UNITED STATESSECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
AMERICAN VANGUARD CORPORATION
(949) 260-1200
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGSDURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Stock, $.10 Par Value — 3,819,212 shares as of May 10, 2001
TABLE OF CONTENTS
INDEX
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
AMERICAN VANGUARD CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
2
AMERICAN VANGUARD CORPORATION AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS
ASSETS (note 7)
See notes to consolidated financial statements.
3
LIABILITIES AND STOCKHOLDERS’ EQUITY
Note: The balance sheet at December 31, 2001 has been derived from the audited financial statements at that date.
4
AMERICAN VANGUARD CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS
For The Three Months Ended March 31, 2002 and 2001
(Continued)
5
AMERICAN VANGUARD CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
Supplemental schedule of non-cash investing and financial activities:
On March 18, 2002, the Company announced that its Board of Directors declared a cash dividend of $.14 per share as well as a four-for-three stock split. The cash dividend and newly issued shares were distributed on April 12, 2002 to shareholders of record at the close of business on March 29, 2002. The cash dividend was paid on the number of shares outstanding prior to the stock split. Shareholders entitled to fractional shares resulting from the stock dividend received cash in lieu of such fractional share based on the closing price of the Company’s stock on March 29, 2002. Cash dividends paid April 12, 2002 totaled $403,500.
On March 20, 2001, the Company announced that the Board of Directors declared a cash dividend of $.11 per share as well as a 10% stock dividend. Both dividends were distributed on April 13, 2001. The cash dividends totaled $287,400.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7
Notes to Consolidated Financial Statements, Continued
8
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. It is not possible to foresee or identify all such factors. The Company makes no commitment to update any forward-looking statement or to disclose any facts, events, or circumstances after the date hereof that may affect the accuracy of any forward-looking statement. For more detailed information, refer to Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operation, Risk Factors, in the Company’s Annual Report on Form 10-K for the year ended December 31, 2001.
RESULTS OF OPERATIONS
Quarter Ended March 31:
The Company reported net income of $799,300 or $.20 per diluted share in the first quarter ended March 31, 2002 as compared to $597,700 or $.15 per diluted share for the same period in 2001.
Net sales increased by 30% or $4,445,700 to $19,309,000 for the quarter ended March 31, 2002 from $14,863,300 for the same period in 2001. The increase in sales was a result of higher sales of the Company’s soil and public health insecticides and there was a stronger demand for the Company’s soil fumigant product line.
The gross profit margin for the quarter ended March 31, 2002 increased to 41% from 39% for the same period in 2001, due primarily to a change in product mix.
Operating expenses, which are net of other income, increased to $6,521,000 for the quarter ended March 31, 2002 as compared to
9
$5,011,300 for the same period in 2001. The differences in operating expenses by specific departmental costs are as follows:
Interest costs were $203,800 during the quarter ended March 31, 2002 as compared to $469,500 for same period in 2001. The Company’s average overall debt for the quarter ended March 31, 2002 was $18,604,000 as compared to $25,284,000 for the same period in 2001. Lower overall debt levels coupled with lower effective interest rates resulted in the decline in interest costs.
In 1986, the Company constructed an incinerator to destroy a waste gas that had been previously discharged to the atmosphere pursuant to an air permit. By reducing this emission, the Company was entitled to transfer a portion of its emission credits to others. The Company recognized in the three months ended March 31, 2001 a net gain before taxes of $465,500 as a result of the sale of a portion of its credits.
The Company settled negotiations with an insurance carrier related to the recovery of certain costs pertaining to the completed remediation work of a railroad siding which resulted in a net gain before taxes of $208,300 for the quarter ended March 31, 2001.
10
Weather patterns can have an impact on the Company’s operations. Weather conditions influence pest population by impacting gestation cycles for particular pests and the effectiveness of some of the Company’s products, among other factors. The end user of some of the Company’s products may, because of weather patterns, delay or intermittently disrupt field work during the planting season which may result in a reduction of the use of some of the Company’s products.
Because of elements inherent to the Company’s business, such as differing and unpredictable weather patterns, crop growing cycles, changes in product mix of sales, ordering patterns that may vary in timing, and promotional/early order programs, measuring the Company’s performance on a quarterly basis, (gross profit margins on a quarterly basis may vary significantly) even when such comparisons are favorable, is not as meaningful an indicator as full-year comparisons. The primary reason is that the use cycles do not necessarily coincide with financial reporting cycles. Because of the Company’s cost structure, the combination of variable revenue streams, and changing product mixes, results in varying quarterly levels of profitability.
LIQUIDITY AND CAPITAL RESOURCES
The Company used $5,824,000 in operating activities for the three months ended March 31, 2002. Net income of $799,300, non-cash depreciation and amortization of $507,100 and an decrease in inventories of $1,030,900 provided $2,337,300 of cash for operations. This was more that offset by increases in receivables and prepaid expenses of $3,898,700 and $58,900, respectively; a decrease of $4,203,700 in payables and accrued expenses.
The Company used $2,900,200 in investing activities during the quarter ended March 31, 2002. It invested $2,560,400 in capital expenditures primarily related to the re-commissioning of its facility located in Axis, Alabama, while other noncurrent assets increased by $339,800.
Financing activities provided $8,682,700 for the first three months of 2002. The Company’s net borrowings under its fully-secured revolving line of credit increased by $8,800,000. The Company made payments of its long-term debt of $98,500 and purchased 1,333 shares of treasury stock for $18,800.
In May 2001, the Company announced that Amvac Chemical Corporation, a wholly-owned subsidiary of the Company, completed the acquisition of a manufacturing facility from E.I. Du Pont de Nemours and Company (“DuPont”). The facility, termed Amvac Axis, Alabama (“AAA”) is one of three such units located on DuPont’s five hundred and ten acre complex in Axis, Alabama. The acquisition of AAA consisted of a long-term ground lease of twenty-five acres and the purchase of all improvements thereon. AAA is a multipurpose plant designed primarily to manufacture pyrethroids and organophosphates, including Fortress®, a corn
11
soil insecticide that the Company purchased from DuPont in 2000. The acquisition of AAA significantly increased the Company’s capacity while also providing flexibility and geographic diversity. Management believes, as the Company looks to acquire additional product lines, AAA will allow the Company to produce compounds that could not be manufactured at the Company’s Los Angeles (Commerce, California) facility and will further complement the Company’s toll manufacturing capabilities. The Company began the commissioning phase of AAA during the third quarter of 2001 and it is anticipated that this phase will be completed sometime during the third quarter of 2002. The Company intends to focus its efforts, in addition to acquiring new product lines and expanding the use of its current products, on discussions with companies that in this time of consolidation in the Company’s industry, may be interested in utilizing the Company’s toll manufacturing capabilities of AAA.
Under a fully-secured long-term line of credit agreement with its bank, as amended, the Company may borrow up to $24,000,000. The Company received a commitment from its bank in March 2002, in which the bank has agreed to provide $25,000,000 of a $45,000,000 maximum credit facility. The bank will act as sole administrative agent arranger and syndication agent and a syndicate of financial institutions arranged by the bank will be formed. The $45,000,000 credit facility will consist of a senior secured revolving line of credit of $35,000,000 and a $10,000,000 senior secured term loan. The senior secured revolving line of credit will have a maturity of three years from the closing date. The Company expects to close the transaction in May 2002.
Management continues to believe, to finance its planned manufacturing capacity (AAA), to continue to improve its working capital position, and maintain flexibility in financing interim needs, it is prudent to explore alternate sources of financing.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board finalized FASB Statement No. 141, Business Combinations (SFAS 141), and No. 142, Goodwill and Other Intangible Assets (SFAS 142). SFAS 141 requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interests method of accounting for business combinations initiated after June 30, 2001. SFAS 141 also requires that the Company recognize acquired intangible assets apart from goodwill if the acquired intangible assets meet certain criteria. SFAS 141 applies to all business combinations initiated after June 30, 2001 and for purchase business combinations completed on or after July 1, 2001.
SFAS 142 requires, among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually. In addition, SFAS 142 requires that the Company identify reporting units for the purposes of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible assets, and cease amortization of intangible assets with an indefinite useful life. SFAS 142 is required to be applied in fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized at that date. SFAS 142 requires the Company to complete a transitional goodwill impairment test six months from the date of adoption.
The Company’s previous business combinations were accounted for using the purchase method. The net carrying amount of goodwill and other intangible assets was $10,049,500 and $9,830,500 as of December 31, 2001 and March 31, 2002, respectively. SFAS 141 and SFAS 142 were adopted on the effective dates, and did not result in any material effects on the Company’s financial statements.
SFAS 143, Accounting for Asset Retirement Obligations, was issued in June 2001 and is effective for fiscal years beginning after June 15, 2002. SFAS 143 requires that any legal obligation related to the retirement of long-lived assets be quantified and recorded as a liability with the associated asset retirement cost capitalized on the balance sheet in the period it is incurred when a reasonable estimate of the fair value of the liability can be made. SFAS 143 will be adopted on the effective date, and adoption is not expected to result in any material effects on the Company’s financial statements.
SFAS 144, Accounting for the Impairment of Disposal of Long-lived Assets, was issued in August 2001 and is effective for fiscal years beginning after December 15, 2001. SFAS 144 provides a single, comprehensive accounting model for impairment and disposal of long-lived assets and discontinued operations. SFAS 144 was adopted on the effective date, and did not result in any material effects on the Company’s financial statements.
CRITICAL ACCOUNTING POLICIES
General
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses at the date that the financial statements are prepared. Actual results could differ from those estimates.
Revenue Recognition
Sales are recognized upon shipment of products or transfer of title to the customer.
Fair Value of Financial Instruments
The carrying values of cash, receivables and accounts payable approximate their fair values because of the short maturity of these instruments.
The fair value of the Company’s long-term debt and note payable to bank is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. Such fair value approximates the respective carrying values of the Company’s long-term debt and note payable to bank.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method.
Depreciation
Depreciation of property, plant and equipment is calculated on the straight-line method over the estimated useful lives of the assets.
Income Taxes
Income taxes have been provided using the asset and liability method in accordance with Financial Accounting Standard No. 109, “Accounting for Income Taxes”.
The asset and liability method requires the recognition of deferred tax assets and liabilities for future tax consequences of temporary differences between the financial statements bases and tax bases of assets and liabilities at the date of the financial statements using the provisions of the tax laws then in effect.
There are no material changes from the disclosures in the Company’s Form 10-K filed with the U.S. Securities and Exchange Commission for the year ended December 31, 2001.
12
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.
Item 1. Legal Proceedings
The Company is involved in legal proceedings arising in the ordinary course of its business. The results of litigation cannot be predicted with certainty. The Company has and will continue to expend resources and incur expenses in connection with these proceedings. There can be no assurance that the Company will be successful in these proceedings. While the Company continually evaluates insurance levels for product liability, property damage and other potential areas of risk, and adverse determination in one or more of these proceedings could subject the Company to significant liabilities, which could have a material adverse effect on its financial condition and operating results.
Item 6. Exhibits and Reports on Form 8-K
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
14