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AVD > SEC Filings for AVD > Form 10-Q on 2-May-2014All Recent SEC Filings

Show all filings for AMERICAN VANGUARD CORP

Form 10-Q for AMERICAN VANGUARD CORP


2-May-2014

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, 2013.

RESULTS OF OPERATIONS

Quarter Ended March 31:



                                                 2014          2013          Change
    Net sales:
    Insecticides                               $ 46,437      $  78,867      $ (32,430 )
    Herbicides/soil fumigants/fungicides         22,931         32,986        (10,055 )
    Other, including plant growth regulators      3,807          3,691            116

    Total Crop                                   73,175        115,544        (42,369 )
    Non-crop                                      7,920          5,993          1,927

                                               $ 81,095      $ 121,537      $ (40,442 )

    Cost of sales:
    Insecticides                               $ 30,588      $  44,497      $ (13,909 )
    Herbicides/soil fumigants/fungicides         13,470         17,874         (4,404 )
    Other, including plant growth regulators      3,435          1,343          2,092

    Total crop                                   47,493         63,714        (16,221 )
    Non-crop                                      4,697          4,042            655

                                               $ 52,190      $  67,756      $ (15,566 )

    Gross margin:
    Insecticides                               $ 15,849      $  34,370      $ (18,521 )
    Herbicides/soil fumigants/fungicides          9,461         15,112         (5,651 )
    Other, including plant growth regulators        372          2,348         (1,976 )

    Gross margin crop                            25,682         51,830        (26,148 )
    Gross margin non-crop                         3,223          1,951          1,272

                                               $ 28,905      $  53,781      $ (24,876 )

    Gross margin crop                                35 %           45 %
    Gross margin non-crop                            41 %           33 %
    Total gross margin                               36 %           44 %

                                                 2014          2013          Change
    Net sales:
    US sales                                   $ 57,956      $ 103,105      $ (45,149 )
    International sales                          23,139         18,432          4,707

                                               $ 81,095      $ 121,537      $ (40,442 )


Table of Contents

Overall financial performance including net sales and net income for the quarter ended March 31, 2014 was significantly lower as compared to the same period in 2013. Our net sales for the period declined 33% to $81,095, as compared to $121,537 for the first quarter of 2013. Net sales for our crop business are down 37%, while net sales for our non-crop products are up 32%. A more detailed discussion of general market conditions and sales performance by category of products appears below.

As reported previously, prolonged wet weather in the Midwest United States during the spring of 2013 limited the application of many crop protection products that are used at the time of planting. As a result, higher than normal levels of these products, including AMVAC's corn soil insecticides, remained in the distribution channel at the end of the 2013 growing season. Most of our first quarter performance decline is attributable to reduced demand for corn inputs, as the channel of distribution first works down 2013 inventory carryover to satisfy 2014 demand. Further, severe winter weather in 2014 has delayed spring crop planting, prompting continued delays in flow through of these crop protection inputs. Finally, the generally lower crop commodity prices have created some uncertainty among growers regarding the planting of corn versus soybeans.

Across our crop business, net sales of our insecticides group were down approximately 41% to end at $46,437, as compared to $78,867 during the first quarter of 2013. Within this segment, net sales of our granular soil insecticides were down approximately 44%, largely for the reasons cited above affecting the U.S. corn market. Our sales of Mocap and Nemacur insecticides, which are used primarily outside the U.S. market, were slightly higher than the prior year. Thimet sales in the first three months of 2014 were much higher in anticipation of increased planted acres for peanuts in comparison to 2013. Net sales of our non-granular insecticides increased 55% in 2014, as compared to the same period of the prior year, with our cotton foliar insecticide Bidrin leading the growth. Finally, net sales of our three product lines that face generic competition (acephate, bifenthrin and permethrin) were up 10% as compared to sales in 2013's first quarter.

Within the group of herbicides/fungicides/fumigants, net sales for the first quarter of 2014 declined by approximately 30% to $22,931 from $32,986 in the comparable period in 2013. Net sales of our herbicide products were down considerably due primarily to higher than normal inventory of corn products in the distribution channel, prolonged winter weather and commodity prices. Our soil fumigants business grew by approximately 5% over the prior year's first quarter, and our PCNB fungicide sales also showed strong year-over-year improvement.

Within the group of other products (which includes plant growth regulators, molluscicides and tolling activity), net sales were up approximately 3% as compared to the first quarter of 2013. This increase was driven by our new potato sprout inhibitor SmartBlock®. Offsetting these gains were a modest reduction in granules sales and lower sales of our plant growth regulator, NAA.

Our non-crop sales ended the first quarter of 2014 at $7,920 as compared to $5,993 for the same period of the prior year. This increase was primarily driven by sales of our foliar mosquito adulticide Dibrom®, which were up three-fold in the first quarter as our distributors replenish inventories drawn down during the prior summer season.

Our cost of sales for the first quarter of 2014 was $52,190 or 64% of net sales. This compared to $67,756 or 56% of net sales for 2013. The Company aggregates a number of key variable, semi-variable and fixed cost components within reported cost of sales. The two major cost components are raw materials (including sub contract costs) and factory operating costs. During the quarter, our raw material costs decreased by 33%, consistent with the reduction in sales. Our factory expenses were down by approximately 8% year-over-year as we focused on dropping costs as we slowed factory output. Finally, in light of higher-than-normal inventory levels for certain corn products both in the distribution channel and at the company, we made the decision to reduce output. Approximately two thirds of the reduction in gross margin is attributed to increased unabsorbed factory expenses. The balance arose from proportionately increased international sales which attracts lower margins and to a lesser extent from the change in product mix in our U.S. markets as compared to the same period of the prior year. As a result, our gross margin ended at 36% of sales, as compared to 44% in the same period of the prior year.


Table of Contents

Operating expenses decreased by $2,685 to $24,943 for the three months ended March 31, 2014 as compared to the same period in 2013. The differences in operating expenses by department are as follows:

                                                     2014         2013        Change
    Selling                                        $  8,171     $  7,231     $    940
    General and administrative                        6,474       10,211       (3,737 )
    Research, product development and regulatory      4,733        4,545          188
    Freight, delivery and warehousing                 5,565        5,641          (76 )

                                                   $ 24,943     $ 27,628     $ (2,685 )

• Selling expenses increased by $940 to end at $8,171 for the three months ended March 31, 2014, as compared to the same period of 2013. The main drivers are increased advertising expenses primarily focused on promotion of our brands and continued expenses associated with supporting growth in demand for our proprietary delivery systems.

• General and administrative expenses decreased by $3,737 to end at $6,474 for the three months ended March 31, 2014, as compared to the same period of 2013. This arises primarily from a reduction in incentive compensation costs in response to the weaker financial performance in the first quarter of 2014, as compared to the prior year. In addition, legal costs were reduced due to a data compensation matter that was concluded in the second quarter of prior year.

• Research, product development costs and regulatory expenses increased slightly by $188, to end at $4,733 for the three months ended March 31, 2014, as compared to the same period of 2013. This is mainly due to timing of requirements for studies on our existing products.

• Freight, delivery and warehousing costs for the three months ended March 31, 2014 were $5,565 or 6.9% of sales as compared to $5,641 or 4.6% of sales for the same period in 2013. This is due to strong sales by our international business plus additional warehousing costs as we work through our increased inventory levels.

Interest costs net of capitalized interest, were $613 in the first three months of 2014 as compared to $353 in the same period of 2013. Interest costs are summarized in the following table:

Average Indebtedness and Interest expense

                                                      Q1 2014                                    Q1 2013
                                       Average      Interest       Interest       Average       Interest       Interest
                                         Debt        Expense         Rate           Debt        Expense          Rate
Term Loan                              $     -      $      -              -       $ 52,048     $      515            4.0 %
Revolving line of credit                 75,477           489            0.0 %          -              -              -

Average                                $ 75,477     $     489            2.6 %    $ 52,048     $      515            4.0 %
Notes payable                               186             2             -            405             -              -
Amortization of deferred loan fees           -             59             -             -              32             -
Amortization of other deferred
liabilities                                  -             69             -             -              -              -
Other interest expense                       -             12             -             -              -              -
Capitalized Interest                         -            (18 )           -             -            (194 )           -

Total                                  $ 75,663     $     613            3.2 %    $ 52,453     $      353            2.7 %

The Company's average overall debt for the three months ended March 31, 2014 was $75,663 as compared to $52,453 for the three months ended March 31, 2013. During the quarter we increased our usage of revolving debt to fund elevated levels of working capital as demand has been slower than anticipated, and as a result, the inventory overhang continues to drive working capital. As can be seen from the table above, our effective bank interest rate was 2.6% for the three months ended as compared to 4.0% in 2013. This is driven by the new credit facility agreement and the reduced proportion of our debt covered by the interest rate swap contract.

Income tax expense decreased by $7,965 to end at $1,016 for the three months ended March 31, 2014 as compared to $8,981 for the comparable period in 2013. The effective tax rate for the quarter was 30.0% as compared to 34.8% in the same period of the prior year. The decrease in effective tax rate is primarily due to comparatively higher earnings in our international tax jurisdictions that are taxed at a comparatively lower rate.


Table of Contents

The effective tax rate for the three months ended March 31, 2014 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 March 31, 2014, we recognized a loss of $328 on our investment in TyraTech. No income or loss was recognized during the three months ended March 31, 2013. The loss is exclusive of a gain of $256 related to the sale by TyraTech of additional stock.

Non-controlling interest for the three months ended March 31, 2014 increased to $154 as compared to $96 for the three months ended March 31, 2013. Non-controlling interest represents the share of net loss that is attributable to TyraTech's share, the minority shareholder, of our majority owned subsidiary, Envance.

Our overall net income for the first three months of 2014 was $2,159 or $0.07 per diluted share ($0.08 per share-basic) as compared to $16,915 or $0.59 per diluted share ($0.60 per share - basic) in the same quarter of 2013.

LIQUIDITY AND CAPITAL RESOURCES

The Company utilized $41,890 of cash in operating activities during the three months ended March 31, 2014, as compared to utilizing $18,136 in the same period of the prior year. Net income of $2,005, non-cash depreciation, amortization of intangibles and other assets and other liabilities of $5,256, non-cash incentive compensation of $533 and net loss on equity investment of $72 provided a cash inflow of $7,866 as compared to $22,027 during the same period of the prior year.

During the three months ended March 31, 2014, the Company has recorded significantly lower sales in its key corn soil insecticides and herbicides, in comparison to the same period of the prior year. Our slower sales in the period resulted in lower accounts receivable due on these products at March 31, 2014, as compared to March 31, 2013. Despite the slowdown in our corn insecticide product sales, we have total accounts receivable of $103,391. This balance is driven primarily by crop terms which mean that, substantially, the payments are due during the latter part of the second quarter of this year. This is consistent with the market dynamics the Company experienced in 2013. As of the balance sheet date, March 31, 2014, we believe our inventories are valued at lower of cost or market.

Our inventories have increased during the quarter due to slow sales, not offset by a slowdown in our manufacturing output. The driver here is that we purchase raw materials based on forecast demand and often on very long lead times. These purchases will mean that we expect to see further increases in this asset category as we proceed through the second quarter of 2014, at which point we expect that channel inventories will have reduced to such a degree that we will then start to see a reduction in our on-hand finished goods inventory. As we see the next two to four quarters unfold we will adjust our manufacturing and inventory plans accordingly.

Our deferred revenues decreased as customers who paid cash in the final quarter of 2013 took delivery of product.

The Company accrues programs in line with the growing season upon which specific products are targeted. Typically crop products have a growing season that ends on September 30th each year. During the three months ended March 31, 2014, the Company made accruals in the amount of $16,264. Programs are primarily paid out to customers either in the final quarter of the fiscal year or the first quarter of the next fiscal year. During the first three months of 2014, the Company made payments in the amount of $7,938. Payments are not generally significant in the second and third quarters of each financial year. During the three months ended March 31, 2013, the Company accrued $44,060 and made payments in the amount of $2,699.

Finally, our prepaid and other assets increased by $3,242 as annual contracts are paid at the beginning of the year. Furthermore, accounts payable decreased by $381 as purchases continue to decrease in response to actions to reduce our inventory.

The Company utilized $1,816 during the three months ended March 31, 2014, compared to utilizing $8,083 during the same period of 2013. This is primarily driven by capital spending in our factories. During the three months ended March 31, 2013, the Company made a $3,687 investment in TyraTech Inc. There was no similar investment made in 2014.

Financing activities provided $45,398 during the three months ended March 31, 2014, compared to utilizing $2,652 in the same period of the prior year. This included significant draws of $47,450 against our senior credit facility. During the quarter we have made immaterial scheduled deferred payments related to product acquisitions. Further, the Company made dividend payments in the amount of $1,418 and utilized $1,531 repurchasing shares of our common stock in accordance with our repurchase policy aimed at offsetting dilution caused by incentive compensation. Finally, the Company received $1,253 from the exercise of stock options and the sale of common stock under its Employee Stock Purchase Plan (including associated tax benefits of $235) as compared to $484 for the same period of last year.


Table of Contents

The Company has a revolving line of credit and various notes payable that together constitute the short-term and long-term loan balances shown in the balance sheet at March 31, 2014 and December 31, 2013. These are summarized in the following table:

  Indebtedness                        March 31, 2014                       December 31, 2013
                              Long-       Short-                    Long-       Short-
  $000's                       term        term        Total         term        term        Total
  Revolving line of credit   $ 99,000     $    -      $ 99,000     $ 51,550     $    -      $ 51,550
  Notes payable                   108          70          178          126          69          195

  Total Indebtedness         $ 99,108     $    70     $ 99,178     $ 51,676     $    69     $ 51,745

The Company has three key covenants under its senior credit facility (with which AMVAC is in compliance). The covenants are as follows: The Company must
(1) maintain its borrowings below a certain consolidated funded debt ratio,
(2) limit its annual spending on the acquisition of fixed asset capital additions, and (3) maintain a certain consolidated fixed charge coverage ratio. As of March 31, 2014, the Company was in compliance with all covenants.

At March 31, 2014, based on its performance against the most restrictive covenants listed above, the Company had the capacity to increase its borrowings by up to $87,814.

We expect that, in light of lower earnings, our capacity to borrow under our revolving line of credit will be reduced in the near term. Accordingly, the Company may seek an appropriate short-term amendment to the senior credit facility.

RECENTLY ISSUED ACCOUNTING GUIDANCE

In February 2013, The Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2013-02, Comprehensive Income (Topic 220):
Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, establishes new requirements for disclosing reclassifications of items out of accumulated other comprehensive income (OCI). Specifically, (1) disclosure is required of the changes in components of accumulated OCI, (2) disclosure is required of the effects on individual line items in net income for each item of accumulated OCI that is reclassified in its entirety to net income, and
(3) cross references are required to other disclosures that provide additional details for OCI items that are not reclassified in their entirety to net income. The requirements of ASU 2013-02 apply to all entities (i.e., both public and nonpublic) that report items of OCI in any period presented. ASU 2013-02 is effective prospectively for reporting periods beginning after December 15, 2012. The Company adopted this standard effective January 1, 2013.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The Company continually re-assesses the critical accounting policies used in preparing its financial statements for inclusion in the American Vanguard published financial statements. In the Company's condensed consolidated Form 10-K for the financial year ended December 31, 2013, 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. All the policies listed in the Company's Form 10-K for the year ended December 31, 2013 remain valid and is hereby incorporated by reference.

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