American Vanguard Corp.
American Vanguard Corp. details
American Vanguard Corporation is a diversified specialty and agricultural products company that develops and markets products for crop protection and management, turf and ornamentals management and public and animal health. American Vanguard is included on the Russell 2000® & Russell 3000® Indexes and the Standard & Poors Small Cap 600 Index.
Ticker:AVD
Employees: 804
Filing
hi
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 SEPTEMBER 30, 2022
☐ 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 (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)
Securities registered pursuant to Section 12(b) of the Act:
Trading
Title of each class 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 — 29,581,627 shares as of November 2, 2022.
AMERICAN VANGUARD CORPORATION
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 22
Item 3. Quantitative and Qualitative Disclosures About Market Risk 30
Item 4. Controls and Procedures 30
PART II—OTHER INFORMATION 31
Item 1. Legal Proceedings 31
Item 1A. Risks Factors 31
Item 2. Purchases of Equity Securities by the Issuer 31
Item 6. Exhibits 33
SIGNATURES 34
2
PART I. FINANCI AL INFORMATION
Item 1. FINANC IAL STATEMENTS
AMERICAN VANGUARD CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
For the Three Months Ended September 30, For the Nine Months Ended September 30,
2022 2021 2022 2021
Net sales $ 152,117 $ 147,298 $ 449,636 $ 398,063
Cost of sales (90,733 ) (90,234 ) (267,280 ) (243,729 )
Gross profit 61,384 57,064 182,356 154,334
Operating expenses (50,140 ) (48,410 ) (145,550 ) (132,934 )
Adjustment to bargain purchase gain on business acquisition — 292 — 171
Operating income 11,244 8,946 36,806 21,571
Change in fair value of equity investments (454 ) (668 ) (857 ) 103
Other income — — — 672
Interest expense, net (1,086 ) (962 ) (2,256 ) (2,921 )
Income before provision for income taxes and loss on equity
method investment 9,704 7,316 33,693 19,425
Income tax expense (2,963 ) (1,517 ) (10,187 ) (5,324 )
Income before loss on equity method investment 6,741 5,799 23,506 14,101
Loss on equity method investment — (301 ) — (388 )
Net income $ 6,741 $ 5,498 $ 23,506 $ 13,713
Earnings per common share—basic $ .23 $ .18 $ .80 $ .46
Earnings per common share—assuming dilution $ .23 $ .18 $ .78 $ .45
Weighted average shares outstanding—basic 29,214 29,892 29,496 29,854
Weighted average shares outstanding—assuming dilution 29,805 30,390 30,128 30,470
See notes to the Condensed Consolidated Financial Statements.
3
AMERICAN VANGUARD CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEM ENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2022 2021 2022 2021
Net income $ 6,741 $ 5,498 $ 23,506 $ 13,713
Other comprehensive loss:
Foreign currency translation adjustment, net of tax effects (2,764 ) (3,459 ) (1,748 ) (3,048 )
Comprehensive income $ 3,977 $ 2,039 $ 21,758 $ 10,665
See notes to the Condensed Consolidated Financial Statements.
4
AMERICAN VANGUARD CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDAT ED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
ASSETS
September 30, December 31,
2022 2021
Current assets:
Cash and cash equivalents $ 20,808 $ 16,285
Receivables:
Trade, net of allowance for doubtful accounts of $4,535 and $3,938, respectively 194,515 149,326
Other 10,022 9,595
Total receivables, net 204,537 158,921
Inventories 192,309 154,306
Prepaid expenses 16,967 12,488
Income taxes receivable 2,180 —
Total current assets 436,801 342,000
Property, plant and equipment, net 68,598 66,111
Operating lease right-of-use assets 25,402 25,386
Intangible assets, net 187,207 197,841
Goodwill 46,215 46,260
Other assets 11,936 16,292
Deferred income tax assets, net 16 270
Total assets $ 776,175 $ 694,160
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current installments of other liabilities $ — $ 802
Accounts payable 81,919 67,140
Customer prepayments 222 63,064
Accrued program costs 108,016 63,245
Accrued expenses and other payables 24,390 20,745
Income taxes payable — 3,006
Current operating lease liabilities 5,329 5,059
Total current liabilities 219,876 223,061
Long-term debt, net 148,414 52,240
Long-term operating lease liabilities 20,536 20,780
Other liabilities, net of current installments 5,457 5,335
Deferred income tax liabilities, net 19,324 20,006
Total liabilities 413,607 321,422
Commitments and contingent liabilities
Stockholders' equity:
Preferred stock, $.10 par value per share; authorized 400,000 shares; none issued — —
Common stock, $.10 par value per share; authorized 40,000,000 shares; issued
34,463,947 shares at September 30, 2022 and 34,248,218 shares at December 31, 2021 3,446 3,426
Additional paid-in capital 101,426 101,450
Accumulated other comprehensive loss (15,532 ) (13,784 )
Retained earnings 325,698 304,385
Less treasury stock at cost, 4,884,200 shares at September 30, 2022 and 3,361,040 shares at December 31, 2021 (52,470 ) (22,739 )
Total stockholders’ equity 362,568 372,738
Total liabilities and stockholders' equity $ 776,175 $ 694,160
See notes to the Condensed Consolidated Financial Statements.
5
AMERICAN VANGUARD CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEM ENTS OF STOCKHOLDERS’ EQUITY
For The Three and Nine Months Ended September 30, 2022
(In thousands, except share data)
(Unaudited)
Accumulated
Common Stock Additional Other Treasury Stock
Paid-in Comprehensive Retained
Shares Amount Capital Loss Earnings Shares Amount Total
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 2 434 — — — — 436
Cash dividends on common stock ($0.025 per share) — — — — (736 ) — — (736 )
Foreign currency translation adjustment, net — — — 7,080 — — — 7,080
Stock-based compensation — — 1,563 — — — — 1,563
Stock options exercised; grants, termination
and vesting of restricted stock units
(net of shares in lieu of taxes) (183,093 ) (18 ) (2,156 ) — — — — (2,174 )
Shares repurchased 332,404 (6,219 ) (6,219 )
Net income — — — — 9,935 — — 9,935
Balance, March 31, 2022 34,091,876 3,410 101,291 (6,704 ) 313,584 3,693,444 (28,958 ) 382,623
Cash dividends on common stock ($0.025 per share) — — — — (742 ) — — (742 )
Foreign currency translation adjustment, net — — — (6,064 ) — — — (6,064 )
Stock-based compensation — — 1,273 — — — — 1,273
Stock options exercised; grants, termination
and vesting of restricted stock units
(net of shares in lieu of taxes) 351,358 35 892 — — — — 927
Shares repurchased — — — — — 606 (13 ) (13 )
Net income — — — — 6,830 — — 6,830
Balance, June 30, 2022 34,443,234 3,445 103,456 (12,768 ) 319,672 3,694,050 (28,971 ) 384,834
Common stock issued under ESPP 24,489 2 399 — — — — 401
Cash dividends on common stock ($0.025 per share) — — — — (715 ) — — (715 )
Foreign currency translation adjustment, net — — — (2,764 ) — — — (2,764 )
Stock-based compensation — — 1,560 — — — — 1,560
Stock options exercised; grants, termination
and vesting of restricted stock units
(net of shares in lieu of taxes) (3,776 ) (1 ) 11 — — — — 10
Shares repurchased — — — — — 387,340 (7,499 ) (7,499 )
Accelerated share repurchase pending final settlement — — (4,000 ) — — 802,810 (16,000 ) (20,000 )
Net income — — — — 6,741 — — 6,741
Balance, September 30, 2022 34,463,947 $ 3,446 $ 101,426 $ (15,532 ) $ 325,698 4,884,200 $ (52,470 ) $ 362,568
See notes to the Condensed Consolidated Financial Statements.
6
AMERICAN VANGUARD CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEM ENTS OF STOCKHOLDERS’ EQUITY
For The Three and Nine Months Ended September 30, 2021
(In thousands, except share data)
(Unaudited)
Accumulated
Common Stock Additional Other Treasury Stock
Paid-in Comprehensive Retained AVD
Shares Amount Capital Loss Earnings Shares Amount Total
Balance, December 31, 2020 33,922,433 $ 3,394 $ 96,642 $ (9,322 ) $ 288,182 3,061,040 $ (18,160 ) $ 360,736
Common stock issued under ESPP 25,120 2 338 — — — — 340
Cash dividends on common stock ($0.02 per share) — — — — (596 ) — — (596 )
Foreign currency translation adjustment, net — — — (2,503 ) — — — (2,503 )
Stock-based compensation — — 1,792 — — — — 1,792
Stock options exercised; grants, termination
and vesting of restricted stock units
(net of shares in lieu of taxes) (73,231 ) (7 ) (2,787 ) — — — — (2,794 )
Net income — — — — 3,071 — — 3,071
Balance, March 31, 2021 33,874,322 3,389 95,985 (11,825 ) 290,657 3,061,040 (18,160 ) 360,046
Cash dividends on common stock ($0.02 per share) — — — — (600 ) — — (600 )
Foreign currency translation adjustment, net — — — 2,914 — — — 2,914
Stock-based compensation — — 1,806 — — — — 1,806
Stock options exercised; grants, termination
and vesting of restricted stock units
(net of shares in lieu of taxes) 387,329 39 22 — — — — 61
Net income — — — — 5,144 — — 5,144
Balance, June 30, 2021 34,261,651 3,428 97,813 (8,911 ) 295,201 3,061,040 (18,160 ) 369,371
Common stock issued under ESPP 25,662 2 401 403
Cash dividends on common stock ($0.02 per share) — — — — (594 ) — — (594 )
Foreign currency translation adjustment, net — — — (3,459 ) — — — (3,459 )
Stock-based compensation — — 1,711 — — — — 1,711
Stock options exercised; grants, termination
and vesting of restricted stock units
(net of shares in lieu of taxes) (14,648 ) (2 ) (8 ) — — — — (10 )
Shares repurchased — — — — — 300,000 (4,579 ) (4,579 )
Net income — — — — 5,498 — — 5,498
Balance, September 30, 2021 34,272,665 $ 3,428 $ 99,917 $ (12,370 ) $ 300,105 3,361,040 $ (22,739 ) $ 368,341
See notes to the Condensed Consolidated Financial Statements.
7
AMERICAN VANGUARD CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED S TATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
For the Nine Months Ended September 30,
2022 2021
Cash flows from operating activities:
Net income $ 23,506 $ 13,713
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation and amortization of property, plant and equipment and intangible assets 16,649 17,045
Amortization of other long-term assets 2,656 2,981
Loss on disposal of property, plant and equipment 265 —
Accretion of discounted liabilities 28 (10 )
Amortization of deferred loan fees 174 294
Provision for bad debts 597 1,202
Loan principal and interest forgiveness — (672 )
Fair value adjustment to contingent consideration 621 520
Stock-based compensation 4,396 5,309
Change in deferred income taxes (64 ) (560 )
Change in fair value of equity investments 857 (103 )
Loss on equity method investment — 388
Adjustment to bargain purchase gain on business acquisition — (171 )
Net foreign currency adjustments 218 (330 )
Changes in assets and liabilities associated with operations:
Increase in net receivables (46,289 ) (42,979 )
Increase in inventories (38,987 ) (4,325 )
Increase in prepaid expenses and other assets (4,272 ) (2,194 )
(Increase) decrease in income tax receivable/payable, net (5,201 ) 2,031
Increase in net operating lease liability 10 183
Increase in accounts payable 14,418 7,769
Decrease in customer prepayments (62,831 ) (38,272 )
Increase in accrued program costs 45,016 33,982
Increase in other payables and accrued expenses 2,555 4,025
Net cash used in operating activities (45,678 ) (174 )
Cash flows from investing activities:
Capital expenditures (8,946 ) (7,963 )
Proceeds from disposal of property, plant and equipment 46 —
Acquisition of product line — (10,000 )
Intangible assets (1,078 ) (285 )
Investments — (183 )
Net cash used in investing activities (9,978 ) (18,431 )
Cash flows from financing activities:
Payments under line of credit agreement (64,000 ) (57,408 )
Borrowings under line of credit agreement 160,000 86,000
Payment of contingent consideration — (250 )
Net receipt from the issuance of common stock under ESPP 837 743
Net receipt from the exercise of stock options 783 172
Payment for tax withholding on stock-based compensation awards (2,020 ) (2,915 )
Repurchase of common stock (33,731 ) (4,579 )
Payment of cash dividends (2,072 ) (1,789 )
Net cash provided by financing activities 59,797 19,974
Net increase in cash and cash equivalents 4,141 1,369
Effect of exchange rate changes on cash and cash equivalents 382 (574 )
Cash and cash equivalents at beginning of period 16,285 15,923
Cash and cash equivalents at end of period $ 20,808 $ 16,718
See notes to the Condensed Consolidated Financial Statements.
8
AMERICAN VANGUARD CORPORATION AND SUBSIDIARIES
Notes to Condensed Consol idated Financial Statements
(In thousands, except share data)
(Unaudited)
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 statement have been included. Operating results for the three- and nine-month periods ended September 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. 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, 2021.
The Company continues to closely monitor the impact of the novel coronavirus (COVID-19) pandemic on all aspects of its business, including how the pandemic will impact its customers, business partners, and employees. The Company is considered an essential business by most governments in the jurisdictions and territories in which the Company operates and, as a result, did not incur significant disruptions from the COVID-19 pandemic during the three- and nine-month periods ended September 30, 2022 and 2021. During the three- and nine-month periods ended September 30, 2022, the Company experienced strong demand for its domestic crop and international products, and generally more normal business activities including face-to-face meetings with customers and suppliers etc. The Company established a pandemic working group at the start of the COVID-19 pandemic.
Looking forward, the Company is unable to predict the impact that the pandemic may have on its future financial condition, results of operations and cash flows due to numerous uncertainties. The extent to which the COVID-19 pandemic impacts the Company’s operations and those of its customers in the near term will depend on future developments, which are highly uncertain and, beyond extrapolating our experience since the start of the pandemic, cannot be predicted with confidence. The Company continues to monitor its business for adverse impacts of the pandemic, including some continuing volatility in foreign exchange markets, supply-chain disruptions in certain markets, and increased costs of employee safety and retention, among others.
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 1 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 nine-month periods presented in the table below.
The operating lease expense for the three-month periods ended September 30, 2022, and 2021, was $ 1,653 and $ 1,568 , respectively, and $ 4,876 and $ 4,464 for the nine-month periods ended September 30, 2022 and 2021, 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 Three months Nine months Nine months
ended ended ended ended
September 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021
Cash paid for amounts included in the
measurement of lease liabilities $ 1,613 $ 1,260 $ 4,846 $ 4,271
ROU assets obtained in exchange for new
liabilities $ 2,378 $ 5,805 $ 4,202 $ 17,872
The weighted-average remaining lease term and discount rate related to the operating leases as of September 30, 2022 were as follows:
Weighted-average remaining lease term (in years) 6.08
Weighted-average discount rate 4.00 %
9
Future minimum lease payments under non-cancellable operating leases as of September 30, 2022 were as follows:
2022 (excluding nine-months ended September 30, 2022) $ 1,603
2023 5,977
2024 5,132
2025 4,610
2026 3,439
Thereafter 8,580
Total lease payments 29,341
Less: imputed interest (3,476 )
Total $ 25,865
Amounts recognized in the condensed consolidated balance sheets:
Operating lease liabilities, current $ 5,329
Operating lease liabilities, long-term $ 20,536
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. Based on similar economic and operational characteristics, the Company’s business is aggregated into one reportable segment. Selective enterprise information of sales disaggregated by category and geographic region is as follows:
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Net sales:
U.S. crop $ 69,115 $ 66,722 $ 220,503 $ 184,052
U.S. non-crop 18,936 21,622 53,648 60,563
Total U.S. 88,051 88,344 274,151 244,615
International 64,066 58,954 175,485 153,448
Total net sales: $ 152,117 $ 147,298 $ 449,636 $ 398,063
Timing of revenue recognition:
Goods and services transferred at a point
in time $ 152,117 $ 147,298 $ 449,493 $ 397,762
Goods and services transferred over time — — 143 301
Total net sales: $ 152,117 $ 147,298 $ 449,636 $ 398,063
Contract assets relate to royalties earned on certain functional licenses granted for the use of the Company’s intellectual property and amounted to $ 3,000 and $ 3,900 at September 30, 2022 and December 31, 2021, respectively. The short-term and long-term contract assets of $ 1,525 and $ 1,475 are included in other receivables and other assets, respectively, on the condensed consolidated balance sheets as of September 30, 2022. The short-term and long-term assets of $ 1,825 and $ 2,075 are included in other receivables and other assets, respectively, on the condensed consolidated balance sheets as of December 31, 2021.
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 nine-month periods ended September 30, 2022, that was included in customer prepayments at the beginning of 2022, was $ 272 and $ 63,064 , respectively. The Company expects to recognize all its remaining customer prepayments as revenue in fiscal 2022.
10
4. Property, Plant and Equipment — Property, plant and equipment at September 30, 2022 and December 31, 2021 consists of the following:
September 30, December 31,
2022 2021
Land $ 2,755 $ 2,756
Buildings and improvements 19,909 19,844
Machinery and equipment 140,309 132,159
Office furniture, fixtures and equipment 10,419 10,094
Automotive equipment 1,595 1,832
Construction in progress 7,898 8,199
Total gross value 182,885 174,884
Less accumulated depreciation (114,287 ) (108,773 )
Total net value $ 68,598 $ 66,111
The Company recognized depreciation expense related to property and equipment of $ 2,091 and $ 2,496 for the three-month periods ended September 30, 2022 and 2021, respectively. The Company recognized depreciation expense related to property and equipment of $ 6,207 and $ 6,341 for the nine-month periods ended September 30, 2022 and 2021, respectively.
Substantially all of the Company’s assets are pledged as collateral to its banks.
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:
September 30,
2022 December 31, 2021
Finished products $ 163,359 $ 138,159
Raw materials 28,950 16,147
$ 192,309 $ 154,306
6. Segment Reporting — Based on similar economic and operational characteristics, the Company’s business is aggregated into one reportable segment. Selective enterprise information is as follows:
For the three months
ended September 30,
2022 2021 Change % Change
Net sales:
U.S. crop $ 69,115 $ 66,722 $ 2,393 4 %
U.S. non-crop 18,936 21,622 (2,686 ) -12 %
U.S. total 88,051 88,344 (293 ) 0 %
International 64,066 58,954 5,112 9 %
Net sales: $ 152,117 $ 147,298 $ 4,819 3 %
Gross profit:
U.S. crop $ 34,502 $ 30,237 $ 4,265 14 %
U.S. non-crop 8,811 8,882 (71 ) -1 %
U.S. total 43,313 39,119 4,194 11 %
International 18,071 17,945 126 1 %
Total gross profit: $ 61,384 $ 57,064 $ 4,320 8 %
11
For the nine months
ended September 30,
2022 2021 Change % Change
Net sales:
U.S. crop $ 220,503 $ 184,052 $ 36,451 20 %
U.S. non-crop 53,648 60,563 (6,915 ) -11 %
U.S. total 274,151 244,615 29,536 12 %
International 175,485 153,448 22,037 14 %
Net sales: $ 449,636 $ 398,063 $ 51,573 13 %
Gross profit:
U.S. crop $ 104,599 $ 78,313 $ 26,286 34 %
U.S. non-crop 24,826 28,047 (3,221 ) -11 %
U.S. total 129,425 106,360 23,065 22 %
International 52,931 47,974 4,957 10 %
Total gross profit: $ 182,356 $ 154,334 $ 28,022 18 %
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 nine-month periods ended September 30, 2022, and 2021.
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:
Dividend Total
Declaration Date Record Date Distribution Date Per Share Paid
September 12, 2022 September 23, 2022 October 7, 2022 $ 0.025 $ 715
June 6, 2022 June 24, 2022 July 8, 2022 $ 0.025 $ 742
March 14, 2022 March 25, 2022 April 15, 2022 $ 0.025 $ 736
December 13, 2021 December 27, 2021 January 10, 2022 $ 0.020 $ 594
September 13, 2021 October 1, 2021 October 15, 2021 $ 0.020 $ 594
June 8, 2021 June 24, 2021 July 8, 2021 $ 0.020 $ 600
March 10, 2021 March 15, 2021 April 15, 2021 $ 0.020 $ 596
December 7, 2020 December 23, 2022 January 6, 2021 $ 0.020 $ 592
9. Earnings Per Share — The components of basic and diluted earnings per share were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
Numerator:
Net income attributable to AVD $ 6,741 $ 5,498 $ 23,506 $ 13,713
Denominator: (in thousands)
Weighted average shares outstanding-basic 29,214 29,892 29,496 29,854
Dilutive effect of stock options and grants 591 498 632 616
Weighted average shares outstanding-diluted 29,805 30,390 30,128 30,470
12
For the three- and nine-month periods ended September 30, 2022, and 2021, respectively, no stock options were excluded from the computation of diluted earnings 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 September 30, 2022 and December 31, 2021. The Company has no short-term debt as of September 30, 2022 and December 31, 2021. The debt is summarized in the following table:
Long-term indebtedness ($000's) September 30, 2022 December 31, 2021
Revolving line of credit $ 149,300 $ 53,300
Deferred loan fees (886 ) (1,060 )
Net long-term debt $ 148,414 $ 52,240
The Company’s main bank is Bank of the West, a wholly-owned subsidiary of the French bank, BNP Paribas. Bank of the West has been the Company’s bank for more than 40 years and is the syndication manager for the Company’s loans.
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, and (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, sole lead arranger and book runner, 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 a maturity date of August 5, 2026 . The Credit Agreement amends and restates 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 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. Distributions to the Company’s shareholders are limited to net income for the four fiscal quarter period ending on the fiscal quarter immediately prior to the fiscal quarter in which the current distribution was declared.
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”). Interest payments for LIBOR Revolver Loans are payable on the last day of each interest period (either one, two, three or six months, as selected by the borrower) and the maturity date, while interest payments for Adjusted Base Rate Revolver Loans are payable on the last business day of each calendar quarter and the maturity date. The interest rate as of September 30, 2022 was 4.46 %.
At September 30, 2022, the Company was compliant with all covenants to its current credit agreement. Also, at September 30, 2022, the Company’s total Funded Debt amounted to $ 149,300 . At that date the Company’s rolling four quarter Consolidated EBITDA (as defined in the Credit Agreement) amounted to $ 77,167 , which results in a leverage ratio of 1.93 , as compared to a maximum leverage ratio permitted under the Credit Agreement of 3.5 . At September 30, 2022, the Company has the capacity to increase its borrowings by up to $ 120,783 , according to the terms thereof. This compares to an available borrowing capacity of $ 94,973 as of September 30, 2021. At December 31, 2021, the Company had borrowing capacity of $ 178,705 . The level of borrowing capacity is driven by three factors: (1) our financial performance, as measured in EBITDA for both the trailing twelve-month period and proforma basis arising from acquisitions, (2) net borrowings, and (3) the leverage covenant (the TL Ratio).
Agrinos had an existing Paycheck Protection Program (PPP) loan in the amount of $ 705 as of the date it was acquired by the Company in October 2020. This PPP loan was granted to Agrinos on April 27, 2020. On January 7, 2021, the Small Business Administration forgave $ 667 in principal and $ 5 in interest of this PPP loan. As a result, the PPP loan was extinguished on January 7, 2021 and the total amount forgiven of $ 672 was recorded as other income in the Company’s condensed consolidated statements of operations and represents a non-cash financing activity on the condensed consolidated statement of cash flows for the nine months ended September 30, 2021.
11. Reclassifications — Certain items may have been reclassified in the prior period condensed consolidated financial statements to conform with the September 30, 2022, presentation.
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12. Comprehensive Income — Total comprehensive income includes, in addition to net income, changes in equity that are excluded from the condensed consolidated statement of operations and are recorded directly into a separate section of stockholders’ equity on the condensed consolidated balance sheets. For the three- and nine-month periods ended September 30, 2022, and 2021, total comprehensive income consisted of net income attributable to American Vanguard and foreign currency translation adjustments.
13. Stock-Based Compensation — The following tables illustrate the Company’s stock-based compensation, unamortized stock-based compensation, and remaining weighted average amortization period.
Stock-Based Stock-Based Remaining
Compensation Compensation Unamortized Weighted
for the Three for the Nine Stock-Based Average
months ended months ended Compensation Period (years)
September 30, 2022
Restricted Stock $ 1,184 $ 3,257 $ 8,010 2.0
Unrestricted Stock 130 369 347 0.7
Performance-Based Restricted Stock 246 770 3,093 1.9
Total $ 1,560 $ 4,396 $ 11,450
September 30, 2021
Restricted Stock $ 1,246 $ 3,469 $ 8,277 2.0
Unrestricted Stock 100 317 267 0.7
Performance-Based Restricted Stock 365 1,523 3,522 2.0
Total $ 1,711 $ 5,309 $ 12,066
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 nine-month periods ended September 30, 2022, and 2021.
Time-Based Restricted and Unrestricted Stock — A summary of non-vested shares as of, and for, the three- and nine-month periods ended September 30, 2022, and 2021 is presented below:
Three and Nine Months Ended Three and Nine Months Ended
September 30, 2022 September 30, 2021
Weighted Weighted
Average Average
Grant Grant
Number Date Fair Number Date Fair
of Shares Value of Shares Value
Nonvested shares at December 31st 817,290 $ 17.04 820,624 $ 16.64
Vested (230,080 ) 17.31 (197,615 ) 19.91
Forfeited (24,109 ) 17.10 (11,580 ) 16.95
Nonvested shares at March 31st 563,101 16.93 611,429 15.57
Granted 242,067 23.79 289,757 20.10
Vested (27,482 ) 22.35 (30,112 ) 16.72
Forfeited (14,070 ) 18.53 (11,231 ) 16.60
Nonvested shares at June 30th 763,616 18.88 859,843 17.04
Granted 13,600 $ 18.94 3,400 15.17
Vested (1,262 ) 19.39 (5,962 ) 15.36
Forfeited (15,945 ) 20.09 (13,841 ) 17.21
Nonvested shares at September 30th 760,009 $ 18.86 843,440 $ 17.04
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Performance-Based Restricted Stock — A summary of non-vested performance-based shares as of, and for, the three- and nine-month periods ended September 30, 2022, and 2021, respectively is presented below:
Three and Nine Months Ended Three and Nine Months Ended
September 30, 2022 September 30, 2021
Weighted Weighted
Average Average
Grant Grant
Number Date Fair Number Date Fair
of Shares Value of Shares Value
Nonvested shares at December 31st 379,061 $ 16.43 391,771 $ 16.26
Additional granted (forfeited) based on
performance achievement (41,088 ) 16.56 71,180 20.53
Vested (78,704 ) 17.18 (175,087 ) 19.78
Forfeited (7,074 ) 16.77 (505 ) 19.26
Nonvested shares at March 31st 252,195 16.17 287,359 15.16
Granted 83,190 23.63 102,043 20.03
Forfeited (7,829 ) 17.50 — —
Nonvested shares at June 30th 327,556 16.58 389,402 16.44
Forfeited (2,577 ) 17.80 (3,733 ) 17.04
Nonvested shares at September 30th 324,979 $ 16.57 385,669 $ 16.43
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:
Incentive Stock Option Plans
Activity for the three- and nine-month periods ended September 30, 2022:
Weighted
Number of Average Price
Shares Per Share
Balance outstanding, December 31, 2021 and March 31, 2022 108,036 $ 11.49
Options exercised (33,745 ) 11.49
Balance outstanding, June 30, 2022 74,291 $ 11.49
Options exercised (1,541 ) 11.49
Balance outstanding, September 30, 2022 72,750 $ 11.49
All the incentive stock options outstanding as of September 30, 2022, have an exercise price per share of $ 11.49 , total intrinsic value of $ 525 , and a remaining life of 27 months.
Activity for the three- and nine-month periods ended September 30, 2021:
Weighted
Number of Average Price
Shares Per Share
Balance outstanding, December 31, 2020 123,087 $ 11.48
Options exercised (5,838 ) 11.49
Balance outstanding, March 31, 2021 117,249 11.48
Options exercised (8,826 ) 11.35
Balance outstanding, June 30, 2021 108,423 11.49
Options exercised (387 ) 11.49
Balance outstanding, September 30, 2021 108,036 $ 11.49
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Performance Incentive Stock Option Plan
Activity for the three- and nine-month periods ended September 30, 2022:
Weighted
Number of Average Price
Shares Per Share
Balance outstanding, December 31, 2021 and March 31, 2022 114,658 $ 11.49
Options exercised (32,850 ) 11.49
Balance outstanding, June 30 and September 30, 2022 81,808 $ 11.49
Activity for the three- and nine-month periods ended September 30, 2021:
Weighted
Number of Average Price
Shares Per Share
Balance outstanding, December 31, 2020 114,658 $ 11.49
Options exercised — —
Balance outstanding, September 30, 2021 114,658 $ 11.49
All the performance incentive stock options outstanding as of September 30, 2022, have an exercise price per share of $ 11.49 , total intrinsic value of $ 590 , and a remaining life of 27 months.
14. 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, 2021, except as described below.
EPA FIFRA/RCRA Matter. On November 10, 2016, the Company 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 defending the Company’s interests. AMVAC is cooperating in the investigation.
Since April 2018, the Department of Justice (“DOJ”) has conducted several interviews of AMVAC employees and issued supplemental document requests in connection with the investigation. In November 2020, DOJ issued a second grand jury subpoena seeking records and related communications with regard to a submission made by the Company to the Environmental Protection Agency (“EPA”) in connection with a request to amend a pesticide’s registration. Soon thereafter, DOJ also identified the Company and one of its non-executive employees as targets of the government’s investigation. In January 2021, DOJ and EPA informed the Company that it is investigating 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. DOJ also identified evidence that it contends supports alleged violations with respect to both the Company and the individual target. As part of discussions regarding possible resolution, in October 2021, the Company presented its evaluation of the legal and factual issues raised by the government (which do not include any allegations of harm to human health or the environment) to both DOJ and USEPA. Further, three corporate witnesses were interviewed by the grand jury in Mobile, Alabama in February 2022. Following that interview, the individual target entered into a plea agreement which was entered by the court having jurisdiction in this matter in May 2022. In July 2022, the DOJ outlined its current view of the investigation and indicated an interest in reaching resolution of the matter. Further discussions on that subject are imminent. The Company expects that talks regarding potential resolution will resume in the near future.
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 flow. Accordingly, we have not recorded a loss contingency for this matter.
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Harold Reed v. AMVAC et al . During January 2017, the Company was served with two Statements of Claim that had been filed on March 29, 2016 with the Court of Queen’s Bench of Alberta, Canada (as case numbers 160600211 and 160600237) in which plaintiffs, Harold Reed (an applicator) and 819596 Alberta Ltd. dba Jem Holdings (an application equipment rental company), allege physical injury and damage to equipment, respectively, arising from a fire that occurred during an application of the Company’s potato sprout inhibitor, SmartBlock, at a potato storage facility in Coaldale, Alberta on April 2, 2014. Four other related matters were subsequently consolidated into this case (alleging loss of potatoes, damage to equipment, damage to Quonset huts and loss of business income). The parties have exchanged written discovery, and depositions of persons most knowledgeable took place during the first quarter of 2019. Citing the length of the cases’ pendency and the expense, in December 2019, plaintiff Reed voluntarily dismissed two actions (160600211 and 160600237) for no consideration. Over the course of 2020, discovery was completed, and the parties held a mediation on March 11, 2021; however, no settlement was reached. The parties participated in a second mediation in August 2022, during which plaintiffs significantly lowered their collective demands, and all parties were able to reach a settlement under the terms of which three co-defendants (including the Company) are equally sharing in a cash contribution. The Company’s contribution toward settlement was largely covered by pre-existing reserves and, in any event, is not material to its financial performance or operations. The court has entered an order of dismissal with prejudice pursuant to the settlement agreement; thus, this matter is resolved.
DCPA Suspension Proceedings . In May 2022, the USEPA issued a notice of intention to suspend DCPA, the active ingredient of an herbicidal product marketed by the Company under the name Dacthal, on the basis that the Company acted allegedly inappropriately in providing data studies that had been requested by the agency. In fact, the agency had requested 89 data studies and, over the course of several years, the Company had supplied 69 such studies and had been working constructively on mutually acceptable timetables either to complete, or to obtain waivers for, the balance of the studies. The Company petitioned an administrative law judge (“ALJ”) to appeal the notice of intention to suspend ("NOITS"). In response to USEPA’s motion, the ALJ granted an accelerated decision to uphold the NOITS. The Company, in turn, has appealed the ALJ’s decision to the Environmental Appeals Board (“EAB”), on the ground that the basis was erroneous, both with respect to statutory construction and factual inferences being improperly made in the agency’s favor. In October 2022, the EAB reversed the ALJ’s order, finding that that court had used a statutorily improper standard (namely, whether the Company had submitted all requested data as opposed to the proper standard of whether the Company acted appropriately in responding to the data call-ins). The matter has been remanded to the ALJ, which has set a hearing date of January 24, 2023. At the same time, USEPA has expressed an interest in settlement of the matter; thus, the Company, USEPA and the Office of General Counsel are engaged in settlement discussions in parallel with the proceedings at the ALJ. At this stage, the Company is unable to predict the probable outcome of the matter and, accordingly, has not recorded a loss contingency with respect thereto.
15. Recent Issued Accounting Guidance
Accounting Standards Adopted
In November 2021, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2021-10, “Disclosures by Business Entities about Government Assistance.” This ASU codifies new requirements to disclose information about the nature of certain government assistance received, the accounting policy used to account for the transactions, the location in the financial statements where such transactions were recorded, and significant terms and conditions associated with such transactions. The guidance is effective for annual periods beginning after December 15, 2021. Effective January 1, 2022, the Company adopted ASU No. 2021-10 on a prospective basis. The adoption of this standard was not material to the Company’s condensed consolidated financial statements.
Accounting Standards Not Yet Adopted
In October 2021, the FASB issued ASU 2021-08, “Business Combinations (Topic 805): Accounting for Contract Assets and Liabilities from Contracts with Customers.” This ASU requires an acquiring entity to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with ASC 606. The ASU is effective for fiscal years and interim periods beginning after December 15, 2022, with early adoption permitted. The Company is evaluating the impact of adopting this ASU and does not expect a material impact on its condensed consolidated financial statements.
The Company reviewed all other 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.
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16. 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:
• Level 1 – Quoted prices in active markets for identical assets or liabilities. • Level 2 – Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. • Level 3 – Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability.
The carrying amount of the Company’s financial instruments, which principally include cash and cash equivalents, short-term investments, accounts receivable, long-term investments, accounts payable and accrued expenses, approximates fair value because of the relatively short maturity of such instruments. The carrying amount of the Company’s short-term and long-term borrowings, which are considered Level 2 liabilities, approximates fair value based upon current rates and terms available to the Company for similar debt.
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 following table illustrates the Company’s contingent consideration movements related to its business acquisitions:
Three months ended Three months ended
September 30, 2022 September 30, 2021
Balance, June 30 $ 1,367 $ 2,116
Fair value adjustment — (493 )
Payments on existing obligations (1,292 ) —
Accretion of discounted liabilities 10 (1 )
Foreign exchange effect (85 ) (57 )
Balance, September 30 $ — $ 1,565
Nine months ended Nine months ended
September 30, 2022 September 30, 2021
Balance, December 31 $ 786 $ 2,468
Purchase price adjustment — (955 )
Fair value adjustment 635 520
Payments on existing obligations (1,292 ) (250 )
Accretion of discounted liabilities 28 (10 )
Foreign exchange effect (157 ) (208 )
Balance, September 30 $ — $ 1,565
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The contingent consideration in the amount of $ 786 is included in current installments of other liabilities on the condensed consolidated balance sheets as of December 31, 2021.
17. 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:
Total
Balance, December 31, 2021 $ (13,784 )
Foreign currency translation adjustment, net of tax effects of ($48) 7,080
Balance, March 31, 2022 (6,704 )
Foreign currency translation adjustment, net of tax effects of $109 (6,064 )
Balance, June 30, 2022 (12,768 )
Foreign currency translation adjustment, net of tax effects of $81 (2,764 )
Balance, September 30, 2022 $ (15,532 )
Balance, December 31, 2020 $ (9,322 )
Foreign currency translation adjustment, net of tax effects of $1,179 (2,503 )
Balance, March 31, 2021 (11,825 )
Foreign currency translation adjustment, net of tax effects of ($1,731) 2,914
Balance, June 30, 2021 (8,911 )
Foreign currency translation adjustment, net of tax effects of $1,359 (3,459 )
Balance, September 30, 2021 $ (12,370 )
18. 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 September 30, 2022 and December 31, 2021, the Company’s ownership position in Bi-PA was 15 %. Since this investment does not have a 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 nine-month periods ended September 30, 2022. The Company recorded an impairment in the amount of $ 399 during the three- and nine-month periods ended September 30, 2021.The investment is recorded within other assets on the condensed consolidated balance sheets and amounted to $ 2,884 as of September 30, 2022 and December 31, 2021.
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 $ 659 and $ 1,516 as of September 30, 2022 and December 31, 2021, respectively. The Company recorded a loss of $ 454 and $ 269 for the three-month periods ended September 30, 2022 and 2021, respectively. The Company recorded a loss of $ 857 and a gain of $ 502 for the nine-month periods ended September 30, 2022 and 2021, respectively. The investment is recorded within other assets on the condensed consolidated balance sheets.
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19. Product and Business Acquisitions — The Company did not complete any acquisitions during the three- and nine-month periods ended September 30, 2022. The Company completed one product acquisition during the three- and nine-months ended September 30, 2021. The acquisition was completed on July 1, 2021, for $ 10,000 in cash consideration. The acquisition was accounted for as an asset acquisition and the $10,000 in consideration was allocated as follows: product registrations and product rights $ 8,225 , trade names and trademarks $ 1,650 , and prepaid asset $ 125 .
20. Income Taxes — Income tax expense was $ 2,963 and $ 1,517 for the three-month period ended September 30, 2022, and 2021, respectively. The effective tax rate was 30.5 % and 20.7 % for the three-month periods ended September 30, 2022 and 2021, respectively. Income tax expense was $ 10,187 and $ 5,324 for the nine months ended September 30, 2022, and 2021, respectively. The effective tax rate for the nine-month periods ended September 30, 2022 and 2021, was 30.2 % and 27.4 %, respectively. For the three- and nine-month periods ended September 30, 2022, the rate increased compared to the same periods of 2021 reflecting the mix of income in different jurisdictions. For tax years beginning after December 31, 2021, the Tax Cuts and Jobs Act (“TCJA”) of 2017 amends Internal Revenue Code Section 174 Costs wherein research and development expenditures will no longer be deducted in the tax year that such costs are incurred but must now be capitalized and amortized over either a five- or fifteen-year period, depending on the location of the activities performed. The effective tax rate is based on the projected income for the full year and is subject to ongoing review and adjustment by management.
21. Stock Re-purchase Programs — The Company periodically repurchases shares of its common stock under a board-authorized repurchase program through a combination of open market transactions and accelerated share repurchase (ASR) arrangements.
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, par value $ 0.10 per share, in the open market over the succeeding one year, subject to limitations and restrictions under applicable securities laws.
The table below summarizes the number of shares of the Company’s common stock that were repurchased during the three- and nine-month periods ended September 30, 2022. There were no such purchases during the three- and nine-month periods ended September 30, 2021.
Maximum number
of shares that may
Total number of Average price yet be purchased
Month ended shares purchased paid per share Total amount paid under the plan
March 31, 2022 332,404 $ 18.71 $ 6,219 667,596
Balance at March 31, 2022 332,404 $ 6,219 667,596
April 30, 2022 100 $ 19.99 $ 2 667,496
May 31, 2022 506 $ 19.99 $ 11 666,990
Balance at June 30, 2022 606 $ 19.99 $ 13 666,990
August 31, 2022 165,039 $ 19.59 $ 3,234 501,951
September 30, 2022 222,301 $ 19.19 $ 4,265 279,650
Balance at September 30, 2022 387,340 $ 19.36 $ 7,499 279,650
Total number of shares repurchased 720,350 $ 19.06 $ 13,731 279,650
On August 22, 2022, pursuant to a Board of Directors resolution, the Company entered into an accelerated share repurchase arrangement to repurchase $ 20,000 of its common stock. Under the agreement, the Company paid $ 20,000 and immediately received an initial delivery of 802,810 shares in the amount of $ 16,000 , which the Company recorded as treasury shares. The Company recorded the remaining $ 4,000 as a reduction to additional paid-in capital pending final settlement in the fourth quarter of 2022. The final number of shares that the Company ultimately receives under the agreement will be determined based on the average of the Rule 10b-18 volume-weighted average prices of the Company’s common stock during the term of the agreement, less and agreed discount, and subject to adjustments pursuant to the terms of the agreement.
The table below summarizes the number of shares of the Company’s common stock that were received under the accelerated share repurchase arrangement during the three- and nine-month periods ended September 30, 2022. There were no such transactions during the three- and nine-month periods ended September 30, 2021.
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Total number of Average price
Month ended shares received paid per share Total amount paid
August 31, 2022 802,810 $ 19.93 $ 16,000
In summary, the Company added a total of 1,190,150 and 1,523,160 of treasury shares of the Company’s common stock during the three- and nine-month periods ended September 30, 2022.
22. Supplemental Cash Flow Information
For the Nine Months Ended September 30,
2022 2021
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 2,073 $ 2,839
Income taxes, net $ 15,530 $ 3,836
Non-cash transactions:
ROU assets exchanged for lease liabilities $ 4,202 $ 17,872
Cash dividends declared and included in accrued expenses $ 715 $ 594
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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.
MANAGEMENT OVERVIEW
Overview of the Company’s Performance
During the third quarter of 2022, the agriculture industry continued to demonstrate resiliency. Driven by geopolitical conditions, corn and soybean commodity prices for row crops remained high. Further, supply chain conditions continued to improve across many industries. Further, thus far, the industry has been able to compensate for the effects of inflation through price increases. The Company responded to these conditions by increasing prices, where possible, and deployed its factory assets to continue meeting demand. Consequently, the Company’s overall operating results for the third quarter of 2022 improved modestly in terms of net sales and more significantly in terms of profitability, as compared with those of the same period of 2021. Led by increased sales within our international business, consolidated net sales increased by 3% (to end at $152,117 as compared to $147,298) and net income increased by 23% (to $6,741 from $5,498).
On a consolidated basis, domestic sales were flat, and international sales increased 9%, resulting in an overall net sales improvement of 3%. By contrast, cost of sales was virtually flat, quarter-over-quarter. This lower comparative increase in cost of sales was a result of higher selling prices and a favorable mix of higher-margin products in the third quarter of 2022, as compared to the same period of the prior year. Cost of sales were 60% of sales in the third quarter of 2022, as compared to 61% for the same period of 2021. These factors, taken together, yielded a 8% increase in gross profit, while overall gross margin percent improved to 40% from 39% quarter-over-quarter, as a result of selling more higher margin products, increased prices, and better factory performance.
Operating expenses remained flat at 33% of net sales, notwithstanding significant inflationary pressure. Operating income for the period increased by 26% (to $11,244 from $8,946), driven by the overall sales increase, higher selling prices and improved factory utilization. Interest expense was flat as compared with the same period of 2021, while tax expense rose by 95% (from $1,517 in the third quarter of 2021 to $2,963 in the same period of 2022) due to an increase in taxable income and higher effective tax rate. These factors yielded net income for the period of $6,741, a 23% increase over compared to $5,498 in the third quarter of 2021. Details on our financial performance are set forth below.
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RESULTS OF OPERATIONS
Quarter Ended September 30, 2022 and 2021:
2022 2021 Change % Change
Net sales:
U.S. crop $ 69,115 $ 66,722 $ 2,393 4 %
U.S. non-crop 18,936 21,622 (2,686 ) -12 %
Total U.S. 88,051 88,344 (293 ) 0 %
International 64,066 58,954 5,112 9 %
Total net sales: $ 152,117 $ 147,298 $ 4,819 3 %
Cost of sales:
U.S. crop $ 34,613 $ 36,485 $ (1,872 ) -5 %
U.S. non-crop 10,125 12,740 (2,615 ) -21 %
Total U.S. 44,738 49,225 (4,487 ) -9 %
International 45,995 41,009 4,986 12 %
Total cost of sales: $ 90,733 $ 90,234 $ 499 1 %
Gross profit:
U.S. crop $ 34,502 $ 30,237 $ 4,265 14 %
U.S. non-crop 8,811 8,882 (71 ) -1 %
Total U.S. 43,313 39,119 4,194 11 %
International 18,071 17,945 126 1 %
Total gross profit $ 61,384 $ 57,064 $ 4,320 8 %
Gross margin:
U.S. crop 50 % 45 %
U.S. non-crop 47 % 41 %
Total U.S. 49 % 44 %
International 28 % 30 %
Total gross margin 40 % 39 %
Our domestic crop business recorded net sales that were 4% higher than those of the third quarter of 2021 ($69,115 as compared to $66,722). Year-over-year gains were posted by Dacthal (a leading weed control solution for a variety of high value vegetable crops including onions), Folex (which benefited from favorable harvest weather conditions and the increase in 2022 cotton acres in the Mississippi Delta region), and Bidrin (our cotton foliar insecticide which benefitted from increased early-season pest pressure). These gains were partially offset by lower sales of corn soil insecticide Aztec, due to a shift in customer purchasing patterns, and temporarily delayed sales of Thimet for sugarcane applications which were curtailed at the end of the quarter due to the impact of Hurricane Ian on logistics in Florida. Further, while drought conditions in our Western and Southwestern markets adversely impacted the physical volume of our soil fumigants products, we achieved improved net sales through appropriate price adjustments.
Cost of sales within the domestic crop business decreased by 5% (from $36,485 in 2021 to $34,613 in 2022) primarily as a result of selling more higher-margin products, and improved factory performance. As a result of these factors and increased pricing, domestic crop generated an 14% increase in gross profit (from $30,237 in the third quarter of 2021 to $34,502 this year) on a 4% increase in sales.
Our domestic non-crop business posted a decline in net sales in the third quarter of 2022, as compared to the same period in the prior year (down 12% to $18,936 from $21,622 in 2021). In the quarter, demand for our OHP nursery and ornamental products declined, as consumer spending paused on concerns over a possible economic recession. Conversely, we saw an uptick in demand for goods that we supply to professional pest control applicators and landscapers. Mosquito control product sales were below the prior year third quarter, but in the aftermath of Hurricane Ian channel inventories of our Dibrom adulticide are being depleted and is expected to be replenished in the next two quarters.
Cost of sales within the domestic non-crop business declined by 21% in the third quarter of 2022, as compared to the same period in the prior year (from $12,740 in 2021 to $10,125 in 2022), primarily resulting from lower sales offset by price increases and improved factory performance and associated overhead cost recovery. Gross profit for domestic non-crop decreased by 1% (from $8,882 in 2021 to $8,811 in 2022).
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Net sales of our international businesses rose by 9% during the period ($64,066 in 2022 vs. $58,954 in 2021) and constituted 42% of our consolidated quarterly sales. These results were achieved despite the challenges posed by the strong US Dollar and various production, supply, and transportation difficulties. The business benefited from sales increases in soil fumigants, Mocap and Nemacur soil insecticides and an especially strong performance in Brazil, where our Counter nematicide sales are accelerating. Our Central American business experienced increased demand in the pineapple, banana, and citrus markets, along with continuing expansion of our Greenplants micronutrient solutions. In Mexico, despite drought conditions, our business experienced good performance by penetrating previously untapped regions of the country with at-plant fumigants and herbicides on high-value crops. Despite sufficient rainfall and heavy demand for molluscicides and other insecticide products for use on canola, winter wheat and pulse, our Australian operations posted lower sales as a result of supply constraints and transportation-related difficulties.
Cost of sales in our international business increased by 12% (from $41,009 in 2021 to $45,995 in 2022), on sales that increased by 9% and was impacted by cost increases (including logistics and freight) of the third-party products that we distribute. Gross profit for the international businesses increased by 1% (to $18,071 in 2022 from $17,945 in 2021).
On a consolidated basis, gross profit for the third quarter of 2022 increased by 8% (from $57,064 in 2021 to $61,384 in 2022). Overall gross margin percentage ended at 40% in the third quarter of 2022, as compared to 39% in the third quarter of the prior year. The primary driver for this increase was higher selling prices coupled with improved factory performance, partially offset by inflation on raw materials and logistics and, for our international businesses, higher purchases costs related to increases in the US Dollar.
Operating expenses increased by $1,730 to $50,140 for the three-month period ended September 30, 2022, as compared to the same period in 2021. The changes in operating expenses by department are as follows:
2022 2021 Change % Change
Selling $ 14,162 $ 12,462 $ 1,700 14 %
General and administrative 15,570 15,727 (157 ) -1 %
Research, product development and regulatory 8,513 7,674 839 11 %
Freight, delivery and warehousing 11,895 12,547 (652 ) -5 %
Subtotal $ 50,140 $ 48,410 $ 1,730 4 %
• Selling expenses increased by $1,700 to end at $14,162 for the three-month period ended September 30, 2022, as compared with the same period of the prior year. This included increased costs associated with travel expenses (as the business resumed in-person interaction with customers), inflation related increased wages, increased spending on advertising and promoting the Company’s products, and the cost of commissions associated with sales growth in Brazil. These increased costs were somewhat offset by exchange movement in key currencies. • General and administrative expenses decreased by $157 to end at $15,570 for the three-month period ended September 30, 2022, as compared to the same period of 2021. The main drivers were the positive impacts on the foreign currency exchange rates, offset by increased wages, travel expenses, legal and other administrative costs in support of our growing business. • Research, product development costs and regulatory expenses increased by $839 to end at $8,513 for the three-month period ended September 30, 2022, as compared to the same period of 2021. The main drivers were increased international regulatory and registration costs as we invest in our strongly growing business. • Freight, delivery and warehousing costs for the three-month period ended September 30, 2022, were $11,895 or 7.8% of sales as compared to $12,547 or 8.5% of sales for the same period in 2021. The decrease can mainly be attributed to improved supply chain conditions and variations in delivery destinations.
On April 1, 2020, the Company made a strategic investment in Clean Seed Inc., in the amount of $1,190. The Company recorded negative fair value adjustments in the amount of $454 and $269 for the three months ended September 30, 2022 and 2021, respectively.
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Interest costs net of capitalized interest were $1,086 in the three-month period ended September 30, 2022, as compared to $962 in the same period of 2021. Interest costs are summarized in the following table:
Average Indebtedness and Interest expense
Three months ended September 30, 2022 Three months ended September 30, 2021
Average Interest Interest Average Interest Interest
Debt Expense Rate Debt Expense Rate
Revolving line of credit (average) $ 125,441 $ 1,104 3.5 % $ 147,171 $ 889 2.4 %
Amortization of deferred loan fees — 61 — — 70 —
Amortization of other deferred liabilities — 10 — — 2 —
Other interest expense — (1 ) — — 52 —
Subtotal 125,441 1,174 3.7 % 147,171 1,013 2.8 %
Capitalized interest — (88 ) — — (51 ) —
Total $ 125,441 $ 1,086 3.5 % $ 147,171 $ 962 2.6 %
The Company’s average overall debt for the three-month period ended September 30, 2022 was $125,441, as compared to $147,171 for the three-month period ended September 30, 2021. Our borrowings in the three-month period ended September 30, 2022, were lower mainly due to cash generated over the last 12 months used to pay down debt, partially offset by the acquisition activity over the same period and increases in working capital in support of business growth. As can be seen from the table above, the effective bank interest rate on our revolving line of credit was 3.5% and 2.4% at each of the three-month period ended September 30, 2022 and 2021, respectively.
Income tax expense increased by $1,446 to $2,963 for the three-month period ended September 30, 2022, as compared to $1,517 for the comparable period in 2021. The effective tax rates for the three-month period ended September 30, 2022, and 2021, were 30.5% and 20.7%, respectively. The effective tax rate for all interim periods is based on the projected income for the full year and is subject to ongoing review and adjustment by management. The increase in effective tax rate was primarily driven by the mix of our domestic and international income.
Our net income for the three-month period ended September 30, 2022, was $6,741 or $0.23 per basic and diluted share, as compared to $5,498 or $0.18 per basic and diluted share in the same quarter of 2021.
Nine Months Ended September 30, 2022 and 2021:
Overview of the Company’s Performance
During the first nine months of 2022, the global agricultural industry maintained the upcycle that began in 2021. Commodity prices remained high, driven in part by the Russian invasion of Ukraine, which has served to reduce exports from both Russia and Ukraine, of corn, wheat, sunflower oil and fertilizer inputs into the global market, and a stronger farm economy in the U.S. Inflation in multiple countries has led to higher costs of goods and transportation; however, the strength of the farm economy was able to absorb these effects during the subject period. Following extraordinary activity in the first quarter, domestic distribution within our industry slowed procurement modestly during the second and third quarters. All told, the Company’s overall operating results for the first nine months of 2022 improved in most all respects over those of the same period of 2021.
On a consolidated basis, with domestic sales up 12% and international sales up by 14%, overall net sales increased by 13% (to $449,636 from $398,063). Cost of sales were up 10% on an absolute basis but decreased as a percent of net sales to 59% from 61%. Factory performance improved during the first nine months of 2022, as compared to that of 2021. These factors, taken together, yielded an increase in gross profit, which was up $28,022 or 18% period-over-period and improved to 41% of net sales, up from 39% during the first nine months of 2021. Operating expenses rose on an absolute basis by 10% but declined as a percent of net sales to 32% as compared to 33% of net sales for the same period of the prior year.
Interest expense declined slightly, while income tax expense increased to $10,187 from $5,324 during the comparable period last year, primarily as a result of stronger financial performance and higher effective tax rate. Overall, the Company’s net income for the period increased by 71%, ending at $23,506, as compared to $13,713 during the first nine months of the prior year. Details on our financial performance are set forth below.
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RESULTS OF OPERATIONS
Nine months ended September 30, 2022, and 2021
2022 2021 Change % Change
Net sales:
U.S. crop $ 220,503 $ 184,052 $ 36,451 20 %
U.S. non-crop 53,648 60,563 (6,915 ) -11 %
Total U.S. 274,151 244,615 29,536 12 %
International 175,485 153,448 22,037 14 %
Total net sales: $ 449,636 $ 398,063 $ 51,573 13 %
Cost of sales:
U.S. crop $ 115,904 $ 105,739 $ 10,165 10 %
U.S. non-crop 28,822 32,516 (3,694 ) -11 %
Total U.S. 144,726 138,255 6,471 5 %
International 122,554 105,474 17,080 16 %
Total cost of sales: $ 267,280 $ 243,729 $ 23,551 10 %
Gross profit:
U.S. crop $ 104,599 $ 78,313 $ 26,286 34 %
U.S. non-crop 24,826 28,047 (3,221 ) -11 %
Total U.S. 129,425 106,360 23,065 22 %
International 52,931 47,974 4,957 10 %
Total gross profit $ 182,356 $ 154,334 $ 28,022 18 %
Gross margin:
U.S. crop 47 % 43 %
U.S. non-crop 46 % 46 %
Total U.S. 47 % 43 %
International 30 % 31 %
Total gross margin 41 % 39 %
Our domestic crop business recorded net sales that were 20% above those of first nine months of 2021. Assisted by consistently high crop commodity prices and a strong domestic farm economy, the Company experienced strong demand across all product categories and was able to implement appropriate pricing actions to cover escalating material and transportation costs. Our Midwest corn business was exceptional, with Aztec soil insecticide and Impact herbicide brands increasing 70% over the prior year nine-month period. Our domestic cotton business led by Bidrin foliar insecticide and Folex harvest defoliant grew by over 40% in the first three quarter of 2022, as compared to the same period of 2021. Domestic Crop also benefited from very strong sales increases in Dacthal for high valued vegetable crops, Assure II which is expanding sales significantly in the US and Envoke, a newly introduced herbicide used to address glyphosate resistant weeds. The only area of demand softness was in soil fumigants, which experienced lower unit volumes due to drought conditions in Western and Southwestern states where water allocation has been implemented. However, we were able to make pricing adjustment to cover inflationary material and transportation costs in order to retain our traditional profit margins. During the first nine months of 2022, customer procurement activity was exceptionally high in the first quarter and assumed more normalized levels in the second and third quarters.
Cost of sales within the domestic crop business increased 10%, as compared to the first nine months of 2021, driven by sales that increased by 20% including increased sales of higher margin products (many of which we manufacture in our domestic facilities) and benefitting from improved factory performance. Gross profit for domestic crop rose by 34% during the nine-month period to $104,599 from $78,313.
Our domestic non-crop business recorded an 11% decrease in net sales for the first nine months of the year (to $53,648 from $60,563). Revenue for our Envance technologies decreased when compared to the same period in 2021, due primarily to a one-time license fee received in 2021, and the timing of recognizing revenue for recurring royalties. Additionally, we experienced a fall-off in consumer demand for our OHP nursery and ornamental products, which we attribute to a pause in consumer spending caused by concerns over possible economic recession. Sales of our Dibrom® mosquito adulticide remained nearly flat as did demand for commercial pest control products (pest strips and bifenthrin).
Cost of sales within the domestic non-crop business decreased by 11%, (to $28,822 in 2022 from $32,516 in 2021) on net sales that were down by 11%. Gross profit for domestic non-crop decreased by 11% (to $24,826 in 2022 from $28,047 in 2021), due largely to the non-recurrence of a one-time, upfront license fee as described above.
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Net sales of our international businesses increased by 14% during the first three quarters of 2022 (to $175,485 in 2022 from $153,448 in 2021). Central America and Mexico both delivered double-digit growth by satisfying continuing strong demand for soil fumigants (on high-value crops), herbicides and granular insecticides. Brazil continued an upward trend (grew over 35%) fueled by further market penetration of our Counter granular insecticide/nematicide. Australia matched prior year sales driven by our expanded market footprint following the integration of the acquired AgNova business, partially offset by supply and logistics challenges. Significant product sales improvements included Mocap and Nemacur insecticides (together growing over 40%) and Assure II herbicide growing approximately 250%.
Cost of sales in our international business increased by 16% (to $122,544 in 2022 from $105,474 in 2021) primarily driven by volume growth and impacted by increased prices from the strengthening US Dollar, and general inflation on materials and associated logistics costs. Gross profit for the international businesses increased by 10% to $52,931 during the first nine months of 2022 from $47,974 during the same period in 2021.
On a consolidated basis, net sales for the first nine months of 2022 increased 13%, and gross profit increased by 18%. Our gross profit in the first nine months of 2022 increased in part as a result of improved sales volumes and pricing, and improved factory performance. Gross margin performance, when expressed as a percentage of sales, rose to 41% from 39% year-over-year.
Operating expenses increased by $12,616 to $145,550 for the nine-month period ended September 30, 2022, as compared to the same period in 2021. The changes in operating expenses by department are as follows:
2022 2021 Change % Change
Selling $ 37,844 $ 35,184 $ 2,660 8 %
General and administrative:
Other 50,262 46,859 3,403 7 %
Proxy contest activities 1,785 — 1,785 100 %
Research, product development and regulatory 23,241 21,221 2,020 10 %
Freight, delivery and warehousing 32,418 29,670 2,748 9 %
$ 145,550 $ 132,934 $ 12,616 9 %
• Selling expenses increased by $2,660 to end at $37,844 for the nine-month period ended September 30, 2022, as compared to the same period of 2021. The main drivers were increased costs associated with commissions in Brazil, travel expenses (as the business resumed in-person interaction with customers), inflation related increased wages and product complaints as a result of sales growth in Mid-west offset by positive movements in some key exchange rates. • General and administrative expenses - other increased by $3,403 to end at $50,262 for the nine-month period ended September 30, 2022, as compared to the same period of 2021. The main drivers were increased wages, travel expenses and other administrative costs in support of our growing business, increased legal costs, the settlement of deferred consideration related to the Australian business acquired in the final quarter of 2020, and increased short- and long-term incentive compensation as a result of our improved business performance. These costs were partly offset by some positive moves of exchange rates. • The Company spent $1,785 in fees associated with our Proxy defense activities; there were no such fees in the comparative period of the prior year. • Research, product development costs and regulatory expenses increased by $2,020 to end at $23,241 for the nine-month period ended September 30, 2022, as compared to the same period of 2021. The main drivers were increased costs associated with in-field activities in support of our proprietary delivery systems, and international product defense and registration expenses supporting strong sales growth. • Freight, delivery and warehousing costs for the nine-month period ended September 30, 2022 were $32,418 or 7.2% of sales as compared to $29,670 or 7.5% of sales for the same period in 2021. This increased expense is primarily driven by strong sales growth and variations in final delivery destinations, partially offset by improved supply chain conditions.
During the nine-month period ended September 30, 2022, the Company recorded a decrease in the fair value of our equity investment in Clean Seed in the amount of $857 and recorded an increase in the amount of $103 during the nine months ended September 30, 2021. These changes in fair value of our investment directly reflect changes in the stock’s quoted market price.
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During the nine-month period ended September 30, 2021, a Paycheck Protection Program loan assumed on the acquisition of Agrinos in the fourth quarter of 2020 was fully extinguished with the majority of the balance forgiven and recorded as other income in the Company’s condensed consolidated statements of operations in the amount of $672.
Interest costs net of capitalized interest were $2,256 in the first nine-month period of 2022, as compared to $2,921 in the same period of 2021. Interest costs are summarized in the following table:
Average Indebtedness and Interest expense
Nine months ended September 30, 2022 Nine months ended September 30, 2021
Average Interest Interest Average Interest Interest
Debt Expense Rate Debt Expense Rate
Revolving line of credit (average) $ 111,939 $ 2,250 2.7 % $ 144,405 $ 2,733 2.5 %
Amortization of deferred loan fees — 199 — — 230 —
Amortization of other deferred liabilities — 27 — — (6 ) —
Other interest expense — 20 — — 140 —
Subtotal 111,939 2,496 3.0 % 144,405 3,097 2.9 %
Capitalized interest — (240 ) — — (176 ) —
Total $ 111,939 $ 2,256 2.7 % $ 144,405 $ 2,921 2.7 %
The Company’s average overall debt for the nine-month period ended September 30, 2022, was $111,939, as compared to $144,405 for the nine months ended September 30, 2021. During the period, we continued to focus on our use of revolving debt, while funding working capital for the growing business. As can be seen from the table above, our effective bank interest rate on our revolving line of credit was 2.7% for the nine months ended September 30, 2022, as compared to 2.5% for the same period of 2021.
Income tax expense increased by $4,863 to end at $10,187 for the nine-month period ended September 30, 2022, as compared to income tax expense of $5,324 for the comparable period in 2021. The effective tax rate for the nine months ended September 30, 2022, was 30.2% as compared to 27.4% for same period last year. The rate has increased compared to prior year reflecting a mix of income in different jurisdictions. For tax years beginning after December 31, 2021, the Tax Cuts and Jobs Act (“TCJA”) of 2017 amends Internal Revenue Code Section 174 wherein research and development expenditures will no longer be deducted in the tax year that such costs are incurred but must now be capitalized and amortized over either a five- or fifteen-year period, depending on the location of the activities performed. The effective tax rate for all interim periods is based on the projected income for the full year and is subject to ongoing review and adjustment by management.
Our net income for the nine-month period ended September 30, 2022 was $23,506 or $0.80 per basic and $0.78 per diluted share, as compared to $13,713 or $0.46 per basic and $0.45 per diluted share in the same period of 2021.
LIQUIDITY AND CAPITAL RESOURCES
The Company’s operating activities utilized net cash of $45,678 during the nine-month period ended September 30, 2022, as compared to $174 during the nine months ended September 30, 2021. Included in the $45,678 are net income of $23,506, plus non-cash depreciation, amortization of intangibles and other assets and discounted future liabilities, in the amount of $19,305, loss on disposal of property, plant and equipment of $265, amortization of deferred loan fees of $174 and provision for bad debts in the amount of $597. Also included are stock-based compensation of $4,396, adjustment to contingent consideration in the amount of $621, increase in deferred income taxes of $64, change in fair value of an equity investment of $857, and net foreign currency adjustments of $218. These together provided net cash inflows of $49,903, as compared to $39,606 for the same period of 2021.
During the nine-month period of 2022, the Company increased working capital by $97,986, as compared to an increase of $37,611 during the same period of the prior year. Included in this change: inventories increased by $38,987, as compared to $4,325 for the same period of 2021. While increases in inventory are normal for the Company’s annual cycle, the Company decided this year to bring in raw materials earlier than in prior seasons in order to secure our needs of key materials for the balance of the year and the start of the next growing season.
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Customer prepayments decreased by $62,831, as compared to $38,272 in the same period of 2021, driven by customer decisions regarding demand, payment timing and our cash incentive programs. Our accounts payable balances increased by $14,418, as compared to an increase of $7,769 in the same period of 2021, driven by increased factory activity levels. Accounts receivables increased by $46,289, as compared to an increase of $42,979 in the same period of 2021. This is primarily driven by increased group sales and strong international growth. Prepaid expenses increased by $4,272, as compared to $2,194 in the same period of 2021. Income tax receivable increased by $5,201, as compared to a decrease of $2,031 in the prior year. Accrued programs increased by $45,016, (as compared to $33,982 in the prior year), which is normal at this point in the growing season. Finally, other payables and accrued expenses increased by $2,555, as compared to $4,025 in the prior year.
With regard to our program accrual, the increase (as noted above) primarily reflects our volume and mix of sales (certain products are marketed with higher levels of program accruals), and mix of customers in the first nine months of 2022, as compared to the prior year. The Company accrues programs in line with the growing season upon which specific products are targeted. Typically crop products have a growing season that ends on September 30 th of each year. During the first nine months of 2022, the Company made accruals for programs in the amount of $78,640 and payments in the amount of $33,869. During the first nine months of the prior year, the Company made accruals in the amount of $59,267 and made payments in the amount of $25,353. The increase in accruals for programs in the first nine months of 2022, compared to the same period in 2021, is a direct result of an increase in sales of qualifying products.
Cash used for investing activities for the nine-month period ended September 30, 2022 and 2021 was $9,978 and $18,431, respectively. The $18,431 in 2021 includes a product acquisition in the amount of $10,000. No such acquisition took place in the current year. In 2022, the Company spent $8,946 on purchases of fixed assets primarily focused on continuing to invest in manufacturing infrastructure. In addition, the Company made a payment of $1,000 to Clean Seed to amend a license agreement under which royalty-bearing license rights were converted to fully paid-up, royalty-free, perpetual license rights, and spent $78 on patents for the Envance technology business.
During the nine-month period ended September 30, 2022, financing activities provided $59,797, as compared to $19,974 during the same period of the prior year. Net borrowings under the Credit Agreement amounted to $96,000 during the nine-month period ended September 30, 2022, as compared to $28,592 in the same period of the prior year. The Company paid dividends to stockholders amounting to $2,072 during the nine months ended September 30, 2022, as compared to $1,789 in the same period of 2021. The Company paid $13,731 for the repurchase of 720,350 shares of its common stock during the nine-month period ended September 30, 2022 and $20,000 in connection with an accelerated share repurchase program. There were no such purchases during the nine-month period ended September 30, 2021. The Company received $837 for the issuance of shares under ESPP during the nine-month period ended September 30, 2022, as compared to $743 for the same period last year. The Company also received $783 from the exercise of stock options during the nine-month period ended September 30, 2022, as compared to $172 in the prior period. Lastly, in exchange for shares of common stock returned by employees, the Company paid $2,020 and $2,915 for tax withholding on stock-based compensation awards during the nine-months ended September 30, 2022 and 2021, respectively.
The Company has a revolving line of credit that is shown as long-term debt in the condensed consolidated balance sheets at September 30, 2022 and December 31, 2021. These are summarized in the following table:
Long-term indebtedness ($000's) September 30, 2022 December 31, 2021
Revolving line of credit $ 149,300 $ 53,300
Deferred loan fees (886 ) (1,060 )
Net long-term debt $ 148,414 $ 52,240
At September 30, 2022, the Company was compliant with all covenants to its credit agreement. Also, at September 30, 2022, the Company’s total Funded Debt amounted to $149,300. At that date the Company’s rolling four quarter Consolidated EBITDA (as defined in the Credit Agreement, see Note 10) amounted to $77,167, which results in a leverage ratio of 1.93, as compared to a maximum leverage ratio permitted under the Credit Agreement of 3.5. At September 30, 2022, the Company has the capacity to increase its borrowings by up to $120,783, according to the terms thereof. This compares to an available borrowing capacity of $94,973 as of September 30, 2021. At December 31, 2021, the Company had borrowing capacity of $178,705. The level of borrowing capacity is driven by three factors: (1) our financial performance, as measured in EBITDA for both the trailing twelve-month period and proforma basis arising from acquisitions, (2) net borrowings, and (3) the leverage covenant (the TL Ratio).
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.
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RECENTLY ISSUED ACCOUNTING GUIDANCE
Please refer to Note 15 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, 2021, 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, 2021.
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 nine-months ended September 30, 2022.
Item 3. QUANTITATIVE AND QUALITAT IVE 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, 2021 and note 10 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 September 30, 2022, 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 September 30, 2022, 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.
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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 14 in the accompanying Notes to the condensed consolidated financial statements for legal updates.
Item 1A. Ri sk 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, 2021, filed on March 14, 2022. There are no material changes to the risk factors as so stated.
Domestic and regional inflation trends, increased interest rates and other factors could lead to the erosion of economies and adversely impact the Company. Both the US and many other countries are experiencing inflation, which, in turn, is leading to increase costs in multiple industry segments, including agriculture and related industries. The persistence of inflation has led central bankers to increase interest rates within their regions. There is no guarantee that these measures will arrest the inflationary trend. Further, these factors, taken together with reduced productivity and constraints on the labor supply could lead to recessionary periods in the regions in which the Company does business. While the Company takes measures within its control to manage the effects of inflation, higher interest rates and other factors, ultimately, they are outside of the Company’s control. Further, the persistence and/or severity of one or more of them could adversely affect the financial performance and/or operations of the Company.
Item 2. Purchases of Eq uity Securities by the Issuer
The Company periodically repurchases shares of its common stock under a board-authorized repurchase program through a combination of open market transactions, and accelerated share repurchase (ASR) arrangements.
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, par value $0.10 per share, in the open market over the succeeding one year, subject to limitations and restrictions under applicable securities laws.
The table below summarizes the number of shares of our common stock that were repurchased during the three- and nine-month periods ended September 30, 2022. There were no such purchases during the three- and nine-month periods ended September 30, 2021. The shares and respective amount are recorded as treasury shares on the Company’s condensed consolidated balance sheet.
Maximum number
of shares that may
Total number of Average price yet be purchased
Month ended shares purchased paid per share Total amount paid under the plan
March 31, 2022 332,404 $ 18.71 $ 6,219 667,596
Balance at March 31, 2022 332,404 $ 6,219 667,596
April 30, 2022 100 $ 19.99 $ 2 667,496
May 31, 2022 506 $ 19.99 $ 11 666,990
Balance at June 30, 2022 606 $ 19.99 $ 13 666,990
August 31, 2022 165,039 $ 19.59 $ 3,234 501,951
September 30, 2022 222,301 $ 19.19 $ 4,265 279,650
Balance at September 30, 2022 387,340 $ 19.36 $ 7,499 279,650
Total number of shares repurchased 720,350 $ 19.06 $ 13,731 279,650
On August 22, 2022, pursuant to a Board of Directors resolution, the Company entered into an accelerated share repurchase arrangement to repurchase $20,000 of its common stock. Under the agreement, the Company paid $20,000 and immediately received an initial delivery of 802,810 shares in the amount of $16,000, which the Company recorded as treasury shares. The Company recorded the remaining $4,000 as a reduction to additional paid-in capital pending final settlement in the fourth quarter of 2022. The final number of shares that the Company ultimately receives under the agreement will be determined based on the average of the Rule 10b-18 volume-weighted average prices of the Company’s common stock during the term of the agreement, less and agreed discount, and subject to adjustments pursuant to the terms of the agreement.
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The table below summarizes the number of shares of the Company’s common stock that were received under the accelerated share repurchase arrangement during the three- and nine-month periods ended September 30, 2022. There were no such transactions during the three- and nine-month periods ended September 30, 2021.
Total number of Average price
Month ended shares received paid per share Total amount paid
August 31, 2022 802,810 $ 19.93 $ 16,000
In summary, the Company added a total of 1,190,150 and 1,523,160 of treasury shares of the Company’s common stock during the three- and nine-month periods ended September 30, 2022.
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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 September 30, 2022, 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 September 30, 2022, has been formatted in Inline XBRL.
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SIGNA TURES
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: November 8, 2022 By: /s/ eric g. wintemute
Eric G. Wintemute
Chief Executive Officer and Chairman of the Board
Dated: November 8, 2022 By: /s/ david t. johnson
David T. Johnson
Chief Financial Officer & Principal Accounting Officer
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