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AVD > SEC Filings for AVD > Form 10-Q on 6-Aug-2013All Recent SEC Filings

Show all filings for AMERICAN VANGUARD CORP

Form 10-Q for AMERICAN VANGUARD CORP


6-Aug-2013

Quarterly Report


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 and filings filed with the U.S. Securities and Exchange Commission (the "SEC"). It is not possible to foresee or identify all such factors. For more detailed information, refer to Item 1A., Risk factors and Item 7A., Quantitative and Qualitative Disclosures about Market Risk, in the Company's Annual Report on Form 10-K for the year ended December 31, 2012.

RESULTS OF OPERATIONS

Quarter Ended June 30:



                                        2013          2012         Change
              Net sales:
              Insecticides            $ 39,218      $ 45,432      $ (6,214 )
              Herbicides                24,699        13,656        11,043
              Other                     13,228        16,204        (2,976 )

              Total Crop                77,145        75,292         1,853
              Non-crop                   9,616         9,545            71

                                      $ 86,761      $ 84,837      $  1,924

              Cost of sales:
              Insecticides            $ 21,386      $ 24,697      $ (3,311 )
              Herbicides                11,958         8,988         2,970
              Other                      6,910         8,045        (1,135 )

              Total crop                40,254        41,730        (1,476 )
              Non-crop                   4,441         4,761          (320 )

                                      $ 44,695      $ 46,491      $ (1,796 )

              Gross margin:
              Insecticides            $ 17,832      $ 20,735      $ (2,903 )
              Herbicides                12,741         4,668         8,073
              Other                      6,318         8,159        (1,841 )

              Gross margin crop         36,891        33,562         3,329
              Gross margin non-crop      5,175         4,784           391

                                      $ 42,066      $ 38,346      $  3,720

              Gross margin crop             48 %          45 %
              Gross margin non-crop         55 %          50 %
              Total gross margin            49 %          45 %

                                        2013          2012         Change
              Net sales:
              US sales                $ 67,837      $ 65,792      $  2,045
              International sales       18,924        19,045          (121 )

                                      $ 86,761      $ 84,837      $  1,924

Financial performance for the quarter ended June 30, 2013 included net sales that were up 2.3% to $87,761 compared to $84,837 for the second quarter of 2012. This revenue performance is now the highest second quarter sales performance recorded by the Company. Our gross profit performance improved and ended at $42,066 or 48% of sales as compared $38,346 or 45% of sales last year. Our operating costs for the period increased as a percentage of sales primarily because these are substantially fixed costs which have been put in place to support long-term development and growth of the business, and also included some significant one-time costs as more fully described in our discussion of operating expenses. Our tax rate improved and our net income attributed to American Vanguard, which was down 4% from the prior year, was nevertheless at our target rate of 10% of net sales. Net sales for our crop business were up by approximately 2.5%, while net sales for non-crop products were up by about 1% for the comparable period of the prior year. A more detailed discussion of general market conditions and sales performance by category of products appears below.

Second quarter financial performance was significantly influenced by weather in the United States. Continuous rainfall in the Midwest created considerable difficulties in the planting of the 2013 corn crop. In some areas of northern Iowa and southern Minnesota, field flooding made it impossible to get the crop planted. In other areas of the Corn Belt, persistent rainy weather minimized the days available to plant, causing many growers to bypass some crop defense applications at the time of planting, in order to focus exclusively on getting their seed into the ground. While wet conditions did not adversely affect the sales of either our corn insecticides or corn herbicide for the reporting period, they did affect the use of these products, leaving higher than normal stocks in customers' inventories. Similar conditions in the Southern U.S. had the effect of shortening the necessary growing season, prompted some cotton growers to switch their acres to soybeans and, in turn, led to a drop in the sale of our cotton products. In addition to persistent wet conditions, our sales performance was affected by a drop in peanut acres.


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Net sales of our total insecticide group were down about 13%, at $39,218 as compared to $45,432 during the second quarter of 2012. Net sales of our granular soil insecticides ("GSIs") were up approximately 1% over that of the comparable quarter in 2012, led by our four products for corn (Aztec, SmartChoice, Counter and Force) - offset by a more than 50% decline in Thimet sales attributable to fewer peanut acres being planted in 2013. Our non-GSI insecticides posted lower sales during the second quarter (down about 40%) primarily due to lighter purchases of our cotton product Bidrin - a direct consequence of the wet weather induced shift from cotton to soybeans plantings-as discussed above.

Within the group of herbicides/fungicides/fumigants, net sales for the second quarter of 2013 increased by approximately 81% to $24,699 from $13,656 in the comparable period of 2012. Net sales of our herbicide products nearly tripled, due primarily to strong sales of our post-emergent corn herbicide, Impact. We benefitted from our continuing co-marketing agreement with Monsanto and the greater supply availability that we secured this year. Our fumigant sales were lower as a result of some localized irrigation restrictions in California. Our fungicide PCNB continued to recapture business, roughly doubling its prior year quarterly sales level.

Within the group of other products (which includes plant growth regulators, molluscicides and tolling activity), our net sales dropped by about 20% as compared to those in the second quarter of 2012. This decrease was due largely to a decline in sales of our cotton harvest defoliant, Folex, as lower cotton plantings caused a slowdown in purchases during the spring before subsequent use of the product in the autumn.

Our non-crop sales ended the second quarter of 2013 at $9,616 as compared to $9,545 for the same period of the prior year. This slight increase resulted from sales of our mosquito adulticide Dibrom®, which was up 25% as a result of wet conditions discussed above and in preparation for the potential of autumn Gulf Coast hurricane activity, offset by declines in tolling revenues.

Our cost of sales for the second quarter of 2013 was $44,695 or 51% of net sales. This compared to $46,491 or 55% of net sales for 2012. The Company aggregates a number of key variable, semi-variable and fixed cost components within reported cost of sales. The two major components are raw materials (including sub contract costs) and factory operating costs. As a result of a change in the sales mix and volume, our absolute expense for raw materials reduced by 4% in the quarter ended June 30, 2013, as compared to the same period of the prior year. Within this change, our actual purchasing cost for raw material increased by 0.8%. Furthermore, with increased demand for plant capacity relating to the production of our own products, we continued to reduce volume manufacturing activity for third parties. Typically, these activities included some raw materials supplied by the customer and, as such, tend to have lower raw material cost (as a percentage of sales) reported by the Company. Our factory operating costs (which include fixed and semi-variable costs) increased by 22%, supporting the forecasted increase in sales revenue for the second quarter and for the balance of the year. Some production ended in inventory because of the unexpected prolonged adverse weather conditions in our key markets. Costs also increased by approximately 3% for inflation. The changes in selling price, volume, product mix and cost of sales resulted overall in a 4% improvement in gross margin to 49% in 2013 as compared to 45% for the same period of the prior year.

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

Operating expenses increased by $5,065 to $29,169 for the three months ended June 30, 2013 as compared to the same period in 2012. The differences in operating expenses by department are as follows:

                                                      2013         2012       Change
     Selling                                        $  8,451     $  6,401     $ 2,050
     General and administrative                        9,958        7,776       2,182
     Research, product development and regulatory      5,068        4,967         101
     Freight, delivery and warehousing                 5,692        4,960         732

                                                    $ 29,169     $ 24,104     $ 5,065


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• Selling expenses increased by approximately 32% over the same quarter of the prior year. The main drivers for increased overall expenses were costs associated with servicing our growing business including an expanded sales force, field stewardship activities and advertising and promotion expenses.

• General and administrative expenses increased by 28% to $9,958 as compared to $7,776 for the same period of the prior year. The main drivers for the increase are primarily related to higher legal costs associated with a data compensation matter, which concluded in July, other outside consulting services associated with business development including our international structure and extra personnel costs in support of our expanding business.

• Research, product development costs and regulatory expenses increased by about 2% over the comparable three month period of the prior year, driven by timing and mix on external regulatory projects.

• Freight, delivery and warehousing costs increased by about 15%, which was driven primarily by mix of products and markets. We continue to focus on managing logistics expenses throughout our supply chain. As a percentage of sales, freight ended at 6.6% of sales for the three months ended June 30, 2013 as compare to 5.8% for the same period of the prior year.

Interest costs net of capitalized interest, were $670 in the three months ended June 30, 2013, as compared to $609 in the same period of 2012. Interest costs are summarized in the following table:

Average Indebtedness and Interest expense

                                                      Q2 2013                                     Q2 2012
                                       Average      Interest       Interest       Average       Interest        Interest
                                         Debt        Expense         Rate           Debt        Expense           Rate
Term loan                              $ 42,054     $     407            3.9 %    $ 51,956     $      477             3.7 %
Working capital revolver                 33,725           189            2.2 %          -              -               -

Average                                  75,779           596            3.1 %      51,956            477             3.7 %

Other notes payable                         242             2            3.3 %       6,223             54            12.8 %
Capitalized interest                         -            (31 )           -             -            (112 )            -
Amortization of deferred loan fees           -             38             -             -              32              -
Amortization of other deferred
liabilities                                  -             56             -             -             143              -
Other interest expense                       -              9             -             -              15              -

Adjusted average indebtedness          $ 76,021     $     670            3.5 %    $ 58,179     $      609             4.2 %

The Company's average overall debt for the three months ended June 30, 2013 was $76,021 as compared to $58,179 for the three months ended June 30, 2012. Furthermore, during the three months to June 30, 2013, we incurred non-cash costs related to amortization of discounting of deferred payments and other interest expense in the amount of $74 as compared to $132 for the same period of the prior year. As can be seen from the table above, the effective rate on our bank borrowings was 3.1% for the period to June 30, 2013 as compared to 3.7% for the same period of the prior year. Our overall effective interest rate was 3.5% for the three months ended June 30, 2013 as compared to 4.2% at June 30, 2012.

Income tax expense has decreased by $928 to end at $3,961 for the three months ended June 30, 2013 as compared to $4,889 for the comparable period in 2012. The effective tax rate for the quarter was 32.40% as compared to 35.86% in the same period of the prior year. The reduction in the rate is primarily driven by the increased benefit from domestic production activities, Alabama income tax capital credit, and higher foreign income.

Our overall net income attributed to American Vanguard for the three months ended June 30, 2013 was $8,386 or $0.29 per share (diluted) as compared to $8,744 or $0.30 per share (diluted) in the same quarter of 2012.


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Six Months Ended June 30:



                                       2013           2012          Change
             Net sales:
             Insecticides            $ 118,085      $ 101,266      $ 16,819
             Herbicides                 57,685         33,332        24,353
             Other                      16,919         20,583        (3,664 )

             Total crop                192,689        155,181        37,508
             Non-crop                   15,609         16,911        (1,302 )

                                     $ 208,298      $ 172,092      $ 36,206

             Cost of goods sold:
             Insecticides            $  65,677      $  52,760      $ 12,917
             Herbicides                 29,948         21,774         8,174
             Other                       8,300         13,082        (4,782 )

             Total crop                103,925         87,616        16,309
             Non-crop                    8,526          8,752          (226 )

                                     $ 112,451      $  96,368      $ 16,083

             Gross margin:
             Insecticides            $  52,408      $  48,506      $  3,902
             Herbicides                 27,737         11,558        16,179
             Other                       8,619          7,501         1,118

             Gross margin crop          88,764         67,565        21,199
             Gross margin non-crop       7,083          8,159        (1,076 )

                                     $  95,847      $  75,724      $ 20,123


             Gross margin crop              46 %           44 %
             Gross margin non-crop          46 %           48 %
             Total gross margin             46 %           44 %

                                       2013           2012          Change
             Net sales:
             US sales                $ 170,942      $ 135,335      $ 35,607
             International sales        37,356         36,757           599

                                     $ 208,298      $ 172,092      $ 36,206

Overall financial performance including net sales and net income for the six month period ended June 30, 2013 showed considerable improvement as compared to the same period in 2012. Net sales for the period were up approximately 21% to $208,298 compared to $172,092 for the first half of 2012. Our gross profit performance improved to $95,847 or 46% of net sales, as compared to $75,724 or 44% of net sales. Our operating expenses remained flat as a percentage of net sales at 27%, despite our continuing investment in resources aimed at growing, developing and maintaining our business for the long-term. Our tax rate improved from 36% of taxable income to 34%. Further, net income attributed to American Vanguard was up approximately 45% to $25,301 (or 12.1% of net sales) as compared to $17,478 (or 10.2% of net sales) for the same period in 2012. Net sales for our crop business were up by approximately 24%, while net sales for non-crop products were down by about 8% for the comparable period of the prior year. A more detailed discussion of general market conditions and sales performance by category of products appears below.

Over the course of the first half of 2013, the Company experienced strong fundamental demand despite unfavorable weather conditions in many of its prime crop markets. Extremely wet conditions across the Central and Southern regions of the continental United States delayed corn and cotton planting, shortened the growing season and caused many growers to plant their crops without taking the time to perform various crop protection measures or, alternatively, to forgo corn in favor of planting soybeans which requires a shorter growing period. As a result, AVD's first half performance was characterized by robust first quarter sales on strong demand, and second quarter sales roughly flat with the prior year. This culminated in higher than normal in channel inventories at the end of the planting season. Despite these recent planting difficulties, growers continue to embrace the importance of conventional chemistry solutions for yield enhancement as part of integrated pest management practices.

Half year net sales of our insecticides group were up about 17% to $118,085 as compared to $101,266 during the first half of 2012. Within this segment, net sales of our granular soil insecticides ("GSIs") were up approximately 28% over that of the comparable period in 2012. Our premier corn soil insecticide Aztec increased nearly 93% and our SmartChoice product tripled in sales to lead this surge. Thimet sales declined due to decreased peanut acres being planted in 2013. Net sales of our non-GSI insecticides were approximately 36% lower during the first half of 2013 as compared to the same period of the prior year, largely because sales of our foliar cotton insecticide Bidrin were reduced due to lower cotton plantings.


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Within the group of herbicides/fungicides/fumigants, net sales for the first half of 2013 were 73% higher as compared to the first half of 2012. Net sales of our herbicide products tripled, led by our post-emergent corn herbicide Impact. AVD continues to benefit from the co-marketing program with Monsanto's Roundup herbicide brands and from increased supply availability. Partially offsetting this gain, we experienced a modest decline in net sales of our herbicide Dacthal® used in high value vegetable crop applications and a slight sales decline for our soil fumigants in the first half of 2013, as compared to the same period of the prior year.

Within the group of other products (which includes plant growth regulators, molluscicides and tolling activity), our net sales dropped by about 18% as compared to those in the first half of 2012. Contributing to this decrease were lower sales of our cotton harvest aid, Folex, due to a drop in cotton acres planted and declines in toll manufacturing revenues and pharmaceutical sales.

Our non-crop sales for the first half of 2012 were $15,609 as compared to $16,911 for the same period of the prior year. Sales of our mosquito adulticide Dibrom®, were essentially flat, while we saw a decline in net sales of our Pest Strip business driven by timing of customer orders.

Our cost of sales for first six months of 2013 was $112,451 or 54% of net sales. This compared to $96,368 or 56% of net sales for 2012. The Company aggregates a number of key variable, semi-variable and fixed cost components within reported cost of sales. The two major components are raw materials (including sub contract costs) and factory operating costs. As a result of significantly higher sales volumes and a different mix of products sold, our absolute total cost of raw materials increased by approximately 14%, driven by sales up 21%. Within this increased cost, our actual purchasing costs for raw materials increased by 1.1%. During 2013 the Company continued to focus on selling higher margin and higher cost products and de-emphasized lower margin, lower cost products facing generic competition. Our factory operating costs (which include fixed and semi-variable costs) increased by 28%, supporting the forecast increase in sales revenue referenced and approximately a 3% increase in inflation. The changes in selling price, volume, product mix and cost of sales resulted overall in a 2% improvement in gross margin to 46% in 2013 as compared to 44% for the same period of the prior year.

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

Operating expenses increased by $9,718 to $56,798 for the six months ended June 30, 2013, as compared to the same period in 2012. The differences in operating expenses by department are as follows:

                                                     2013         2012       Change
    Selling                                        $ 15,682     $ 12,115     $ 3,567
    General and administrative                       20,171       13,828       6,343
    Research, product development and regulatory      9,612       10,472        (860 )
    Freight, delivery and warehousing                11,333       10,665         668

                                                   $ 56,798     $ 47,080     $ 9,718

• Selling expenses for the period increased by about 29% over the comparable period. This increase is driven by higher costs associated with advertising and promotions, field stewardship costs and an expanded sales force.

• General and administrative expenses increased by about 46% over the same period of 2012. The main drivers are the increased size and cost of our support organization, higher incentive compensation as a result of our business performance, and additional legal costs on a data compensation matter that concluded in July 2013.

• Research, product development costs and regulatory expenses decreased by about 8% when compared to the same period of 2012. This is as a result of timing and mix of external regulatory studies.

• Freight, delivery and warehousing costs for the six months ended June 30, 2013 were $11,333 or 5.4% of sales as compared to $10,665 or 6.2% of sales for the same period in 2012. This reflects sales which were up 21% including significantly higher sales of our Impact product which, because of packaging and concentration, has lower freight costs.


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Interest costs net of capitalized interest, were $1,023 in the six months of 2013 as compared to $1,308 in the same period of 2012. Interest costs are summarized in the following table:

Average Indebtedness and Interest expense

                                                    Six months ended June 30, 2013                    Six months ended June 30, 2012
                                               Average           Interest       Interest         Average           Interest       Interest
                                                 Debt            Expense          Rate             Debt            Expense          Rate
Term loan                                    $     47,023       $      880            3.7 %    $     52,956       $      973            3.7 %
Working capital revolver                           16,956              189            2.2 %              -                -              -

Average                                            63,979            1,069            3.3 %          52,956              973            3.7 %

Other notes payable                                   327                4            2.4 %           6,453              110            3.4 %
Interest income                                        -                -              -                 -                -              -
Capitalized interest                                   -              (225 )           -                 -              (148 )           -
Amortization of deferred loan fees                     -                70             -                 -                64             -
Amortization of other deferred liabilities             -                86             -                 -               284             -
Other interest expense                                 -                19             -                 -                25             -

Adjusted average indebtedness                $     64,306       $    1,023            3.2 %    $     59,409       $    1,308            4.4 %

The Company's average overall debt for the six months ended June 30, 2013 was $64,306 as compared to $59,409 for the same period of 2012. Furthermore, during the six months to June 30, 2013, we incurred non-cash costs related to amortization of discounting of deferred payments and other interest income in the amount of $46 as compared to interest expense of $335 for the same period of the prior year. As can be seen from the table above, the effective rate on our bank borrowings was 3.3% for the period to June 30, 2013 as compared to 3.7% for the same period of the prior year. Our overall effective interest rate was 3.2% for the six months ended June 30, 2013 as compared to 4.4% in the same period of 2012.

During the three months ended June 30, 2013, the Company borrowed under its revolving credit line to fund working capital needs (principally inventory) until the main accounts receivable payments became due on June 15, 2013. During the period beginning on April 15 and ending on June 7 2013, the Company borrowed . . .

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