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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED June 30, 2023
☐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 001-13795
AMERICAN VANGUARD CORPORATION
Delaware
95-2588080
(State or other jurisdiction of
Incorporation or organization)
(I.R.S. Employer
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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading
Symbol(s)
Name of each exchange on which registered
Common Stock, $.10 par value
AVD
New York Stock Exchange
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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
☐
Accelerated Filer
☒
Non-Accelerated Filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
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 — 29,297,022 shares as of August 1, 2023.
INDEX
Page Number
PART I—FINANCIAL INFORMATION
Item 1.
Financial Statements (unaudited)
Condensed Consolidated Statements of Operations
3
Condensed Consolidated Statements of Comprehensive Income
4
Condensed Consolidated Balance Sheets
5
Condensed Consolidated Statements of Stockholders’ Equity
6
Condensed Consolidated Statements of Cash Flows
8
Notes to Condensed Consolidated Financial Statements
9
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
20
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
28
Item 4.
Controls and Procedures
PART II—OTHER INFORMATION
29
Legal Proceedings
Item 1A.
Risks Factors
Purchases of Equity Securities by the Issuer
30
Item 6.
Exhibits
31
SIGNATURES
32
2
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
AMERICAN VANGUARD CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
For the Three Months Ended June 30,
For the Six Months Ended June 30,
2023
2022
Net sales
$
132,790
148,203
257,674
297,797
Cost of sales
(89,881
)
(98,872
(176,230
(197,070
Gross profit
42,909
49,331
81,444
100,727
Operating expenses
(39,155
(38,518
(74,423
(75,165
Operating income
3,754
10,813
7,021
25,562
Change in fair value of equity investment
(55
(486
(77
(403
Interest expense, net
(3,211
(772
(4,898
(1,170
Income before provision for income taxes
488
9,555
2,046
23,989
Income tax expense
(1,541
(2,725
(1,181
(7,224
Net income (loss)
(1,053
6,830
865
16,765
Net income (loss) per common share—basic
(.04
.23
.03
.57
Net income (loss) per common share—assuming dilution
.55
Weighted average shares outstanding—basic
28,428
29,602
28,397
29,639
Weighted average shares outstanding—assuming dilution
30,225
28,985
30,289
See notes to the Condensed Consolidated Financial Statements.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Other comprehensive income (loss):
Foreign currency translation adjustment, net of tax effects
3,505
(6,064
6,051
1,016
Comprehensive income
2,452
766
6,916
17,781
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
ASSETS
June 30, 2023
December 31, 2022
Current assets:
Cash and cash equivalents
14,632
20,328
Receivables:
Trade, net of allowance for doubtful accounts of $6,135 and $5,136, respectively
151,479
156,492
Other
11,473
9,816
Total receivables, net
162,952
166,308
Inventories
237,587
184,190
Prepaid expenses
17,546
15,850
Income taxes receivable
5,436
1,891
Total current assets
438,153
388,567
Property, plant and equipment, net
73,452
70,912
Operating lease right-of-use assets
23,724
24,250
Intangible assets, net
178,624
184,664
Goodwill
48,219
47,010
Other assets
10,193
10,769
Deferred income tax assets, net
293
141
Total assets
772,658
726,313
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
78,876
69,000
Customer prepayments
27,368
110,597
Accrued program costs
80,333
60,743
Accrued expenses and other payables
13,273
20,982
Current operating lease liabilities
5,493
5,279
Total current liabilities
205,343
266,601
Long-term debt, net
160,750
51,477
Long-term operating lease liabilities
18,884
19,492
Other liabilities, net of current installments
4,923
4,167
Deferred income tax liabilities, net
13,683
14,597
Total liabilities
403,583
356,334
Commitments and contingent liabilities
Stockholders' equity:
Preferred stock, $.10 par value per share; authorized 400,000 shares; none issued
—
Common stock, $0.10 par value per share; authorized 40,000,000 shares; issued 34,643,674 shares at June 30, 2023 and 34,446,194 shares at December 31, 2022
3,464
3,444
Additional paid-in capital
106,719
105,634
Accumulated other comprehensive loss
(6,131
(12,182
Retained earnings
327,911
328,745
Less treasury stock at cost, 5,438,093 shares at June 30, 2023 and 5,029,892 shares at December 31, 2022
(62,888
(55,662
Total stockholders’ equity
369,075
369,979
Total liabilities and stockholders' equity
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For The Three and Six Months Ended June 30, 2023
Common Stock
Additional
AccumulatedOther
Treasury Stock
Shares
Amount
Paid-in Capital
ComprehensiveLoss
RetainedEarnings
Total
Balance, December 31, 2022
34,446,194
5,029,892
Stocks issued under ESPP
22,101
478
480
Cash dividends on common stock ($0.030 per share)
(851
Foreign currency translation adjustment, net
2,546
Stock-based compensation
1,474
Stock options exercised; grants, termination and vesting of restricted stock units (net of shares in lieu of taxes)
(4,466
Shares repurchased
27,835
(557
Net income
1,918
Balance, March 31, 2023
34,463,829
3,446
107,591
(9,636
329,812
5,057,727
(56,219
374,994
(848
1,067
179,845
18
(1,939
(1,921
380,366
(6,669
Net loss
Balance, June 30, 2023
34,643,674
5,438,093
For The Three and Six Months Ended June 30, 2022
AVDTotal
Balance, December 31, 2021
34,248,218
3,426
101,450
(13,784
304,385
3,361,040
(22,739
372,738
Common stock issued under ESPP
26,751
434
436
Cash dividends on common stock ($0.025 per share)
(736
7,080
1,563
(183,093
(18
(2,156
(2,174
332,404
(6,219
9,935
Balance, March 31, 2022
34,091,876
3,410
101,291
(6,704
313,584
3,693,444
(28,958
382,623
(742
1,273
351,358
35
892
927
606
(13
Balance, June 30, 2022
34,443,234
3,445
103,456
(12,768
319,672
3,694,050
(28,971
384,834
7
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation of property, plant and equipment
4,322
4,077
Amortization of intangibles assets
6,707
6,927
Amortization of other long-term assets
1,117
1,739
Provision for bad debts
902
470
Fair value adjustment to contingent consideration
635
2,541
2,836
Change in deferred income taxes
(1,015
109
Changes in liabilities for uncertain tax positions or unrecognized tax benefits
419
Change in fair value of equity investments
77
403
117
412
Net foreign currency adjustments
(382
(20
Changes in assets and liabilities associated with operations:
Decrease (increase) in net receivables
6,092
(18,645
Increase in inventories
(50,900
(27,774
Increase in prepaid expenses and other assets
(1,749
(3,652
Change in income tax receivable/payable, net
(3,510
(3,526
Increase (decrease) in net operating lease liability
132
(21
Increase in accounts payable
9,105
19,439
Decrease in customer prepayments
(83,225
(62,789
Increase in accrued program costs
19,607
35,987
Decrease in other payables and accrued expenses
(7,824
(602
Net cash used in operating activities
(96,602
(27,230
Cash flows from investing activities:
Capital expenditures
(6,498
(5,654
Proceeds from disposal of property, plant and equipment
44
27
Intangible assets
(718
(1,044
Net cash used in investing activities
(7,172
(6,671
Cash flows from financing activities:
Payments under line of credit agreement
(54,050
(56,600
Borrowings under line of credit agreement
162,500
105,000
Receipt from the issuance of common stock under ESPP
Net receipt from the exercise of stock options
765
Payment for tax withholding on stock-based compensation awards
(1,948
(2,012
Repurchase of common stock
(7,226
(6,232
Payment of cash dividends
(1,702
(1,330
Net cash provided by financing activities
98,086
40,027
Net (decrease) increase in cash and cash equivalents
(5,688
6,126
Effect of exchange rate changes on cash and cash equivalents
(8
(354
Cash and cash equivalents at beginning of period
16,285
Cash and cash equivalents at end of period
22,057
1. Summary of Significant Accounting Policies — The accompanying unaudited condensed consolidated financial statements of American Vanguard Corporation and Subsidiaries (“AVD” or “the Company”) have been prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments (consisting of consolidating adjustments, eliminations and normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023. The financial statements and related notes do not include all information and footnotes required by US GAAP for annual reports. This quarterly report should be read in conjunction with the consolidated financial statements included in the Company’s annual report on Form 10-K for the year ended December 31, 2022. Certain operating cash flow items have been reclassified in the prior period condensed consolidated financial statements to conform with the June 30, 2023 presentation.
2. Leases — The Company has operating leases for warehouses, manufacturing facilities, offices, cars, railcars and certain equipment. The lease term includes the non-cancellable period of the lease plus any additional periods covered by either an option to extend (or not terminate) that the Company is reasonably certain to exercise. The Company has leases with a lease term ranging from one year to 20 years. Finance leases are immaterial to the accompanying condensed consolidated financial statements. There were no lease transactions with related parties as of and for the three- and six-month periods presented in the table below.
The operating lease expense for the three months ended June 30, 2023 and 2022, was $1,674 and $1,619, respectively, and $3,310 and $3,223 for the six months ended June 30, 2023 and 2022, respectively. Lease expenses related to variable lease payments and short-term leases were immaterial. Additional information related to operating leases are as follows:
Three Months Ended June 30,
Six Months Ended June 30,
Cash paid for amounts included in the measurement of lease liabilities
1,544
1,559
3,187
3,233
ROU assets obtained in exchange for new liabilities
693
898
2,576
1,825
The weighted-average remaining lease term and discount rate related to the operating leases as of June 30, 2023 were as follows:
Weighted-average remaining lease term (in years)
5.48
Weighted-average discount rate
4.17
%
Future minimum lease payments under non-cancellable operating leases as of June 30, 2023 were as follows:
2023 (excluding six months ended June 30, 2023)
3,235
2024
5,880
2025
5,330
2026
2027
2,700
Thereafter
6,200
Total lease payments
27,422
Less: imputed interest
(3,045
24,377
Amounts recognized in the condensed consolidated balance sheets at June 30, 2023:
Operating lease liabilities, current
Operating lease liabilities, long-term
3. Revenue Recognition —The Company recognizes revenue from the sale of its products, which include crop and non-crop products. The Company sells its products to customers, which include distributors, retailers, and growers. In addition, the Company recognizes royalty income from licensing agreements. The Company has one reportable segment. Selective enterprise information of sales disaggregated by category and geographic region is as follows:
Net sales:
U.S. crop
56,212
63,513
118,105
151,349
U.S. non-crop
16,878
20,996
30,759
34,753
Total U.S.
73,090
84,509
148,864
186,102
International
59,700
63,694
108,810
111,695
Total net sales:
Timing of revenue recognition:
Goods and services transferred at a point in time
148,166
257,631
297,654
Goods and services transferred over time
37
43
143
Contract assets relate to royalties earned on certain functional licenses granted for the use of the Company’s intellectual property and amounted to $3,100 at June 30, 2023 and December 31, 2022. The short-term and long-term contract assets of $2,493 and $607 are included in other receivables and other assets, respectively, on the condensed consolidated balance sheets as of June 30, 2023. As of December 31, 2022, the short-term and long-term assets amounted to $2,098 and $1,002, respectively.
The Company sometimes receives payments from its customers in advance of goods and services being provided in return for early cash incentive programs. These payments are included in customer prepayments on the condensed consolidated balance sheets. Revenue recognized for the three and six months ended June 30, 2023, that was included in customer prepayments at the beginning of 2023, was $42,966 and $65,725, respectively, and $17,500 was refunded to a customer. The Company expects to recognize all its remaining customer prepayments as revenue in fiscal 2023.
4. Property, Plant and Equipment — Property, plant and equipment at June 30, 2023 and December 31, 2022 consists of the following:
Land
2,764
2,757
Buildings and improvements
21,062
20,794
Machinery and equipment
146,476
142,980
Office furniture, fixtures and equipment
11,304
13,231
Automotive equipment
1,506
1,584
Construction in progress
7,811
5,897
Total gross value
190,923
187,243
Less accumulated depreciation
(117,471
(116,331
Total net value
The Company recognized depreciation expense related to property and equipment of $2,143 and $1,974 for the three-month period ended June 30, 2023 and 2022, respectively. The Company recognized depreciation expense related to property and equipment of $4,322 and $4,077 for the six months ended June 30, 2023 and 2022, respectively.
Substantially all of the Company’s assets are pledged as collateral to its banks.
10
5. Inventories — Inventories are stated at the lower of cost or net realizable value. Cost is determined using the first-in, first-out (“FIFO”) or average cost methods. The components of inventories consist of the following:
Finished products
203,210
155,128
Raw materials
34,377
29,062
6. Segment Reporting — The Company has one reportable segment. Selective enterprise information is as follows:
For the three months ended June 30,
Change
% Change
(7,301
-11
(4,118
-20
U.S. total
(11,419
-14
(3,994
-6
(15,413
-10
Gross profit:
21,703
23,913
(2,210
-9
7,109
9,244
(2,135
-23
28,812
33,157
(4,345
-13
14,097
16,174
(2,077
Total gross profit:
(6,422
For the six months ended June 30,
(33,244
-22
(37,238
(2,885
-3
(40,123
40,585
56,186
(15,601
-28
14,298
16,730
(2,432
-15
54,883
72,916
(18,033
-25
26,561
27,811
(1,250
-4
(19,283
-19
7. Accrued Program Costs — The Company offers various discounts to customers based on the volume purchased within a defined time period, other pricing adjustments, some grower volume incentives or other key performance indicator driven payments, which are usually made at the end of a growing season, to distributors, retailers or growers. The Company describes these payments as “Programs”. Programs are a critical part of doing business in both the U.S. crop and non-crop chemicals marketplaces. These discount Programs represent variable consideration. Revenues from sales are recorded at the net sales price, which is the transaction price net of the impact of Programs and includes estimates of variable consideration. Variable consideration includes amounts expected to be paid to its customers estimated using the expected value method. Each quarter management reviews individual sale transactions with Programs to determine what, if any, estimated program liabilities have been incurred. Once this initial calculation is made for the specific quarter, sales and marketing management, along with support from financial analysts, reviews the accumulated Program balance and, for volume driven payments, make assessments of whether or not customers are tracking in a manner that indicates that they will meet the requirements set out in agreed upon terms and conditions attached to each Program. Following this assessment, management makes adjustments to the accumulated accrual to properly reflect the Company’s best estimate of the liability at the balance sheet date. Programs are then reviewed with executive management for final approval. Programs are paid out predominantly on an annual basis, usually in the final quarter of the financial year or the first quarter of the following year. No significant changes in estimates were made during the three- and six-month periods ended June 30, 2023, and 2022.
11
8. Cash Dividends on Common Stock —The Company has declared and paid the following cash dividends in the periods covered by this Form 10-Q:
Declaration Date
Record Date
Distribution Date
DividendPer Share
Total Paid
June 12, 2023
June 28, 2023
July 14, 2023
0.030
848
March 13, 2023
March 24, 2023
April 14, 2023
851
December 13, 2022
December 28, 2022
January 11, 2023
June 6, 2022
June 24, 2022
July 8, 2022
0.025
742
March 14, 2022
March 25, 2022
April 15, 2022
736
December 13, 2021
December 27, 2021
January 10, 2022
0.020
594
9. Net income (loss) Per Share — The components of basic and diluted net income (loss) per share were as follows:
Numerator:
Denominator: (in thousands)
Weighted average shares outstanding-basic
Dilutive effect of stock options and grants
623
588
650
Weighted average shares outstanding-diluted
Due to a net loss for the three-month period ended June 30, 2023, stock options and other grants were excluded from the computation of diluted net income (loss) per share. For the three-month period ended June 30, 2023, and six-month periods ended June 30, 2023, and 2022, no stock options were excluded from the computation of diluted net income (loss) per share.
10. Debt — The Company has a revolving line of credit that is shown as long-term debt in the condensed consolidated balance sheets at June 30, 2023 and December 31, 2022. The Company has no short-term debt as of June 30, 2023 and December 31, 2022. The debt is summarized in the following table:
Long-term indebtedness ($000's)
Revolving line of credit
52,300
Deferred loan fees
(863
(823
Total indebtedness, net of deferred loan fees
159,887
The deferred loan fees as of June 30, 2023 are included in other assets on the condensed consolidated balance sheets.
The Company and certain of its affiliates are parties to a revolving line of credit agreement entitled the “Third Amended and Restated Loan and Security Agreement” dated as of August 5, 2021 (the “Credit Agreement”), which is a senior secured lending facility among AMVAC, the Company’s principal operating subsidiary, as Borrower Agent (including the Company and AMVAC BV), as Borrowers, on the one hand, and a group of commercial lenders led by Bank of the West as administrative agent, documentation agent, syndication agent, collateral agent and sole lead arranger, on the other hand. The Credit Agreement consists of a line of credit of up to $275,000, an accordion feature of up to $150,000, a letter of credit and swingline sub-facility (each having limits of $25,000) and has a maturity date of August 5, 2026. The Credit Agreement amended and restated the previous credit facility, which had a maturity date of June 30, 2022. With respect to key financial covenants, the Credit Agreement contains two: namely, borrowers are required to maintain a Total Leverage (“TL”) Ratio of no more than 3.5-to-1, during the first three years, stepping down to 3.25-to-1 as of September 30, 2024, and a Fixed Charge Coverage Ratio ("FCCR") of at least 1.25-to-1. In addition, to the extent that it completes acquisitions totaling $15 million or more in any 90-day period, AMVAC may step-up the TL Ratio by 0.5-to-1, not to exceed 4.00-to-1, for the next three full consecutive quarters. Acquisitions below $50 million do not require Agent consent.
12
The Company’s borrowing capacity varies with its financial performance, measured in terms of Consolidated EBITDA as defined in the Credit Agreement, for the trailing twelve-month period. Under the Credit Agreement, revolving loans bear interest at a variable rate based, at borrower’s election with proper notice, on either (i) LIBOR plus the “Applicable Margin” which is based upon the Total Leverage (“TL”) Ratio (“LIBOR Revolver Loan”) or (ii) the greater of (x) the Prime Rate, (y) the Federal Funds Rate plus 0.5%, and (z) the Daily One-Month LIBOR Rate plus 1.00%, plus, in the case of (x), (y) or (z) the Applicable Margin (“Adjusted Base Rate Revolver Loan”). The Company and the Lenders entered into an amendment to the Credit Agreement, effective March 9, 2023, whereby LIBOR was replaced by SOFR with a credit spread adjustment of 10.0 bps for all SOFR periods. The revolving loans now bear interest at a variable rate based at our election with proper notice, on either (i) SOFR plus 0.1% per annum and the “Applicable Margin” or (ii) the greater of (x) the Prime Rate, (y) the Federal Funds Rate plus 0.5%, and (z) the Daily One-Month SOFR Rate plus 1.10%, plus, in the case of (x), (y) or (z) the Applicable Margin (“Adjusted Base Rate Revolver Loan”). Interest payments for SOFR Revolver Loans are payable on the last day of each interest period (either one-, three- or six- month periods, as selected by the Company) and the maturity date, while interest payments for Adjusted Base Rate Revolver Loans are payable on the last business day of each month and the maturity date. The interest rate on June 30, 2023, was 6.83%. Interest was $2,699 and $745 for the three months ended June 30, 2023 and 2022, respectively, and $4,241 and $1,146 for the six months ended June 30, 2023 and 2022, respectively.
As of June 30, 2023, the Company was in compliance with the TL Ratio but noncompliant with respect to the FCCR. On August 3, 2023, the Company obtained a waiver for the FCCR noncompliance.
According to the terms of the Credit Agreement, as amended, and based on our performance against the most restrictive covenant listed above, the Company had the capacity to increase its borrowings by up to $22,858 and $200,372 as of June 30, 2023 and December 31, 2022, respectively.
11. Classification Corrections — Corrections to the condensed consolidated statements of operations for the three and six months ended June 30, 2022 were made in connection with the Company’s operations in Australia, where the Company sells its products to distribution companies as well as directly to growers via third-party agents. The Company identified errors related to the classification of third-party agent’s commission amounts. The Company evaluated these errors and the impact to previously issued financial statements and concluded that the impact of this classification error is not material to any previously issued quarterly or annual financial statements. However, management has recorded correcting adjustments to the previously reported financial statement line items and related disclosures. The third-party agents’ commission in the amount of $119 and $278 was reclassified from net sales to operating expenses for the three and six months ended June 30, 2022, respectively. The impact was an increase in net sales and gross profit in the amount of $119 and $278 and an offsetting increase in operating expenses in the same amount. This correction did not have any impact on operating income, net income, and earnings per common share.
13
12. Change in Accounting Principle — Historically, the Company included warehousing, handling and outbound freight costs in operating expenses on its Consolidated Statements of Operations. Effective January 1, 2023, the Company elected to include these costs in cost of sales instead of operating expenses on its condensed consolidated statements of operations. The effects of the change in accounting have been retrospectively applied to all periods presented. The Company believes that the change in accounting is preferable as it aligns the Company’s classification of this warehousing, handling and outbound freight costs in such a way as to present operational management with a clearer vision of the operational performance by business unit. This accounting change also increases the comparability of the Company’s financial performance with its peer companies as most peer companies include warehousing, handling and outbound freight costs in cost of sales rather than operating expenses. As a result, this change is intended to help interested parties better understand the Company’s performance and facilitate comparisons with most of the Company’s peer companies. The following table compares the Company’s historical classification with the classification after the adoption of the change in accounting for the three and six months ended June 30, 2023 and 2022:
Classification after adoption of accounting change
Previous classification
148,084
(80,263
(88,305
52,527
59,779
(39,154
(48,772
(48,966
3,755
297,519
(157,356
(176,547
100,318
120,972
(93,297
(95,410
The change in accounting principle did not have any impact on operating income, net income and earnings per share.
13. Comprehensive Income (Loss) — Total comprehensive income (loss) includes, in addition to net income (loss), changes in equity that are excluded from the condensed consolidated statements of operations and are recorded directly into a separate section of stockholders’ equity on the condensed consolidated balance sheets. For the three- and six-month periods ended June 30, 2023 and 2022, total comprehensive income consisted of net income (loss) and foreign currency translation adjustments.
14. Stock-Based Compensation — The following tables illustrate the Company’s stock-based compensation, unamortized stock-based compensation, and remaining weighted average amortization period.
Stock-BasedCompensationfor the Threemonths ended
Stock-BasedCompensationfor the Sixmonths ended
UnamortizedStock-BasedCompensation
RemainingWeightedAveragePeriod (years)
Restricted Stock
1,211
2,410
9,147
2.2
Unrestricted Stock
130
260
477
0.9
Performance-Based Restricted Stock
(274
(129
3,238
12,862
June 30, 2022
1,079
2,072
9,277
122
239
476
72
525
3,781
2.1
13,534
14
The Company also granted stock options in past periods. All outstanding stock options are fully vested and exercisable and no expense was recorded during the three- and six-month periods ended June 30, 2023, and 2022.
Time-Based Restricted and Unrestricted Stock — A summary of non-vested shares as of, and for, the three- and six-month periods ended June 30, 2023, and 2022 is presented below:
Three and Six Months EndedJune 30, 2023
Three and Six Months EndedJune 30, 2022
Numberof Shares
WeightedAverageGrantDate FairValue
Nonvested shares at December 31st
742,050
18.86
817,290
17.04
Vested
(2,017
15.71
(230,080
17.31
Forfeited
(5,479
19.87
(24,109
17.10
Nonvested shares at March 31st
734,554
563,101
16.93
Granted
279,419
21.17
242,067
23.79
(309,318
14.83
(27,482
22.35
(16,354
19.50
(14,070
18.53
Nonvested shares at June 30th
688,301
21.59
763,616
18.88
Performance-Based Restricted Stock — A summary of non-vested performance-based shares as of, and for, the three- and six-month periods ended June 30, 2023, and 2022, respectively is presented below:
318,699
18.05
379,061
16.43
Additional granted (forfeited) based on performance achievement
(41,088
16.56
(78,704
17.18
(7,074
16.77
252,195
16.17
(58,827
14.73
94,028
21.51
83,190
23.63
(86,188
13.99
(3,316
16.91
(7,829
17.50
264,396
21.36
327,556
16.58
Stock Options — The Company has stock options outstanding under its incentive stock option plans and performance incentive stock option plan. All outstanding stock options are vested and exercisable. The following tables present details for each type of plan:
15
Incentive Stock Option Plans
Activity for the three- and six-month periods ended June 30, 2023:
Number of Shares
WeightedAverage PricePer Share
Balance outstanding, December 31, 2022
68,896
11.49
Options exercised
(1,537
Balance outstanding, March 31, 2023
67,359
(1,287
Balance outstanding, June 30, 2023
66,072
All the incentive stock options outstanding as of June 30, 2023, have an exercise price per share of $11.49, total intrinsic value of $422, and a remaining life of 18 months.
Activity for the three- and six-month periods ended June 30, 2022:
Balance outstanding, December 31, 2021 and March 31, 2022
108,036
(33,745
Balance outstanding, June 30, 2022
74,291
Performance Incentive Stock Option Plan
There was no activity for the three- and six-month periods ended June 30, 2023. There were 81,808 performance incentive stock options outstanding as of June 30, 2023, with an exercise price per share of $11.49 and a remaining life of 18 months.
Number ofShares
Balance outstanding, December 31, 2021
114,658
(32,850
81,808
All the performance incentive stock options outstanding as of June 30, 2023, have an exercise price per share of $11.49, total intrinsic value of $522, and a remaining life of 18 months.
15. Legal Proceedings — During the reporting period, there have been no material developments in legal proceedings that were reported in the Company’s Form 10-K for the year ended December 31, 2022, except as described below.
Department of Justice and Environmental Protection Agency Investigation. On November 10, 2016, AMVAC was served with a grand jury subpoena from the United States Attorney’s Office for the Southern District of Alabama, seeking documents regarding the importation, transportation, and management of a specific pesticide. The Company retained defense counsel to assist in responding to the subpoena and otherwise in defending the Company’s interests. AMVAC is cooperating in the investigation. After interviewing multiple witnesses (including three employees before a grand jury in February 2022) and making multiple document requests, the Department of Justice (“DoJ”) identified the Company and a manager-level employee as targets of the government’s investigation. DoJ’s investigation focused on potential violations of two environmental statutes, the Federal Insecticide, Fungicide, and Rodenticide Act (“FIFRA”) and the Resource Conservation and Recovery Act (“RCRA”), as well as obstruction of an agency proceeding and false statement statutes. In March 2022, the individual target entered into a plea agreement relating to provision of false information in a government proceeding. In July 2022, the DoJ sent correspondence to the Company’s counsel to the effect that it was focusing on potential RCRA violations relating to the reimportation of Australian containers in 2015. Our defense counsel spoke with DoJ on the subject in early October 2022 and then again in May 2023, at which times DoJ expressed an interest in resolving the matter. The Company anticipates further discussion on resolution of the matter.
16
The governmental agencies involved in this investigation have a range of civil and criminal penalties they may seek to impose against corporations and individuals for violations of FIFRA, RCRA and other federal statutes including, but not limited to, injunctive relief, fines, penalties and modifications to business practices and compliance programs, including the appointment of a monitor. If violations are established, the amount of any fines or monetary penalties which could be assessed and the scope of possible non-monetary relief would depend on, among other factors, findings regarding the amount, timing, nature and scope of the violations, and the level of cooperation provided to the governmental authorities during the investigation. As a result, the Company cannot yet anticipate the timing or predict the ultimate resolution of this investigation, financial or otherwise, which could have a material adverse effect on our business prospects, operations, financial condition and cash flows. Accordingly, the Company has not recorded a loss contingency for this matter.
Pitre etc. v. Agrocentre Ladauniere et al. On February 11, 2022, a strawberry grower named Les Enterprises Pitre, Inc. filed a complaint in the Superior Court, District of Labelle, Province of Quebec, Canada, entitled Pitre, etc. v. Agrocentre Ladauniere, Inc. etal, including Amvac Chemical Corporation, seeking damages in the amount of approximately $5 million arising from stunted growth of, and reduced yield from, its strawberry crop allegedly from the application of AMVAC’s soil fumigant, Vapam, in spring of 2021. Examinations of plaintiff were held in mid-August 2022, during which plaintiff in effect confirmed that he had planted his seedlings before expiration of the full-time interval following product application (as per the product label), that he had failed to follow the practice of planting a few test seedlings before planting an entire farm, and that he had placed his blind trust in his application adviser on all manner of timing and rate. An examination of the Company’s most knowledgeable witness is scheduled to take place in November 2023. Information to date is not sufficient to form a judgment as to either the probability or amount of loss; thus, the Company has not recorded a loss contingency for this matter.
Notice of Intention to Suspend DCPA. On April 28, 2022, the USEPA published a notice of intent to suspend (“NOITS”) DCPA, the active ingredient of an herbicide marketed by the Company under the name Dacthal. The agency cited as the basis for the suspension that the Company did not take appropriate steps to provide data studies requested in support of the registration review. In fact, over the course of several years, the Company cooperated in performing the vast majority of the nearly 90 studies requested by USEPA and had been working in good faith to meet the agency’s schedule. After an appeals court (the Environmental Appeals Board) clarified the proper standard for use at the hearing (namely, whether registrant took appropriate steps to respond to the data call-in), a hearing was held in January 2023 before the ALJ, by which time USEPA had narrowed the scope of its claim to nine outstanding studies, all of which have been completed by the Company and 8 of 9 of which have been submitted to the agency and none of which are necessary for USEPA to commence its risk assessment. In April 2022, the ALJ reached a decision, finding that the agency acted within its authority in issuing the NOITS. The company is in the midst of discussions with USEPA on the terms of a settlement, and, to date, the parties have agreed to extend the company’s deadline for filing an appeal. During the course of these proceedings, AMVAC has been free to make, sell and distribute both the technical grade material and end-use product and may continue to do so unless and until there is an adverse ruling at both the trial and appellate level (if any). The Company believes that a loss is neither probable nor estimable and, consequently, has not recorded a loss contingency for this matter.
16. Recent Issued Accounting Guidance — The Company reviewed all recently issued accounting pronouncements and concluded that they were either not applicable or not expected to have a significant impact to its condensed consolidated financial statements.
17. Fair Value of Financial Instruments — The accounting standard for fair value measurements provides a framework for measuring fair value and requires certain disclosures regarding fair value measurements. Fair value is defined as the price that would be received for an asset or the exit price that would be paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. This accounting standard established a fair value hierarchy, which requires an entity to maximize the use of observable inputs, where available. The following summarizes the three levels of inputs required:
The carrying amount of the Company’s financial instruments, which principally include cash and cash equivalents, short-term investments, accounts receivable, accounts payable and accrued expenses, approximates fair value because of the relatively short maturity of such instruments. The carrying amount of the Company’s borrowings, which are considered Level 2 liabilities, approximates fair value as they bear interest at a variable rate that represents current market rates.
17
The Company measures its contingent earn-out liabilities in connection with business acquisitions at fair value on a recurring basis using significant unobservable inputs classified within Level 3 of the fair value hierarchy. The Company may use various valuation techniques depending on the terms and conditions of the contingent consideration including a Monte-Carlo simulation. This simulation uses probability distribution for each significant input to produce hundreds or thousands of possible outcomes and the results are analyzed to determine probabilities of different outcomes occurring. The Company did not have any contingent earn-out liabilities at June 30, 2023 and December 31, 2022.
The following table illustrates the Company’s contingent earn-out liability movements related to its business acquisitions as of, and for, the three-and six-month periods ended June 30, 2022:
Three months ended June 30, 2022
Six months ended June 30, 2022
Balance, March 31, 2022 and December 31, 2021
1,437
786
Fair value adjustment
36
Accretion of discounted liabilities
Foreign exchange effect
(117
(71
1,367
18. Accumulated Other Comprehensive Loss (“AOCL”)—The following table lists the beginning balance, annual activity and ending balance of accumulated other comprehensive loss, which consists of foreign currency (FX) translation adjustments:
Foreign currency translation adjustment, net of tax effects of ($132)
Foreign currency translation adjustment, net of tax effects of ($122)
Foreign currency translation adjustment, net of tax effects of ($48)
Foreign currency translation adjustment, net of tax effects of $109
19. Equity Investments — In February 2016, AMVAC Netherlands BV made an investment in Biological Products for Agriculture (“Bi-PA”). Bi-PA develops biological plant protection products that can be used for the control of pests and disease of agricultural crops. As of June 30, 2023 and 2022, the Company’s ownership position in Bi-PA was 15%. Since this investment does not have readily determinable fair value, the Company has elected to measure the investment at cost less impairment, if any, and also records an increase or decrease for changes resulting from observable price changes in orderly transactions for the identical or a similar investment of Bi-PA. The Company periodically reviews the investment for possible impairment. There was no impairment or observable price changes on the investment during the three and six months ended June 30, 2023 and 2022. The investment is recorded within other assets on the condensed consolidated balance sheets and amounted to $2,869 as of June 30, 2023 and December 31, 2022.
On April 1, 2020, AMVAC purchased 6.25 million shares, an ownership of approximately 8%, of common stock of Clean Seed Capital Group Ltd. (TSX Venture Exchange: “CSX”) for $1,190. The shares are publicly traded, have a readily determinable fair value, and are considered a Level 1 investment. The fair value of the stock amounted to $708 and $784 as of June 30, 2023 and December 31, 2022, respectively. The Company recorded a loss of $55 and $486 for the three months ended June 30, 2023 and 2022, respectively. The Company recorded a loss of $77 and $403 for the six months ended June 30, 2023 and 2022, respectively. The investment is recorded within other assets on the condensed consolidated balance sheets.
20. Income Taxes —Income tax expense for the three and six months ended June 30, 2023 and 2022, is computed using the estimated effective tax rates applicable to each of the domestic and international taxable jurisdictions for the full year. The Company’s tax rate is subject to management’s quarterly review and revision, as necessary. The Company’s provision for income taxes and effective income tax rate are significantly impacted by the mix of the Company’s domestic and foreign income (loss) before income taxes. Income tax expense was $1,541 and $2,725 for the three-month period ended June 30, 2023, and 2022, respectively, and $1,181 and $7,224 for the six months ended June 30, 2023, and 2022, respectively. The effective income tax rate was 315.36% and 28.5% for the three-month periods ended June 30, 2023 and 2022, respectively, and 57.7% and 30.1% for the six months ended June 30, 2023 and 2022, respectively. For the three-month period ended June 30, 2023, the effective income tax rate increased compared to the same period of 2022 primarily due to withholding tax charges, net of income tax credits, associated with interest on certain intercompany loans, and losses incurred at certain entities which did not result in a benefit for income tax purposes as these entities continue to maintain a valuation allowance against their net deferred tax assets. In addition to these factors, the increase in the effective income tax rate for the six months ended June 30, 2023, as compared to the same period in 2022 is due to establishing liabilities for uncertain tax positions in certain jurisdictions, partially offset by a benefit from the remeasurement of certain U.S. federal and state deferred taxes.
It is expected that $1,814 of unrecognized tax benefits will be released within the next twelve months due to expiration of the statute of limitations.
21. Stock Re-purchase Programs — On March 8, 2022, pursuant to a Board of Directors resolution, the Company announced its intention to repurchase an aggregate number of up to 1,000,000 shares of its common stock under a 10b5-1 plan, par value $0.10 per share, in the open market over the succeeding one year, subject to limitations and restrictions under applicable securities laws. During 2022 and 2023, the Company purchased 761,985 shares of its common stock for a total of $14,558 at an average price of $19.11 per share under this plan which terminated on March 8, 2023.
On May 25, 2023, pursuant to a Board of Directors resolution, the Company announced its intention to repurchase up to $15,000 of its common stock under a 10b5-1 plan, par value $0.10 per share, in the open market over the succeeding one year, subject to limitations and restrictions under applicable securities laws. During the three months ended June 30, 2023, the Company purchased 380,366 shares of its common stock for a total of $6,669 at an average price of $17.51 per share under this plan.
The table below summarizes the number of shares of the Company’s common stock that were repurchased during the three and six months ended June 30, 2023 and 2022.
Three months ended
Total number ofshares purchased
Average price paidper share
Total amount paid
17.51
6,669
19.99
Six months ended
408,201
17.88
7,226
333,010
18.71
6,232
As of June 30, 2023, the Company may yet purchase up to $8,331 of its common stock under its current 10b5-1 plan.
22. Supplemental Cash Flow Information
Supplemental cash flow information:
Cash paid during the period for:
Interest
2,556
1,100
Income taxes, net
5,641
10,749
Non-cash transactions:
Deferred consideration in connection with business acquisitions:
Cash dividends declared and included in accrued expenses
19
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Numbers in thousands)
FORWARD-LOOKING STATEMENTS/RISK FACTORS:
The Company, from time-to-time, may discuss forward-looking statements including assumptions concerning the Company’s operations, future results and prospects. These forward-looking statements are based on current expectations and are subject to a number of risks, uncertainties and other factors. In connection with the Private Securities Litigation Reform Act of 1995, the Company provides the following cautionary statements identifying important factors which, among other things, could cause the actual results and events to differ materially from those set forth in or implied by the forward-looking statements and related assumptions contained in the entire Annual Report. Such factors include, but are not limited to: product demand and market acceptance risks; the effect of economic conditions; weather conditions; changes in regulatory policy; the impact of competitive products and pricing; changes in foreign exchange rates; product development and commercialization difficulties; capacity and supply constraints or difficulties; availability of capital resources; general business regulations, including taxes and other risks as detailed from time-to-time in the Company’s reports and filings filed with the U.S. Securities and Exchange Commission (the “SEC”). It is not possible to foresee or identify all such factors. For more detailed information, refer to Item 3., Quantitative and Qualitative Disclosures about Market Risk, and Part II, Item 1A., Risk Factors, in this Quarterly Report on Form 10-Q.
Effective January 1, 2023, the Company includes warehousing, handling and outbound freight costs in cost of sales instead of operating expenses on its condensed consolidated statements of operations. The effects of the change in accounting have been retrospectively applied to all periods presented. The Company believes that the change in accounting is preferable as it aligns the Company’s classification of this warehousing, handling and outbound freight costs in such a way as to present operational management with a clearer vision of the operational performance by business unit. This accounting change also increases the comparability of the Company’s financial performance with its peer companies as most peer companies include warehousing, handling and outbound freight costs in cost of sales rather than operating expenses. As a result, this change is intended to help interested parties better understand the Company’s performance and facilitate comparisons with most of the Company’s peer companies. The change in accounting principle did not have any impact on operating income, net income and earnings per share. Please refer to Note 12 to the condensed consolidated financial statements for further details.
Overview of the Company’s Performance
The Company’s financial performance for the second quarter of 2023 declined as compared to the second quarter of 2022. While commodity prices remained stable, in the face of increasing interest rates, the distribution channel within domestic crop implemented strict measures to control inventory and otherwise limit the carrying costs of working capital. As a result, customers are allowing inventories to reduce to low levels before ordering closer to the time of use. In addition, during the quarter, the Company experienced supply unavailability of one of its high-margin herbicides. Within the non-crop business, retailers – whether big box stores, nurseries, or garden centers – broke with traditional stocking patterns and both delayed placing orders until closer to time of use and ordered less product, relying on the Company to hold inventory. Further, during the period, our international businesses experienced significant market pressure from China-based suppliers that flooded the Central American markets with low-priced generic goods.
Against this backdrop, on a consolidated basis, domestic sales declined by 14% while international sales declined by 6%, resulting in an overall net sales decline of 10%. Overall cost of sales decreased by 9%. Cost of sales were 68% of sales in 2023, as compared to 67% for the same period of 2022. These factors, taken together with slightly higher manufacturing costs (both labor and service-related), resulted in a 13% decrease in gross profit (to $42,909 in 2023 from $49,311 in the comparable quarter of 2022), while overall gross margin percent declined to 32% from 33% quarter-over-quarter.
Operating expenses increased to $39,154 for the three-months period ended June 30, 2023 from $38,518, as compared to prior year; further, operating expenses as a percent of net sales rose to 29% in the second quarter of 2023 from 26% in the comparable period of 2022, largely due to higher research, product development costs, regulatory expenses costs and increase sales and marketing expenses.
Operating income for the period decreased to $3,755 from $10,813, driven by reduced sales, decreased gross margin percentage and proportionately higher operating expenses. During the second quarter, the Company experienced significantly higher interest expenses, due to comparatively higher interest rates. Income before taxes ended at $489 including a profitable performance for most of the Company’s operating entities around the world, offset by losses in a small number of businesses. One of the businesses which lost money in the quarter is in Brazil. Losses at that entity generate a tax benefit, offset by a valuation allowance. As a result, net tax expense exceeded income before taxes, resulting in a net loss for the quarter. Additionally, a withholding tax charge was incurred on interest relating to intercompany debt.
These factors yielded a net loss for the period of $1,052, as compared to net income of $6,830 in the second quarter of 2022. Details on our financial performance are set forth below.
RESULTS OF OPERATIONS
Quarter Ended June 30, 2023 and 2022:
Cost of sales:
(34,509
(39,600
5,091
(9,769
(11,752
1,983
-17
(44,278
(51,352
7,074
(45,603
(47,520
1,917
Total cost of sales:
8,991
Total gross profit
Gross margin:
39
38
42
24
25
Total gross margin
33
Our domestic crop business recorded net sales during the second quarter of 2023 that were 11% lower than those of the second quarter of 2022 ($56,212 as compared to $63,513). This overall decline was largely attributable to a broad-based slowdown in distribution channel purchasing, as our customers focused on inventory reduction in the face of rising interest rates and higher carrying costs for working capital. Within our several product lines, there was nevertheless a degree of variability. While overall net sales of our corn products were relatively stable year-over-year, with soil insecticides higher compared to the second quarter of the prior year, we recorded reduced sales of our Impact post-emergent corn herbicides, due largely to higher-than-normal inventory levels of generic herbicides in the distribution channel. Further, we recorded no sales of Dacthal®, our specialty crop herbicide, in the second quarter due to unavailability of goods from our overseas supply chain partner as compared to second quarter of the prior year, when inventory was readily available, and demand was strong in light of news of a potential suspension. In our cotton products, we experienced an increase in sales of our foliar insecticide, Bidrin®, which were partially offset by a decline in sales of Folex®, our harvest defoliant – we expect that these sales will shift to later in 2023. The cotton market was also influenced by a decline in cotton commodity prices and a decline in planted cotton acres (down approximately 2 million acres year-over-year). Partially offsetting these declines, we saw an increase in sales of our soil fumigants with improved agricultural water allocation in the western region and stronger sales of our Thimet® granular insecticide for use in peanuts and sugar cane.
Cost of sales within the domestic crop business decreased by 13% (from $39,600 in 2022 to $34,509 in 2023) as a result of decreased volumes, lower in-bound freight costs and a change in the mix of products sold, as compared to the second quarter of 2022. Our net factory cost for the quarter rose, due largely to increased factory overhead costs. Domestic crop recorded a 9% decrease in gross profit (from $23,913 in 2022 to $21,703 in 2023) and an overall improvement in gross margin percentage to 39% versus 38% for the comparable quarter in 2022.
21
Our domestic non-crop business posted a 20 % decrease in net sales in the second quarter 2023, as compared to the same period in the prior year ($16,878 in 2023 v. $20,996 in 2022). We experienced lower demand for our consumer pest control products, as retail channels significantly tightened their procurement activity in order to reduce working capital carrying costs. Many such retailers are operating on a just-in-time approach toward stocking, which is a break from the historical norm. Additionally, our non-crop business recorded lower net sales from our OHP nursery and ornamental businesses, which were similarly influenced by inventory reduction at point of sale. Partially offsetting these decreases, our Dibrom® mosquito adulticide generated higher sales compared to the same quarter of the prior year, as wet weather in the western United States has engendered greater mosquito pressure and, with it, the upsurge of vector-borne diseases such as malaria and Zika virus. Finally, royalty and license fees for our Envance proprietary solutions were higher than the second quarter of last year.
Cost of sales within the domestic non-crop business decreased by about 17% in the second quarter 2023, as compared to the same period in the prior year (from $11,752 to $9,769). This was driven by a different mix of products including some lower margin products. This, in turn, led to a decrease in gross profit for domestic non-crop of 23% (from $9,244 in 2022 to $7,109 in 2023) and yielded a gross margin percentage of 42% versus 44% for the comparable quarter in 2022.
Net sales of our international businesses declined by about 6% during the period ($59,700 in 2023 vs. $63,694 in 2022). Broadly speaking, we experienced sales decreases in herbicides and soil fumigants, partially offset by increases in fungicides, foliar insecticides and granular soil insecticides Counter® and Mocap®. Regionally speaking, we posted sales decreases in the Central American market through our AgriCenter group due to Asian suppliers flooding the market with low-priced, generic products and drought conditions in Panama. Similarly, demand for our Assure II herbicide for soybeans in Canada lessened, following historically stronger sales in the first quarter. Net sales of our business in Brazil declined due to general market conditions that reflect price erosion competition from generic products sourced in Asia. Partly offsetting these decreases, our Australian business delivered higher sales and steady gross profits versus the prior year, as the addition of AgNova products has enhanced our market position. Similarly, our performance in Mexico remained solid, despite some temporary product manufacturing impediments.
Cost of sales in our international business decreased by 4% (from $47,520 in 2022 to $45,603 in 2023), and gross profit decreased by 13% (to $14,097 in 2023 from $16,174 in 2022). Gross margin percentage for the international business dropped to 24% from 25% quarter-over-quarter.
On a consolidated basis, gross profit for the second quarter of 2023 decreased by 13% (from $49,331 in 2022 to $42,909 in 2023). Taken together, the overall gross margin percentage ended at 32% in the second quarter of 2023, as compared to 33% in the second quarter of the prior year.
Operating expenses increased by $637 to $39,155 for the three-month period ended June 30, 2023, as compared to the same period in 2022. The changes in operating expenses by department are as follows:
Selling
13,200
12,717
483
General and administrative
16,542
16,258
284
Proxy contest activities
1,785
(1,785
-100
Research, product development and regulatory
9,413
7,758
1,655
Subtotal
39,155
38,518
637
22
On April 1, 2020, the Company made a strategic investment in Clean Seed Inc., in the amount of $1,190. The Company recorded a negative fair value adjustment in the amount of $55 during the three months ended June 30, 2023 and $486 during the comparative three months of the prior year.
Interest costs net of capitalized interest were $3,211 in the three-month period ended June 30, 2023, as compared to $772 in the same period of 2022. Interest costs are summarized in the following table:
Average Indebtedness and Interest expense
Three months ended June 30, 2023
AverageDebt
InterestExpense
InterestRate
Revolving line of credit (average)
152,750
2,699
7.1
124,184
745
2.4
Amortization of deferred loan fees
55
69
Amortization of other deferred liabilities
Other interest expense
571
3,325
8.7
837
2.7
Capitalized interest
(114
(65
3,211
8.4
772
2.5
The Company’s average overall debt for the three-month period ended June 30, 2023 was $152,750, as compared to $124,184 for the three-month period ended June 30, 2022. The effective bank interest rate on our revolving line of credit was 7.1% and 2.4% for the three-month periods ended June 30, 2023 and 2022, respectively.
Income tax expense decreased by $1,184 to $1,541 for the three-month period ended June 30, 2023, as compared to $2,725 for the comparable period in 2022. The effective tax rates for the three-month period ended June 30, 2023, and 2022, were 315.36% and 28.5%, respectively. The increase in the effective tax rate for the three months ended June 30, 2023 compared to the same period in 2022 is primarily due to withholding tax charges, net of income tax credits, associated with interest on certain intercompany loans, and losses incurred at certain entities which did not result in a benefit for income tax purposes as these entities continue to maintain a valuation allowance against their net deferred tax assets.
We generated income before provision for income taxes of $489 and $9,555 for the three months ended June 30, 2023 and 2022, respectively. Our net loss (after income taxes) for the three-month period ended June 30, 2023, was $1,052 or ($0.04) per basic and diluted share, as compared to a net income of $6,830 or $0.23 per basic and diluted share in the same quarter of 2022.
Six Months Ended June 30, 2023 and 2022:
Within the global agricultural industry, the first six months of 2023 marked a plateau to the upcycle that had begun in 2021. Commodity prices were relatively stable, although corn and soybean prices showed vacillation. Wheat prices have risen and fallen with developments arising from the Russian invasion of Ukraine. However, rising interest rates have engendered a newfound sense of fiscal rectitude among farmers, retailers and distributors. In an effort to control the carrying costs of working capital, the distribution channel for crop products has tightened its procurement practices and consequently reduced demand. We have seen the same sudden shift within the non-crop markets, where big box stores, nurseries and garden centers have sharply curtailed inventory stocking. On the international side, while we have experienced consistent performance in certain markets (Mexico and Australia), LATAM markets have been flooded with low-priced generic goods from China-based companies. Amidst these market dynamics, the Company’s overall operating results for the first six months of 2023 declined over those of the same period in 2022.
On a consolidated basis, with domestic sales down 20% and international sales down by 3%, overall net sales decreased by 13% (to $257,674 in 2023 from $297,797 in 2022). Cost of sales were reduced by 11% on an absolute basis and, as a consequence of the comparative declines between domestic and international business, increased as a percent of net sales to 68% from 66%. While factory activity during the first half of 2023 was strong, increased factory overhead costs yielded a higher net factory cost, as compared to the first six months of 2022. These factors, taken together, yielded a 19% decrease in gross profit (to $81,444 in 2023 from $100,727 in 2022) and gross margin percentage declined to 32% from 34% in the first half of 2022. In the first half of 2023, operating expenses were down approximately 1%, as compared to those of the prior year period and increased as a percentage of net sales to 29% from 25% for the same period of the prior year.
23
Interest expense increased significantly during the period due to lower cash receipts, primarily driven by the reduced sales of our Aztec product in the last three quarters driven by supply chain challenges. This has resulted in higher average borrowings, coupled with higher interest rates, resulting in significantly higher interest expense.
Income tax expense decreased as income before taxes was lower than the first half of the prior year. The Company’s net income ended at $865, as compared to $16,765 in the first half of the prior year. Details on our financial performance are set forth below.
Six months ended June 30, 2023, and 2022
(77,520
(95,163
17,643
(16,461
(18,023
1,562
(93,981
(113,186
19,205
(82,249
(83,884
1,635
-2
20,840
34
46
48
Our domestic crop business recorded net sales that were 22% below those of first half of 2022 (to $118,105 from $151,349). After experiencing supply chain disruptions to our corn soil insecticide business during the first quarter of 2023, we experienced reduced demand during the second quarter caused by more stringent procurement patterns by the distribution channel, driven by their desire to control working capital carrying costs. This procurement slowdown translated into a significant decline in our first half sales of several herbicides and key granular soil insecticides used in corn. The US crop business benefited from improved sales performance of our Bidrin foliar insecticide for cotton and our domestic soil fumigant business for potatoes and high-value crops.
Cost of sales within the domestic crop business decreased 19%, as compared to the first six months of 2022, primarily driven by lower sales. Gross profit decreased by 28% to $40,585 from $56,186, and gross profit margin ended at 34% for the first half of 2023 as compared to 37% in 2022.
Our domestic non-crop business recorded an 11% decrease in net sales for the first half of the year (to $30,759 from $34,753). This decrease was largely due to the purchasing slowdown in several markets, as retailers sharply reduced their procurement practices in an effort to control their inventories. Sales in our OHP nursery and ornamental business and sales of our consumer-oriented pest strip business both suffered from this procurement shift, as distribution channels and consumer-facing retailers sought to work down inventory levels. Sales of our Dibrom® mosquito adulticide rose slightly as rainy weather in the western United States prompted unexpected non-Gulf Coast purchasing. The non-crop business benefited from steady pharmaceutical product sales business and increased royalty payments relating to licenses of our Envance formulations.
Cost of sales within the domestic non-crop business decreased by 9%, (to $16,461 in 2023 from $18,023 in 2022). Gross profit for domestic non-crop decreased by 15% to $14,298 in 2023 from $16,730 in 2022, due largely to decreased sales and a higher volume of lower-margin products. Gross margin percentage for the six months ended at 46%, as compared to 48% for the same period in 2022.
Net sales of our international businesses decreased by 3% during the first half of 2023 (to $108,810 in 2023 from $111,695 in 2022). Central America, which had experienced double-digit growth in the first quarter, struggled during the second quarter with declining sales in Panama due to drought and the increased competition throughout the region from generic products sourced in Asia. Mexico continued to generate strong results throughout the first half, with solid demand for soil fumigants (on high-value crops), Bromacil herbicides and various granular insecticides. Similarly, Australia enjoyed improved sales driven by favorable weather and the benefits of integrating the AgNova business. Brazil continues to be challenged by price erosion caused by channel inventory overstocking and low-priced generic pricing.
Cost of sales in our international business decreased by 2% (to $82,249 in 2023 from $83,884 in 2022) primarily driven by a decline in volume. Gross profit for the international businesses decreased by 4% to $26,561 in 2023 from $27,811 in 2022, and gross margin percentage ended at 24% down from 25% during the first six months of 2022.
On a consolidated basis, gross profit for the six months of 2023 decreased by 19% (to $81,444 in 2023 from $100,727 in 2022). This decrease was due largely to reduced sales and a change in mix of sales between domestic and international customers. Gross margin performance, when expressed as a percentage of sales, decreased to 32% from 34%.
Operating expenses decreased by $742 to $74,423 for the six-month period ended June 30, 2023, as compared to the same period in 2022. The changes in operating expenses by department are as follows:
26,571
23,961
2,610
General and administrative:
29,028
34,691
(5,663
-16
541
(1,244
-70
18,283
14,728
3,555
74,423
75,165
-1
During the six-month period ended June 30, 2023 and 2022, the Company recorded a decrease in the fair value of our equity investment in Clean Seed in the amount of $77, as compared to a decrease of $403 during the six months ended June 30, 2022. These changes in fair value of our investment directly reflect changes in the stock’s quoted market price.
Interest costs net of capitalized interest were $4,898 in the first six-month period of 2023, as compared to $1,170 in the same period of 2022. Interest costs are summarized in the following table:
Six months ended June 30, 2023
123,248
4,241
6.9
105,076
1,146
118
138
700
5,059
8.2
1,322
(161
(152
4,898
7.9
1,170
The Company’s average overall debt for the six-month period ended June 30, 2023, was $123,248, as compared to $105,076 for the six-month period ended June 30, 2022. Our effective bank interest rate on our revolving line of credit was 6.9% for the six months ended June 30, 2023, as compared to 2.2% in 2022.
Income tax expense decreased by $6,043 to end at $1,181 for the six-month period ended June 30, 2023, as compared to income tax expense of $7,224 for the comparable period in 2022. The effective tax rate for the six months ended June 30, 2023, was 57.7% as compared to 30.11% for the same period last year. The increase in effective income tax rate in 2023 compared to the prior year is primarily due to withholding tax charges, net of income tax credits, associated with interest on certain intercompany loans, losses incurred at certain entities which did not result in a benefit for income tax purposes as these entities continue to maintain a valuation allowance against their net deferred tax assets, and establishing liabilities for uncertain tax positions in certain jurisdictions. These factors were partially offset by a benefit from the remeasurement of certain U.S. federal and state deferred taxes.
We generated income before provision before income taxes of $2,046 and $23,989 for the six months ended June 30, 2023 and 2022, respectively. Our net income (after income taxes) for the six-month period ended June 30, 2023 was $865 or $0.03 per basic and diluted share, as compared to $16,765 or $0.57 per basic and $0.55 per diluted share in the same period of 2022.
LIQUIDITY AND CAPITAL RESOURCES
The Company’s operating activities utilized net cash of $96,602 during the six-month period ended June 30, 2023, as compared to $27,230 during the six months ended June 30, 2022. Included in the $96,602 are net income of $865, plus non-cash depreciation, amortization of intangibles and other assets and discounted future liabilities, in the amount of $12,146, and provision for bad debts in the amount of $902, change in deferred income taxes of $1,015 and changes in liabilities for uncertain tax positions or unrecognized tax benefits of $419. Also included are stock-based compensation of $2,541, change in fair value of an equity investment of $77, and net foreign currency adjustments of $382. These together provided net cash inflows of $15,670, as compared to $34,353 for the same period of 2022.
During the six-month period of 2023, the Company increased working capital by $110,845, as compared to an increase of $68,187 during the same period of the prior year. Included in this change: inventories increased by $50,900, as compared to $27,774 for the same period of 2022. While increases in inventory are normal for the Company’s annual cycle, this year the Company has seen distinct changes in buying patterns across its global markets as customers are pushing back purchase close to time of use as they manage working capital and interest expense.
Customer prepayments decreased by $83,225, as compared to $62,789 in the same period of 2022, driven by customer decisions regarding demand, payment timing and our cash incentive programs. The $83,225 also includes a repayment to a customer in the amount of $17,500 due to the lack of product availability caused by supply chain disruptions. Our accounts payable balances increased by $9,105, as compared to $19,439 in the same period of 2022, as we work to manage inventory growth. Accounts receivables decreased by $6,092, as compared to an increase of $18,645 in the same period of 2022. This is primarily driven by a decrease in sales. Prepaid expenses increased by $1,749, as compared to $3,652 in the same period of 2022. Income tax receivable changed by $3,510, as compared to $3,526 in the prior year. Accrued programs increased by $19,607, as compared to $35,987 in the prior year, driven by lower sales activity. Finally, other payables and accrued expenses decreased by $7,824, as compared to an increase of $602 in the prior year.
26
Accrued program costs are recorded 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 six months of 2023, the Company made accruals for programs in the amount of $44,714 and payments in the amount of $25,124, resulting in a net increase in accrued program costs of $19,607. During the first six months of the prior year, the Company made accruals in the amount of $67,274 and made payments in the amount of $31,367, resulting in a net increase of accrued program costs of $35,987. The decrease in accruals for programs in the first six months of 2023, compared to the same period in 2022, is a direct result of lower sales of qualifying products.
Cash used for investing activities for the six-month period ended June 30, 2023, and 2022 was $7,172 and $6,671, respectively. In 2023, the Company spent $6,498 on purchases of fixed assets primarily focused on continuing to invest in manufacturing infrastructure, as compared to $5,654 for the same period of prior year. The Company made a payment of $650 for a product acquisition and spent $68 on patents for the Envance business. In addition, the Company received proceeds from disposal of property, plant and equipment in the amount of $44, as compared to $27 in prior year.
During the six months ended June 30, 2023, financing activities provided $98,086, as compared to $40,027 during the same period of the prior year. Net borrowings under the Credit Agreement amounted to $108,450 during the six-month period ended June 30, 2023, as compared to $48,400 in the same period of the prior year. The Company paid dividends to stockholders amounting to $1,702 during the six months ended June 30, 2023, as compared to $1,330 in the same period of 2022. The Company paid $7,226 for the repurchase of 408,201 shares of its common stock during the six-month period ended June 30, 2023, as compared to $6,232 for 333,010 shares during the six-month period ended June 30, 2022. The Company received $512 for the issuance of ESPP shares and exercise of stock options for the six months ended June 30, 2023, as compared to $1,202 for the same period in prior year. Lastly, in exchange for shares of common stock returned by employees, the Company paid $1,948 and $2,012 for tax withholding on stock-based compensation awards during the six months ended June 30, 2023 and 2022, respectively.
The Company has a revolving line of credit that is shown as long-term debt in the condensed consolidated balance sheets at June 30, 2023 and December 31, 2022. These are summarized in the following table:
Net long-term debt
As of June 30, 2023, the Company was in compliance with the Consolidated Funded Debt Ratio but noncompliant with respect to the Fixed Charge Covenant ratio (“FCCR”). The noncompliance was driven by a reduction in the Consolidated EBITDA (in the numerator of the FCCR calculation) during the twelve months ended June 30, 2023, coupled with higher-than-normal distributions (in the denominator of the FCCR calculation) arising from share repurchases made by the Company during the same period. On August 3, 2023, the Company obtained a waiver for the FCCR noncompliance. The impact of most of the share repurchases will be eliminated from the denominator in the FCCR calculation in the third quarter of 2023.
At June 30, 2023, according to the terms of the Credit Agreement, as amended, and based on our performance against the most restrictive covenant listed above, the Company had the capacity to increase its borrowings by up to $22,858, compared to $200,372 as of December 31, 2022.
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 16 in the accompanying notes to the condensed consolidated financial statements for recently issued accounting standards.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company continually re-assesses the critical accounting policies used in preparing its financial statements. In the Company’s Form 10-K filed with the SEC for the year ended December 31, 2022, the Company provided a comprehensive statement of critical accounting policies. These policies have been reviewed in detail as part of the preparation work for this Form 10-Q. After our review of these matters, we have determined that, during the subject reporting period, there has been no material change to the critical accounting policies that are listed in the Company’s Form 10-K for the year ended December 31, 2022.
Certain of the Company’s policies require the application of judgment by management in selecting the appropriate assumptions for calculating financial estimates. These judgments are based on historical experience, terms of existing contracts, commonly accepted industry practices and other assumptions that the Company believes are reasonable under the circumstances. These estimates and assumptions are reviewed periodically, and the effects of updates to estimates and assumptions are reflected in the condensed consolidated financial statements in the period that these updates are determined to be necessary. Actual results may differ from these estimates under different outcomes or conditions. Our estimates did not change materially during the three and six months ended June 30, 2023.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk related to changes in interest rates, primarily from its borrowing activities. The Company’s indebtedness to its primary lender is evidenced by a line of credit with a variable rate of interest, which fluctuates with changes in the lender’s reference rate. For more information, please refer to the applicable disclosures in the Company’s Form 10-K filed with the SEC for the year ended December 31, 2022, and Note 10 in the accompanying notes to the condensed consolidated financial statements.
The Company faces market risk to the extent that changes in foreign currency exchange rates affect our non-U.S. dollar functional currency as to foreign subsidiaries’ revenues, expenses, assets and liabilities. The Company currently does not engage in hedging activities with respect to such exchange rate risks.
Assets and liabilities outside the U.S. are located in regions where the Company has subsidiaries or joint ventures: Central America, South America, North America, Europe, Asia, and Australia. The Company’s investments in foreign subsidiaries and joint ventures with a functional currency other than the U.S. dollar are generally considered long-term. Accordingly, the Company does not hedge these net investments.
Item 4. CONTROLS AND PROCEDURES
As of June 30, 2023, the Company has a comprehensive set of disclosure controls and procedures designed to ensure that all information required to be disclosed in our filings under the Securities Exchange Act (1934) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. As of June 30, 2023, the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, has concluded, based on their evaluation, that the Company’s disclosure controls and procedures are effective to provide reasonable assurance of the achievement of the objectives described above.
There were no changes in the Company’s internal controls over financial reporting that occurred during the most recent quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
PART II. OTHER INFORMATION
The Company was not required to report any matters or changes for any items of Part II except as disclosed below.
Item 1. Legal Proceedings
Please refer to Note 15 in the accompanying notes to the condensed consolidated financial statements for legal updates.
Item 1A. Risk Factors
The Company continually re-assesses the business risks, and as part of that process detailed a range of risk factors in the disclosures in American Vanguard’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed on March 16, 2023. The following disclosure amends and supplements those risk factors and, except to the extent restated below, there are no material changes to the risk factors as so stated.
Disruption in the global supply chain is creating delays, unavailability and adverse conditions for our industry—Despite improvement in container availability and freight costs, the global supply chain continues to present risk. Industry consolidation, coupled with longer-term production commitments, has materially affected the Company’s supply of raw materials and intermediates in the past. There is no guarantee that the supply chain condition will materially improve any time soon or that the Company will avoid material disruption. Such disruption could have a material adverse effect on the Company’s operations, financial condition or cash flows.
The Company is dependent upon sole source or a limited number of suppliers for certain of its raw materials and active ingredients—There are a limited number of suppliers of certain important raw materials used by the Company in a number of its products. Certain of these raw materials are available solely from single or very few sources either domestically or overseas. In connection with supply chain disruptions in 2022 phosphorus and related compounds were increasingly difficult to source for our entire industry; ensuring a continuous supply required extraordinary efforts both with respect to sourcing and production planning. Similarly, in the first half of 2023, DCPA, the active ingredient in one of the Company’s high-margin herbicides, was unavailable from its overseas supplier. That said, there is no guarantee that any of our suppliers will be willing or able to supply products to the Company reliably, continuously and at the levels anticipated by the Company or required by the market. If these sources prove to be unreliable and the Company is not able to supplant or otherwise second source these products, it is possible that the Company will not achieve its projected sales which, in turn, could adversely affect the Company's consolidated financial statements.
The Company benefits from customer early pay in meeting its working capital needs—As is the case with other companies in this industry, the Company receives cash from certain major customers at year-end in exchange for granting discounts on the Company’s products during the first half of the following year. The Company typically uses this cash to pay down secured debt and for other working capital needs. This flow of cash obviates the need for additional borrowing, which, in turn, preserves borrowing capacity used in part for paying customer programs in the middle of the calendar year and, consequently, reduces interest expense. There is no guarantee that the Company’s customers will continue to support the early pay program at current levels. Further a material change in this program could have an adverse effect upon the Company’s liquidity and its ability to meet working capital demands.
Public statements made by USEPA regarding their preliminary findings in connection with the registration review of the Company’s products could adversely affect product sales and/or commercial viability. Registrations for the Company’s products are subject to registration review by the USEPA from time to time. In the course of the review, the Company submits, and the USEPA reviews, data studies. At any stage in the course of the review, USEPA may reach preliminary findings that could impair the commercial viability of a product. For example, in connection with USEPA’s review of the DCPA registration, based upon a comparative thyroid assay study (which is comparatively rare and quite complex), based upon limited data points, the USEPA found an adverse effect upon neonate rodents. Consequently, in June 2023, the agency published preliminary findings, noting its concern that based upon current, permitted use patterns, the product could have an adverse effect upon human health and, in particular, pregnant women. At the same time, the agency invited the Company to examine mitigation measures to allay their concerns, which the Company is doing. There is no guarantee that mitigation measures or additional data proffered by the Company will be sufficient to overcome USEPA’s conclusions. Further, it is possible that the agency could take more drastic measures to either reduce the use or cancel the registration of the product. Regulatory activities of this nature, whether in connection with DCPA or other products of significance, could have a material adverse effect upon the Company’s financial performance.
Item 2. Purchases of Equity Securities by the Issuer
On May 25, 2023, pursuant to a Board of Directors resolution, the Company announced its intention to repurchase up to $15 million of its common stock under a 10b5-1 plan, par value $0.10 per share, in the open market over the succeeding one year, subject to limitations and restrictions under applicable securities laws.
Item 6. Exhibits
Exhibits required to be filed by Item 601 of Regulation S-K:
Exhibit
No.
Description
31.1
Certification of Chief Executive Officer Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.
31.2
Certification of Chief Financial Officer Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.
32.1
Certification Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.
101
The following materials from American Vanguard Corp’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2023, formatted in iXBRL (Inline Extensible Business Reporting Language): (i) Condensed Consolidated Statements of Operations; (ii) Condensed Consolidated Statements of Comprehensive Income; (iii) Condensed Consolidated Balance Sheets; (iv) Condensed Consolidated Statement of Stockholders’ Equity; (v) Condensed Consolidated Statements of Cash Flows; and (vi) Notes to Condensed Consolidated Financial Statements, tagged as blocks of text.
104
The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2023, has been formatted in Inline XBRL.
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 8, 2023
By:
/s/ eric g. wintemute
Eric G. Wintemute
Chief Executive Officer and Chairman of the Board
/s/ david t. johnson
David T. Johnson
Chief Financial Officer & Principal Accounting Officer