American Vanguard Corp: Form 10-Q for the period ended Mar 31, 2024

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.

Overview of the Company’s Performance

The global agriculture market remains stable but is characterized by mixed conditions. A strong United States dollar coupled with high grain inventory stocks has served to suppress commodity prices for both corn and soybeans. At these price levels, however, farming is still a profitable business. That said, while the distribution channel has relaxed its inventory destocking practice from last year, it continues to exercise fiscal restraint in procurement. This is also true within the non-crop markets.

Within this context, the Company’s overall financial performance during the quarter was better with respect to net sales and adjusted EBITDA and slightly below net income for the comparable period last year. During the first quarter of 2024 our sales increased by 8%, as compared to the first quarter of 2023. Regionally speaking, domestic sales increased by 12%, while international sales increased by 2%. Improvements along the supply chain allowed sales to normalize for some of the Company’s highest margin herbicides and insecticides. Improved net sales were primarily driven by increased availability of herbicides, an increase in market share in granular soil insecticides and an increase in demand for mosquito control products.

Cost of goods sold increased broadly in line with sales and were up 7%, as compared to the same quarter of 2023. This included changes in product mix, relative to the same period of last year and factory performance that was significantly better than the same period of the prior year, with both lower factory costs and slightly increased output, relative to 2023. As a result of these factors, gross margins for the business remained constant at 31%, versus the same period of 2023.

Operating expenses increased by 3% versus the first quarter of 2024, due primarily to increased general and administrative and foreign exchange expenses, audit fees, incentive compensation accruals and transformation costs, partially offset by decreased regulatory expenses. While the overall operating expenses increased on an absolute basis, they decreased as a percentage of sales to 27%, as compared to 28% in the same period of the prior year.

Interest expense increased, based upon increased average borrowings, driven by elevated interest rates and higher working capital levels as the Company starts its annual cycle that includes starting to build inventory at the start of the year to fuel sales growth planned for the rest of the year. Taxes increased by $1,845 to $1,484 during the quarter, versus the first three months of 2023, during which the company recorded income tax benefits amounting to $361. The first quarter tax result was driven in part by the effect of lower financial performance in Brazil, which requires the Company to record a valuation allowance that results in a higher, consolidated tax rate. The Company generated net income of $1,552 (or $0.06 per share) compared to $1,918 (or $0.07 per share) in the prior year.

RESULTS OF OPERATIONS

Quarter Ended March 31:

Our domestic crop business recorded net sales during the first quarter of 2024 that were 9% higher than those of the first quarter of 2023 ($67,257 as compared to $61,876). Overall herbicides sales were up 17% in the quarter versus this time last year. The quarter benefited from sales of the herbicide, Dacthal, which was not available during the comparable quarter in 2023 due to supply chain constraints. On a related note, the Company has meanwhile suspended sales of Dacthal for regulatory reasons (refer to Note 12 to the condensed consolidated financial statements for further details). In foliar insecticides, the Company benefited from increased cotton planting with Dibrom and Bidrin sales up 39%. In granular insecticides, sales were up 9%, with Thimet growing as a result of increased peanut crop acreage, and Index® sales in corn trending higher. These positive developments in granular pesticides were partially offset by Aztec sales which were down 37%, as sales patterns normalized. In comparison, during the same period of the prior year, customers took advantage of readily available inventory of Aztec to restock after an extended period during which that product had not been available. Soil fumigant sales were down 14% due to a shortened application window driven by cool and wet temperatures in the Northwest and a decrease in potato prices.

Our domestic non-crop business posted a 28% increase in net sales in the first quarter 2024, as compared to the same period in the prior year ($17,768 as compared to $13,899). In this category, Dibrom® and Trumpet mosquito adulticide sales were up 16% based upon predictions for stronger than normal tropical storm activity. Our OHP business was up 10%, buoyed by strong sales of its biorational portfolio and pre-emergent herbicides. Finally, private label pest strip sales were up over 100% compared to the year ago period.

Net sales of our international businesses rose by about 2% during the period ($50,118 as compared to $49,110). This group experienced sales growth in foliar and granular insecticides and growth regulators, partially offset by a decrease in soil fumigants, herbicides and fungicides sales. The Company experienced growth in Mexico and the Asia Pacific region, although weak agave prices limited the strength in Mexico and Japanese currency volatility impacted margins for sales in this region. Brazilian sales appear to have stabilized, however Canadian sales were soft, as channel inventory for our products remained high in this jurisdiction.

On a consolidated basis, gross profit for the first quarter of 2024 increased by 10% ($42,418 as compared to $38,537). Increased sales volume, normalization of supply chains and an improved factory performance all contributed to better profitability. Gross margin for the quarter remained stable compared to the year ago period at 31%.

Operating expenses increased by $1,055 or 3% to $36,327 for the three months ended March 31, 2024, as compared to the same period in 2023. The change in operating expenses by department are as follows:

• Selling expenses decreased by $490 for the three months ended March 31, 2024, as compared with the same period of the prior year. This included reductions in domestic marketing and medical insurance costs, somewhat offset by increased costs associated with our international businesses.
• General and administrative expenses increased by $4,183 for the three months ended March 31, 2024, as compared to the same period of 2023. The main drivers were changes in transactional foreign exchange gains/losses, increased short-term and long-term incentive compensation accruals, increased reserves for credit losses in Central America, additional audit costs, and investments in both IT and human capital initiatives during the first three months of 2024, as compared to the same period in the prior year.
• The Company spent $541 in fees associated with its proxy activities during the first three months of the prior year. There were no similar costs in the same period of 2024.
• Amortization declined slightly during the first three months of 2024 as compared to the same period of the prior year as the result of completely amortized assets.
• Transformation costs related to the Company’s digital and structural transformation project amounted to $1,152. The digital transformation effort is intended to ensure that business process owners have access to current and complete data that has been generated through standardized systems and processes. The structural transformation effort is intended to improve operating leverage by applying business analytics to current operations, structures, products and services and identifying process improvements. The Company hired a Chief Transformation Officer to steer and drive the project. In addition, Kearney Management Consulting is assisting the Company in navigating the project to gain the maximum benefit at the earliest possible time.
• Research, product development costs and regulatory expenses decreased by $3,164 for the three months ended March 31, 2024, as compared to the same period of 2023. The main drivers for the reduction were lower regulatory expenses, and lower costs associated with our SIMPAS product development activities.

On April 1, 2020, the Company made a strategic investment in Clean Seed Inc. (“Clean Seed”), in the amount of $1,190. The investment is carried at fair value and is included in other assets on the Company’s condensed consolidated balance sheets. The Company recorded a gain of $638 during the three months ended March 31, 2024 and a loss of $22 during the same period of the prior year. The gain and loss reflect changes in fair value of the investment in Clean Seed during those periods, and are included in change in fair value of equity instruments on the Company’s condensed consolidated financial statements.

Interest costs net of capitalized interest were $3,693 in the first three months of 2024, as compared to $1,686 in the same period of 2023. Interest costs are summarized in the following table:

Average Indebtedness and Interest expense

The Company’s average overall debt for the three months ended March 31, 2024 was $176,344, as compared to $107,986 for the three months ended March 31, 2023. Our borrowings in the three months ended March 31, 2024 were higher when compared to the same period of the prior year, mainly as a result of increased working capital. This is normal for the Company’s annual cycle which includes building inventory at the start of the calendar year to support sales activities during the rest of the year. As can be seen from the table above, our effective bank interest rate on our revolving line of credit was 8.3% for the three months ended March 31, 2024, as compared to 6.8% in 2023.

Income tax expense was $1,484 for the three months ended March 31, 2024, as compared to an income tax benefit of $361 for the three-months ended March 31, 2023. The effective income tax rate for the three months ended March 31, 2024 was computed based on the estimated effective tax rate for the full year which is approximately 28%, excluding discrete items and entities subject to full valuation allowances against related net deferred tax assets. During the first three months of 2024, the majority of the Company’s businesses generated taxable profits. On a consolidated basis, these taxable profits were partially offset by the performance of the Company’s subsidiaries in Brazil which incurred losses. These losses did not result in any tax benefits as the Brazilian subsidiaries maintain full valuation allowances against their net deferred tax assets. As a result, the Company’s overall effective tax rate for the first quarter was 48.9%. During the first three months of the prior year, the Company’s effective tax rate was impacted by the same matters as during the first three months in 2024. However, the Company benefited from a one-time remeasurement benefit of certain U.S. federal and state deferred taxes related to partnership arrangements associated with regulatory activities. These factors resulted in an overall negative effective tax rate of 23.2% and a tax benefit for the period of $361.

Our overall net income for the first three months of 2024 was $1,552 or $0.06 per basic and diluted share, as compared to $1,918 or $0.07 per basic and diluted share in the first quarter of 2023.

LIQUIDITY AND CAPITAL RESOURCES

The Company used cash of $42,424 in operating activities during the three months ended March 31, 2024, as compared to $41,452 during the three months ended March 31, 2023. Included in the $42,424 are net income of $1,552, plus non-cash depreciation, amortization of intangibles and other assets and discounted future liabilities, in the amount of $5,630, provision for bad debts in the amount of $700 and other in the amount of $5. Also included are stock-based compensation of $2,005, an increase in deferred income taxes of $1,025, and net change in foreign currency adjustment of $373. These together provided net cash inflows of $7,881, as compared to $10,367 for the same period of 2023.

During the first three months of 2024, the Company increased net working capital by $49,996, as compared to $52,995 during the same period of the prior year. Included in this change: inventories increased by $9,353, as compared to $33,731 for the first quarter of 2023. Customer prepayments decreased by $37,037, as compared to $22,759 in the same period of 2023, driven by customer decisions regarding demand, payment timing and our cash incentive programs. Our accounts payable balances decreased by $3,951, as compared to an increase of $5,655 in the same period of 2023. Accounts receivable increased by $5,579, as compared to $8,779 in the same period of 2023. Prepaid expenses increased by $1,466, as compared to decreased by $600 in the same period of 2023. Income tax receivable decreased by $1,014, as compared to a increased by $2,965 in the prior year. Accrued programs increased by $6,399, as compared to $10,660 in the prior year, as a result of both higher sales and the mix of those sales including products with higher program elements incorporated in pricing. Finally, other payables and accrued expenses decreased by $332, as compared to $500 in the prior year.

With regard to our program accrual, the increase (as noted above) primarily reflects our level and mix of sales and customers in the first quarter of 2023, as compared to 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 quarter of 2022, the Company made accruals for programs in the amount of $25,266 and made payments in the amount of $18,999. During the first quarter of the prior year, the Company made accruals in the amount of $23,669 and made payments in the amount of $13,033.

Cash used for investing activities was $3,567 for the three months ended March 31, 2024, as compared to $3,308 for the three months ended March 31, 2023. The Company spent $3,565 on fixed assets acquisitions primarily focused on continuing to invest in manufacturing infrastructure. In addition, the Company spent $25 on patents for the Envance technology business.

During the three months ended March 31, 2024, financing activities provided $47,685, as compared to $43,777 during the same period of the prior year. Net borrowings under the Credit Agreement amounted to $48,117 in the first quarter of 2024, as compared to $44,700 in the same period of the prior year. The Company paid dividends to stockholders amounting to $834 during the three months ended March 31, 2024, as compared to $851 in the same period of 2023. The Company received $18 for the exercise of stock options in the prior year, as compared to none in the current period. Lastly, in exchange for shares of common stock returned by employees, we paid $14 and $13 for tax withholding on stock-based compensation awards during the three months ended March 31, 2024 and 2023, respectively.

The Company has long-term debt as of March 31, 2024 and December 31, 2023 relating to a senior credit facility as summarized in the following table:

It is useful to note that, while classified as long-term debt, funds borrowed by the Company under the Credit Agreement are used for working capital needs on an ongoing basis. The Company has in place a cash sweep mechanism for the domestic business and follows strict controls on repaying outstanding balances promptly in order to minimize the carrying cost of borrowed funds.

As of March 31, 2024, the Company was deemed to be in compliance with its financial covenants. Based on its performance against the most restrictive covenant of the Credit Agreement with its lenders, the Company had the capacity to increase its borrowings by up to $84,953. This compares to an available borrowing capacity of $115,002 as of December 31, 2023.

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

RECENTLY ISSUED ACCOUNTING GUIDANCE

Please refer to Note 13 in the accompanying Notes to the Condensed Consolidated Financial Statements for recently issued and adopted 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, 2023, 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, except to the extent stated below, 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, 2023.

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

***Goodwill—***The Company reviews goodwill for impairment utilizing either a qualitative or quantitative assessment. If the Company decides that it is appropriate to perform a qualitative assessment and concludes that the fair value of a reporting unit more likely than not exceeds its carrying value, no further evaluation is necessary. If the Company performs a quantitative assessment, the Company compares the fair value of a reporting unit with its carrying value and recognizes an impairment charge for the amount that the carrying amount exceeds the reporting unit’s fair value. The Company annually tests goodwill for impairment at the beginning of the fourth quarter, or earlier if triggering events occur. Fair value determinations require considerable judgment and are sensitive to inherent uncertainties and changes in estimates and assumptions regarding revenue growth rates, gross margins, expenses, capital expenditures, working capital requirements, tax rates, terminal growth rates, discount rates, and synergies available to market participants. As of October 1, 2023, the Company conducted its most recent annual impairment test by quantitatively testing goodwill assigned to its domestic and international reporting units. Based on the results of the quantitative test, the Company concluded that the fair value of both the domestic and international reporting units exceed their respective carrying value. The fair value of the domestic and international reporting units exceeded the carrying value by 18% and 9%, respectively. The carrying value of both reporting units is mainly sensitive to discount rates, the projected net sales growth rates, gross margin improvements, and terminal growth rates. Negative deviations from the Company’s projections and assumptions used in its quantitative impairment test may result in an impairment. As of March 31, 2024, goodwill related to the domestic and international reporting units amounted to $9,132 and $41,337, respectively.

On April 9, 2024, out of an abundance of caution, the Company voluntarily suspended sales of Dacthal pending review and potential approval of a significantly narrower label submitted to the USEPA. The outcome of USEPA's review is uncertain at present (refer to Note 12 to the condensed consolidated financial statements for further details). Should the Company not be able to resume sales of Dacthal, the Company’s current assessment is that the fair value of the domestic reporting unit would be negatively impacted, but not to the extent that would result in an impairment of the domestic reporting unit goodwill. The potential loss of Dacthal sales does not have any impact on the fair value of the international reporting unit.

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, 2023.

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 March 31, 2024, 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 March 31, 2024, the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, had 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, 2023, filed on March 27, 2024. The following disclosure amends and supplements those risk factors and, except to the extent stated below, there are no material changes to the risk factors as so stated.

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.