1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO_________ COMMISSION FILE NUMBER 0-6354 AMERICAN VANGUARD CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 95-2588080 (State or other jurisdiction of (I.R.S. Employer Incorporation or organization) Identification Number) 4695 MacArthur Court, Newport Beach, California 92660 - ----------------------------------------------- ----- (Address of principal executive offices) (Zip Code) (949) 260-1200 -------------- (Registrant's telephone number, including area code) ................................................................................ (Former name, former address and former fiscal year, if changed since last report) 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 PROCEEDINGS DURING 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 X 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 -- 2,507,582 shares as of July 31, 1998.
2 AMERICAN VANGUARD CORPORATION INDEX ----- PART I - FINANCIAL INFORMATION Page Number ----------- Item 1. Financial Statements. Consolidated Statements of Operations for the three and six months ended June 30, 1998 and 1997 1 Consolidated Balance Sheets as of June 30, 1998 and December 31, 1997 2 Consolidated Statements of Cash Flows for the six months ended June 30, 1998 and 1997 4 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 8 PART II - OTHER INFORMATION 13 SIGNATURE PAGE 14
3 PART I. FINANCIAL INFORMATION - ----------------------------- ITEM 1. FINANCIAL STATEMENTS AMERICAN VANGUARD CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) <TABLE> <CAPTION> For the three months For the six months ended June 30 ended June 30 --------------------------- -------------------------- 1998 1997 1998 1997 ---- ---- ---- ---- <S> <C> <C> <C> <C> Net sales $14,060,500 $15,962,700 $24,853,500 $26,546,300 Cost of sales 8,524,700 8,625,600 15,159,000 15,057,400 ----------- ----------- ----------- ----------- Gross profit 5,535,800 7,337,100 9,694,500 11,488,900 Operating expenses 5,360,800 5,757,400 9,494,300 9,638,400 ----------- ----------- ----------- ----------- Operating income 175,000 1,579,700 200,200 1,850,500 Interest expense (472,800) (430,700) (926,800) (786,400) Interest income 1,100 2,200 2,400 6,900 ----------- ----------- ----------- ----------- Income (loss) before income taxes (296,700) 1,151,200 (724,200) 1,071,000 Income taxes benefit (expense) 118,700 (463,100) 289,700 (439,000) ----------- ----------- ----------- ----------- Net income (loss) $ (178,000) $ 688,100 $ (434,500) $ 632,000 =========== =========== =========== =========== Per share information: Net income (loss) $ (.07) $ .27 $ (.17) $ .25 =========== =========== =========== =========== Weighted average number of shares 2,507,582 2,507,582 2,507,582 2,507,582 =========== =========== =========== =========== </TABLE> See notes to consolidated financial statements. 1
4 AMERICAN VANGUARD CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> June 30, Dec. 31, ASSETS (NOTE 6) 1998 1997 ----------- ----------- (Unaudited) (Note) <S> <C> <C> Current assets: Cash $ 635,300 $ 746,600 Receivables: Trade 18,403,400 21,244,600 Other 601,400 441,400 ----------- ----------- 19,004,800 21,686,000 ----------- ----------- Inventories (note 2) 16,613,400 12,937,900 Prepaid expenses 886,900 1,035,600 ----------- ----------- Total current assets 37,140,400 36,406,100 Property, plant and equipment, net (note 3) 12,474,400 13,439,000 Land held for development 210,800 210,800 Cost in excess of assets acquired, net 3,169,700 3,290,500 Deferred charges, net 1,541,300 1,571,200 Other assets 1,148,700 288,700 ----------- ----------- $55,685,300 $55,206,300 =========== =========== </TABLE> (Continued) See notes to consolidated financial statements. 2
5 AMERICAN VANGUARD CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> June 30, Dec. 31, LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997 ----------- ----------- (Unaudited) (Note) <S> <C> <C> Current liabilities: Current installments of long-term debt $ 1,138,500 $ 1,059,500 Accounts payable 3,844,000 3,785,200 Accrued expenses 2,328,000 3,561,100 Accrued royalty obligation current portion 1,600,000 1,600,000 Income taxes payable -- 554,100 ----------- ----------- Total current liabilities 8,910,500 10,559,900 Note payable to bank 18,600,000 14,100,000 Long-term debt, excluding current installments 3,412,200 3,980,400 Accrued royalty obligation, excluding current portion 1,466,300 2,659,700 Deferred income taxes 2,646,500 2,646,500 ----------- ----------- Total liabilities 35,035,500 33,946,500 ----------- ----------- Stockholders' Equity: (note 4) Preferred stock, $.10 par value per share; authorized 400,000 shares; none issued -- -- Common stock, $.10 par value per share; authorized 10,000,000 shares; 2,564,182 shares issued 256,400 256,400 Additional paid-in capital 3,879,000 3,879,000 Retained earnings 16,873,300 17,483,300 ----------- ----------- 21,008,700 21,618,700 Treasury stock at cost (56,600 shares) 358,900 358,900 ----------- ----------- Total stockholders' equity 20,649,800 21,259,800 ----------- ----------- $55,685,300 $55,206,300 =========== =========== </TABLE> Note: The balance sheet at December 31, 1997 has been derived from the audited financial statements at that date (note 1). See notes to consolidated financial statements. 3
6 AMERICAN VANGUARD CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997 (UNAUDITED) <TABLE> <CAPTION> Increase (decrease) in cash 1998 1997 ---- ---- <S> <C> <C> Cash flows from operating activities: Net income (loss) $ (434,500) $ 632,000 Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 1,561,000 1,353,800 Changes in assets and liabilities associated with operations: Decrease (increase) in receivables 2,681,200 (459,800) Increase in inventories (3,675,500) (6,072,300) Decrease (increase) in prepaid expenses 148,700 (368,600) Increase in accounts payable 58,800 2,815,700 Decrease in other payables and accrued expenses (2,980,600) (2,756,700) ----------- ----------- Net cash used in operating activities (2,640,900) (4,855,900) ----------- ----------- Cash flows from investing activities: Capital expenditures (381,200) (856,700) Increase in deferred charges (120,000) (1,600) Net increase in other noncurrent assets, primarily deposits (804,500) (8,000) ----------- ----------- Net cash used in investing activities (1,305,700) (866,300) ----------- ----------- </TABLE> (Continued) 4
7 AMERICAN VANGUARD CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997 (UNAUDITED) <TABLE> <CAPTION> Increase (decrease) in cash 1998 1997 ---- ---- <S> <C> <C> Cash flows from financing activities: Net borrowings under line of credit agreement $4,500,000 $7,464,000 Increase in long-term debt -- 47,300 Principal payments on long-term debt (489,200) (621,000) Payment of cash dividends (175,500) (150,400) ---------- ---------- Net cash provided by financing activities 3,835,300 6,739,900 ---------- ---------- Net increase (decrease) in cash (111,300) 1,017,700 Cash at beginning of year 746,600 632,400 ---------- ---------- Cash as of June 30 $ 635,300 $1,650,100 ========== ========== </TABLE> See notes to consolidated financial statements. 5
8 AMERICAN VANGUARD CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation, have been included. Operating results for the three and six-month periods ended June 30, 1998 are not necessarily indicative of the results that may be expected for the year ending December 31, 1998. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1997. 2. Inventories - The components of inventories consist of the following: <TABLE> <CAPTION> June 30, 1998 December 31, 1997 ------------- ----------------- <S> <C> <C> Finished products $12,687,900 $ 9,847,700 Raw materials 3,925,500 3,090,200 ----------- ----------- $16,613,400 $12,937,900 =========== =========== </TABLE> 3. Property, plant and equipment at June 30, 1998 and December 31, 1997, consists of the following: <TABLE> <CAPTION> June 30, December 31, 1998 1997 ---- ---- <S> <C> <C> Land $ 2,382,600 $ 2,382,600 Buildings and improvements 4,685,500 4,573,600 Machinery and equipment 23,317,200 22,864,000 Office furniture and fixtures 1,142,700 1,128,800 Automotive equipment 105,000 105,000 Construction in progress 651,300 926,200 ----------- ----------- 32,284,300 31,980,200 Less accumulated depreciation 19,809,900 18,541,200 ----------- ----------- $12,474,400 $13,439,000 =========== =========== </TABLE> 6
9 AMERICAN VANGUARD CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 4. On March 4, 1998, the Company announced that the Board of Directors declared a cash dividend of $.07 per share. The dividend was paid on March 25, 1998 to stockholders of record as of March 13, 1998. 5. Earnings Per Share ("EPS") - Basic EPS is computed as net income divided by the weighted average number of shares of common stock outstanding during the period. Diluted EPS reflects potential dilution that could occur if securities or other contracts, which, for the Company, consists of options to purchase shares of the Company's common stock, are exercised. These options were anti-dilutive for the periods ended June 30, 1998 and 1997, and as such, dilutive EPS amounts are the same as basic EPS for the periods presented. 6. Substantially all of the Company's assets not otherwise specifically pledged as collateral on existing loans and capital leases, are pledged as collateral under the Company's credit agreement with a bank. As referenced in note 1, for further information, refer to the consolidated financial statements and footnotes thereto (specifically note 3) included in the Company's Annual Report on Form 10-K for the year ended December 31, 1997. 7. Reclassification - Certain items have been reclassified in the prior period consolidated financial statements to conform with the June 30, 1998, presentation. 7
10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS - --------------------- QUARTER ENDED JUNE 30: - ---------------------- Net sales decreased $1,902,200 or 12% to $14,060,500 for the quarter ended June 30, 1998 from $15,962,700 for the same period in 1997. The cumulative impact of lower cotton acreage, adverse weather patterns and lower pest pressures, which affected the sales of certain of the Company's insecticides, were the primary reasons for the decline in sales. Gross profits declined by $1,801,300 to $5,535,800 for the three months ended June 30, 1998 from $7,337,100 for the same period in 1997. The gross profit percentage declined from 46% for the quarter ended June 30, 1997 to 39% for the quarter ended June 30, 1998. The decline is partially due to the lower sales volume which has a proportionately greater impact on gross profit as costs of sales do not necessarily decrease at the same level as a result of relatively constant fixed overhead levels. The change in the gross profit was also negatively impacted by competitive pricing pressures for certain of the Company's soil fumigant products, and by changes in the sales mix of the Company's products. Operating expenses, which are net of other income, declined by $396,600 to $5,360,800 for the quarter ended June 30, 1998 as compared to $5,757,400 for the same period in 1997. The differences in operating expenses by specific departmental costs are as follows: o Selling and regulatory expenses declined by $272,700 to $1,777,000 in the second quarter of 1998 as compared to $2,049,700 during the same period in 1997. The decline was primarily due to reduced royalties on sales of certain of the Company's insecticides coupled with lower variable selling expenses directly related to lower sales levels. o General and administrative expenses remained virtually unchanged in the second quarter of 1998 when compared to the same period in 1997 reflecting a decline of $30,000, to $1,793,000 in the second quarter of 1998 as compared to $1,823,000 in the second quarter of 1997. o Research and development expenses declined by $176,700 to $733,700 in the second quarter of 1998 as compared to $910,400 during the same quarter in 1997. The decline was primarily due to a decrease in costs incurred to generate 8
11 scientific data related to the continuing registration of certain of the Company's insecticide product lines. o Shipping and receiving costs increased by $82,800 to $1,057,100 in the second quarter of 1998 from $974,300 in the second quarter of 1997 primarily due to the timing of shipments of the Company's soil fumigant products to customers and storage sites. Interest costs were $472,800 during the three months ended June 30, 1998 as compared to $430,700 for the same period in 1997. The average level of borrowing under the Company's line of credit was approximately $16,934,100 for the second quarter of 1998 as compared to $14,897,000 for the same period in 1997. The average level of other long-term debt was $4,693,500 for the second quarter of 1998 as compared to $5,118,000 for the same period in 1997. On a combined basis, the Company's average debt for the second quarter of 1998 was $21,627,500 as compared to $20,015,000 for the second quarter of 1997. The higher average debt levels account for the increase in interest costs. 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. Because most of the Company's cost structure is fixed, at least in the short-term, the combination of variable revenue streams, changing product mixes, and a fixed cost structure results in varying quarterly levels of profitability. SIX MONTHS ENDED JUNE 30: - ------------------------- Net sales declined by $1,692,800 to $24,853,500 for the six months ended June 30, 1998 from $26,546,300 for the same period in 1997. While there was a slight increase in sales in the first quarter of 1998, the decrease in second quarter sales, for the reasons described above, primarily accounted for the overall decline in sales for the six months ended June 30, 1998. Gross profits decreased $1,794,400 to $9,694,500 for the first six months of 1998 from $11,488,900 for the same period in 1997. The gross profit percentage declined to 39% for the first six months of 1998 as compared to 43% for the same period in 1997. The decline in the gross 9
12 profit margin occurred for the reasons described above for the quarter ended June 30, 1998. Operating expenses declined by $144,100 to $9,494,300 for the first six months of 1998 from $9,638,400 for the same period in 1997. The differences in operating expenses by specific departmental costs are as follows: o Selling and regulatory expenses declined by $142,500 to $3,025,600 during the six months ended June 30, 1998 from $3,168,100 during the same period in 1997. The primary reasons for the decrease were reduced variable selling costs due to the decline in sales partially offset by a net increase in payroll and payroll related costs for the six months ended June 30, 1998 as compared to the same period in 1997. o General and administrative expenses increased $232,500 to $3,044,500 in the first six months of 1998 from $2,812,000 in the first six months of 1997. The increase was primarily attributable to an increase in legal fees (some of which related to expenses incurred in actions in which the Company is the plaintiff) and payroll and payroll related costs. o Research and development expenses declined by $282,700 to $1,524,200 during the six months ended June 30, 1998 as compared to $1,806,900 for the same period in 1997. The decrease was primarily attributable to a decrease in costs incurred to generate scientific data related to the continuing registration of certain of the Company's insecticide product lines. o Shipping and receiving costs increased by $48,600 to $1,900,000 in the six months ended June 30, 1998 from $1,851,400 during the same period in 1997. The increase reflects a slight increase in distribution of Company's soil fumigant products, to storage sites and distribution centers. Interest costs were $926,800 during the six months ended June 30, 1998 as compared to $786,400 for the same period in 1997. The average level of borrowing under the Company's line of credit was $16,709,400 for the first half of 1998 as compared to $13,054,100 for the same period in 1997. The average level of other long-term debt was $4,795,300 for the six months ended June 30, 1998 as compared to $5,225,200 for the same period in 1997. On a combined basis, the Company's average debt for the six months ended June 30, 1998 was $21,504,700 as compared to $18,279,300 for the first six months of 1997. The higher average debt levels account for the significant increase in interest costs in 1998. 10
13 LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- Working capital was $28,229,900 at June 30, 1998 reflecting an improvement of $2,383,700 over working capital of $25,846,200 at December 31, 1997. The Company used cash in its operating activities of $2,640,900 in the first six months of 1998 primarily to build inventory and reduce accrued expenses. Inventories increased by $3,675,500 during the first half of the year in anticipation of product demand in the summer and fall months of 1998. Accrued expenses declined by $2,980,600 as a result of payments of income taxes, product rebates and royalties and other sales related expenses. The use of funds was partially offset by non-cash depreciation and amortization of $1,561,000 and reductions in receivable balances of $2,681,200. The Company also invested $381,200 in capital improvements and $924,500 in other non-current assets during the six months ended June 30, 1998. Deposits related to the pending acquisition of the rights, title and interest in the U.S. Dibrom(R) insecticide business and the acquisition of a new computer system, accounted for the most significant portion of the increase in other non-current assets. The Company procured cash by increasing borrowings under its long-term line of credit by $4,500,000 during the six months ended June 30, 1998. The Company made principal payments on its long-term debt in the amount of $489,200 and paid cash dividends of $175,500 during the six months ended June 30, 1998. The Company's fully-secured line of credit was increased to $24,000,000 from $20,500,000 in May 1998 and the expiration date was extended to July 31, 2000 from July 31, 1999. As of June 30, 1998, the Company had $5,400,000 in availability under its fully-secured long-term line of credit. Management believes current financial resources (working capital and short-term borrowing arrangements) and anticipated funds from operations will be adequate to meet financial needs during the remainder of 1998. Management also believes, to continue to improve its working capital position and maintain flexibility in financing interim needs, it is prudent to explore alternate sources of financing. This Report may contain forward-looking statements and may include 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 (if any) and related assumptions contained in the entire Report. Such factors include, but are not limited to: product demand and market acceptance 11
14 risks; the effect of economic conditions; weather conditions; 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 and economic conditions; and changes in government laws and regulations. 12
15 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 4. Submission of Matters to a Vote of Security Holders (a) The Annual Meeting of Stockholders was held on June 18, 1998. (b) Elections of directors: Proxies for the meeting were solicited pursuant to Regulation 14 under the Act. There was no solicitation in opposition to management's nominees as listed on the proxy statement, and all such nominees were elected. Therefore, the directors elected are not listed herein. (c) Not applicable. (d) Not applicable. ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit 27 - Financial Data Schedule (b) Reports on Form 8-K filed during the three months ended June 30, 1998: Date of the Report: July 2, 1998 Item Reported: 5. Other Events. Description: Agreement signed between Amvac Chemical Corporation ("AMVAC"), a wholly-owned subsidiary of American Vanguard Corporation, and Valent USA Corporation ("VALENT"), a wholly-owned subsidiary of Sumitomo Chemical Company, Limited. AMVAC to acquire the rights, title and interest in the U.S. Dibrom(R) insecticide business of VALENT. The acquisition is subject to certain due diligence provisions in the agreement. AMVAC will acquire certain assets and take over the marketing of the products on November 2, 1998. 13
16 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. AMERICAN VANGUARD CORPORATION Dated: August 13, 1998 By: /s/ Eric G. Wintemute ----------------------------- Eric G. Wintemute President, Chief Executive Officer and Director Dated: August 13, 1998 By: /s/ J. A. Barry ----------------------------- J. A. Barry Senior Vice President, Chief Financial Officer, Treasurer and Director 14
17 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION ------ ----------- 27 Financial Data Schedule