 for the nine months ended September 30, 2018. The difference in average debt levels between the two periods relates to the businesses acquired during the final quarter of 2018 and year-to-date in 2019. As can be seen from the table above, our effective bank interest rate on our revolving line of credit was 4.5% for the nine months ended September 30, 2019, as compared to 4.2% in 2018.

Income tax expense was $4,059 for the nine months ended September 30, 2019, as compared to $6,966 for the nine months ended September 30, 2018. The effective tax rate for the nine months ended September 30, 2019 and 2018 was 28.2%. As with the quarter ended September 30, 2018, the nine month period is impacted by the transition tax adjustment of $1,089. Excluding that one-time charge, the Company’s tax rate would have been 23.8% for the nine months ended September 30, 2018. The effective tax rate is based on the projected income for the full year and is subject to ongoing review and adjustment by management.

During the nine months ended September 30, 2019 and 2018, the Company recognized losses of $149 and $256, respectively, on our investment in the Hong Kong joint venture which is a 50% owned equity investment. During the nine months ended September 30, 2018, we recognized a loss of $795 on our investment in TyraTech. TyraTech became a wholly owned and consolidated subsidiary on November 9, 2018.

Non-controlling interest represents the share of net income or loss that is attributable to the minority stockholder of our majority owned subsidiary, Envance. During the nine months ended September 30, 2018, a loss of $120 attributed to non-controlling interest. Envance became a wholly owned subsidiary on November 9, 2018.

Net income for the nine months ended September 30, 2019 was $10,165 or $0.35 per basic and $0.34 per diluted share, as compared to $16,779 or $0.57 per basic and $0.56 per diluted share in the same period of 2018.

LIQUIDITY AND CAPITAL RESOURCES

The Company used cash of $21,684 in operating activities during the nine months ended September 30, 2019, as compared to $15,090 during the nine months ended September 30, 2018.  Included in the $21,684 are net income of $10,165, plus non-cash depreciation, amortization of intangibles and other assets and discounted future liabilities, in the amount of $17,107, provision for bad debts in the amount of $728, reassessment of deferred compensation of $3,539, stock based compensation of $5,159, changes in deferred income taxes of $459 and losses from equity method investments of $149. The total provided net cash inflows of $29,310, as compared to $35,191 for the same period of 2018.

As of September 30, 2019, the Company increased working capital by $49,160, as compared to working capital at December 31, 2018.  Inventories increased by $19,713, driven by our expanded businesses. Deferred revenue decreased by $19,800, driven by customer decisions regarding product demand, payment timing and our cash incentive programs. Our accounts payable balances increased by $5,516 driven by increased manufacturing activity and the impact of newly acquired businesses. Accounts receivables increased by $15,983 driven primarily by a different mix of domestic crop sales (and associated timing and terms) following the purchases of new products in 2018. Prepaid expenses increased by $849 and income tax payable increased by $4,477. Accrued programs increased by $20,163. Finally, other payables and accrued expenses decreased by $4,936.

 

29


 

With regard to our program accrual, the change primarily reflects our mix of sales and customers in the first nine months of 2019, as compared to the prior year. The Company accrues programs in line with the growing season upon which specific products are targeted. Most of our programs relate to domestic products. Typically, domestic crops have a growing season that ends on September 30th of each year. During the first nine months of 2019, the Company made accruals for programs in the amount of $38,900 and made payments in the amount of $18,737. During the first nine months of 2018, the Company made accruals in the amount of $38,027 and made payments in the amount of $15,145.

Cash used for investing activities was $42,382 for the nine months ended September 30, 2019, as compared to $6,788 for the nine months ended September 30, 2018. The Company spent $10,546 on capital expenditures primarily focused on continuing to invest in manufacturing infrastructure and $31,836 relating to products and business acquisitions during 2019.

The Company has a revolving line of credit that is shown as long-term debt in the condensed consolidated balance sheets at September 30, 2019 and December 31, 2018. The debt is summarized in the following table:

 

Long-term indebtedness ($000's)

 

September 30, 2019

 

 

December 31, 2018

 

Revolving line of credit

 

$

165,600

 

 

$

97,400

 

Deferred loan fees

 

 

(592

)

 

 

(729

)

Net long-term debt

 

$

165,008

 

 

$

96,671

 

 

As of June 30, 2017, AMVAC Chemical Corporation (“AMVAC”), the Company’s principal operating subsidiary, as borrower, and affiliates (including the Company, AMVAC CV and AMVAC BV), as guarantors and/or borrowers, entered into a Third Amendment to Second Amended and Restated Credit Agreement (the “Credit Agreement”) with a group of commercial lenders led by Bank of the West (AMVAC’s primary bank) as agent, swing line lender and Letter of Credit (“L/C”) issuer. The Credit Agreement is a senior secured lending facility, consisting of a line of credit of up to $250,000, an accordion feature of up to $100,000 and a maturity date of June 30, 2022.  The Credit Agreement contains two key financial covenants; namely, borrowers are required to maintain a Consolidated Funded Debt Ratio of no more than 3.25-to-1 and a Consolidated Fixed Charge Covenant Ratio of at least 1.25-to-1.   The Company’s borrowing capacity varies with its financial performance, measured in terms of EBITDA, for the trailing twelve month period. Under the Credit Agreement, revolving loans bear interest at a variable rate based, at borrower’s election with proper notice, on either (i) LIBOR plus the “Applicable Rate” which is based upon the Consolidated Funded Debt Ratio (“Eurocurrency Rate Loan”) or (ii) the greater of (x) the Prime Rate, (y) the Federal Funds Rate plus 0.5%, and (z) the Daily One-Month LIBOR Rate plus 1.00%, plus, in the case of (x), (y) or (z) the Applicable Rate (“Alternate Base Rate Loan”). Interest payments for Eurocurrency Rate Loans are payable on the last day of each interest period (either one, two, three or six months, as selected by the borrower) and the maturity date, while interest payments for Alternate Base Rate Loans are payable on the last business day of each month and the maturity date.

At September 30, 2019, according to the terms of the Credit Agreement and based on its performance against the most restrictive covenants listed above, the Company had the capacity to increase its borrowings by up to $30,435. This compares to an available borrowing capacity of $105,111 as of September 30, 2018. The level of borrowing capacity is driven by three factors: (1) our financial performance, as measured in EBITDA for trailing twelve month period, which has declined, (2) net borrowings, which have increased due to recent acquisitions, and (3) the leverage covenant (being the number of times EBITDA the Company may borrow under its credit facility agreement).

We believe that anticipated cash flow from operations, existing cash balances and available borrowings under our senior credit facility will be sufficient to provide us with liquidity necessary to fund our working capital and cash requirements for the next twelve months.

RECENTLY ISSUED ACCOUNTING GUIDANCE

Please refer to Note 15 in the accompanying Notes to the Condensed Consolidated Financial Statements for recently issued accounting standards.  

 

30


 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The Company continually re-assesses the critical accounting policies used in preparing its financial statements. In the Company’s Form 10-K filed with the SEC for the year ended December 31, 2018, the Company provided a comprehensive statement of critical accounting policies. These policies have been reviewed in detail as part of the preparation work for this Form 10-Q. After our review of these matters, we have determined that, during the subject reporting period, there has been no material change to the critical accounting policies that are listed in the Company’s Form 10-K for the year ended December 31, 2018, except for the adoption of ASC 842, Leases, as of January 1, 2019.  

Certain of the Company’s policies require the application of judgment by management in selecting the appropriate assumptions for calculating financial estimates. These judgments are based on historical experience, terms of existing contracts, commonly accepted industry practices and other assumptions that the Company believes are reasonable under the circumstances. These estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the condensed consolidated financial statements in the period that revisions are determined to be necessary. Actual results may differ from these estimates under different outcomes or conditions.

 

Item 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to market risk related to changes in interest rates, primarily from its borrowing activities. The Company’s indebtedness to its primary lender is evidenced by a line of credit with a variable rate of interest, which fluctuates with changes in the lender’s reference rate. For more information, please refer to the applicable disclosures in the Company’s Form 10-K filed with the SEC for the year ended December 31, 2018.

The Company conducts business in various foreign currencies, primarily in Europe, Mexico, Central and South America. Therefore, changes in the value of the currencies of such countries or regions affect the Company’s financial position and cash flows when translated into US dollars. The Company has mitigated and will continue to mitigate a portion of its currency exchange exposure through natural hedges based on the operation of decentralized foreign operating companies in which the majority of all costs are local currency based. Furthermore, the Company has established a procedure for covering forward exchange rates on specific purchase orders when appropriate. A 10% change in the value of all foreign currencies would have an immaterial effect on the Company’s financial position and cash flows.

Item 4.

CONTROLS AND PROCEDURES

As of September 30, 2019, the Company has a comprehensive set of disclosure controls and procedures designed to ensure that all information required to be disclosed in our filings under the Securities Exchange Act (1934) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. As of September 30, 2019, the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, has concluded, based on their evaluation, that the Company’s disclosure controls and procedures are effective to provide reasonable assurance of the achievement of the objectives described above.

 

There were no changes in the Company’s internal controls over financial reporting that occurred during the most recent quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.  We implemented internal controls to ensure we adequately evaluated our contracts and properly assessed the impact of the new accounting standards under ASC 842, Leases.

 

 

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PART II. OTHER INFORMATION

(Dollars in thousands)

The Company was not required to report any matters or changes for any items of Part II except as disclosed below.

Item 1.

Legal Proceedings

During the reporting period, there have been no material developments in legal proceedings that are pending or threatened against the Company, except as described below.

EPA FIFRA/RCRA Matter.  On November 10, 2016, the Company was served with a grand jury subpoena out of the US District Court for the Southern District of Alabama in which the US Department of Justice (“DoJ”) sought production of documents relating to the Company’s reimportation of depleted Thimet containers from Canada and Australia. The Company retained defense counsel and completed production of documents. Over the past several months, government attorneys have interviewed several individuals who may be knowledgeable of the matter. At this stage, however, DoJ has not made clear its intentions with regard to either its theory of the case or potential criminal enforcement. Thus, it is too early to tell whether a loss is probable or reasonably estimable. Accordingly, the Company has not recorded a loss contingency on this matter.

 

Item 1A.

Risk Factors

The Company continually re-assesses the business risks, and as part of that process detailed a range of risk factors in the disclosures in American Vanguard’s Report on Form 10-K for the fiscal year ended December 31, 2018 as well as the Company’s Form 10-Q for the period ended September 30, 2019.

Item 2.

Purchases of Equity Securities by the Issuer

 

The table below summarizes the number of shares of our common stock that were repurchased during the nine months ended September 30, 2019 under the share repurchase program. The shares and respective amount are recorded as treasury shares on the Company’s condensed consolidated balance sheet.  

 

Month ended

 

Total number of

shares purchased

 

 

Average price paid

per share

 

 

Total amount paid

 

January 31, 2019

 

 

158,048

 

 

$

16.48

 

 

$

2,604

 

Total number of shares repurchased

 

 

158,048

 

 

$

16.48

 

 

$

2,604

 

 

 

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Item 6.

Exhibits

Exhibits required to be filed by Item 601 of Regulation S-K:

 

Exhibit

No.

 

Description

 

 

 

31.1

 

Certification of Chief Executive Officer Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.

 

 

 

31.2

 

Certification of Chief Financial Officer Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.

 

 

 

32.1

 

Certification Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.

 

 

 

101

 

The following materials from American Vanguard Corp’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2019, formatted in XBRL (Extensible Business Reporting Language): (i) Condensed Consolidated Statements of Operations; (ii) Condensed Consolidated Statements of Comprehensive Income; (iii) Condensed Consolidated Balance Sheets; (iv) Condensed Consolidated Statements of Stockholders’ Equity; (v) Condensed Consolidated Statements of Cash Flows; and (vi) Notes to Condensed consolidated Financial Statements, tagged as blocks of text.

 

 

 

 

33


 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

american vanguard corporation

 

 

 

Dated: November 6, 2019

By:

/s/    eric g. wintemute

 

 

Eric G. Wintemute

 

 

Chief Executive Officer and Chairman of the Board

 

 

 

Dated: November 6, 2019

By:

/s/    david t. johnson

 

 

David T. Johnson

 

 

Chief Financial Officer & Principal Accounting Officer

 

 

 

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