10-K 1 avd-10k_20161231.htm 10-K avd-10k_20161231.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For The Year Ended December 31, 2016

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For The Transition Period From                      To                      

Commission file number 001-13795

 

AMERICAN VANGUARD CORPORATION

 

 

Delaware

 

95-2588080

(State or other jurisdiction of

Incorporation or organization)

 

(I.R.S. Employer

Identification Number)

 

 

 

4695 MacArthur Court, Newport Beach, California

 

92660

(Address of principal executive offices)

 

(Zip Code)

(949) 260-1200

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class:

 

Name of each exchange on which registered:

Common Stock, $.10 par value

 

New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

NONE

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes      No  

Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Act.    Yes      No  

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes      No  

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes      No  

The aggregate market value of the voting stock of the registrant held by non-affiliates is $434.0 million. This figure is estimated as of June 30, 2016 at which date the closing price of the registrant’s Common Stock on the New York Stock Exchange was $15.11 per share. For purposes of this calculation, shares owned by executive officers, directors, and 5% stockholders known to the registrant have been deemed to be owned by affiliates. The number of shares of $.10 par value Common Stock outstanding as of June 30, 2016, was 29,326,078. The number of shares of $.10 par value Common Stock outstanding as of February 22, 2017 was 29,388,860.

 

 

 


AMERICAN VANGUARD CORPORATION

AND SUBSIDIARIES

ANNUAL REPORT ON FORM 10-K

December 31, 2016

 

 

 

 

 

Page No.

 

 

PART I

 

 

 

 

 

 

 

Item 1.

 

Business

 

1

 

 

 

 

 

Item 1A.

 

Risk Factors

 

6

 

 

 

 

 

Item 1B.

 

Unresolved Staff Comments

 

9

 

 

 

 

 

Item 2.

 

Properties

 

9

 

 

 

 

 

Item 3.

 

Legal Proceedings

 

10

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

13

 

 

 

 

 

 

 

PART II

 

 

 

 

 

 

 

Item 5.

 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities

 

14

 

 

 

 

 

Item 6.

 

Selected Financial Data

 

17

 

 

 

 

 

Item 7.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

18

 

 

 

 

 

Item 7A.

 

Quantitative and Qualitative Disclosures About Market Risk

 

32

 

 

 

 

 

Item 8.

 

Financial Statements and Supplementary Data

 

32

 

 

 

 

 

Item 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

32

 

 

 

 

 

Item 9A.

 

Controls and Procedures

 

32

 

 

 

 

 

Item 9B.

 

Other Information

 

35

 

 

 

 

 

 

 

PART III

 

 

 

 

 

 

 

Item 10.

 

Directors, Executive Officers and Corporate Governance

 

35

 

 

 

 

 

Item 11.

 

Executive Compensation

 

35

 

 

 

 

 

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

35

 

 

 

 

 

Item 13.

 

Certain Relationships and Related Transactions, and Director Independence

 

35

 

 

 

 

 

Item 14.

 

Principal Accountant Fees and Services

 

35

 

 

 

 

 

 

 

PART IV

 

 

 

 

 

 

 

Item 15.

 

Exhibits and Financial Statement Schedules

 

36

 

 

 

 

 

Item 16.

 

Form 10-K Summary

 

36

 

 

 

 

 

SIGNATURES AND CERTIFICATIONS

 

37

 

 

i


AMERICAN VANGUARD CORPORATION

AND SUBSIDIARIES

(Dollars in thousands, except per share data)

PART I

Unless otherwise indicated or the context otherwise requires, the terms “Company,” “we,” “us,” and “our” refer to American Vanguard Corporation and its consolidated subsidiaries (“AVD”).

Forward-looking statements in this report, including without limitation, statements relating to the Company’s plans, strategies, objectives, expectations, intentions, and adequacy of resources, are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements involve risks and uncertainties. (Refer to Part I, Item 1A, Risk Factors and Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operation, included in this Annual Report.)

ITEM 1

BUSINESS

AVD was incorporated under the laws of the State of Delaware in January 1969 and operates as a holding company. Unless the context otherwise requires, references to the “Company” or the “Registrant,” in this Annual Report refer to AVD. The Company conducts its business through its subsidiaries, AMVAC Chemical Corporation (“AMVAC”), GemChem, Inc. (“GemChem”), 2110 Davie Corporation (“DAVIE”), Quimica Amvac de Mexico S.A. de C.V. (“AMVAC M”), AMVAC Mexico Sociedad de Responsabilidad Limitada (“AMVAC M Srl”), AMVAC de Costa Rica Sociedad de Responsabilidad Limitada (“AMVAC CR Srl”), AMVAC Switzerland GmbH (“AMVAC S”), AMVAC do Brasil Representácoes Ltda (“AMVAC B”), AMVAC C.V. (“AMVAC CV”), AMVAC Netherlands BV (“AMVAC BV”), Envance Technologies, LLC (“Envance”) and AMVAC Singapore Pte, Ltd (“AMVAC Sgpr”) and Huifeng AMVAC Innovation Co. Limited (“Hong Kong JV”).

Based on similar economic and operational characteristics, the Company’s business is aggregated into one reportable segment. Refer to Part II, Item 7 for selective enterprise information.

AMVAC

AMVAC is a California corporation that traces its history from 1945 and is a specialty chemical manufacturer that develops and markets products for agricultural, commercial and consumer uses. It manufactures and formulates chemicals for crops, turf and ornamental plants, and human and animal health protection. These chemicals, which include insecticides, fungicides, herbicides, molluscicides, growth regulators, and soil fumigants, are marketed in liquid, powder, and granular forms. In prior years, AMVAC considered itself a distributor-formulator, but now AMVAC primarily synthesizes, formulates, and distributes its own proprietary products or custom manufactures or formulates for others. In addition, the Company has carved out a leadership position in closed delivery systems, currently offers certain of its own products in SmartBox, Lock ‘n Load and EZ Load systems, and is developing a precision application technology known as SIMPAS (see “Intellectual Property” below) which will permit the delivery of multiple products (from AMVAC and other companies) at variable rates in a single pass.  AMVAC has historically expanded its business through both the acquisition of established chemistries (which it has revived in the marketplace) and the development and commercialization of new compounds through licensing arrangements. Below is a description of the Company’s acquisition/licensing activity over the past five years.

On October 26, 2015, AMVAC entered into a license and supply agreement with Badische Anilin-und Soda Fabrik (“BASF”) under which BASF sold and AMVAC acquired certain assets relating to the imazaquin product line. Imazaquin is an herbicide that is used on soybeans and for certain non-crop applications.

On April 29, 2015 the registrant’s international subsidiary, AMVAC CV, completed the acquisition of certain assets related to the bromacil herbicide product line from DuPont Crop Protection. The assets acquired included the Hyvar® and Krovar® trademarks, product registrations, product registration data, customer lists, certain know-how, technical registrations and associated registration data in all markets outside of North America. Bromacil is a broad spectrum residual herbicide used on crops such as pineapples, citrus, agave and asparagus, and is marketed globally under either the Hyvar® or Krovar® brands

On April 6, 2015 the registrant’s international subsidiary, AMVAC CV, completed the acquisition of certain assets related to the Nemacur® insecticide/nematicide product line from Adama Agricultural Solutions Ltd (“Adama”). The assets acquired include trademarks, product registrations, associated registration data, and customer information that relate to the marketing and sale of this crop protection product in Europe. Nemacur® is used to control soil insects and nematodes on many fruit and vegetable crops.

1


AMERICAN VANGUARD CORPORATION

AND SUBSIDIARIES

(Dollars in thousands, except per share data)

 

On March 25, 2013, AVD made an equity investment in TyraTech Inc. (“TyraTech”), a Delaware corporation that specializes in developing, marketing and selling pesticide products containing natural oils and other natural ingredients. As of December 31, 2016, the Company’s ownership position in TyraTech was approximately 15.11%.

Seasonality

The agricultural chemical industry, in general, is cyclical in nature. The demand for AMVAC’s products tends to be seasonal. Seasonal usage, however, does not necessarily follow calendar dates, but more closely follows varying growing seasonal patterns, weather conditions, geography, weather related pressure from pests and customer marketing programs.

Backlog

AMVAC does not believe that backlog is a significant factor in its business. AMVAC primarily sells its products on the basis of purchase orders, although from time to time it has entered into requirements contracts with certain customers.

Customers

The Company’s largest three customers accounted for 15%, 11% and 8% of the Company’s sales in 2016; 14%, 11% and 10%  in 2015; and 16%, 10% and 9% in 2014.

Distribution

AMVAC predominantly distributes its products domestically through national distribution companies and buying groups or co-operatives, which purchase AMVAC’s goods on a purchase order basis and, in turn, sell them to retailers/growers/end-users. The Company manages its international sales through its Netherlands’ entity, AMVAC BV, which has sales offices in Mexico and Costa Rica and employed sales force executives or sales agents in other territories. The Company’s domestic and international distributors, agents, or customers typically have long-established relationships with retailers/end-users, far-reaching logistics, transportation capabilities and/or customer service expertise. The markets for AMVAC products vary by region, target crop, use and type of distribution channel. AMVAC’s customers are experts at addressing these various markets.

Competition

In its many marketplaces, AMVAC faces competition from both domestic and foreign manufacturers. Many of our competitors are larger and have substantially greater financial and technical resources than AMVAC. AMVAC’s capacity to compete depends on its ability to develop additional applications for its current products and/or expand its product lines and customer base. AMVAC competes principally on the basis of the quality and efficacy of its products, price and the technical service and support given to its customers.

Generally, the treatment against pests of any kind is broad in scope, there being more than one way, or one product, for treatment, eradication, or suppression. In some cases, AMVAC has attempted to position itself in smaller niche markets which are no longer addressed by larger companies. In other cases, for example in the Midwestern corn market, the Company competes directly with larger competitors.

Manufacturing

Through its four domestic manufacturing facilities (see Item 2, Properties), AMVAC synthesizes many of the technical grade active ingredients that are in its end-use products. Further, AMVAC formulates and packages its end use products at its own facilities or at the facilities of third-party formulators.

2


AMERICAN VANGUARD CORPORATION

AND SUBSIDIARIES

(Dollars in thousands, except per share data)

 

Raw Materials

AMVAC utilizes numerous companies to supply the various raw materials and components used in manufacturing its products. Many of these materials are readily available from domestic sources. In those instances where there is a single source of supply or where the source is not domestic, AMVAC seeks to secure its supply by either long-term (multi-year) arrangements or purchasing on long lead times from its suppliers. AMVAC believes that it is considered to be a valued customer to such sole-source suppliers.

Intellectual Property

AMVAC’s proprietary product formulations are protected, to the extent possible, as trade secrets and, to a lesser extent, by patents. Certain of the Company’s closed delivery systems are patented and AMVAC has made applications for related inventions to expand its equipment portfolio, particularly with respect to its Smart Integrated Multi-Product Precision Application System, (“SIMPAS”) technology. Further, AMVAC’s trademarks bring value to its products in both domestic and foreign markets. AMVAC considers that, in the aggregate, its trademarks, licenses, and patents constitute a valuable asset. While it does not regard its business as being materially dependent upon any single trademark, license, or patent, it believes that its developmental equipment technology may bring significant value in future years.

EPA Registrations

In the United States, AMVAC’s products also receive protection afforded by the terms of the Federal Insecticide, Fungicide and Rodenticide Act (“FIFRA”) legislation. The legislation makes it unlawful to sell any pesticide in the United States, unless such pesticide has first been registered by the United States Environmental Protection Agency (“USEPA”). Substantially all of AMVAC’s products, sold in United States, are subject to USEPA registration and periodic re-registration requirements and are registered in accordance with FIFRA. This registration by USEPA is based, among other things, on data demonstrating that the product will not cause unreasonable adverse effects on human health or the environment, when used according to approved label directions. In addition, each state requires a specific registration before any of AMVAC’s products can be marketed or used in that state. State registrations are predominantly renewed annually with a smaller number of registrations that are renewed on a multiple year basis.

Foreign jurisdictions typically have similar registration requirements by statute. The USEPA, state, and foreign agencies have required, and may require in the future, that certain scientific data requirements be performed on registered products sold by AMVAC. AMVAC, on its own behalf and in joint efforts with other registrants, has furnished, and is currently furnishing, required data relative to specific products.

Under FIFRA, the federal government requires registrants to submit a wide range of scientific data to support U.S. registrations. This requirement results in operating expenses in such areas as regulatory compliance, with USEPA and other such bodies in the markets in which the Company sells its products. In addition the Company is required to generate new formulations of existing products or to produce new products in order to remain compliant. AMVAC expensed $11,544, $9,831, and $14,084 during 2016, 2015 and 2014 respectively, on these activities.

 

 

 

2016

 

 

2015

 

 

2014

 

Registration

 

$

7,750

 

 

$

6,375

 

 

$

9,188

 

Product development

 

 

3,794

 

 

 

3,456

 

 

 

4,896

 

 

 

$

11,544

 

 

$

9,831

 

 

$

14,084

 

 

Environmental

During 2016, AMVAC continued activities to address environmental issues associated with its facility in Commerce, CA. (the “Facility”). An outline of the history of those activities follows.

In 1995, the California Department of Toxic Substances Control (“DTSC”) conducted a Resource Conservation and Recovery Act (“RCRA”) Facility Assessment (“RFA”) of those facilities having hazardous waste storage permits. In March 1997, the RFA culminated in DTSC accepting the Facility into its Expedited Remedial Action Program. Under this program, the Facility was required to conduct an environmental investigation and health risk assessment. Depending on the findings of these investigations, the Facility might also be required to develop and implement remedial measures to address any historical environmental impairment.

This activity then took two paths: first, the RCRA permit closure and second, the larger site characterization.

3


AMERICAN VANGUARD CORPORATION

AND SUBSIDIARIES

(Dollars in thousands, except per share data)

 

With respect to the RCRA permit closure, in 1998, AMVAC began the formal process to close its hazardous waste permit at the Facility (which had allowed AMVAC to store hazardous waste longer than 90 days) as required by federal regulations. Formal regulatory closure actions began in 2005 and were completed in 2008, as evidenced by DTSC’s October 1, 2008 acknowledgement of AMVAC’s Closure Certification Report.

With respect to the larger site characterization, soil and groundwater characterization activities began in December 2002 in accordance with the Site Investigation Plan that was approved by DTSC. Additional activities were conducted from 2003 to 2014, with oversight provided by DTSC. Additional review of groundwater and soil data is being conducted in response to federally-mandated initiatives of similarly affected sites. Risk assessment activities have been concluded. The Company submitted a revised draft remedial action plan (“RAP”) to DTSC in March 2016 which incorporated DTSC’s January 2016 comments.   Under the provisions of the RAP, the Company is proposing not to disturb sub-surface contaminants, but to continue monitoring, maintain the cover above affected soil, enter into restrictive covenants regarding potential use of the property in the future, and provide financial assurances regarding the requirements of the RAP.  In January 2017, the DTSC commenced a public survey as a first step in the public comment process.  The Company expects that that process will continue for several months.  Until the remedial action plan has been approved by DTSC (including with respect to the nature of financial assurances) after the required public comment period, it is uncertain whether the cost associated with further investigation and potential remediation activities will have a material impact on the Company’s consolidated financial statements or its results of operations. Thus, the Company is unable to determine what sort of remediation is probable, nor can the cost of remediation be reasonably estimated. Accordingly, the Company has not recorded a loss contingency with respect thereto.  

AMVAC is subject to numerous federal and state laws and governmental regulations concerning environmental matters and employee health and safety at its four manufacturing facilities. The Company continually adapts its manufacturing process to the environmental control standards of the various regulatory agencies. The USEPA and other federal and state agencies have the authority to promulgate regulations that could have an impact on the Company’s operations.

AMVAC expends substantial funds to minimize the discharge of materials in the environment and to comply with the governmental regulations relating to protection of the environment. Wherever feasible, AMVAC recovers and recycles raw materials and increases product yield in order to partially offset increasing pollution abatement costs.

The Company is committed to a long-term environmental protection program that reduces emissions of hazardous materials into the environment, as well as to the remediation of identified existing environmental concerns.

Employees

As of December 31, 2016, the Company employed 395 employees. The Company employed 369 employees as of December 31, 2015 and 379 employees as of December 31, 2014. From time to time, due to the seasonality of its business, AMVAC uses temporary contract personnel to perform certain duties primarily related to packaging of its products. None of the Company’s employees are subject to a collective bargaining agreement. The Company believes it maintains positive relations with its employees.

Domestic operations

AMVAC is a California corporation that was incorporated under the name of Durham Chemical in August 1945. The name of the corporation was subsequently changed to AMVAC in January 1973. As the Company’s main operating subsidiary, AMVAC owns and/or operates the Company’s domestic manufacturing facilities and is also the parent company (owns 99%) of AMVAC CV. AMVAC manufactures, formulates, packages and sells its products in the USA and is a wholly owned subsidiary of AVD.

GemChem is a California corporation that was incorporated in 1991 and was subsequently purchased by the Company in 1994. GemChem sells into the pharmaceutical, cosmetic and nutritional markets, in addition to purchasing key raw materials for the Company. GemChem is a wholly owned subsidiary of AVD.

DAVIE owns real estate for corporate use only. See also Part I, Item 2 of this Annual Report. DAVIE is a wholly owned subsidiary of AVD.

Envance is a Delaware Limited Liability Company and is a majority owned subsidiary of the Company.  It was formed in 2012 with joint venture partner, TyraTech.  AMVAC’s initial shareholding was 60% and its shareholding increased to 87% in 2015.  

4


AMERICAN VANGUARD CORPORATION

AND SUBSIDIARIES

(Dollars in thousands, except per share data)

 

Envance has the rights to develop and commercialize pesticide products and technologies made from natural oils in global consumer, commercial, professional, crop protection and seed treatment markets and has begun bringing products to market.

International operations

In July 2012, the Company formed AMVAC CV, which is incorporated in the Netherlands, for the purpose of managing foreign sales on behalf of the Company. AMVAC CV is owned jointly by AMVAC as the general partner, and AVD International, LLC (also formed in July 2012 as a wholly owned subsidiary of AMVAC), as the limited partner, and is therefore a wholly owned subsidiary of AMVAC.

AMVAC BV is a registered Dutch private limited liability company that was formed in July 2012. AMVAC BV is located in the Netherlands and is wholly owned by AMVAC CV. During 2016, the international business sold the Company’s products in 59 countries, as compared to 54 countries in 2015.

AMVAC CR Srl is a wholly owned subsidiary of AMVAC BV that was formed in 2008 to conduct the Company’s business in Costa Rica and other countries in Central America.  

AMVAC M Srl is a wholly owned subsidiary of AMVAC BV and was formed in 1998 (originally formed as AMVAC M and changed to AMVAC Mexico Srl in 2013) to conduct the Company’s business in Mexico.  

AMVAC Sgpr is a wholly owned subsidiary of AMVAC BV and was opened on April 12, 2016. This new entity was formed to conduct the Company’s business in the Asia Pacific and China region.

Hong Kong JV is a 50% owned joint venture with a wholly owned subsidiary of Huifeng Agrochemical Company, Ltd, (“Huifeng”) a China based basic chemical manufacturer. The subsidiary, Shanghai Focus Biological Technology Co.,Ltd, is Huifeng’s development business. The joint venture was formed on July 7, 2016. The purpose of the joint venture is to be a technology transfer platform between the co-owners, including the development of proprietary agrochemical formulations and precision application systems for crop protection.

The Company classifies as international sales all products bearing foreign labeling shipped to a foreign destination.

 

 

 

2016

 

 

2015

 

 

2014

 

International sales

 

$

83,259

 

 

$

77,295

 

 

$

73,706

 

Percentage of net sales

 

 

26.7

%

 

 

26.7

%

 

 

24.7

%

 

Risk Management

The Company regularly monitors matters, whether insurable or not, that could pose material risk to its operations, financial performance or the safety of its employees and neighbors. The Risk Committee of the Board of Directors (“Board”) was formed in 2010, consists of three members of the Board and meets regularly. In fact, all members of the Board attend the majority of Risk Committee meetings. Working with senior management, the committee continuously evaluates the Company’s risk profile, identifies mitigation measures and ensures that the Company is prudently managing these risks. In support of the Risk Committee, senior management has appointed a risk manager and designated several senior executives to lead teams focused on addressing each of several of the most material risks facing the Company; these groups perform analysis with the benefit of operational knowledge. The top risks identified by management and being addressed by risk teams (in no particular order) include: adverse political and regulatory climate; managing high levels of inventory and associated reduced levels of manufacturing activity; succession planning and bench strength; maintaining a competitive edge in the marketplace; the possibility of an environmental event; undervaluation of the Company; availability of acquisition and licensing targets and cyber terrorism. Over the course of 2016, the Company continued to implement its enterprise risk management program, which extends to all areas of potential risk and is a permanent feature in the Company’s operation. In addition, the Company continually evaluates insurance levels for product liability, property damage and other potential areas of risk. Management believes its facilities and equipment are adequately insured against loss from usual business risks. In addition, in January 2017, the Company obtained insurance coverage against cyberterrorism risks.

5


AMERICAN VANGUARD CORPORATION

AND SUBSIDIARIES

(Dollars in thousands, except per share data)

 

Available Information

The Company makes available free of charge (through its website, www.american-vanguard.com), its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with the Securities and Exchange Commission (“SEC”). All reports filed with the SEC are available free of charge on the SEC website, www.sec.gov. Also available free of charge on the Company’s website are the Company’s Audit Committee, Compensation Committee, Finance Committee and Nominating and Corporate Governance Committee Charters, the Company’s Corporate Governance Guidelines, the Company’s Code of Conduct and Ethics, the Company’s Employee Complaint Procedures for Accounting and Auditing Matters and the Company’s policy on Stockholder Nomination and Communication. The Company’s Internet website and the information contained therein or incorporated therein are not intended to be incorporated into this Annual Report on Form 10-K.

ITEM 1A.

RISK FACTORS

The regulatory climate has grown increasingly challenging to the Company’s interests both domestically and internationally—Various agencies within the U.S. (both federal and state) and foreign governments continue to exercise increased scrutiny in permitting continued uses (or the expansion of such uses) of older chemistries, including many of the Company’s products and, in some cases, have initiated or entertained challenges to these uses. The challenge of the regulatory climate is even more pronounced in certain other geographical regions where the Company faces resistance to the continued use of certain of its products. There is no guarantee that this climate will change in the near term or that the Company will be able to maintain or expand the uses of many of its products in the face of these regulatory challenges.

USEPA has proposed further limitations on the continued registration of organophosphates—On September 25, 2015 the USEPA published in the Federal Register draft human health risk assessments for four of the Company’s organophosphate (“OP”) compounds (marketed under the names Bidrin, Counter, Folex and Mocap® ) in which it recommends the application of a 10X safety factor under the FQPA (Food Quality Protection Act) in light of the alleged possibility of neurodevelopmental harm to women and children based on epidemiological data. The agency is seeking public comment on these risk assessments and has indicated its current intention to apply this safety factor to all registered OPs, as they come up for review or renewal. The Company, like many in our industry, believes that the basis for applying this safety factor is unsound and that there is no causal link between the perceived harm and the use of its products. Accordingly, the Company intends to take all action necessary to defend its registrations. It is expected we will be joined in this effort by other companies who are similarly concerned about the potential impact of USEPA’s action. Further, there is no guarantee that the Company’s actions will alter the course that USEPA has proposed and, if the agency’s position becomes final, some uses of the company’s OP products could be limited or cancelled. Such action could have a material adverse effect upon the Company’s financial performance in future reporting periods.

Use of the Company’s products is subject to continuing challenges from activist groups—Use of agrochemical products, including the Company’s products is regularly challenged by activist groups in many jurisdictions under a multitude of federal and state statutes, including FIFRA, the Food Quality Protection Act, Endangered Species Act, and the Clean Water Act, to name a few. These challenges typically take the form of lawsuits or administrative proceedings against the USEPA and/or other federal or state agencies, the filing of amicus briefs in pending actions, the introduction of legislation that is inimical to the Company’s interests, and/or adverse comments made in response to public comment invited by USEPA in the course of registration, re-registration or label expansion. It is possible that one or more of these challenges could succeed, resulting in a material adverse effect upon one or more of the Company’s products.

The distribution and sale of the Company’s products are subject to prior governmental approvals and thereafter ongoing governmental regulation—The Company’s products are subject to laws administered by federal, state and foreign governments, including regulations requiring registration, approval and labeling of its products. The labeling requirements restrict the use of, and type of, application for our products. More stringent restrictions could make our products less available, which would adversely affect our revenues and profitability. Substantially all of the Company’s products are subject to the USEPA (and/or similar agencies in the various territories or jurisdictions in which we do business) registration and re-registration requirements, and are registered in accordance with FIFRA. Such registration requirements are based, among other things, on data demonstrating that the product will not cause unreasonable adverse effects on human health or the environment when used according to approved label directions. All states, where any of the Company’s products are used, also require registration before products, such as the Company sells, can be marketed or used in that state. Governmental regulatory authorities have required, and may require in the future, that certain scientific data requirements be performed on the Company’s products. The Company, on its behalf and also in joint efforts with other registrants, has and is currently furnishing certain required data relative to its products. There can be no assurance, however, that the USEPA or

6


AMERICAN VANGUARD CORPORATION

AND SUBSIDIARIES

(Dollars in thousands, except per share data)

 

similar agencies will not request that certain tests or studies be repeated or that more stringent legislation or requirements will not be imposed in the future. The Company can provide no assurance that any testing approvals or registrations will be granted on a timely basis, if at all, or that its resources will be adequate to meet the costs of regulatory compliance.

The manufacturing of the Company’s products is subject to governmental regulations—The Company currently owns and operates three manufacturing facilities in Los Angeles, California; Axis, Alabama; and Marsing, Idaho and owns and has manufacturing services provided in a fourth facility in Hannibal, Missouri (the “Facilities”). The Facilities operate under the terms and conditions imposed by state and local authorities. The manufacturing of key ingredients for certain of the Company’s products occurs at the Facilities. An inability to renew or maintain a license or permit, or a significant increase in the fees for such licenses or permits, could impede the Company’s manufacture of one or more of its products, and/or increase the cost of production; this, in turn, would materially and adversely affect the Company’s ability to provide customers with its products in a timely and affordable manner.

The Company may be subject to environmental liabilities—While the Company expends substantial funds to minimize the discharge of materials into the environment and to comply with governmental regulations relating to protection of the environment and its workforce, federal and state authorities may nevertheless seek fines and penalties for any violation of the various laws and governmental regulations. In addition, while the Company continually adapts its manufacturing processes to the environmental control standards of regulatory authorities, it cannot completely eliminate the risk of accidental contamination or injury from hazardous or regulated materials. Further, these various governmental agencies could, among other things, impose liability on the Company for (i) cleaning up the damage resulting from the release of pesticides and other agents into the environment, including with respect to subsurface environmental contamination at its Los Angeles-based manufacturing facility, which has been the subject of characterization, risk assessment and remediation planning for several years (see, “Environmental” above), and/or (ii) potential civil and criminal enforcement arising under RCRA for the Company’s importation (transportation, handling, and storage) of depleted, Thimet containers (see, “Legal Proceedings” below).  In short, the Company may be held liable for significant damages or fines relating to any environmental contamination, injury, or compliance violation which could have a material adverse effect on the Company’s financial condition and consolidated statements of operations.

The Company’s business may be adversely affected by cyclical and seasonal effects—Demand for the Company’s products tends to be seasonal. Seasonal usage follows varying agricultural seasonal patterns, weather conditions and weather related pressure from pests, and customer marketing programs and requirements. Weather patterns can have an impact on the Company’s operations. For example, the end user of its products may, because of weather patterns, delay or intermittently disrupt field work during the planting season, which may result in a reduction of the use of some products and therefore may, at some point, reduce the Company’s revenues and profitability. In light of the possibility of adverse seasonal effects, there can be no assurance that the Company will maintain sales performance at historical levels in any particular region.

The Company is dependent upon certain sole source suppliers for certain of its raw materials and active ingredients— There are a limited number of suppliers of certain important raw materials used by the Company in many of its products. Certain of these raw materials are available solely from sources overseas or from single sources domestically. Further, in conjunction with the purchase and/or licensing of various product lines (including Impact®, Force®, and Scepter®), the Company has entered into multi-year supply arrangements under which such counterparties are the sole source of either active ingredients and/or formulated end-use product and, in some cases, the manufacturer has entered the market as a competitor. There is no guarantee that any or all of these sole source manufacturers will be willing or able to supply these products to the Company reliably, continuously and at the levels anticipated by the Company or required by the market. If these sources prove to be unreliable and the Company is not able to supplant or otherwise second source these suppliers, it is possible that the Company will not realize its projected sales, which, in turn, could adversely affect the Company’s consolidated statements of operations.

To the extent that capacity utilization is not fully realized at its manufacturing facilities, the Company may experience lower profitability—While the Company endeavors continuously to maximize utilization of it manufacturing facilities, our success in these endeavors is dependent upon many factors beyond our control, including fluctuating market conditions, product life cycles, weather conditions, availability of raw materials and regulatory constraints, among other things. There can be no assurance that the Company will be able to maximize the utilization of capacity at its manufacturing facilities. Further, there is no assurance that absorption of factory costs will improve to the point that will enable the Company to return to its historically higher levels of profitability.

The Company’s continued success depends, in part, upon a limited number of key employees—Within certain functions, the Company relies heavily on a small number of key employees to manage ongoing operations and to perform strategic planning. In some cases, there are no internal candidates who are qualified to succeed these key personnel in the short term. In the event that the

7


AMERICAN VANGUARD CORPORATION

AND SUBSIDIARIES

(Dollars in thousands, except per share data)

 

Company was to lose one or more key employees, there is no guarantee that Company could replace them with people having comparable skills. Further, the loss of key personnel could adversely affect the operation of the business.

The Company faces competition in certain markets from new technologies and demand for organically produced food—The Company faces competition from larger companies that market new chemistries, genetically modified (“GMO”) seeds and other similar technologies (e.g., RNA interference) in certain of the crop protection sectors in which the Company competes, particularly that of corn. In fact, many growers that have chosen to use GMO seeds have reduced their use of the types of pesticides sold by the Company. At the same time, the demand for organically-produced food, which, generally speaking, is made without the use of synthetic chemicals (which constitute most of the Company’s products) continues to increase.  There is no guarantee that the Company will maintain its market share or pricing levels in sectors that are subject to competition from companies that market new technologies.  Further, it is possible that increased demand for organic crops may, over time, reduce the demand for the Company’s products.

The Company faces competition from generic competitors that source product from countries having lower cost structures—The Company continues to face competition from competitors around the globe that may enter the market through either offers to pay data compensation, or similar means in foreign jurisdictions, and then subsequently source material from countries having lower cost structures (typically India and China). These competitors typically tend to operate at thinner gross margins and, with low costs of goods, tend to drive pricing and profitability of subject product lines downward. There is no guarantee that the Company will maintain market share and pricing over generic competitors or that such competitors will not offer generic versions of the Company’s products in the future.

The Company’s key customers typically carry competing product lines and may be influenced by the Company’s larger competitors—A significant portion of the Company’s products are sold to national distributors in the United States, which also carry product lines of competitors that are much larger than the Company. Typically, revenues from the sales of these competing product lines and related program incentives constitute a greater part of our distributors’ income than do revenues from sales and program incentives arising from the Company’s product lines. Further, these distributors are often under pressure to market competing product lines rather than the Company’s. In light of these facts, there is no assurance that such customers will continue to market our products aggressively or successfully or that the Company will be able to influence such customers to continue to purchase our products instead of those of our competitors.

Industry consolidation may threaten the Company’s position in various markets—The global agricultural chemical industry continues to undergo significant consolidation. Many of the Company’s competitors have grown or are expected to grow through mergers and acquisitions. As a result, these competitors will tend to realize greater economies of scale, more diverse portfolios and greater influence throughout the distribution channels. Consequently, the Company may find it more difficult to compete in various markets. While such merger activity may generate acquisition opportunities for the Company, there is no guarantee that the Company will benefit from such opportunities. Further, there is a risk that the Company’s future performance may be hindered by the growth of its competitors through consolidation.

The Company is dependent on a limited number of customers, which makes it vulnerable to the continued relationship with and financial health of those customers—In 2016 and 2015, three customers accounted for 34% and 35%, respectively, of the Company’s sales. The Company’s future prospects may depend on the continued business of such customers and on our continued status as a qualified supplier to such customers. The Company cannot guarantee that these key customers will continue to buy products from us at current levels. The loss of a key customer could have a material adverse effect on the Company’s financial condition and consolidated statements of operations.

The carrying value of certain assets on the Company’s consolidated balance sheets may be subject to impairment depending upon market trends and other factors—The Company regularly reviews the carrying value of certain assets, including long-lived assets, inventory, fixed assets and intangibles. Depending upon the class of assets in question, the Company takes into account various factors including, among others, sales, trends, market conditions, cash flows, profit margins and the like. Based upon this analysis, where circumstances warrant the Company may leave such carrying values unchanged or adjust them as appropriate. There is no guarantee that these carrying values can be maintained indefinitely, and it is possible that one or more such assets could be subject to impairment which, in turn, could have an adverse impact upon the Company’s financial condition and consolidated statements of operations.

Reduced financial performance may limit the Company’s ability to borrow under its credit facility—The Company has historically grown net sales through both expansion of current product lines and acquisition of product lines from third parties. In

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(Dollars in thousands, except per share data)

 

order to finance acquisitions, the Company has usually drawn upon its senior credit facility. However, the Company’s borrowing capacity under the senior credit facility depends, in part, upon its satisfaction of a negative covenant that sets a maximum ratio of borrowed debt to earnings (as measured over the trailing 12 month period). There is no guarantee that the Company will continue to generate earnings necessary to ensure that it has sufficient borrowing capacity to support future acquisitions or that, when necessary, the lender group will amend the senior credit facility to provide for such borrowing capacity. Further, despite the Company’s excellent long-standing relationship with its lenders, in light of the uncertainties in global financial markets there is no guarantee that the Company’s lenders will be either willing or able to continue lending to the Company at such rates and in such amounts as may be necessary to meet the Company’s working capital needs.

The Company’s growth has been fueled in part by acquisition—Over the past few decades, the Company’s growth has been driven by acquisition and licensing of both established and developmental products from third parties. There is no guarantee that acquisition targets or licensing opportunities meeting the Company’s investment criteria will remain available or will be affordable. If such opportunities do not present themselves, then the Company may be unable to record consistent growth in future years.

ITEM 1B.

UNRESOLVED STAFF COMMENTS

None

ITEM  2

PROPERTIES

AMVAC owns in fee the Facility constituting approximately 152,000 square feet of improved land in Commerce, California (“Commerce”) on which its West Coast manufacturing, some of its warehouse facilities and some of its manufacturing administrative offices are located.

DAVIE owns in fee approximately 72,000 square feet of warehouse, office and laboratory space on approximately 118,000 square feet of land in Commerce, California, which is leased to AMVAC. In 2013, the Company made a significant investment in the Glenn A. Wintemute Research Center, which houses the Company’s primary research laboratory supporting synthesis, formulation and other new product endeavors.

On December 28, 2007, AMVAC purchased certain manufacturing assets relating to the production of Thimet and Counter and located at BASF’s multi-plant facility situated in Hannibal, Missouri (the “Hannibal Site”). Subject to the terms and conditions of the Agreement, AMVAC purchased certain buildings, manufacturing equipment, office equipment, fixtures, supplies, records, raw materials, intermediates and packaging constituting the “T/C Unit” of the Hannibal Site. The parties entered into a ground lease and a manufacturing and shared services agreement, under which BASF continues to supply various shared services to AMVAC for the Hannibal Site.

On March 7, 2008, AMVAC acquired from Bayer CropScience Limited Partnership, (“BCS LP”), a U.S. business of BCS, a facility (the “Marsing Facility”) located in Marsing, ID, which consists of approximately 17 acres of improved real property, 15 of which are owned by AMVAC and two of which AMVAC leases from the City of Marsing for a term of 25 years. The Marsing Facility is engaged in the blending of liquid and powder raw materials and the packaging of finished liquid, powder and pelletized products for sale into the US agricultural market. With this acquisition, AMVAC acquired the ability to formulate flowable materials. In connection with the acquisition, AMVAC and BCS LP agreed to enter into a master processor agreement under which AMVAC provides certain third party manufacturing services to BCS LP on an ongoing basis that continued into 2015. Following the termination of the master supply agreement, AMVAC and BCS LP have continued to trade on a normal commercial basis.

In 2001, AMVAC completed the acquisition of a manufacturing facility (the “Axis Facility”) from E.I. DuPont de Nemours and Company (“DuPont”). The Axis Facility is one of three such units located on DuPont’s 510 acre complex in Axis, Alabama. The acquisition consisted of a long-term ground lease of 25 acres and the purchase of all improvements thereon. The facility is a multi-purpose plant designed for synthesis of active ingredients and formulation and packaging of finished products.

The production areas of AMVAC’s facilities are designed to run on a continuous 24 hour per day basis. AMVAC regularly adds chemical processing equipment to enhance or expand its production capabilities. AMVAC believes its facilities are in good operating condition, are suitable and adequate for current needs, can be modified to accommodate future needs, have flexibility to change products, and can produce at greater rates as required. Facilities and equipment are insured against losses from fire as well as other usual business risks. The Company knows of no material defects in title to, or encumbrances on, any of its properties except that substantially all of the Company’s assets are pledged as collateral under the Company’s loan agreements with its primary lender

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AMERICAN VANGUARD CORPORATION

AND SUBSIDIARIES

(Dollars in thousands, except per share data)

 

group. For further information, refer to note 2 of the Notes to the Consolidated Financial Statements in Part IV, Item 15 of this Annual Report.

AMVAC owns approximately 42 acres of unimproved land in Texas for possible future expansion.

The Company leases approximately 19,953 square feet of office space located at 4695 MacArthur Court in Newport Beach, California. The lease was amended in September 2015 and was extended (at that time) to expire June 30, 2021.  The premises serve as the Company’s corporate headquarters.

AMVAC BV’s, GemChem’s, AMVAC M’s, AMVAC M Srl’s, AMVAC CR Srl’s and AMVAC Sgpr’s facilities consist of administration and/or sales offices which are leased.

ITEM  3

LEGAL PROCEEDINGS

A. DBCP Cases

Over the course of the past 30 years, AMVAC and/or the Company have been named or otherwise implicated in a number of lawsuits concerning injuries allegedly arising from either contamination of water supplies or personal exposure to 1, 2-dibromo-3-chloropropane (“DBCP®”). DBCP was manufactured by several chemical companies, including Dow Chemical Company, Shell Oil Company and AMVAC and was approved by the USEPA to control nematodes. DBCP was also applied on banana farms in Latin America. The USEPA suspended registrations of DBCP in October 1979, except for use on pineapples in Hawaii. The USEPA suspension was partially based on 1977 studies by other manufacturers that indicated a possible link between male fertility and exposure to DBCP among their factory production workers involved with producing the product.

At present, there are four domestic lawsuits and approximately 85 Nicaraguan lawsuits filed by former banana workers in which AMVAC has been named as a party. Only two of the Nicaraguan actions have actually been served on AMVAC.

As described more fully below, activity in domestic cases during 2016 is as follows: in Hawaii, Patrickson, et. al. v. Dole Food Company, et. al which had been dismissed in 2011 (for expiration of the statute of limitations), was appealed and, upon the appellate court’s adoption of cross-jurisdictional tolling, remanded to the trial court for adjudication; and Adams, from which co-defendant Dole was dismissed, is on appeal with respect to such dismissal and, at any rate, involves claims that pre-dated AMVAC’s sales into the relevant market. All but two matters that had been pending in Louisiana and Delaware have been dismissed (and affirmed on appeal) based upon the applicable statutes of limitation. The pending Delaware matters are more fully described below. With respect to Nicaraguan matters, there was no change in status during 2016.

Delaware Matter

On or about May 31, 2012, two cases (captioned Abad Castillo and Marquinez) were filed with the United States District Court for the District of Delaware (USDC DE No. 1:12-C.V.-00695-LPS) involving claims for physical injury arising from alleged exposure to DBCP over the course of the late 1960’s through the mid-1980’s on behalf of 2,700 banana plantation workers from Costa Rica, Ecuador, Guatemala, and Panama.  Defendant Dole brought a motion to dismiss 22 plaintiffs from Abad Castillo on the ground that they were parties in cases that had been filed by HendlerLaw, P.C. in Louisiana.  On September 19, 2013, the appeals court determined that 14 of the 22 plaintiffs should be dismissed.  On May 27, 2014, the district court granted Dole’s motion to dismiss the matter without prejudice on the ground that the applicable statute of limitations had expired in 1995.  Then, on August 5, 2014, the parties stipulated to summary judgment in favor of defendants (on the same ground as the earlier motion) and the court entered judgment in the matter.  Plaintiffs were given an opportunity to appeal; however, only 57 of the 2,700 actually entered an appeal.  Thus, at this stage, only 57 plaintiffs remain in the action.  We expect that the appellate court will schedule oral argument by March 2017 and may issue a decision by July 2017. The Company believes that a loss is neither probable nor reasonably estimable and has not recorded a loss contingency on this matter.  

On or about May 31, 2012, HendlerLaw, P.C. filed several actions involving claims for personal injury allegedly arising from exposure to DBCP on behalf of 230 banana workers from Costa Rica, Ecuador and Panama. Defendant Dole subsequently brought a motion to dismiss these matters under the “first-to-file” theory of jurisdiction, specifically in light of the fact that they involved identical claims and claimants as matters that had been brought by the same law firm in Louisiana. These Delaware matters have been consolidated into one matter (the “Hendler-Delaware Case”). On August 21, 2012, the U.S. District Court in the Hendler-Delaware case granted defendants’ motion to dismiss the actions with prejudice, finding that the same claimants and claims had been pending in the Hendler-Louisiana cases where they had been first filed.  However, plaintiffs appealed the dismissal, and on September 2, 2016,

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AMERICAN VANGUARD CORPORATION

AND SUBSIDIARIES

(Dollars in thousands, except per share data)

 

the Third Circuit Court reversed the District Court decision, finding that it was not proper for the trial court to have dismissed these cases with prejudice even though the Louisiana courts had dismissed the same claims for expiration of the statute of limitations.  In reaching its decision, the Third Circuit  reasoned that no court had yet addressed the merits of the matter, that Delaware’s statute of limitations may differ from that of Louisiana, and that it would have been proper for the Delaware trial court to have dismissed the matter without prejudice (that is, with the right to amend and refile).  Accordingly, the matter has been remanded to the U.S. District Court in Delaware.  The Company believes the Hendler-Delaware case has no merit and, further, that a loss is neither probable nor reasonably estimable; accordingly, it has not recorded a loss contingency.

Hawaiian Matters

Patrickson, et. al. v. Dole Food Company, et al In October 1997, AMVAC was served with two complaints in which it was named as a defendant, filed in the Circuit Court, First Circuit, State of Hawai’i and in the Circuit Court of the Second Circuit, State of Hawai’i (two identical suits) entitled Patrickson, et. al. v. Dole Food Company, et. al (“Patrickson Case”) alleging damages sustained from injuries (including sterility) to banana workers caused by plaintiffs’ exposure to DBCP while applying the product in their native countries. Other named defendants include: Dole Food Company, Shell Oil Company and Dow Chemical Company. After several years of law and motion activity, the court granted judgment in favor of the defendants based upon the statute of limitations on July 28, 2010. On August 24, 2010, the plaintiffs filed a notice of appeal. On April 8, 2011, counsel for plaintiffs filed a pleading to withdraw and to substitute new counsel. On October 21, 2015, the Hawai’i Supreme Court granted the appeal and overturned the lower court decision, ruling that the State of Hawai’i now recognizes cross-jurisdictional tolling, that plaintiffs filed their complaint within the applicable statute of limitations and that the matter is to be remanded to the lower court for further adjudication. No discovery has taken place in this matter, and, at this stage in the proceedings, the Company does not believe that a loss is either probable or reasonably estimable and, accordingly, has not recorded a loss contingency for this matter.

Adams v. Dole Food Company et al On approximately November 23, 2007, AMVAC was served with a suit filed by two former Hawaiian pineapple workers (and their spouses), alleging that they had testicular cancer due to DBCP exposure: Adams v. Dole Food Company et al in the First Circuit for the State of Hawaii. Plaintiff alleges that they were exposed to DBCP between 1971 and 1975. AMVAC denies that any of its product could have been used at the times and locations alleged by these plaintiffs. Following the dismissal of Dole Food Company on the basis of the exclusive remedy of worker’s compensation benefits, plaintiffs appealed the dismissal. The court of appeals subsequently remanded the matter to the lower court in February 2014, effectively permitting plaintiffs to amend their complaint to circumvent the workers’ compensation bar. There has been no activity in the case since that time, and there is no estimated date of opinion. The Company does not believe that a loss is either probable or reasonably estimable and has not recorded a loss contingency for this matter.

Nicaraguan Matters

A review of court filings in Chinandega, Nicaragua, has found 85 suits alleging personal injury allegedly due to exposure to DBCP and involving approximately 3,592 plaintiffs have been filed against AMVAC and other parties. Of these cases, only two – Flavio Apolinar Castillo et al. v. AMVAC Chemical Corporation et al., No. 535/04 and Luis Cristobal Martinez Suazo et al. v. AMVAC Chemical Corporation et al., No. 679/04 Castillo and Suazo, (which were filed in 2004 and involve 15 banana workers) have been served on AMVAC. All but one of the suits in Nicaragua have been filed pursuant to Special Law 364, an October 2000 Nicaraguan statute that contains substantive and procedural provisions that Nicaragua’s Attorney General previously expressed as unconstitutional. Each of the Nicaraguan plaintiffs’ claims $1 million in compensatory damages and $5 million in punitive damages. In all of these cases, AMVAC is a joint defendant with Dow Chemical Company and Dole Food Company, Inc. AMVAC contends that the Nicaragua courts do not have jurisdiction over it and that Public Law 364 violates international due process of law. AMVAC has objected to personal jurisdiction and demanded under Law 364 that the claims be litigated in the United States. In 2007, the court denied these objections, and AMVAC appealed the denial. It is not presently known as to how many of these plaintiffs actually claim exposure to DBCP at the time AMVAC’s product was allegedly used nor is there any verification of the claimed injuries. Further, to date, plaintiffs have not had success in enforcing Nicaraguan judgments against domestic companies before U.S. courts. With respect to these Nicaraguan matters, AMVAC intends to defend any claim vigorously. Furthermore, the Company does not believe that a loss is either probable or reasonably estimable and has not recorded a loss contingency for these matters.

B. Other Matters

USEPA RCRA/FIFRA Matter  On or about March 24, 2015, Region 4 of the USEPA issued to registrant’s principal operating subsidiary, AMVAC, an Opportunity to Show Cause (“OSC”) why USEPA should not take formal action under Section 3008(a) of the

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AMERICAN VANGUARD CORPORATION

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(Dollars in thousands, except per share data)

 

RCRA for potential noncompliance arising from AMVAC’s importation, transportation and storage of used, depleted Lock‘N Load containers having residual amounts of its product Thimet.  The scope of these discussions subsequently expanded to involve USEPA Region 5 and to include the importation of depleted Lock ‘N Load containers from Australia in October 2015 and full Lock ‘N Load containers from Canada in January 2016.  On or about March 25, 2016, USEPA Region 5 issued a Stop Sale, Use or Removal Order (“SSURO”) ordering AMVAC to cease the distribution or sale of US Thimet 20G, Canadian Thimet 15G and Australian Thimet 200G on the grounds that the importation of both depleted and full containers of Thimet and the subsequent use of their contents was allegedly inconsistent with FIFRA and RCRA. After hosting a plant inspection by Regions 4 and 5 and providing documentation to the agency, AMVAC requested and received relief from the SSURO in the form of nine amendments.  As a consequence of this relief, the Company believes that it will have adequate inventory to meet customers’ needs for the foreseeable future.  

AMVAC believes that it has lawfully imported used Thimet containers from Canada and Australia for the purpose of potentially refilling, reprocessing or properly disposing of them. Further, the Company believes that it has it has carried out its Thimet business in good faith, maintained a focus on product stewardship and not posed any increased risk of harm to human health or the environment.  Nevertheless, USEPA’s Region 5 has expressed its intention to bring a civil enforcement action relating to its overall findings.  On October 11, 2016, the Company met with USEPA’s Office of Enforcement and Compliance (as well as with Regions 4 and 5) to clarify a path forward to ensure future compliance. However, on November 10, 2016, the Company was served with a grand jury subpoena out of the U.S. District Court for the Southern District of Alabama in which both the Environmental Crimes Section (“ECS”) of USEPA and the U.S. Department of Justice (“DoJ”) are seeking the production of documents relating to the re-importation of depleted Thimet containers.  The Company has retained defense counsel and is cooperating with both ECS and DoJ in the production.  At this stage, the company has not yet received a final position from USEPA with regard to civil enforcement, nor have ECS and DoJ made clear their intentions with regard to any potential criminal enforcement.  Thus, it is too early to tell whether a loss on either front is probable or reasonably estimable. Accordingly, the Company has not recorded a loss contingency on these matters.

Galvan v. AMVAC In an action entitled Graciela Galvan v. AMVAC Chemical Corp. filed on April 7, 2014 with the Superior Court for the State of California for the County of Orange (No. 00716103CXC) plaintiff, a former employee, alleges violations of wages and hours requirements under the California Labor Code. The Company completed the deposition of putative class representative and participated in mediation on the matter. In February 2016, the court granted plaintiff’s motion for class certification with respect to only one of the seven original claims (namely, that allegedly discretionary bonus payments made to class members during the subject period should have been taken into account when calculating overtime).  The Company believes that such bonus payments were discretionary and, as such, were properly excluded from overtime calculations.  Nevertheless, in the interest of saving defense costs and mitigating downside risk, the Company engaged in settlement discussions with plaintiff’s counsel over the course of several months.  The proposed settlement is not material to the Company’s consolidated financial statements.  The terms of the settlement are subject to approval by the presiding judge in the action. If approved by the judge, the matter should be dismissed with prejudice within six to nine months.

DeChene Farms The Company received a claim by a Minnesota-based grower to the effect that the in-furrow use of the Company’s insecticide, Mocap®, resulted in delayed germination and resulting diminished size of approximately 300 acres of red Norland potatoes.  Based upon its then-current understanding of the claim, during third quarter of 2016, the Company recorded a loss contingency for the matter in an amount that was not material to its consolidated financial statements.  Subsequently, the Company retained two independent investigators and conducted its own investigation of the matter as to causation.  Further, we received information regarding market conditions and crop valuation from the grower, who alleged that he had received a lower price per pound for his crop.  The Company held negotiations with grower and, in December 2016, the parties agreed to settle the matter.  The settlement amount was not material to the Company’s consolidated financial statements.

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 (“Reed,”), an applicator, and 819596 Alberta Ltd. dba Jem Holdings (“Jem”), 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.  Plaintiffs allege, among other things, that Amvac was negligent and failed to warn them of the risks of such application.  Reed seeks damages of $250K for pain and suffering, while Jem seeks $60K in lost equipment; both plaintiffs also seek unspecified damages as well. Also during January 2017, counsel for Reed requested that counsel for the Company accept service of four related actions relating to the same incident and pending with the same court: (i) Van Giessen Growers, Inc. v Harold Reed et al (No. 160303906)(in which grower seeks $400K for loss of potatoes); (ii) James Houweling et al. v. Harold Reed et al. (No. 160104421)(in which equipment owner seeks damages for lost equipment); (iii) Chin Coulee Farms, etc. v. Harold Reed et al. (No. 150600545)(in which owner of potatoes and truck seeks $530K for loss thereof); and (iv) Houweling Farms v. Harold Reed et al. (No. 15060881)(in which owner of several

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AMERICAN VANGUARD CORPORATION

AND SUBSIDIARIES

(Dollars in thousands, except per share data)

 

Quonset huts seeks damages for lost improvements, equipment and business income equal to $4.3 million).  The Company was not named in the original complaints in these four actions but has since been added in cross-claims by defendant Reed.  In his cross claims, Reed also alleges that other cross-defendants were negligent for using highly flammable insulation and failing to maintain sparking electrical fixtures in the storage units affected by the fire.  The Company believes that plaintiffs’ and cross-plaintiffs’ claims against it are without merit and intends to defend these matters vigorously.  At this stage in the proceedings, however, it is too early to determine whether a loss is probable or reasonably estimable; accordingly, the Company has not recorded a loss contingency.

ITEM 4

MINE SAFETY DISCLOSURES

Not Applicable

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AMERICAN VANGUARD CORPORATION

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PART II

ITEM  5

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Effective March 6, 2006, the Company listed its $0.10 par value common stock (“Common Stock”) on the New York Stock Exchange under the ticker symbol AVD. From January 1998 through March 5, 2006, the Common Stock was listed on the American Stock Exchange under the ticker symbol AVD. The Company’s Common Stock traded on The NASDAQ Stock Market under the symbol AMGD from March 1987 through January 1998.

The following table sets forth the range of high and low sales prices as reported for the Company’s Common Stock for the calendar quarters indicated.

 

 

 

High

 

 

Low

 

Calendar 2016

 

 

 

 

 

 

 

 

First quarter

 

$

17.07

 

 

$

9.63

 

Second quarter

 

 

17.41

 

 

 

12.60

 

Third quarter

 

 

17.92

 

 

 

14.45

 

Fourth quarter

 

 

20.00

 

 

 

14.20

 

Calendar 2015

 

 

 

 

 

 

 

 

First quarter

 

$

12.53

 

 

$

9.73

 

Second quarter

 

 

15.25

 

 

 

10.48

 

Third quarter

 

 

14.10

 

 

 

10.84

 

Fourth quarter

 

 

16.06

 

 

 

11.50

 

 

Holders

As of February 17, 2017, the number of stockholders of the Company’s Common Stock was approximately 4,650, which includes beneficial owners with shares held in brokerage accounts under street name and nominees.

Dividends

The Company has issued a cash dividend in each of the last nineteen years dating back to 1996. Cash dividends issued during the past three years are summarized in the table below.

 

Declaration Date

 

Distribution Date

 

Record Date

 

Dividend

Per Share

 

 

Total

Paid

 

December 8, 2016

 

January 6, 2017

 

December 23, 2016

 

$

0.01

 

 

$

289

 

June 13, 2016

 

July 12, 2016

 

June 30, 2016

 

 

0.01

 

 

 

289

 

October 11, 2016

 

November 11, 2016

 

October 28, 2016

 

 

0.01

 

 

 

289

 

Total 2016

 

 

 

 

 

$

0.03

 

 

$

867

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 16, 2015

 

April 17, 2015

 

April 3, 2015

 

 

0.02

 

 

 

572

 

Total 2015

 

 

 

 

 

$

0.02

 

 

$

572

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 11, 2014

 

January 9, 2015

 

December 26, 2014

 

 

0.02

 

 

 

569

 

September 19, 2014

 

October 22, 2014

 

October 8, 2014

 

 

0.05

 

 

 

1,417

 

June 9, 2014

 

July 17, 2014

 

July 3, 2014

 

 

0.05

 

 

 

1,420

 

March 10, 2014

 

April 18, 2014

 

April 4, 2014

 

 

0.05

 

 

 

1,417

 

Total 2014

 

 

 

 

 

$

0.17

 

 

$

4,823

 

 

14


AMERICAN VANGUARD CORPORATION

AND SUBSIDIARIES

(Dollars in thousands, except per share data)

 

Purchases of Equity Securities by the Issuer

None

 

Securities Authorized for Issuance Under Equity Compensation Plans

 

Plan Category

 

Number of securities to

be issued upon exercise

of outstanding options,

warrants, and rights

(a)

 

 

Weighted-average

exercise price of

outstanding options,

warrants, rights

(b)

 

 

Number of securities

remaining available for

future issuance

under equity

compensation plans

(excluding securities

reflected in

column (a) (c)

 

Equity compensation plans approved by security holders

 

 

624,239

 

 

$

9.61

 

 

 

827,000

 

Total

 

 

624,239

 

 

$

9.61

 

 

 

827,000

 

 

 

15


AMERICAN VANGUARD CORPORATION

AND SUBSIDIARIES

(Dollars in thousands, except per share data)

 

Stock Performance Graph

The following graph presents a comparison of the cumulative, five-year total return for the Company, the S&P 500 Stock Index, and a peer group (Specialty Chemical Industry). The graph assumes that the beginning values of the investments in the Company, the S&P 500 Stock Index, and the peer group of companies each was $100 on December 31, 2010. All calculations assume reinvestment of dividends. Returns over the indicated period should not be considered indicative of future returns.

 

16


AMERICAN VANGUARD CORPORATION

AND SUBSIDIARIES

(Dollars in thousands, except per share data)

 

ITEM 6

SELECTED FINANCIAL DATA

The selected consolidated financial data set forth below with respect to each of the calendar years in the five-year period ended December 31, 2016, have been derived from the Company’s consolidated financial statements and are qualified in their entirety by reference to the more detailed consolidated financial statements and the independent registered public accounting firm’s reports thereon, which are included elsewhere in this Report on Form 10-K for each of the three years in the period ended December 31, 2016. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

 

 

2016

 

 

2015

 

 

2014

 

 

2013

 

 

2012

 

Net sales

 

$

312,113

 

 

$

289,382

 

 

$

298,634

 

 

$

381,021

 

 

$

366,190

 

Gross profit

 

$

128,288

 

 

$

111,902

 

 

$

114,496

 

 

$

171,347

 

 

$

161,125

 

Operating income

 

$

20,540

 

 

$

11,524

 

 

$

6,710

 

 

$

55,735

 

 

$

59,323

 

Income before income tax expense and loss on equity

    investment

 

$

18,917

 

 

$

8,962

 

 

$

3,644

 

 

$

53,834

 

 

$

56,852

 

Net income attributable to American Vanguard

 

$

12,788

 

 

$

6,591

 

 

$

4,841

 

 

$

34,449

 

 

$

36,867

 

Earnings per common share

 

$

0.44

 

 

$

0.23

 

 

$

0.17

 

 

$

1.22

 

 

$

1.32

 

Earnings per common share—assuming dilution

 

$

0.44

 

 

$

0.23

 

 

$

0.17

 

 

$

1.19

 

 

$

1.28

 

Total assets (1)

 

$

429,956

 

 

$

435,270

 

 

$

463,590

 

 

$

439,917

 

 

$

394,686

 

Working capital (1)

 

$

130,001

 

 

$

139,850

 

 

$

197,073

 

 

$

132,486

 

 

$

103,770

 

Long-term debt less current installments

 

$

40,951

 

 

$

68,321

 

 

$

98,605

 

 

$

50,671

 

 

$

35,869

 

Stockholders’ equity

 

$

282,357

 

 

$

268,326

 

 

$

261,003

 

 

$

257,795

 

 

$

225,436

 

Weighted average shares outstanding—basic

 

 

28,859

 

 

 

28,673

 

 

 

28,436

 

 

 

28,301

 

 

 

27,914

 

Weighted average shares outstanding—assuming dilution

 

 

29,394

 

 

 

29,237

 

 

 

28,912

 

 

 

28,899

 

 

 

28,756

 

Dividends per share of common stock

 

$

0.03

 

 

$

0.02

 

 

$

0.17

 

 

$

0.22

 

 

$

0.22

 

 

(1)The Company’s consolidated balance sheet as of December 31, 2015, 2014, 2013, and 2012 reflected certain reclassifications for deferred income taxes and income taxes payables.  

17


AMERICAN VANGUARD CORPORATION

AND SUBSIDIARIES

(Dollars in thousands, except per share data)

 

ITEM  7

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS/RISK FACTORS:

The Company, from time-to-time, may discuss forward-looking statements including assumptions concerning the Company’s operations, future results and prospects. Generally, “may,” “could,” “will,” “would,” “expect,” “believe,” “estimate,” “anticipate,” “intend,” “continue” and similar words identify forward-looking statements. Forward-looking statements appearing in this Report are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on our current expectations and are subject to risks and uncertainties that can cause actual results and events to differ materially from those set forth in or implied by the forward-looking statements and related assumptions contained in the entire Report. Such factors include, but are not limited to: product demand and market acceptance risks; the effect of economic conditions; weather conditions; changes in regulatory policy; the impact of competitive products and pricing; changes in foreign exchange rates; product development and commercialization difficulties; capacity and supply constraints or difficulties; availability of capital resources; 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. SEC. It is not possible to foresee or identify all such factors. We urge you to consider these factors carefully in evaluating the forward-looking statements contained in this Report.

MANAGEMENT OVERVIEW

 

Financial performance for the year ended December 31, 2016 included sales of $312,113 which were up approximately 8%, as compared to sales of $289,382 for 2015. Our gross profit performance ended at $128,288 or 41% of sales, as compared to $111,902 or 39% of sales last year. Operating costs for the year remained constant at 35% of sales in 2016 and 2015, notwithstanding this constant rate, costs did increase as we made higher accrual on incentive compensation reflecting the improved financial performance, continued to develop our international footprint and to invest in future business and product development. Overall net income was up at $0.44 per share as compared to $0.23 per share last year.

 

When considering the balance sheet, debt reduced by $3,537 in the three months and by $27,370 for the year ended December 31, 2016.  Inventory ended at $120,576, which is in line with our sales and inventory planning for 2016. In comparison, inventory at this time last year was $136,477.

 

 

18


AMERICAN VANGUARD CORPORATION

AND SUBSIDIARIES

(Dollars in thousands, except per share data)

 

Results of Operations

2016 Compared with 2015:

 

 

 

2016

 

 

2015

 

 

$ Change

 

 

% Change

 

Net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Insecticides

 

$

119,226

 

 

$

117,180

 

 

$

2,046

 

 

 

2

%

Herbicides/soil fumigants/fungicides

 

 

123,540

 

 

 

111,897

 

 

 

11,643

 

 

 

10

%

Other, including plant growth regulators

 

 

29,438

 

 

 

29,013

 

 

 

425

 

 

 

1

%

Total crop

 

 

272,204

 

 

 

258,090

 

 

 

14,114

 

 

 

5

%

Non-crop

 

 

39,909

 

 

 

31,292

 

 

 

8,617

 

 

 

28

%

Total net sales

 

$

312,113

 

 

$

289,382

 

 

$

22,731

 

 

 

8

%

Cost of sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Insecticides

 

$

78,945

 

 

$

77,288

 

 

$

1,657

 

 

 

2

%

Herbicides/soil fumigants/fungicides

 

 

66,299

 

 

 

65,507

 

 

 

792

 

 

 

1

%

Other, including plant growth regulators

 

 

19,139

 

 

 

18,097

 

 

 

1,042

 

 

 

6

%

Total crop

 

 

164,383

 

 

 

160,892

 

 

 

3,491

 

 

 

2

%

Non-crop

 

 

19,442

 

 

 

16,588

 

 

 

2,854

 

 

 

17

%

Total cost of sales

 

$

183,825

 

 

$

177,480

 

 

$

6,345

 

 

 

4

%

Gross profit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Insecticides

 

$

40,281

 

 

$

39,892

 

 

$

389

 

 

 

1

%

Herbicides/soil fumigants/fungicides

 

 

57,241

 

 

 

46,390

 

 

 

10,851

 

 

 

23

%

Other, including plant growth regulators

 

 

10,299

 

 

 

10,916

 

 

 

(617

)

 

 

-6

%

Gross profit crop

 

 

107,821

 

 

 

97,198

 

 

 

10,623

 

 

 

11

%

Gross profit non-crop

 

 

20,467

 

 

 

14,704

 

 

 

5,763

 

 

 

39

%

Total gross profit

 

$

128,288

 

 

$

111,902

 

 

$

16,386

 

 

 

15

%

Gross margin crop

 

 

40

%

 

 

38

%

 

 

 

 

 

 

 

 

Gross margin non-crop

 

 

51

%

 

 

47

%

 

 

 

 

 

 

 

 

Total gross margin

 

 

41

%

 

 

39

%

 

 

 

 

 

 

 

 

Net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S

 

$

228,854

 

 

$

212,087

 

 

$

16,767

 

 

 

8

%

International

 

 

83,259

 

 

 

77,295

 

 

 

5,964

 

 

 

8

%

Total net sales

 

$

312,113

 

 

$

289,382

 

 

$

22,731

 

 

 

8

%

 

The Company’s financial performance in 2016 was generally improved when compared to that of 2015; net sales were up 8%. Gross margin increased to 41% in 2016, as a result of manufacturing cost control, improved factory utilization, a good performance on purchasing key raw materials and favorable product mix changes. Operating expenses remained flat compared to net sales, despite higher spending for development projects including SIMPAS and increased performance driven accruals for incentive compensation. Net income improved by approximately 94%. As sales improved and channel inventory declined, our own inventory reduced in line with our sales and operating plan for 2016 and overall working capital reduced.  With increased sales, the business generated cash from operations and used those funds to reduce debt, add capacity and capability to our manufacturing activity and make strategic investments.

Net sales ended 2016 at $312,113, as compared to $289,382 in the prior year. Included in that performance both our domestic business and our international business grew at approximately the same rate.

 

Domestic sales finished the year at $228,854, as compared to $212,087 in 2015, an increase of 8%. Sales were positively impacted by strong growth in the Midwest corn market where procurement in the distribution channel appears to have normalized and restocking demand had a positive impact on our corn sales, which increased 10% in 2016, as compared to 2015, and ended at 19% of our total sales in 2016, as compared to 18% in 2015. The main driver for year on year growth were sales of our corn herbicide, Impact®, which increased strongly as wet spring weather conditions increased weed proliferation. Furthermore, we also experienced encouraging market demand for our recently licensed herbicide product Scepter®. While we experienced slightly lower annual performance from our soil fumigant products, overall we benefited from increased international sales of our insecticides Mocap® and

19


AMERICAN VANGUARD CORPORATION

AND SUBSIDIARIES

(Dollars in thousands, except per share data)

 

Nemacur® along with revenue increases in our Growth Regulators, our Pharmaceutical products and our Envance pest control products.

International sales ended at $83,259, as compared to $77,295 in 2015, driven by increased sales associated with the key acquisition made in 2015 including European registrations for our nematicide, Nemacur®, and growth of our newly acquired herbicides Hyvar®, Krovar® bromacil, and, regionally; stronger sales in Europe, Mexico, Canada, Central & South America counterbalanced somewhat by lower sales in Asia and Africa. Growth in Europe and Asia was driven by the 2015 acquisitions of Nemacur® and bromacil respectively. Growth in Canada arose primarily from sales of Thimet following the issuance of a new end use registration in 2016, following expiration of an older end use registration in 2015 . These increases were offset somewhat by drought conditions in Africa and Australia.  

The relative sales performance of our crop and non-crop businesses are as follow: Net sales of our crop business in 2016 were $272,204, which constitutes an increase of 5.5% as compared to net sales of $258,090 for that business in 2015. Net sales of our non-crop products in 2016 were $39,909, which is an increase of approximately 28% as compared to $31,292 in 2015. A more detailed discussion of product groups and products having a material effect on net sales for each of the crop and non-crop businesses appears below.

In our Crop business, net sales of insecticides in 2016 ended at $119,226, which was a 2% increase as compared to sales of $117,180 in 2015. For the same period, annual net sales of our granular soil insecticides were up 1% above 2015. We had increased year-over-year performance from our Nemacur® and Mocap® products sold primarily in international markets along with increased domestic sales of Thimet® used in peanuts, sugar cane and potatoes.  While our overall cotton business grew modestly in 2016, net sales of our cotton foliar insecticide Bidrin® were down slightly due to considerably lighter than normal pest pressure. In general, our overall insecticide business showed a solid performance in 2016.

Within the product group of herbicides/soil fumigants/fungicides, our crop net sales in 2016 were up 10% to $123,540 as compared to $111,897 in 2015. Our fumigant product line continued to perform well despite a slight year-over-year decline in revenue caused by wet weather along the West Coast which inhibited some on-ground application of this liquid product. Midwest restocking demand along with wet spring weather conditions which increased weed proliferation resulted in significantly increased sales for our post-emergent corn herbicide Impact. Additionally, our newly acquired bromacil products Hyvar® and Krovar® contributed strongly to an overall increase in our herbicide category. Within this group, fungicides were essentially flat with the prior year.

Within our other products group (which includes plant growth regulators, molluscicides and third party manufacturing activity), we experienced an increase of approximately 1.5% in net sales, ending at $29,438 in 2016, as compared to $29,013 in 2015. The major drivers of this performance were stronger year-over-year sales of our cotton defoliant Folex®, increased sales of our Citrus Fix® and SmartBlock® products, flat performance of our specialty fruit product NAA® and slightly lower sales of our molluscicide Metaldehyde.

Within our non-crop business, 2016 net sales increased by 28% to $39,909 as compared to $31,292 recorded in 2015. Naled sales (our Dibrom® brand mosquito adulticide) rose 2% in 2016, in light of rainy conditions in the southern states, and we posted significant increases in our Pharmaceutical, our Pest Strip® products and our Envance® pest control spray technology.

Our cost of sales for 2016 was $183,825 or 59% of net sales. This compared to $177,480 or 61% of net sales for 2015. The decrease in cost of sales as a percentage of net sales in 2016 was primarily as a result of manufacturing cost controls and, at the same time, increased factory utilization. These actions together resulted in a 0.6% reduction in cost of sales. Furthermore, raw material prices reduced overall by approximately 0.4%, driven by domestic cost reductions offset by a significant increase in one key raw material on an international product line driven by a Chinese manufacturer’s pricing decision. Finally, the Company made more sales with higher margins in 2016 and this accounted for the balance of the 2% improvement in cost of sales.

Gross profit for 2016 improved by $16,386 or 15% to end at $128,288 for the year ended December 31, 2016, as compared to $111,902 for the prior year. Gross margin percentage for 2016 improved by 2% and ended at 41%, as compared to 39% for 2015. The improvement was driven by improved factory cost recovery, strong performance on raw material purchasing and (as noted above in Cost of Sales) some sales mix improvements.

20


AMERICAN VANGUARD CORPORATION

AND SUBSIDIARIES

(Dollars in thousands, except per share data)

 

Operating expenses in 2016 increased by $7,370 to $107,748 or 35% of sales as compared to $100,378 or 35% in 2015. The differences in operating expenses by department are as follows:

 

 

 

2016

 

 

2015

 

 

Change

 

Selling

 

$

27,442

 

 

$

27,052

 

 

$

390

 

General and administrative

 

 

32,128

 

 

 

28,516

 

 

 

3,612

 

Research, product development and regulatory

 

 

21,298

 

 

 

19,116

 

 

 

2,182

 

Freight, delivery and warehousing

 

 

26,880

 

 

 

25,694

 

 

 

1,186

 

 

 

$

107,748

 

 

$

100,378

 

 

$

7,370

 

 

 

Selling expenses slightly increased by $390 to end at $27,442 for the year ended December 31, 2016, as compared to $27,052 in 2015. The main drivers for the increased costs are expanded activities in our advertising and marketing efforts and an increase in costs associated with both international and domestic field sales operations.

 

General and administrative expenses increased by $3,612 to $32,128 for the year ended December 31, 2016, as compared to $28,516 in 2015. The main drivers for the increase are accruals for incentive compensation following significantly improved financial performance and increased legal expenses, particularly related to the dispute with USEPA on the re-importation of depleted Thimet containers.

 

Research, product development and regulatory expenses increased by $2,182 to $21,298 for the year ended December 31, 2016, as compared to $19,116 in 2015. This was driven by increased costs incurred on our SIMPAS product development activities and by timing of product defense studies offset somewhat by benefits from the consolidation and subsequent cost sharing of two industry wide task force groups.

 

Freight, delivery and warehousing costs for the year ended December 31, 2016 increased by $1,186 to $26,880, as compared to $25,694 in 2015. When expressed as a percentage of sales, freight costs reduced slightly year over year to 8.6% in 2016, as compared to 8.9% in 2015.

Net interest expense was $1,623 in 2016, as compared to $2,562 in 2015. Interest costs are summarized in the following table:

 

 

 

2016

 

 

2015

 

Average Indebtedness and Interest expense

 

Average

Debt

 

 

Interest

Expense

 

 

Interest

Rate

 

 

Average

Debt

 

 

Interest

Expense

 

 

Interest

Rate

 

Working capital revolver

 

$

59,897

 

 

$

1,382

 

 

 

2.3

%

 

$

94,765

 

 

$

2,027

 

 

 

2.1

%

Notes payable

 

 

20

 

 

1

 

 

 

5.0

%

 

 

6,809

 

 

 

266

 

 

 

3.9

%

Interest income

 

 

 

 

 

(7

)

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of deferred loan fees

 

 

 

 

 

250

 

 

 

 

 

 

 

 

 

291

 

 

 

 

Amortization of other deferred liabilities

 

 

 

 

 

37

 

 

 

 

 

 

 

 

 

135

 

 

 

 

Other interest expense

 

 

 

 

 

44

 

 

 

 

 

 

 

 

 

53

 

 

 

 

Subtotal

 

$

59,917

 

 

$

1,707

 

 

 

2.8

%

 

$

101,574

 

 

$

2,772

 

 

 

2.7

%

Capitalized interest

 

 

 

 

 

(84

)

 

 

 

 

 

 

 

 

(210

)

 

 

 

Total

 

$

59,917

 

 

$

1,623

 

 

 

2.7

%

 

$

101,574

 

 

$

2,562

 

 

 

2.5

%

 

The Company’s average overall debt for the year ended December 31, 2016 was $59,917 as compared to $101,574 for the comparable period of the previous year. As can be seen from the above table, on a gross basis, our effective interest rate increased on our working capital revolver to 2.3%, as compared to 2.1% in 2015. This increase was driven by changes in Libor rate. The Company continues to operate without a fixed rate swap in place.  After adjustments related to capitalized interest and including expenses related to the amortization of deferred liabilities, the overall effective rate was 2.7% for 2016 as compared to 2.5% in 2015.

 

Income tax expense for 2016 was $5,540, as compared to $2,009 for 2015. The effective tax rate for 2016 was 29.3%, as compared to 22.4% in 2015. The increase in the effective tax rate was primarily driven by improved earnings in jurisdictions with higher income tax rates.  While foreign income has declined in 2016, as compared to 2015, primarily as a result of product market mix and continued price pressure on generic sourced materials, domestic income increased dramatically, as compared to prior year.

21


AMERICAN VANGUARD CORPORATION

AND SUBSIDIARIES

(Dollars in thousands, except per share data)

 

The Company currently is undergoing an examination by the IRS for the tax years ended December 31, 2013 and 2014. While the audit is not yet complete, the Company has agreed to a proposed adjustment.  As a result, the Company has increased deferred tax assets and income taxes payable at December 31, 2015 by $12,598.

For the year ended December 31, 2016, the Company recorded losses on its equity investment of $353. For the same period of 2015, the Company recorded losses on its equity investment of $629 and a loss on dilution in the amount of $7, for a total loss of $636 on its equity method investment. In 2016, our net income was reduced by $236, representing the share of net income of our majority owned subsidiary that was allocated to the non-controlling interest.  In 2015, a net loss of $274 was allocated to the non-controlling interest share.

Net income attributable to American Vanguard ended at $12,788 or 0.44 per diluted share in 2016 as compared to $6,591 or $0.23 per diluted share in 2015.

Liquidity and Capital Resources

The Company generated $46,406 of cash from operating activities provided during the year ended December 31, 2016, as compared to $78,568 in the prior year.

Net income of $13,024, plus non-cash depreciation, amortization of intangibles, other assets and discounted future liabilities generated a total of $34,570. Stock based compensation of 3,071, loss from equity method investment of $353 and change in value of deferred income taxes of $151, provided a net cash inflow of $37,843, as compared to $32,727 for the same period of 2015.

As of December 31, 2016, our working capital has reduced to $130,001, as compared to $139,850 as of December 31, 2015. This change included a reduction in inventory offset by an increase in receivables, an increased cash position and higher accounts payable levels reflecting both increased factory activity and some capital spending close to the end of the year.

At December 31, 2016, our receivables (net of allowances) were $87,206 as compared to $75,389 at the end of the prior year. This is primarily a result of increased sales in the final quarter of the year and the market mix of sales in the last 4 months of the year.

Deferred revenue as of December 31, 2015 was $3,848, as compared to $8,888 at December 31, 2015.  Such deferred revenues are primarily driven by customer decisions to take up opportunities to make early payments in return for some early cash incentive programs.  

Inventories ended the year at $120,576, as compared to $136,477 at December 31, 2015.  The decrease in inventory level is mainly driven by our corn products and was achieved as a result of constant attention to working through a disciplined sales and operation plan for all our products, balancing manufacturing cost recovery, plant capacity and customer needs. During the year we closely monitored channel inventory as our products worked through the distribution channel to the growers. By the end of 2016, we determined that channel inventories of our key products were at or near historically normal levels. In addition, it should be noted that the Company purchases and holds raw material, intermediate or finished goods inventory from time to time based on a single annual purchase from a single source or supplier, potentially resulting in peaks in the carrying value of inventory. Furthermore, in order to achieve efficient manufacturing runs, the Company may manufacture a particular product only one time a year and then carry high levels of that inventory for a period of time.

Timing of payments made on prepaid expenses and other assets caused an increase of $3,872 during the year. As we increased manufacturing activity and capital spending in the final quarter of the year, accounts payable balances increased by $9,015, as compared to this time last year. Furthermore, the Company increased its income tax payable by $1,186 due to improved current year performance.

Our program accruals have decreased by $1,441 to end at $42,930 at December 31, 2016, as compared to $44,371 at December 31, 2015, reflecting primarily the mix of business that has driven the financial performance for 2016. The Company accrues programs in line with the growing season upon which specific products are targeted. Typically crop products have a growing season that ends on September 30th of each year. During the 2016 year, the Company made accruals for programs in the amount of $70,448 and made payments in the amount of $71,889. During the prior year, the Company made accruals in the amount of $61,514 and made payments in the amount of $69,689.

22


AMERICAN VANGUARD CORPORATION

AND SUBSIDIARIES

(Dollars in thousands, except per share data)

 

The Company used $14,137 in investing activities in the year ended December 31, 2016 as compared to $43,691 in 2015. The Company spent $10,630 on fixed assets primarily focused on continuing to invest in manufacturing infrastructure (including putting in place a dedicated manufacturing cell at one of our international toll manufacturing site), $224 on final payments on product line acquisitions completed in 2016 and $3,283 on investments.

Our financing activities used a net cash of $28,545 in 2016, as compared to $32,864 in 2015. The main usage of funds was the pay down on the Company’s senior secured credit facility in the amount of $27,600. The Company further paid $578 in dividends, payment of other notes payable and of long-term liabilities primarily associated with liabilities under deferred purchase agreements on product acquisitions in the amount of $704 and received $337 from the sales of common stock under its ESPP plan (including associated tax benefits). In 2015, the Company paid down debt in the amount of $30,520, paid dividends of $1,141, made payments associated with deferred purchase agreements in the amount of $1,543 and received $340 from sales of common stock under its ESPP plan.

The Company has various loans in place that together constitute the short-term and long-term loan balances shown in the consolidated balance sheets as at December 31, 2016 and December 31, 2015. These are summarized in the following table:

 

Indebtedness

 

At December 31, 2016

 

 

At December 31, 2015

 

$000’s

 

Long-term

 

 

Short-term

 

 

Total

 

 

Long-term

 

 

Short-term

 

 

Total

 

Revolving line of credit

 

$

41,400

 

 

$

 

 

$

41,400

 

 

$

69,000

 

 

$

 

 

$

69,000

 

Deferred loan fees

 

 

(449

)

 

 

 

 

 

(449

)

 

 

(679

)

 

 

 

 

 

(679

)

Notes payable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

55

 

 

 

55

 

Total indebtedness

 

$

40,951

 

 

$

 

 

$

40,951

 

 

$

68,321

 

 

$

55

 

 

$

68,376

 

 

On June 17, 2013, AMVAC, the Company’s principal operating subsidiary, as borrower, and affiliates (including the Company), as guarantors and/or borrowers, entered into a Second Amended and Restated Credit Agreement (the “New Credit Agreement”) with a group of commercial lenders led by Bank of the West (AMVAC’s primary bank) as agent, swing line lender and L/C issuer. The new facility also includes both AMVAC CV and AMVAC BV (both Dutch subsidiaries) as borrowers. The New Credit Agreement supersedes the Amended and Restated Credit Agreement (“First Amendment”) dated as of January 10, 2011. The New Credit Agreement is a senior secured lending facility with a five year term and consists of a revolving line of credit up to $200 million and an accordion feature for up to $100 million. In connection with AMVAC’s entering into the New Credit Agreement, all outstanding indebtedness under the First Amendment was rolled over into the New Credit Agreement, including the conversion of term loans into revolving debt.

On July 18, 2014, AMVAC, as borrower, and affiliates (including the Company), as guarantors and/or borrowers, entered into a First Amendment to Second Amended and Restated Credit Agreement (the “First Amendment”) with a group of commercial lenders led by Bank of the West (AMVAC’s primary bank) as agent, swing line lender and L/C issuer. Under the First Amendment, the Consolidated Funded Debt Ratio was increased for the third and fourth quarters of 2014 and the first quarter of 2015, and, further, borrowers were permitted to pay cash dividends to stockholders during the first and second quarters of 2015 notwithstanding rolling twelve-month net income levels. Under the New Credit Agreement, the Company has three key covenants (with which it was in compliance throughout the year). The covenants are as follows: (1) the Company must maintain its borrowings below a certain consolidated funded debt ratio (taking into account the Company’s twelve month trailing EBITDA), (2) the Company has a limitation on its annual spending on the acquisition of fixed asset capital additions, and (3) the Company must maintain a certain consolidated fixed charge coverage ratio.

As of April 14, 2015, AMVAC, registrant’s principal operating subsidiary, as borrower, and affiliates (including registrant), as guarantors and/or borrowers, entered into a Second Amendment to the Second Amended and Restated Credit Agreement (the “Second Amendment”) with a group of commercial lenders led by Bank of the West (AMVAC’s primary bank) as agent, swing line lender and L/C issuer. Under the Second Amendment, the Consolidated Funded Debt Ratio was increased for the second, third and fourth quarters of 2015 (to 3.5-to-1 from 3.25-to-1) and a fixed charge covenant, requiring, in effect, that the ratio of consolidated current assets to consolidated current liabilities exceed 1.2-to-1 for the duration of the term of the credit facility, was added. The Company is in compliance with all key covenants within the New Credit Agreement as amended at December 31, 2016.

23


AMERICAN VANGUARD CORPORATION

AND SUBSIDIARIES

(Dollars in thousands, except per share data)

 

Contractual Obligations and Off-Balance Sheet Arrangements

We believe that the combination of our cash flows from operations, current cash on hand and the availability under the Company’s credit facility will be sufficient to meet our working capital and capital expenditure requirements and will provide us with adequate liquidity to meet our anticipated operating needs for at least the next 12 months. Although operating activities are expected to provide cash, to the extent of growth in the future, our operating and investing activities will use cash and, consequently, this growth may require us to access some or all of the availability under the credit facility. It is also possible that additional sources of finance may be necessary to support additional growth.

The following summarizes our contractual obligations at December 31, 2016, and the effects such obligations are expected to have on cash flows in future periods:

 

 

 

Payments Due by Period

 

 

 

Total

 

 

Less than

1 Year

 

 

1—3

Years

 

 

4—5

Years

 

 

After

5 Years

 

Long-term debt

 

$

41,400

 

 

$

 

 

$

41,400

 

 

$

 

 

$

 

Estimated interest liability(1)

 

 

1,428

 

 

 

952

 

 

 

476

 

 

 

 

 

 

 

Licensing obligations

 

 

767

 

 

 

200

 

 

 

240

 

 

 

222

 

 

 

105

 

Deferred earn outs on product acquisitions

 

 

26

 

 

 

26

 

 

 

 

 

 

 

 

 

 

Employment agreements

 

 

2,448

 

 

 

1,333

 

 

 

1,115

 

 

 

 

 

 

 

Operating leases—rental properties

 

 

4,876

 

 

 

885

 

 

 

1,787

 

 

 

1,429

 

 

 

775

 

Operating leases—vehicles

 

 

1,152

 

 

 

565

 

 

 

545

 

 

 

42

 

 

 

 

 

 

$

52,097

 

 

$

3,961

 

 

$

45,563

 

 

$

1,693

 

 

$

880

 

 

(1)

Estimated interest liability has been calculated using the current effective rate for each category of debt over the remaining term of the debt and taking into account scheduled repayments. The revolving line has been assumed to be constant (i.e. $41,400) throughout the remaining term. All of our debt is linked to LIBOR rates.

There were no other off-balance sheet arrangements as of December 31, 2016.

Under the terms of the credit facility, all debt outstanding is due when the agreement expires on June 17, 2018.

In addition to the above contractual obligations, $1,893 of unrecognized tax benefits and $408 of accrued penalties and interest have been recorded as long term liabilities as of December 31, 2016. We are uncertain as to if or when such amounts may be settled or any tax benefits may be realized.

24


AMERICAN VANGUARD CORPORATION

AND SUBSIDIARIES

(Dollars in thousands, except per share data)

 

Results of Operations

2015 Compared with 2014:

 

 

 

2015

 

 

2014

 

 

$ Change

 

 

% Change

 

Net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Insecticides

 

$

117,180

 

 

$

135,705

 

 

$

(18,525

)

 

 

-14

%

Herbicides/soil fumigants/fungicides

 

 

111,897

 

 

 

101,785

 

 

 

10,112

 

 

 

10

%

Other, including plant growth regulators

 

 

29,013

 

 

 

30,220

 

 

 

(1,207

)

 

 

-4

%

Total crop

 

 

258,090

 

 

 

267,710

 

 

 

(9,620

)

 

 

-4

%

Non-crop