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AVD > SEC Filings for AVD > Form 10-Q on 1-Nov-2013All Recent SEC Filings

Show all filings for AMERICAN VANGUARD CORP

Form 10-Q for AMERICAN VANGUARD CORP


1-Nov-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 September 30:



                                        2013          2012         Change
              Net sales:
              Insecticides            $ 49,539      $ 34,603      $  14,936
              Herbicides                28,880        24,813          4,067
              Other                      9,189        19,448        (10,259 )

              Total Crop                87,608        78,864          8,744
              Non-crop                   9,593        10,972         (1,379 )

                                      $ 97,201      $ 89,836      $   7,365

              Cost of sales:
              Insecticides            $ 28,700      $ 20,351      $   8,349
              Herbicides                15,742        15,886           (144 )
              Other                      4,715         9,077         (4,362 )

              Total crop                49,157        45,314          3,843
              Non-crop                   4,885         4,897            (12 )

                                      $ 54,042      $ 50,211      $   3,831

              Gross margin:
              Insecticides            $ 20,839      $ 14,270      $   6,569
              Herbicides                13,138         8,996          4,142
              Other                      4,474        10,284         (5,810 )

              Gross margin crop         38,451        33,550          4,901
              Gross margin non-crop      4,708         6,075         (1,367 )

                                      $ 43,159      $ 39,625      $   3,534

              Gross margin crop             44 %          43 %
              Gross margin non-crop         49 %          55 %
              Total gross margin            44 %          44 %

                                        2013          2012         Change
              Net sales:
              US sales                $ 79,425      $ 74,036      $   5,389
              International sales       17,776        15,800          1,976

                                      $ 97,201      $ 89,836      $   7,365


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Our overall financial performance including net sales and net income for the quarter ended September 30, 2013 improved as compared to the same period in 2012. Our net sales for the period were up 8% to $97,201 compared to $89,836 for the third quarter of 2012. Further, net income attributable to American Vanguard was up 10% to $8,870 as compared to $8,076 for the same period in 2012. Net sales for our Crop segment were up by approximately 11%, while net sales for Non-Crop products were down by about 13% for the comparable period. A more detailed discussion of general market conditions and sales performance by category of products appears below.

Sales performance by product category within our portfolio was mixed in the third quarter. Our Insecticide product category continued to be strong, led by a quarterly increase in our granular soil insecticide sales. Particularly in corn, continued market support for using these proven crop protection products in conjunction with genetic-trait seed as part of an integrated pest management system to enhance harvest yields, is driving this strong demand. In our Herbicide product category, performance improved in comparison to the third quarter of 2012 as gains by our Impact and Dacthal herbicides were offset by a small reduction in our Metam soil fumigants. Our Other Product category registered a significant quarterly sales decline, as a result of reduced sales of our Folex® cotton defoliant.

Net sales of our insecticides as a group were up about 43% during the third quarter of 2013. Within this segment, net sales of our granular soil insecticides ("GSIs") as a group were up approximately 35% over that of the comparable quarter in 2012 with particularly strong sales of our corn soil insecticide Force®SmartBox. Sales of Nemacur® posted a strong quarterly performance as improved supply enabled us to satisfy international demand. Thimet® sales were strong as a result of the start-up of the 2013-2014 sugarcane season. Among our non-granular insecticides, quarterly sales for our cotton foliar insecticide Bidrin® were up compared to the prior year quarter, as increased pest pressure in the Southeast U.S. cotton belt (despite reduced cotton acres) stimulated additional applications to combat plant & stink bugs.

Within the group of herbicides/fungicides/fumigants, net sales for the third quarter of 2013 increased by approximately 16% to $28,880 from the comparable period of 2012. Net sales of our herbicide products were higher due primarily to late season demand for our post-emergent corn herbicide, Impact. We saw a small decrease in net sales of our soil fumigants during the period as regional weather conditions interfered with the application of these liquids.

Within the group of other products (which includes plant growth regulators, molluscicides and tolling activity), our net sales decreased by about 53% as compared to those in the third quarter of 2012. This decrease was due to lower sales of our cotton harvest aid Folex. Reduced cotton acreage in the United States and late planting which resulted in late crop maturity contributed to this third quarter weakness in Folex sales, a portion of which will occur in Q4. A quarterly gain in toll manufacturing, pharmaceutical ingredients and Envance consumer pest product sales slightly moderated the decline in this product category.

Our non-crop sales ended the third quarter of 2013 at $9,593 as compared to $10,972 for the same period of the prior year. This change was due largely to reduced sales of our mosquito adulticide Dibrom®, offset by improvement in year-over-year sales of our Nuvan and Pest Strip products for commercial pest control. Additionally, limited hurricane activity along the U.S. Gulf Coast region slightly dampened seasonal demand for our mosquito control adulticide Dibrom®. Finally, our PCNB fungicide sales were down slightly from the prior year's third quarter as the product continues its gradual sales/market share recovery.

Our cost of sales for the third quarter of 2013 was $54,042 or 56% of net sales. This compared to $50,211 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 a change in the sales mix and volume, our expense for raw materials increased by 3.6% in the quarter ended September 30, 2013, as compared to the same period of the prior year. Our factory operating costs increased by 22%, supporting the expanded operating activity in our factories following the implementation of certain capital projects in the last year. During the quarter, we started actions to address inventory levels and held back slightly on production. The changes in selling price, volume, product mix and cost of sales resulted in a gross margin of 44% which was in line with our performance in the same period of the prior year.

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


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Operating expenses increased by $1,565 to $28,025 for the three months ended September 30, 2013 as compared to the same period in 2012. The differences in operating expenses by department are as follows:

                                                      2013         2012       Change
     Selling                                        $  7,419     $  6,775     $   644
     General and administrative                        7,576        7,471         105
     Research, product development and regulatory      5,102        4,715         387
     Freight, delivery and warehousing                 7,928        7,499         429

                                                    $ 28,025     $ 26,460     $ 1,565

• Selling expenses increased by approximately 10% over the comparable quarter. The main drivers for increased overall expenses were marketing expenses and costs associated with servicing our international operations.

• General and administrative expenses increased by about 4% quarter over quarter. The main drivers for the increase are associated with continuing costs of set up our foreign subsidiary structure and additional personnel to support the growing business. Finally, we had legal expenses that were offset by a settlement income related to data compensation matter that concluded in July.

• Research, product development costs and regulatory expenses changed by about 8% over the comparable three month period. This is as a result of timing and mix of external regulatory studies.

• Freight, delivery and warehousing costs increased by about 6%, driven primarily by a high quarterly volume of bulk shipments of our metam liquid soil fumigants. We continue to focus on managing logistics expenses throughout our supply chain. As a percentage of sales, freight ended at 8.1% of sales for the three months ended September 30, 2013 as compared to 8.3% for the same period of the prior year.

Interest costs net of capitalized interest, were $444 in the three months to September 30, 2013 as compared to $536 in the same period of 2012. Interest costs are summarized in the following table:

Average Indebtedness and Interest expense

                                                      Q3 2013                                    Q3 2012
                                       Average      Interest       Interest       Average       Interest       Interest
                                         Debt        Expense         Rate           Debt        Expense          Rate
Term loan                              $     -      $      -              -       $ 49,935     $      466            3.7 %
Working capital revolver                 40,728           355            3.5 %          -              -              -

Average                                  40,728           355            3.5 %      49,935            466            3.7 %

Other notes payable                         224             2            3.3 %       6,096             53            3.5 %
Capitalized interest                         -            (20 )           -             -            (165 )           -
Amortization of deferred loan fees           -             55             -             -              33             -
Amortization of other deferred
liabilities                                  -             44             -             -             143             -
Other interest expense                       -              8             -             -               6             -

Adjusted average indebtedness          $ 40,952     $     444            4.4 %    $ 56,031     $      536            3.8 %

The Company's average overall debt for the three months ended September 30, 2013 was $40,952 as compared to $56,031 for the three months ended September 30, 2012. Furthermore, during the three months to September 30, 2013, we incurred non-cash costs related to amortization of discounting for deferred payments and other interest expense net of capitalized interest in the amount of $89 as compared to $70 for the same period of the prior year. As can be seen from the table above, the effective rate on our bank borrowings was 3.5% for the period to September 30, 2013 as compared to 3.7% for the same period of the prior year. Our overall effective interest rate was 4.4% for the three months ended September 30, 2013 as compared to 3.8% at September 30, 2012.

Income tax expense has increased by $1,006 to end at $5,559 for the three months ended September 30, 2013 as compared to $4,553 for the comparable period in 2012. The effective tax rate for the quarter was 37.84 % as compared to 36.05% in the same period of the prior year. The increase in the rate is primarily driven by the balance of domestic sourced income as compared to foreign source income. The tax rate is based on management's estimate of the full year income tax rate and is subject to ongoing review and revision.


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Our overall net income for the three months ended September 30, 2013 improved by 10% to $8,870 or $0.31 per diluted share as compared to $8,076 or $0.28 per diluted share in the same quarter of 2012.

Nine Months Ended September 30:



                                       2013           2012          Change
             Net sales:
             Insecticides            $ 167,624      $ 135,869      $  31,755
             Herbicides                 86,565         58,145         28,420
             Other                      26,108         40,031        (13,923 )

             Total crop                280,297        234,045         46,252
             Non-crop                   25,202         27,883         (2,681 )

                                     $ 305,499      $ 261,928      $  43,571

             Cost of goods sold:
             Insecticides            $  94,203      $  73,476      $  20,727
             Herbicides                 45,789         37,505          8,284
             Other                      13,097         21,949         (8,852 )

             Total crop                153,089        132,930         20,159
             Non-crop                   13,404         13,649           (245 )

                                     $ 166,493      $ 146,579      $  19,914

             Gross margin:
             Insecticides            $  73,421      $  62,393      $  11,028
             Herbicides                 40,776         20,640         20,136
             Other                      13,011         18,082         (5,071 )

             Gross margin crop         127,208        101,115         26,093
             Gross margin non-crop      11,798         14,234         (2,436 )

                                     $ 139,006      $ 115,349      $  23,657

             Gross margin crop              45 %           43 %
             Gross margin non-crop          47 %           51 %
             Total gross margin             45 %           44 %

                                       2013           2012          Change
             Net sales:
             US sales                $ 250,367      $ 209,371      $  40,996
             International sales        55,132         52,557          2,575

                                     $ 305,499      $ 261,928      $  43,571

Overall financial performance including net sales and net income for the nine month period ended September 30, 2013 improved as compared to the same period in 2012. Net sales for the period were up approximately 17% to $305,499 compared to $261,928 for the first nine months of 2012. Further, net income attributable to American Vanguard was up approximately 34% to $34,171 as compared to $25,554 for the same period in 2012. Net sales for our crop business were up by approximately 20%, while net sales for non-crop products were down by about 10% for the comparable period. A more detailed discussion of general market conditions and sales performance by category of products appears below.

Over the course of the first nine months of 2013, difficult weather conditions in the continental United States have complicated spring crop planting and the use of some of our products. Excessive and extended rainfall in parts of the Midwest and South caused exceptionally late crop plantings and resulted in some growers deciding to switch from corn or cotton crops to soybeans. While such circumstances can be unfavorable to our business, strong demand for many of our most important products has resulted in significant year-over-year sales increases. Particularly in corn, growers increasingly recognize the value of our proven crop protection solutions to enhance harvest yields and have been ramping up their use of our granular soil insecticides and post-emergent herbicide as part of a comprehensive integrated pest management practice.

Net sales of our insecticides as a group were up about 23% at $167,624 during the first nine months of 2013, as compared to $135,869 during the same period of the prior year. Within this segment, net sales of our granular soil insecticides ("GSIs") were up approximately 30% over that of the comparable period in 2012. Most of our GSI brands


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contributed to this increase, including our premier corn soil insecticides Aztec, Force, and SmartChoice. Counter primarily used for nematode control in corn and sugar beets, and Thimet used in peanuts and sugarcane saw year-over-year sales declines primarily as a result of fewer planted peanut and sugar beets acres in the United States during 2013. Net sales of our non-GSI insecticides reduced by about 7% during the first nine months of 2013, mainly due to the year-over-year sales decline of our cotton foliar insecticide Bidrin as a result of 20% fewer planted acres of cotton in the United States during 2013.

Within the group of herbicides/fungicides/fumigants, net sales for the first three quarters of 2013 were up by 49% compared to the first nine months of 2012. This increase was largely driven by our herbicide product Impact which showed excellent growth this year due to improved product availability and the co-marketing agreement with Monsanto involving its Roundup brands. We continue to experience solid demand for our soil fumigants during the first nine months of the 2013, although some weather conditions, water availability and regulatory changes have caused a modest year-over-year decline.

Within the group of other products (which includes plant growth regulators, molluscicides and tolling activity), our net sales decreased by about 35% as compared to those in the nine months of 2012. This results from the YTD sales decline of our cotton harvest defoliant, Folex, due to lower cotton acreage, as well as a slight decline in our metaldehyde granules sales.

Our non-crop sales for the first nine months of 2013 were $25,202 as compared to $27,883 for the same period of the prior year; this represents a reduction of about 10%. Sales of our mosquito adulticide Dibrom® are down slightly year-to-date, due in part to lighter storm conditions in both the Mid-Atlantic and Southeast regions. Sales of our PCNB fungicide are running slightly below the prior year rate, as we endeavor to recapture market position after experiencing very limited sales in 2011 due to a regulatory issue.

Our cost of sales for the nine months of 2013 was $166,493 or 55% of net sales. This compares to $146,579 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 total cost of raw materials increased by approximately 9%, driven by raw materials inflation of 2.2% and sales up 17%. 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 increased by 27%, driven by the expanding operating activity of our factories, increased sales volumes and approximately 3% inflation. The changes in selling price, volume, product mix and cost of sales resulted overall in a 1% improvement in gross margin to 45% 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 $11,283 to $84,823 for the nine months ended September 30, 2013 as compared to the same period of 2012. The differences in operating expenses by department are as follows:

                                                     2013         2012        Change
    Selling                                        $ 23,101     $ 18,889     $  4,212
    General and administrative                       27,747       21,300        6,447
    Research, product development and regulatory     14,714       15,187         (473 )
    Freight, delivery and warehousing                19,261       18,164        1,097

                                                   $ 84,823     $ 73,540     $ 11,283

• Selling expenses for the period increased by about 22% over the comparable period. The main drivers for the increased overall expenses were marketing expenses, costs associated with servicing our international operations and field stewardship activities.

• General and administrative expenses increased by about 30% over the same period of 2012. The main drivers for the increase are primarily related to increased people costs in support of our expanding business, higher legal costs associated with a data compensation matter, which concluded in July, and higher incentive compensation accruals due the overall financial performance.

• Research, product development costs and regulatory expenses decreased by about 3% 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 nine months ended September 30, 2013 were $19,261 or 6.3% of sales as compared to $18,164 or 7.0% of sales for the same period in 2012. This reflects sales which were up almost 17%, including an increase in export sales that were up 5% as compared to the same period of the prior year. We continue to focus on managing logistics expenses throughout our supply chain.


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Interest costs net of capitalized interest, were $1,467 in the nine months of 2013 as compared to $1,844 in the same period of 2012. Interest costs are summarized in the following table:

Average Indebtedness and Interest expense

                                                   Nine months ended September 30, 2013                   Nine months ended September 30, 2012
                                                Average            Interest          Interest          Average            Interest          Interest
                                                 Debt              Expense             Rate             Debt              Expense             Rate
Term loan                                    $      31,177       $        880              3.7 %    $      51,949       $      1,439              3.7 %
Working capital revolver                            24,967                544              2.9 %               -                  -                -

Average                                             56,144              1,424              3.4 %           51,949              1,439              3.7 %

Other notes payable                                    292                  6              2.7 %            6,334                163              3.4 %
Capitalized interest                                    -                (245 )             -                  -                (313 )             -
Amortization of deferred loan fees                      -                 125               -                  -                  97               -
Amortization of other deferred liabilities              -                 130               -                  -                 427               -
Other interest expense                                  -                  27               -                  -                  31               -

Adjusted average indebtedness                $      56,436       $      1,467              3.5 %    $      58,283       $      1,844              4.2 %

The Company's average overall debt for the nine months ended September 30, 2013 was $56,436 as compared to $58,283 for the same period of 2012. Furthermore, during the nine months ended September 30, 2013, we incurred non-cash costs related to amortization of discounting of deferred payments and other interest expense in the amount of $43 as compared to $405 for the same period of the prior year. As can be seen from the table above, the effective rate on our bank borrowings was 3.4% for the period to September 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 nine months ended September 30, 2013 as compared to 4.2% in the same period of 2012.

Income tax expense has increased by $4,089 to end at $18,500 for the nine months ended September 30, 2013 as compared to $14,411 for the comparable period in 2012. The effective tax rate for the nine months is 35.09% as compared to 36.06% in the same period of the prior year. The reduction in the rate is primarily driven by the increased benefits from additional foreign source income, US domestic production and increased tax credits. The tax rate is based on management's estimate of the full year income tax rate and is subject to ongoing review and revision.

Our overall net income attributable to American Vanguard for the nine months of 2013 was $34,170 or $1.19 per diluted share as compared to $25,554 or $0.89 per diluted share in the same period of 2012.

LIQUIDITY AND CAPITAL RESOURCES

The Company generated $7,200 of cash in operating activities during the nine months ended September 30, 2013. This compared to $13,101 in the same period of last year. Net income of $33,830, non-cash depreciation, amortization of intangibles, other assets and discounted future liabilities of $14,289, stock based compensation expense of $2,838 offset by a non cash loss recorded on our equity investment provided a net cash inflow of $51,344 as compared to $39,485 for the same period last year.

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