American Vanguard Corp: Form 10-Q for the period ended Mar 31, 2025

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. Generally, “may,” “could,” “will,” “would,” “expect,” “believe,” “estimate,” “anticipate,” “intend,” “continue” and similar words identify forward-looking statements. Forward-looking statements appearing in this report are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on our current expectations and are subject to risks and uncertainties that can cause 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 given that interest rate and inflation affect the debt market; the impact of, and our ability to, remediate the identified material weaknesses in our internal controls over financial reporting; and 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. Security and Exchange Commission (“SEC”). It is not possible to foresee or identify all such factors. We urge you to consider these factors carefully in evaluating the forward-looking statements contained in this report. You should evaluate all forward-looking statements made in this Form 10-Q in the context of the risks and uncertainties disclosed in Part II, Item 1A of this Form 10-Q under the heading "Risk Factors," in Part I, Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations," and in Item 3 "Quantitative and Qualitative Disclosures About Market Risk."

The forward-looking statements included in this Form 10-Q are made only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law. If we do update one or more forward-looking statements, no inference should be made that we will make additional updates with respect to those or other forward-looking statements.

Overview of the Company’s Performance

A combination of changing, unpredictable and often opposing factors has put the global agricultural market in a static state. While shifting tariffs have created uncertainty as to the strength of export markets, a weak United States dollar and lower corn inventories have relieved pressure and spurred interest in increasing the amount of corn acreage to be planted in 2025. Amidst these conditions, market participants have shown a limited interest in increasing inventories for crop protection products, despite dramatically decreasing inventory levels over the past 24 to 30 months. While distributors will eventually need to increase on-hand inventories to supply their customers’ needs, they are currently adopting conservative working capital practices.

Within this context, the Company’s overall financial performance during the quarter was weaker than the comparable period last year with net sales down 14% during the quarter. Regionally, domestic and international sales were both down 14%. Much of the variance was due to the voluntarily discontinuance of one of the Company’s high margin herbicide products in the second half of 2024. Soil fumigants in the U.S., and Granular Soil Insecticides in the U.S. and Latin America, as well as non-Crop Insecticides performed better than the comparable period last year.

Costs of goods sold decreased 8% as compared to the same quarter of 2024. Volume decline was the primary driver behind the decrease of cost of goods sold. Gross margins declined to 26%, as compared to 33% in the same period of the prior year due to a shift in product offering and increased costs per unit as the result of lower volumes.

Operating expenses were down 5% versus the first quarter of 2024, with selling expenses down significantly, partially offset by increased transformation costs. Expenses for research, product development costs and regulatory expenses declined as a direct result of the decision to terminate the SIMPAS project at the end of 2024. Given the decreased level of sales, operating expenses increased as a percentage of sales to 30%, as compared to 27% in the same period of the prior year.

Interest expense remained approximately flat, based upon increased average borrowings, offset by a reduction in the effective interest rate.

The Company recorded an income tax expense of $387 compared to $1,484 in the same period of last year. The decrease in the income tax expense compared to the same period last year is primarily attributed to losses incurred in the U.S. for the three months ended March 31, 2025, which did not result in a benefit for income tax. The U.S. entities maintain a valuation allowance against their net deferred tax assets which was established during the fourth quarter ended December 31, 2024. The Company generated a net loss of $8,462 (or ($0.30) per share) compared to net income of $1,552 (or $0.06 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 2025 that were 15% lower than those of the first quarter of 2024 ($57,176 vs. $67,257 in the prior year). As previously mentioned, virtually all of the weakness in the U.S. Crop business can be attributed to our herbicide business, which was negatively impacted by the absence from the market of one of our herbicide products that the Company voluntarily cancelled last year. On the other hand, despite the overall weakness in agriculture during the first quarter, our portfolio of biological product sales remained flat, as compared to the same period of the prior year. Finally, included in this result, peanut acreage was up year to date, positively impacting Thimet sales, which rose approximately 17% as compared to last year. As a result of demand and commodity pricing, growers are shifting acreage away from cotton this year and towards peanuts.

Our domestic non-crop business posted a 12% decrease in net sales in the first quarter of 2025, as compared to the same period in the prior year ($15,601 vs. $17,768 in the prior year). In the quarter, while net sales of our fungicides were lower, net sales of biological solutions and granular herbicides improved.

Net sales of our international businesses decreased by 14% during the period ($43,023 vs. $50,118 in the prior year). The weakness is primarily due to lower herbicide sales in Mexico on lower agave prices, and in our Australian business. The Company is focused on selling more profitable products across our international distribution businesses and is willing to forgo sales of lower margin products in order to maximize margins in the international business. Consequently, average pricing improved in nearly all categories.

On a consolidated basis, gross profit for the first quarter of 2025 decreased by 29% ($30,191 vs. $42,418 in the prior year). Decreased sales volume, elevated inventory costs, and competitive pricing all contributed to the decline. Gross margin for the quarter decreased to 26%, as compared to 31% for the same period ended March 31, 2024.

Operating expenses decreased by 5% to $34,501 for the three months ended March 31, 2025, as compared to the same period in 2024. The change in operating expenses by department are as follows:

• Selling expenses decreased by $2,158 for the three months ended March 31, 2025, as compared with the same period of the prior year. This included reductions in domestic wages and salaries following actions taken in 2024 to reduce headcount across the global business, associated reductions in travel expenses and lower advertising and marketing costs as certain promotional activities have been pushed to later in the year.
• Other general and administrative expenses slightly decreased by $469 for the three months ended March 31, 2025, as compared to the same period of the prior year. The main driver was a reduction in stock compensation expense reflecting the Company’s current financial performance, partially offset by expenses for extended year-end audit activities.
• Amortization declined slightly during the first three months of 2025, as compared to the same period of the prior year as a result of a lower book value of intangible assets.
• Transformation costs related to the Company’s digital and structural transformation project amounted to $2,191, as compared to $1,152 in the prior period. The Company expects that business transformation costs will decline over the balance of 2025, as the Company is in the midst of implementing the plans that had been generated with the help of its management consultant last year.
• Research, product development costs and regulatory expenses remained flat for the three months ended March 31, 2025, as compared to the same period of the prior year.

Average Indebtedness and Interest expense

Interest costs net of capitalized interest were $3,765 in the first three months of 2025, as compared to $3,693 in the same period of 2024. Interest costs are summarized in the following table:

The Company’s average overall debt for the three months ended March 31, 2025 was $183,918, as compared to $176,344 for the three months ended March 31, 2024. Our borrowings in the three months ended March 31, 2025 were higher when compared to the same period of the prior year, mainly as a result of expenses incurred during the balance of 2024 pertaining to transformation and other initiatives. As can be seen from the table above, while our borrowings were higher than this time last year, our effective bank interest rate on our revolving line of credit reduced to 7.7% for the three months ended March 31, 2025, as compared to 8.3% in 2024. This resulted in interest expense that was essentially flat period over period.

Income tax expense was $387 for the three months ended March 31, 2025, as compared to $1,484 for the three-months ended March 31, 2024. The effective income tax rate for the three months ended March 31, 2025 was computed based on the estimated effective tax rate for the full year which is approximately 26.6%, excluding discrete items and entities subject to full valuation allowances against related net deferred tax assets. During the fourth quarter ended December 31, 2024, the Company established a valuation allowance against the U.S. entities net deferred tax assets. The company continues to maintain valuation allowances established against the net deferred tax assets of certain international entities, primarily in Brazil, for the three months ended March 31, 2025. During the first three months ended March 31, 2025, many of the Company’s international businesses outside of Brazil were profitable. For the three months ended March 31, 2025 the Company recorded an income tax expense mainly attributed to a loss before provision for income taxes incurred in the U.S. which did not result in a benefit for income tax. The U.S. entities maintain a valuation allowance against their net deferred tax assets which was established during the fourth quarter ended December 31, 2024.

Our overall net loss for the first three months of 2025 was $8,462 or $0.30 per basic and diluted share, as compared to net income of $1,552 or $0.06 per basic and diluted share in the first quarter of 2024.

LIQUIDITY AND CAPITAL RESOURCES

The Company used cash of $20,576 in operating activities during the three months ended March 31, 2025, as compared to $36,107 during the three months ended March 31, 2024. Included in the $20,576 are net loss of $8,462, plus non-cash depreciation, amortization of intangibles and other assets in the amount of $4,749, provision for bad debts in the amount of $1,056 and other in the amount of $126. Also included are stock-based compensation of $559, a net change in deferred income taxes of $1,348, and net change in foreign currency adjustment of $99. These together provided net cash outflows of $633, as compared to an inflows of $7,881 for the same period of 2024.

During the first three months of 2025, the Company increased net working capital by $18,240, as compared to an increase of $49,996 during the same period of the prior year. Included in this change: inventories increased by $4,721, as compared to an increase of $9,353 for the first quarter of 2024. Customer prepayments decreased by $28,215, as compared to a decrease of $37,037 in the same period of 2024, driven by customer decisions regarding demand, payment timing and our cash incentive programs. Our accounts payable balances increased by $22,966, as compared to an increase of $2,366 in the same period of 2024. Accounts receivable decreased by $6,892, as compared to an increase of $5,579 in the same period of 2024. Prepaid expenses and other assets increased by $856, as compared to an increase of $1,466 in the same period of 2024. Income tax receivable/payable, net increased by $1,885, as compared to a decrease of $1,014 in the prior year. Accrued program costs increased by $837, as compared to an increase of $6,399 in the prior year, as a result of both lower sales and the mix of those sales including products with higher program elements incorporated in pricing. Finally, other payables and accrued expenses decreased by $14,961, as compared to a decrease of $332 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 2025, 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 2025, the Company made accruals for programs in the amount of $20,091 and made payments in the amount of $19,221. During the first quarter of the prior year, the Company made accruals in the amount of $25,266 and made payments in the amount of $18,999.

Cash used for investing activities was $446 for the three months ended March 31, 2025, as compared to $3,567 for the three months ended March 31, 2024. The Company spent $431 on fixed assets acquisitions primarily focused on continuing to invest in manufacturing infrastructure.

During the three months ended March 31, 2025, financing activities provided $19,801, as compared to $41,382 during the same period of the prior year. Net borrowings under the Credit Agreement amounted to $20,167 in the first quarter of 2025, as compared to $41,800 in the same period of the prior year. Lastly, in exchange for shares of common stock returned by employees, we paid $11 and $14 for tax withholding on stock-based compensation awards during the three months ended March 31, 2025 and 2024, respectively.

The Company has long-term debt as of March 31, 2025 and December 31, 2024 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, 2025, 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 $53,717. This compares to an available borrowing capacity of $28,623 as of December 31, 2024.

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 1 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, 2024, 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, 2024.

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, 2024.

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.

Evaluation of Disclosure Controls and Procedures

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. The Company’s management, under the supervision of the Company’s Chief Executive Officer and Chief Financial Officer, completed their evaluation, as of March 31, 2025, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures . Based on this evaluation, and as a result of the material weaknesses in our internal control over financial reporting further described in Management’s Report on Internal Control Over Financial Reporting in Item 9A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2024, our principal executive officer and principal financial officer, concluded that as of March 31, 2025, our disclosure controls and procedures were not effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer as appropriate to allow timely decisions regarding required disclosure. Specifically, in Item 9A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2024, management identified following material weaknesses associated with the control environment, control activities and risk assessment components of the COSO framework:

• Control Environment – within the Company’s Australian component (AgNova), the Company identified that the individuals performing control activities within the component were not sufficiently trained or adequately supervised, and lacked appropriate reporting lines and accountability in accordance with principles of the COSO framework.
• Control Activities – due to insufficient resources to facilitate a timely financial close process, the operation of internal controls over financial reporting specific to the controls being performed timely in accordance with principles of the COSO framework were not operating effectively. Further, within AgNova, the Company did not have sufficient segregation of duties in place in accordance with a principle of the COSO framework.
• Risk Assessment – the Company identified that it did not design and implement an effective risk assessment based on the criteria established in the COSO framework. Specifically, the Company did not identify and assess changes to the business that could significantly impact the system of internal control in accordance with principles of the COSO framework.

In addition, management identified a deficiency that constituted a material weakness related to the review of customer agreements related to the accrued Program costs and customer prepayments balances. The Company did not perform a sufficiently precise review in order to appropriately consider all agreed-upon terms with customers in its determination of the accrued Program costs and customer prepayments balances.

In order to remediate these matters, we have identified the following remediation measures:

• Enhancing the oversight, reporting lines and authorities, and accountability processes within our finance organization and including improved training, additional personnel with appropriate skillsets, dedicated personnel regarding risk assessment, more comprehensive supervisory processes and completing the implementation of, and standardized processes relating to, the global ERP system.
• Implementing additional resources to mitigate risks and facilitate a timely financial close process including enhancing policies and procedures including implementing changes to the segregation of duties within AgNova.
• Enhancing our risk assessment process to ensure it is sufficiently robust to identify and analyze significant events affecting our business, including the impact of these events on the timely completion of our financial statements and SEC filings.
• Enhancing our review process of agreed upon terms related to the accrued Program costs and customer prepayments balances to ensure it is sufficiently precise to identify changes that may impact the balances.

We will consider the material weakness to be fully remediated once the applicable controls operate for a sufficient period of time and our management has concluded, through testing, that these controls are operating effectively. We have established the process of identifying these transactions and adding additional internal reviews to account for them under current accounting standards. These processes will be tested in the coming months.

We do not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.

Changes in Internal Control over Financial Reporting

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, 2024, filed on May 29, 2025. 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.

Reduced financial performance may adversely affect the Company’s ability to maintain a capital structure that is sufficient to meet working capital needs. Because the Company’s credit agreement expires in July 2026, the Company will need to either extend or replace the agreement approximately 12 months before such expiration. In light of poor financial performance over the past several quarters, there is no guarantee that the Company will be able to maintain capital sufficient to meet its working capital needs or that such capital will be available on terms that are as favorable as those under the current agreement. Failure to obtain capital in a timely fashion or in inadequate amounts or on unfavorable terms could have an adverse effect upon the Company’s financial performance and/or could impair the Company’s ability to carry on business as a going concern.

The MAHA Commission and MAHA movement may adversely affect demand for the Company’s crop inputs. By virtue of Executive Order, the Administration has established a “Make America Healthy Again” or MAHA Commission consisting of Administrators of the Department of Health and Human Services, the Department of Agriculture and the Environmental Protection Agency. Shortly after the commission’s establishment, the Center for Biological Diversity filed a petition with the commission and its constituent agencies seeking the cancellation of certain pesticides in the name of purported advancing children’s health. At the same time, the ideology at the foundation of the commission has engendered a MAHA movement which has influenced several states to introduce legislation that would call for labeling of foods that were grown with various pesticides. While the MAHA Commission has yet to take a formal position on pesticide use, and state legislatures are still considering food-labeling legislation, there is no guarantee that the commission will support the use of crop inputs or that state legislatures will rein in further requirements on food labeling. In short, it is possible that both federal agencies and state legislatures could impose significant limitations on the use of pesticides in food production in a manner that could adversely affect the Company’s product sales and overall financial performance.