American Vanguard Corp: Form 10-Q for the period ended Sep 30, 2023

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 Annual 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 3., Quantitative and Qualitative Disclosures about Market Risk, and Part II, Item 1A, Risk Factors, in this Quarterly Report on Form 10-Q.

Effective January 1, 2023, the Company includes warehousing, handling and outbound freight costs in cost of sales instead of operating expenses on its condensed consolidated statements of operations. The effects of the change in accounting have been retrospectively applied to all periods presented. The Company believes that the change in accounting is preferable as it aligns the Company’s classification of these warehousing, handling and outbound freight costs in such a way as to present operational management with a clearer vision of the operational performance by business unit. This accounting change also increases the comparability of the Company’s financial performance with its peer companies as most peer companies include warehousing, handling and outbound freight costs in cost of sales rather than operating expenses. As a result, this change is intended to help interested parties better understand the Company’s performance and facilitate comparisons with most of the Company’s peer companies. The change in accounting principle did not have any impact on operating income, net income (loss) and net income (loss) per share. Please refer to Note 11 to the condensed consolidated financial statements for further details.

MANAGEMENT OVERVIEW

Overview of the Company’s Performance

The third quarter of 2023 has been marked by the same factors that have lingered over the course of the full year to date, namely: destocking by customers that seek to avoid the high carrying costs of inventory; supply chain issues with a key herbicide; procurement of goods closer to time-of-use; the influence of low-cost generic products exported to multiple markets from China-based suppliers working within a strained economy; and a strong US Dollar with relatively stable commodity prices. These factors have tended to affect different markets somewhat disparately, as will be noted from the discussion below.

Within this context, the Company’s financial performance for the third quarter of 2023 declined as compared to the third quarter of 2022. Domestically, sales of both crop and non-crop products were nearly flat with those of the comparable quarter in 2022. As a result of the conservative procurement trend, inventory of many of our crop products within the distribution channel was at historic lows, even though end customer demand was strong; this was true, for example of Aztec, our leading corn soil insecticide. Further, we experienced mixed results among other crop protection products. For example, sales of soil fumigants in the Pacific Northwest were strong (as this is the application season and weather was favorable), while sales of cotton products (primarily into the south and southwest) were affected by reduced planted acres and unfavorable weather. Within the domestic non-crop business, retailers continued to demonstrate conservative stocking patterns. Nevertheless, we experienced steady demand for nursery, ornamental and professional pest control products. Within our international business, sales were down slightly, while some regions (e.g., Mexico) showed greater strength and others (e.g., Central America and Brazil) continued to experience market pressure from low-priced, generic goods from China-based suppliers.

Against this backdrop, on a consolidated basis, domestic sales declined by 1% while international sales declined by 3%, resulting in an overall net sales decline of 2%. Overall cost of sales increased by 4% and was 71% of sales in 2023, as compared to 67% for the same period of 2022. These factors, taken together with slightly higher net manufacturing costs resulted in a 13% decrease in gross profit (to $43,084 in 2023 from $49,638 in 2022), while overall gross margin percent declined to 29% from 33% quarter-over-quarter.

Operating expenses increased slightly to $38,893 for the three-months period ended September 30, 2023 from $38,394 in the same quarter of the prior year; further, operating expenses as a percent of net sales rose to 26% in the third quarter of 2023 from 25% in the comparable period of 2022, largely due to higher research, product development costs, regulatory expenses costs and increased sales and marketing expenses.

Operating income for the period decreased to $4,191 from $11,244, driven by reduced sales, higher freight charges (an element of cost of sales), a decreased gross margin percentage and higher operating expenses. During the third quarter, the Company experienced significantly higher interest expenses, due to increased borrowing and significantly higher interest rates. Income before taxes ended at $560 including a profitable performance for most of the Company’s operating entities around the world, offset by losses in certain businesses, including Brazil. Losses at that entity generate a tax benefit, which was not realized as a result of maintaining a full valuation allowance. As a result, net tax expense exceeded income before taxes, resulting in a net loss for the quarter.

These factors yielded a net loss for the period of $325, as compared to net income of $6,741 in the third quarter of 2022. Details on our financial performance are set forth below.

RESULTS OF OPERATIONS

Quarter Ended September 30, 2023 and 2022:

Our domestic crop business recorded net sales that were 2% lower than those of the third quarter of 2022 ($67,749 as compared to $69,101). Our cotton products were negatively influenced by a year-over-year decline in US cotton acreage of up to 25% in key Southeast and Mississippi delta regions resulting in reduced sales of our foliar insecticide Bidrin. Further, late planting of cotton in 2023 led to some delayed applications of our Folex harvest defoliant from this year’s third quarter to the fourth quarter. In addition, we recorded no sales of our herbicide Dacthal, as the Company is awaiting reinstatement of the product registration after having submitted data study requirements. These declines were largely offset by significantly higher sales of our corn soil insecticide Aztec, as corn rootworm pressure intensified, while channel inventories are at historical lows. Sales of our Thimet insecticide for use against wireworm infestation in sugarcane were very strong in the third quarter. Similarly, our metam sodium soil fumigants also posted larger sales, as late summer and early autumn dry weather patterns facilitated increased third quarter application.

Our domestic non-crop business posted increased net sales in the third quarter of 2023, as compared to the same period in the prior year ($19,250 versus $18,936). In the quarter, demand for our OHP nursery and ornamental products remained relatively flat, as consumer spending on such products remained steady. Likewise, we saw a normal late summer/early fall demand for goods that we supply to professional pest control applicators and landscapers. Sales of mosquito control product were slightly lower than those of the prior year third quarter.

Net sales of our international businesses declined by 3% during the period ($62,517 in 2023 vs. $64,220 in 2022) and constituted 42% of our consolidated quarterly sales in the three months ended September 30, 2023 and 2022, respectively. These results arose from a number of factors, including the foreign exchange effect of a strong US Dollar, various supply-chain constraints, industry-wide channel inventory destocking and intensified competition of generic products from Asia. The business benefited from sales increases in several countries of our Mocap and Nemacur soil insecticides and our Counter nematicide in Brazil. Conversely, our Central American business, while maintaining a strong presence in the pineapple, banana, and citrus markets, posted lower sales attributed to significant drought conditions in the region and continued pricing pressure caused by a surge of imported generic products from China. In Mexico, our business recorded good performance driven by our Bromacil herbicide. We experienced relatively flat performance in Australia, as well as with respect to our growth regulators, biorational products and our Agrinos portfolio.

Operating expenses were flat at $38,893 for the three-month period ended September 30, 2023, as compared to $38,394 for the same quarter of the prior year. The changes in operating expenses by nature are as follows:

• Sales and marketing expenses increased by $407 for the three-month period ended September 30, 2023, as compared with the same period of the prior year. This included inflation related increased wages and other costs offset by reductions in travel and marketing expenses.
• General and administrative expenses decreased by $475 for the three-month period ended September 30, 2023, as compared to the same period of 2022. The main drivers were lower legal expenses and incentive compensation expenses, partially offset by inflation related increases in wages and other costs, and adverse movements in key currencies as compared to the US Dollar.
• Research, product development costs and regulatory expenses increased by $567 for the three-month period ended September 30, 2023, as compared to the same period of 2022. The main drivers were increased spending related to the development of our SIMPAS system and expanded registrations for our products in Brazil.

On April 1, 2020, the Company made a strategic investment in Clean Seed Inc., in the amount of $1,190. The Company recorded negative fair value adjustments in the amount of $247 and $454 for the three months ended September 30, 2023 and 2022, respectively.

Interest costs net of capitalized interest were $3,384 in the three-month period ended September 30, 2023, as compared to $1,086 in the same period of 2022. Interest costs are summarized in the following table:

Average Indebtedness and Interest expense

The Company’s average overall debt for the three-month period ended September 30, 2023 was $200,247, as compared to $125,441 for the three-month period ended September 30, 2022. Our borrowings in the three-month period ended September 30, 2023, were higher primarily as a result of customer decisions to slow down purchases from buying early to now buying as close to time of use as possible, resulting in increased working capital for the company as we work through this change in the market places in which we operate. As can be seen from the table above, the effective bank interest rate on our revolving line of credit was 7.1% and 3.5% at each of the three-month period ended September 30, 2023 and 2022, respectively.

Income tax expense decreased by $2,078 to $885 for the three-month period ended September 30, 2023, as compared to $2,963 for the comparable period in 2022. The effective tax rates for the three-month period ended September 30, 2023 and 2022, were 158.0% and 30.5%, respectively. The increase in the effective tax rate for the three months ended September 30, 2023 as compared to the same period in 2022, is primarily attributable to an increase in losses incurred at certain entities which did not result in a benefit for income tax purposes as these entities continue to maintain valuation allowances against their net deferred tax assets.

Our net loss for the three-month period ended September 30, 2023, was $325 or ($0.01) per basic and diluted share, as compared to net income of $6,741 or $0.23 per basic and diluted share in the same quarter of 2022.

Nine Months Ended September 30, 2023 and 2022:

Overview of the Company’s Performance

During much of the year-to-date in 2023, the global agricultural industry has been influenced by a handful of dynamics. First, commodity prices have remained relatively stable; this has been so since the Russian invasion of Ukraine. Second, the US Dollar has been strong, while the Chinese economy has weakened. This, in turn, has created foreign exchange impacts for US-based businesses that serve international markets. In addition, China-based suppliers have oversupplied certain markets (e.g., Central America) with low-priced generic products. Third, the cost of money has risen to the point that customers have engaged in destocking activity to limit carrying costs for inventory. Finally, supply chain disruptions continued to arise from time to time, particularly among domestic companies that import goods from Asia and India. Against that backdrop, the Company’s overall operating results for the first nine months of 2023 declined as compared to those of the same period of 2022.

On a consolidated basis, with domestic sales down 14% and international down by 3%, overall net sales decreased by 10% (to $407,191 from $450,036). Cost of sales were down 9% on an absolute basis but increased as a percent of net sales to 69% from 67%. Factory performance was less cost efficient during the first nine months of 2023, as compared to that of 2022. These factors, taken together, yielded an decrease in gross profit margin to 31% of net sales from 33% during the first nine months of 2022. Operating expenses were flat on an absolute basis but increased as a percent of net sales to 28% as compared to 25% of net sales for the same period of the prior year.

Interest expense rose sharply due to higher interest rates and higher average borrowing, while income tax expense decreased significantly to $2,066 from $10,187 during the comparable period last year, primarily as a result of lower income before taxes. Overall, the Company’s net income for the period decreased to $540 from $23,506 during the first nine months of the prior year. Details on our financial performance are set forth below.

RESULTS OF OPERATIONS

Nine months ended September 30, 2023, and 2022

Our domestic crop business recorded net sales that were 16% lower than those of the first nine months of 2022. The main driver of this performance was in our herbicide product category. Dacthal, which is used on a wide variety of high-value crops was unavailable for sale this year, as the company awaits the reinstatement of its registration. Additionally, our Impact post-emergent corn herbicide posted lower sales this year due to an unexpected grower preference for low-priced non-selective herbicides. Offsetting this decline was our leading soil insecticide Aztec, which rebounded from earlier supply constraints and saw strong demand in light of heavy rootworm pressure throughout the Midwest region. Our domestic cotton business, led by Bidrin foliar insecticide and Folex harvest defoliant, declined during the first three quarters of 2023 due to lower cotton acreage, moderate pest pressure, and a delay in harvest defoliant applications. At the same time, we posted modest increases in our soil fumigant and sugarcane products. The US crop business continues to experience the effects of channel inventory destocking, driven by high interest rate carrying costs. This has led to very cautious purchasing patterns throughout the domestic business since the beginning of the second quarter.

Year-to-date, the Company’s domestic crop business was slowed by supply chain disruption of its premier corn soil insecticide Aztec and herbicide Dacthal during the first quarter. During the second quarter, both US crop and US non-crop experienced slowed sales resulting from global destocking on the part of our distribution channels. Crop sales declines were partially offset by stronger sales of soil fumigants. Within non-crop, big box stores and retailers slowed and reduced procurement activity and departed from the historical norm of maintaining about 6 months’ inventory to about 30 days’ inventory. Within our International business, Central America and Brazil were adversely affected by the export of low-priced generic product from China, partially offset by strong performances in Mexico and Australia.

Our domestic non-crop business recorded an 8% decrease in net sales for the first nine months of the year (to $49,791 from $53,844). We experienced a nine month reduction in consumer demand for our OHP nursery and ornamental products, most of which occurred earlier this year and now has normalized in the most recent quarter. Sales of our Dibrom® mosquito adulticide remained nearly flat while sales for commercial pest control products (pest strips and bifenthrin) declined, due in part to measures imposed by distribution to control inventory carrying costs. License revenue for our Envance technologies increased when compared to the same period in 2022, due to an increase in contractually guaranteed royalty fees.

Net sales of our international businesses declined by 3% during the first three quarters of 2023 (to $171,327 in 2023 from $175,916 in 2022). Central America experienced a rare multi-quarter sales decline due to continuing regional drought conditions and increased competitive pressure from Chinese imports. Brazil continued to gain further market penetration of our Counter granular insecticide/nematicide, but the overall business suffered otherwise from intense channel inventory destocking in the region. Mexico delivered solid performance by satisfying continuing strong demand for Bromacil herbicides and granular soil insecticides, offset somewhat by lower sales of our soil fumigant products. Australia posted higher sales with our expanded market footprint following full integration of the AgNova business, despite the recurrence of drought conditions in parts of the continent.

Operating expenses decreased by $242 to $113,317 for the nine-month period ended September 30, 2023, as compared to the same period in 2022. The changes in operating expenses by department are as follows:

• Sales and marketing increased by $3,017 for the nine-month period ended September 30, 2023, as compared to the same period of 2022. The main drivers were increased inflation related increased wages, higher travel expenses associated with more in-person interactions with customers and increase expenses related to changes in key currencies compared to the US Dollar, offset by lower marketing spending.
• General and administrative expenses - other decreased by $6,137 for the nine-month period ended September 30, 2023, as compared to the same period of 2022. The main drivers were decreased incentive compensation expenses related to our financial performance, lower legal costs and beneficial movements in some key currencies as compared to the US Dollar, partially offset by inflation related increases in wages.
• The Company spent $541 in fees associated with our Proxy defense activities, as compared to $1,785 in the comparative period of the prior year.
• Research, product development costs and regulatory expenses increased by $4,122 for the nine-month period ended September 30, 2023, as compared to the same period of 2022. The main drivers were increased costs associated with in-field activities in support of our proprietary delivery systems, and international product defense and registration expenses supporting strong sales growth.

During the nine-month period ended September 30, 2023, the Company recorded a decrease in the fair value of our equity investment in Clean Seed in the amount of $324 compared to $857 during the nine months ended September 30, 2022. These changes in fair value of our investment directly reflect changes in the stock’s quoted market price.

Interest costs net of capitalized interest were $8,282 in the first nine-month period of 2023, as compared to $2,256 in the same period of 2022. Interest costs are summarized in the following table:

Average Indebtedness and Interest expense

The Company’s average overall debt for the nine-month period ended September 30, 2023, was $149,009, as compared to $111,939 for the nine months ended September 30, 2022. During the period, our average borrowings increased due to share repurchase programs and an increase in inventory due to a slowdown in sales as a result of channel destocking. As can be seen from the table above, our effective bank interest rate on our revolving line of credit was 7.0% for the nine months ended September 30, 2023, as compared to 2.7% for the same period of 2022.

Income tax expense decreased by $8,121 to $2,066 for the nine-month period ended September 30, 2023, as compared to $10,187 for the comparable period in 2022. The effective tax rates for the nine-month period ended September 30, 2023 and 2022, were 79.3% and 30.2%, respectively.

The increase in the effective tax rate for the nine months ended September 30, 2023, as compared to the same period in 2022, is primarily attributable to an increase in losses incurred at certain entities which did not result in a benefit for income tax purposes as these entities continue to maintain a valuation allowance against their net deferred tax assets. Additionally, the Company recorded withholding tax charges (net of income tax credits) associated with interest on certain intercompany loans and the establishment of liabilities for uncertain tax positions in certain jurisdictions. These factors are partially offset by a benefit from the remeasurement of certain U.S. federal and state deferred taxes.

Our net income for the nine-month period ended September 30, 2023 was $540 or $0.02 per basic and diluted share, as compared to $23,506 or $0.80 per basic and $0.78 per diluted share in the same period of 2022.

LIQUIDITY AND CAPITAL RESOURCES

The Company’s operating activities utilized net cash of $145,854 during the nine-month period ended September 30, 2023, as compared to $45,678 during the nine months ended September 30, 2022. Included in the $145,854 are net income of $540, plus non-cash depreciation, amortization of intangibles and other assets and discounted future liabilities, in the amount of $17,850, loss on disposal of property, plant and equipment of $7, amortization of deferred loan fees of $174 and provision for bad debts in the amount of $952. Also included are stock-based compensation of $4,257, increase in deferred income taxes of $977, changes in liabilities for uncertain tax positions or unrecognized tax benefits of $467, change in fair value of an equity investment of $324, and net foreign currency adjustments of $199. These together provided net cash inflows of $23,793, as compared to $49,903 for the same period of 2022.

During the nine-month period of 2023, the Company increased working capital by $160,094, as compared to an increase of $59,659 during the same period of the prior year. Included in this change: inventories increased by $58,163, as compared to $38,987 for the same period of 2022. While increases in inventory are normal for the Company’s annual cycle, the increase was bigger due to slowed sales resulting from global destocking on the part of our distribution channels.

Customer prepayments decreased by $104,590, as compared to $62,831 in the same period of 2022, driven by customer decisions regarding demand, payment timing and our cash incentive programs. Our accounts payable balances increased by $1,240, as compared to an increase of $14,418 in the same period of 2022, driven by decreased factory activity levels. Accounts receivables increased by $29,055, as compared to an increase of $46,289 in the same period of 2022. This is primarily driven by lower overall sales. Prepaid expenses increased by $633, as compared to $4,272 in the same period of 2022. Income tax receivable changed by $4,046, as compared to $5,201 in the prior year. Accrued programs increased by $29,779, (as compared to $45,016 in the prior year), which is normal at this point in the growing season and is related to sales volume. Finally, other payables and accrued expenses decreased by $4,406 compared to an increase of $2,555 in the prior year.

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 of each year. During the first nine months of 2023, the Company made accruals for programs in the amount of $62,248 and payments in the amount of $32,469. During the first nine months of the prior year, the Company made accruals in the amount of $78,885 and made payments in the amount of $33,869. The decrease in accruals for programs in the first nine months of 2023, compared to the same period in 2022, is a direct result of an decrease in sales of qualifying products.

Cash used for investing activities for the nine-month period ended September 30, 2023, and 2022 was $9,148 and $9,978, respectively. In 2023, the Company spent $8,589 on purchases of fixed assets primarily focused on continuing to invest in manufacturing infrastructure, as compared to $8,946 for the same period of prior year. The Company spent $759 on patents and other intangible assets in 2023 as compared to $1,078 in 2022. In addition, the Company received proceeds from disposal of property, plant and equipment in the amount of $200, as compared to $46 in prior year.

During the nine months ended September 30, 2023, financing activities provided $146,680, as compared to $59,797 during the same period of the prior year. Net borrowings under the Credit Agreement amounted to $165,700 during the nine-month period ended September 30, 2023, as compared to $96,000 in the same period of the prior year. The Company paid dividends to stockholders amounting to $2,550 during the nine months ended September 30, 2023, as compared to $2,072 in the same period of 2022. The Company paid $15,539 for the repurchase of 885,290 shares of its common stock during the nine-month period ended September 30, 2023, as compared to $13,731 for 720,350 shares and $20,000 related to an accelerated share repurchase agreement during the nine-month period ended September 30, 2022. The Company received $1,026 for the issuance of ESPP shares and exercise of stock options for the nine months ended September 30, 2023, as compared to $1,620 for the same period in prior year. Lastly, in exchange for shares of common stock returned by employees, the Company paid $1,957 and $2,020 for tax withholding on stock-based compensation awards during the nine months ended September 30, 2023 and 2022, respectively.

The Company has a revolving line of credit that is shown as long-term debt in the condensed consolidated balance sheets at September 30, 2023 and December 31, 2022. These are summarized in the following table:

As of September 30, 2023, by virtue of Amendment Number Six to the Third Amended Loan and Security Agreement, the Company is deemed to be in compliance with its financial covenants (refer to Note 9 to the condensed consolidated financial statements for further details).

At September 30, 2023, according to the terms of the Credit Agreement, as amended, including our performance against the most restrictive covenant listed above, the Company had the capacity to increase its borrowings by up to $28,760, compared to $200,372 as of December 31, 2022.

RECENTLY ISSUED ACCOUNTING GUIDANCE

Please refer to Note 15 in the accompanying Notes to the condensed consolidated financial statements for recently issued accounting standards.

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, 2022, 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, 2022.

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 updates to estimates and assumptions are reflected in the condensed consolidated financial statements in the period that these updates are determined to be necessary. Actual results may differ from these estimates under different outcomes or conditions. Our estimates did not change materially during the three- and nine-months ended September 30, 2023.

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, 2022 and Note 9 to the condensed consolidated financial statements.

The Company faces market risk to the extent that changes in foreign currency exchange rates affect our non-U.S. dollar functional currency as to foreign subsidiaries’ revenues, expenses, assets and liabilities. The Company currently does not engage in hedging activities with respect to such exchange rate risks.

Assets and liabilities outside the U.S. are located in regions where the Company has subsidiaries or joint ventures: Central America, South America, North America, Europe, Asia, and Australia. The Company’s investments in foreign subsidiaries and joint ventures with a functional currency other than the U.S. dollar are generally considered long-term. Accordingly, the Company does not hedge these net investments.

As of September 30, 2023, 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, 2023, 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.

PART II. OTHER INFORMATION

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

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 Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed on March 16, 2023. There are no material changes to the risk factors as so stated, except as follows:

***Disruption in the global supply chain is creating delays, unavailability and adverse conditions for our industry—***Despite improvement in container availability and freight costs, the global supply chain continues to present risk. Industry consolidation, coupled with longer-term production commitments, has materially affected the Company’s supply of raw materials and intermediates in the past. There is no guarantee that the supply chain condition will materially improve any time soon or that the Company will avoid material disruption. Such disruption could have a material adverse effect on the Company’s operations, financial condition or cash flows.

***The Company is dependent upon sole source or a limited number of suppliers for certain of its raw materials and active ingredients—***There are a limited number of suppliers of certain important raw materials used by the Company in a number of its products. Certain of these raw materials are available solely from single or very few sources either domestically or overseas. In connection with supply chain disruptions in 2022 phosphorus and related compounds were increasingly difficult to source for our entire industry; ensuring a continuous supply required extraordinary efforts both with respect to sourcing and production planning. Similarly, in the first half of 2023, DCPA, the active ingredient in one of the Company’s high-margin herbicides, was unavailable from its overseas supplier. That said, there is no guarantee that any of our suppliers will be willing or able to supply products to the Company reliably, continuously and at the levels anticipated by the Company or required by the market. If these sources prove to be unreliable and the Company is not able to supplant or otherwise second source these products, it is possible that the Company will not achieve its projected sales which, in turn, could adversely affect the Company's consolidated financial statements.

***The Company benefits from customer early pay in meeting its working capital needs—***As is the case with other companies in this industry, the Company receives cash from certain major domestic customers at year-end in exchange for granting discounts on the Company’s products during the first half of the following year. The Company typically uses this cash to pay down secured debt and for other working capital needs. This flow of cash obviates the need for additional borrowing, which, in turn, preserves borrowing capacity used in part for paying customer programs in the middle of the calendar year and, consequently, reduces interest expense. There is no guarantee that the Company’s customers will continue to support the early pay program at current levels. Further a material change in this program could have an adverse effect upon the Company’s liquidity and its ability to meet working capital demands.

Public statements made by USEPA regarding their preliminary findings in connection with the registration review of the Company’s products could adversely affect product sales and/or commercial viability. Registrations for the Company’s products are subject to registration review by the USEPA from time to time. In the course of the review, the Company submits, and the USEPA reviews, data studies. At any stage in the course of the review, USEPA may reach preliminary findings that could impair the commercial viability of a product. For example, in connection with USEPA’s review of the DCPA registration, based upon a comparative thyroid assay study (which is comparatively rare and quite complex), based upon limited data points, the USEPA found an adverse effect upon neonate rodents. Consequently, in June 2023, the agency published preliminary findings, noting its concern that based upon current, permitted use patterns, the product could have an adverse effect upon human health and, in particular, pregnant women. At the same time, the agency invited the Company to examine mitigation measures to allay their concerns, which the Company is doing. There is no guarantee that mitigation measures or additional data proffered by the Company will be sufficient to overcome USEPA’s conclusions. Further, it is possible that the agency could take more drastic measures to either reduce the use or cancel the registration of the product. Regulatory activities of this nature, whether in connection with DCPA or other products of significance, could have a material adverse effect upon the Company’s financial performance.