10-K 1 avd-10k_20191231.htm 10-K avd-10k_20191231.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, 2019

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

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock, $.10 par value

 

AVD

 

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

 

  

Accelerated filer

 

Non-accelerated filer

 

  

  

Smaller reporting company

 

 

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

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

The aggregate market value of the voting stock of the registrant held by non-affiliates is $446.4 million. This figure is estimated as of June 30, 2019 at which date the closing price of the registrant’s Common Stock on the New York Stock Exchange was $15.41 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, 2019, was 30,148,629. The number of shares of $.10 par value Common Stock outstanding as of February 24, 2020 was 30,159,277.

 

 

 


AMERICAN VANGUARD CORPORATION

AND SUBSIDIARIES

ANNUAL REPORT ON FORM 10-K

December 31, 2019

 

 

 

 

 

Page No.

 

 

PART I

 

 

 

 

 

 

 

Item 1.

 

Business

 

2

 

 

 

 

 

Item 1A.

 

Risk Factors

 

8

 

 

 

 

 

Item 1B.

 

Unresolved Staff Comments

 

13

 

 

 

 

 

Item 2.

 

Properties

 

13

 

 

 

 

 

Item 3.

 

Legal Proceedings

 

14

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

14

 

 

 

 

 

 

 

PART II

 

 

 

 

 

 

 

Item 5.

 

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

 

15

 

 

 

 

 

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

 

28

 

 

 

 

 

Item 8.

 

Financial Statements and Supplementary Data

 

28

 

 

 

 

 

Item 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

29

 

 

 

 

 

Item 9A.

 

Controls and Procedures

 

29

 

 

 

 

 

Item 9B.

 

Other Information

 

31

 

 

 

 

 

 

 

PART III

 

 

 

 

 

 

 

Item 10.

 

Directors, Executive Officers and Corporate Governance

 

31

 

 

 

 

 

Item 11.

 

Executive Compensation

 

31

 

 

 

 

 

Item 12.

 

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

 

31

 

 

 

 

 

Item 13.

 

Certain Relationships and Related Transactions, and Director Independence

 

31

 

 

 

 

 

Item 14.

 

Principal Accountant Fees and Services

 

31

 

 

 

 

 

 

 

PART IV

 

 

 

 

 

 

 

Item 15.

 

Exhibits and Financial Statement Schedules

 

32

 

 

 

 

 

Item 16.

 

Form 10-K Summary

 

35

 

 

 

 

 

SIGNATURES AND CERTIFICATIONS

 

36

 

 

 

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.)

All dollar amounts reflected in the consolidated financial statements are expressed in thousands, except per share data.

ITEM 1

BUSINESS

American Vanguard Corporation (“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”), AMVAC Mexico Sociedad de Responsabilidad Limitada (“AMVAC M”), AMVAC de Costa Rica Sociedad de Responsabilidad Limitada (“AMVAC CR Srl”), AMVAC C.V. (“AMVAC CV”), AMVAC Hong Kong Limited (“AMVAC Hong Kong”), AMVAC Netherlands BV (“AMVAC BV”), Envance Technologies, LLC (“Envance”), TyraTech Inc. (“TyraTech”), AMVAC Singapore Pte, Ltd (“AMVAC Sgpr”), Huifeng AMVAC Innovation Co. Limited (“Hong Kong JV”), OHP Inc. (“OHP”), Grupo AgriCenter (including the parent AgriCenter S.A. and its subsidiaries) (“AgriCenter”), AMVAC do Brasil Representácoes Ltda (“AMVAC do Brasil”), Agrovant Comércio de Produtos Agrícolas Ltda. (“Agrovant”) and Defensive – Indústria, Comérico & Representação Comerial Ltda. (“Defensive”).

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.

AVD operates its business through its principle operating subsidiaries including AMVAC for its domestic business and AMVAC BV for its international business.

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, formulates or distributes for others. In addition, the Company has carved out a leadership position in closed delivery systems, currently offers certain of its products in SmartBox, Lock ‘n Load and EZ Load systems, and is commercializing a precision application technology known as SIMPAS (see “Intellectual Property” below) which permits the delivery of multiple products (from AMVAC and/or other companies) at variable rates in a single pass. AMVAC has historically expanded its business through both the acquisition of established chemistries, the development and commercialization of new formulations or compounds through licensing arrangements and by expanding its distribution network to gain broader market access.

AMVAC BV is a Netherlands Corporation that was established in 2012 and is based in Houten near Amsterdam in the Netherlands. AMVAC BV sells product through subsidiaries in various international territories.

Below is a description of the Company’s acquisition/licensing activity over the past four years.

On December 20, 2019, the Company’s principal operating subsidiary, AMVAC Chemical Corporation, completed the purchase of certain assets related to four herbicide products from E.I. du Pont de Nemours and Company, doing-business-as Corteva Agriscience and Dow Agrosciences, LLC., for use in the U.S.. The purchased assets include end-use registrations, registration data, trademarks (specifically, Classic®, First Rate®, Python® and Hornet®), inventory, commercial sales information, know-how and certain product supply arrangements.

2


On July 1, 2019, the Company completed the acquisition of three crop protection products for the U.S. market from Raymat Crop Science, Inc. and its affiliate, Esstar Crop Science, Inc. The acquired products are the miticide etoxazole, the insect growth regulator Diflubenzuron, and a rice herbicide bispyribac sodium. The acquired assets included product registrations, trademarks and trade names, customer lists and associated inventory.   

On January 10, 2019, the Company’s international subsidiary AMVAC BV completed the purchase of Defensive and Agrovant, two distribution companies based in Brazil. Defensive and Agrovant market and distribute crop protection products and micronutrients with focus on the fruit and vegetable market segments throughout Brazil. The acquired assets included all of the outstanding stock of those companies, which hold assets that consist, in part, of product registration, trade names and trademarks, customer lists, workforce, fixed assets, and working capital.

On December 28, 2018, the Company’s international subsidiary AMVAC BV completed the purchase of certain assets related to the Quizalofop product family from E.I. du Pont de Nemours and Company. Quizalofop is an herbicide marketed under the name Assure II for use on canola, soybeans and pulse (among other things) in Canada and the U.S.. The acquired assets include product rights, registration data, trademarks, and inventory.  Subsequently, AMVAC BV transferred the acquired assets related to the U.S. market to AMVAC.

On December 14, 2018, AMVAC completed the purchase of certain assets related to the trichlorfon product family from Bayer AG and Bayer CropScience AG (“Bayer”). Trichlorfon is an insecticide marketed under the name Dylox in turf, ornamental and other markets. This transaction includes product registrations, trademarks and manufacturing know-how. AMVAC will manufacture and supply formulated end use products to Bayer for the latter’s distribution.

On November 9, 2018, AMVAC completed the purchase of all of the outstanding shares of TyraTech, Inc. and, in the process, delisted TyraTech from the AIM market of the London Stock Exchange. TyraTech develops non-toxic insecticides and green solutions for pest control. Their patented technology platform leverages synergistic essential oil combinations to target invertebrate pest receptors that are not active in humans and other mammals.

On June 20, 2018, AMVAC completed the purchase of certain intangible assets related to the bromacil product family including end use registrations in the U.S.. The assets were purchased from Bayer AG. Bromacil is a broad-spectrum residual herbicide used for non-agricultural industrial vegetation control and on many crops such as pineapples, citrus, agave and asparagus. Marketed under the Hyvar® and Krovar® brands, bromacil herbicides are valued and long-established weed control tools. AMVAC previously purchased these brands from DuPont Crop Protection in 2015 for markets outside of US and Canada including Japan, Thailand, Mexico, Costa Rica and Brazil.

On October 27, 2017, the Company’s international subsidiary, AMVAC BV, completed the purchase of several affiliated companies operating under AgriCenter S.A., a distribution company based in Costa Rica. AgriCenter markets and distributes end-use chemical and biological products throughout Central America, primarily for crop applications. The acquired assets included product registration, trade names and trademarks, customer lists, personnel, fixed assets, goodwill and working capital.

On October 2, 2017, AMVAC acquired substantially all of the assets of OHP, a US-based distribution company specializing in the greenhouse and nursery production markets. The acquired assets included product rights, trade names, customer relationships, personnel, goodwill, fixed assets and working capital.

On August 22, 2017, AMVAC BV, completed the acquisition of certain selective herbicides and contact fungicides including chlorothanonil, ametryn, and isopyrazam, sold in the Mexican agricultural market. The assets were purchased from Syngenta AG and are used on various crops such as sugarcane, tomatoes, potatoes and hot peppers. The acquired assets included product registrations, trademarks and trade names, customer lists, and associated inventory.  

On June 6, 2017, AMVAC, completed an acquisition of certain herbicides, fungicides and insecticides assets relating to the abamectin, chlorothalonil and paraquat product lines from a group of companies, including Adama Agricultural Solutions, Ltd. These products are used on a wide range of crops such as citrus, cotton, nuts, fruits and vegetables. The acquired assets included product registrations, trademarks and trade names, customer lists, and associated inventory.

On January 13, 2017, AMVAC acquired from The Andersons, Inc. certain assets relating to proprietary formulations containing PCNB, chlorothalonil and propiconazole which are marketed under the name FFII and FFIII. The acquired assets included end use registrations.  

On June 27, 2017, both AMVAC BV and Huifeng made individual capital contributions of $950 to the Hong Kong JV. On July 7, 2017, the Hong Kong JV purchased 100% of the shares of Profeng Australia Pty Ltd. (“Profeng”), for a total consideration of $1,900.

3


On February 29, 2016, AMVAC BV purchased shares constituting a 15% interest in BiPA NV/SA, a Belgian company specializing in the development and early commercialization of biological products for use in agriculture. Through this investment, AMVAC BV obtained possible future access to a pipeline of new biological products for potential commercialization either individually in certain territories or in combination with the Company’s existing product portfolio.

Seasonality

The agricultural chemical industry, in general, is cyclical in nature. The demand for AVD’s products tends to be seasonal. Seasonal usage, however, does not necessarily follow calendar dates, but more closely follows growing patterns, weather conditions, geography, weather related pressure from pests and customer marketing programs. With the expansion of the Company’s global footprint, seasonal effects have become more attenuated on a full-year basis.

Backlog

AVD primarily sells its products on the basis of purchase orders. The purchase orders are typically fulfilled within a short time frame. As a result, backlog is not considered a significant factor of AVD’s business.

Customers

The Company’s largest three customers accounted for 18%, 14% and 7% of the Company’s sales in 2019; 12%, 9% and 8% in 2018; and 13%, 10% and 10% in 2017.

Distribution

AVD manages its U.S. business through its principal operating subsidiary, AMVAC. 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. AVD manages its international sales through AMVAC BV, which has sales offices or wholly owned distributors in Mexico, Costa Rica, several other countries in Central America, Brazil, Australia, and sales force executives or sales agents in other territories. The Company’s domestic and international distributors, agents and customers typically have long-established relationships with retailers/end-users, far-reaching logistics, transportation capabilities and/or customer service expertise. The markets for AVD products vary by region, target crop, use and type of distribution channel. AVD’s customers are experts at addressing these various markets.

Competition

In its many marketplaces, AVD faces competition from both domestic and foreign manufacturers. Many of our competitors are larger and have substantially greater financial and technical resources than AVD. AVD’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. AVD competes principally on the basis of quality, product efficacy, price, technical service and customer support. In some cases, AVD has positioned itself in smaller niche markets, which are no longer addressed by larger companies. In other cases, for example in the Midwest corn market, the Company competes directly with larger competitors.

Manufacturing

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

Raw Materials

AVD 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, AVD seeks to secure its supply by either long-term (multi-year) arrangements or purchasing on long lead times from its suppliers. Further, where the availability or cost of certain raw materials may be subject to the effect of tariffs, the Company may order goods at times or in volumes out of the ordinary course in order to optimize pricing and to ensure supply.

4


Intellectual Property

AVD’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 the Company has made applications for related inventions to expand its equipment portfolio, particularly with respect to its SIMPAS technology. Further, AVD’s trademarks bring value to its products in both domestic and foreign markets. AVD considers that, in the aggregate, its product registrations, trademarks, licenses, customer lists and patents constitute valuable assets. While it does not regard its current business as being materially dependent upon any single product registration, trademark, license, or patent, it believes that patents will play an increasingly important role in its developmental equipment technology in future years.

EPA Registrations

In the U.S., AVD’s products also receive protection afforded by the terms of the Federal Insecticide, Fungicide and Rodenticide Act (“FIFRA”), pursuant to which it is unlawful to sell any pesticide in the U.S., unless such pesticide has first been registered by the U.S. Environmental Protection Agency (“USEPA”). Substantially all of the Company’s products that are sold in U.S. 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 AVD’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 AVD. AVD, 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. The Company expensed $13,989, $16,047 and $14,232, during 2019, 2018 and 2017, respectively, on these activities.

 

 

 

2019

 

 

2018

 

 

2017

 

Registration

 

$

9,046

 

 

$

10,749

 

 

$

9,450

 

Product development

 

 

4,943

 

 

 

5,298

 

 

 

4,782

 

 

 

$

13,989

 

 

$

16,047

 

 

$

14,232

 

 

Environmental

Commerce Site

During 2019, 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. This activity then took two paths: first, the RCRA permit closure and second, the larger site characterization.

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.

5


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. In 2014, the Company submitted a remedial action plan (“RAP”) to DTSC, under the provisions of which, the Company proposed not to disturb sub-surface contaminants, but to continue monitoring, maintain the cover above affected soil, enter into restrictive covenants regarding the potential use of the property in the future, and to continue to provide financial assurances relating to the requirements of the RAP.  In January 2017, the RAP was circulated for public comment.  DTSC responded to those comments and, on September 29, 2017, approved the RAP as submitted by the Company. The Company continues to conduct groundwater monitoring and maintain the cover above affected soil and is working with DTSC to prepare an operation and maintenance plan, to record covenants on certain affected parcels and to obtain further clarification on financial assurance obligations relating to the RAP.  At this stage, the Company does not believe that costs likely to be incurred in connection with the RAP will be material and has not recorded a loss contingency for these activities.

Brazil

AMVAC do Brasil leases a facility, located in the municipality Jaboticabal, in the state of São Paulo, Brazil, that was used for storage of packaged pesticide and fertilizer products in warehouses and storage of mineral oil in above ground storage tanks. As lessee of the facility, AMVAC do Brasil is required to assess the environmental condition of the site and conduct remediation, if necessary and therefore contracted an environmental consultant to perform a preliminary environmental site assessment in December 2019. The assessment indicated possible subsurface contamination in limited areas and recommends a Phase II confirmatory investigation, which may or may not indicate the need for additional investigation and/or remediation.  

Other Environmental

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 in the U.S.. 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 risk of 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, 2019, the Company employed 671 employees. The Company employed 624 employees as of December 31, 2018 and 605 employees as of December 31, 2017. From time to time, due to the seasonality of its business, AVD 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 1971. As the Company’s main operating subsidiary, AMVAC owns and/or operates the Company’s domestic manufacturing facilities. AMVAC manufactures, formulates, packages and sells its products in the U.S. 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 and, in addition purchases of 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 on Form 10-K. DAVIE is a wholly owned subsidiary of AVD.

6


Envance is a Delaware Limited Liability Company and is a wholly owned subsidiary of the Company. It was formed in 2012 with joint venture partner, TyraTech. AMVAC’s initial shareholding was 60% which increased to 87% in 2015. Prior to November 8, 2018 the Company also owned 34.38% of TyraTech. On November 8, the Company acquired the remaining 65.62% of the shares of TyraTech Inc. and, as a result, TyraTech became a wholly owned subsidiary of the Company on November 9, 2018. Also, as a result of acquiring 100% of TyraTech, Envance became a wholly owned subsidiary of the Company. 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 and license its intellectual property to third parties.

On October 2, 2017, AMVAC purchased substantially all of the assets of OHP, a domestic distribution company specializing in products for the turf and ornamental market. OHP markets and sells end use products for third parties, either under third-party brands or else as own label products.

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 2019, the international business sold the Company’s products in 55 countries, as compared to 54 countries in 2018.

AMVAC Hong Kong was formed in November 2019 and is wholly owned by AMVAC. AMVAC Hong Kong took over the role of AMVAC CV as of January 1, 2020.

AMVAC M is a wholly owned subsidiary of AMVAC BV and was originally formed in 1998 (as Quimica Amvac de Mexico S.A. de C.V and subsequently changed to AMVAC Mexico Sociedad de Responsabilidad Limitada “AMVAC M”) to conduct the Company’s business in Mexico.  

AMVAC Sgpr is a wholly owned subsidiary of AMVAC BV and was formed 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 Huifeng (Hong Kong) Limited, a wholly owned subsidiary of Huifeng Agrochemical Company, Ltd, (“Huifeng”) a China based, basic chemical manufacturer. The Hong Kong JV was formed on August 2, 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. Furthermore, it is intended to be used to develop both partners’ business in the region. This included, in 2017, the acquisition of 100% of the shares of Profeng.

On October 27, 2017, AMVAC BV purchased 100% of the stock of AgriCenter, which owned shares in subsidiaries located in Costa Rica, Panama, Nicaragua, Honduras, the Dominican Republic, Mexico, Guatemala, and El Salvador. These affiliated entities, collectively known as AgriCenter, market, sell and distribute end-use chemical and biological products throughout Central America primarily for crop applications.

On January 10, 2019, AMVAC BV acquired 100% of the stock of Defensive and Agrovant, two distribution companies based in Brazil. Defensive and Agrovant market and distribute crop protection products and micronutrients with focus on the fruit and vegetable market segments throughout Brazil.

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

 

 

 

2019

 

 

2018

 

 

2017

 

International sales

 

$

185,961

 

 

$

153,958

 

 

$

98,905

 

Percentage of net sales

 

 

39.7

%

 

 

33.9

%

 

 

27.9

%

 

7


Risk Management

The Company regularly monitors matters, whether insurable or not, that could pose material risk to its operations, the safety of its employees and neighbors, and its financial performance. The Risk Committee of the Board of Directors (“Board”) was formed in 2010, consists of four members of the Board and meets regularly. However, all members of the Board are invited to and regularly attend 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.

Further, 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 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 inventory and optimizing manufacturing efficiency; 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. 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 including cyber-terrorism.

Environmental, Social and Governance (“ESG”)

As outlined in its Corporate Sustainability Reports (“CSR”) (from 2012 and 2017/2018), the Company believes that sustainability is an essential corporate value. We have a responsibility to multiple stakeholders, including investors, employees, neighbors, governments and even future generations, to use resources wisely, to contribute to the improvement of the environment, to foster human rights and to operate our business in a manner that is responsible. We also believe that it is important to investors and other stakeholders that we make this commitment clear and transparent and that we inculturate these values into our workforce.  

Accordingly, director Émer Gunter, has been appointed as ESG (Environmental, Social and Governance) liaison between the Nominating and Corporate Governance Committee and management. In that capacity, Ms. Gunter will lend a more focused oversight of ESG-related matters to the Board, including with respect to identification, measurement and mitigation of risks as well as disclosure of sustainability and related initiatives. Under her direction, senior management will continue to build out and refine its ESG program. Our progress in this endeavor will be documented for the public through CSRs and public financial disclosures during coming reporting periods.

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 Corporate Sustainability Reports. 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 remains 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 many chemistries, including several of the Company’s products and, in some cases, have initiated or entertained challenges to these uses. The challenge of the regulatory climate is more pronounced in certain geographical regions (outside the U.S.) where the Company faces resistance to the continued use of certain of its products. For example, the European Union (“EU”) employs a hazard-based analysis when considering whether product registrations can be maintained; under this approach, EU regulatory authorities typically do not weigh benefit against risk in their assessments and routinely cancel products for which a safer alternative is available, notwithstanding the benefit of the cancelled product.  There is no guarantee that this regulatory 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 such regulatory challenges.

8


Product liability judgments on glyphosate by domestic courts present a litigation risk to companies in this industryOver the past several months, multiple judgments have been rendered by domestic courts in product liability cases against Bayer/Monsanto in connection with injuries allegedly arising from exposure to the herbicide product, glyphosate. The basis was purported carcinogenicity based largely upon the findings of a certain international organization, in spite of significant scientific evidence to the contrary. While the Company has not sold glyphosate domestically, the theory of these results could put one or more of the Company’s products at risk. There is no guarantee that one or more product liability actions would not be brought against the Company on a similar basis. Further, adverse rulings in such actions could have a material adverse effect upon the Company’s financial performance in future reporting periods.

The trend of passing pesticide “ban-bills” in various states could put one or more of the Company’s products at risk—In certain states, including Maryland and New York, state and/or local legislatures have passed legislation banning the use of chlorpyrifos, in spite of valid registrations at USEPA and/or the equivalent state agency. While the Company does not sell chlorpyrifos products, there is no guarantee that one or more of its registered products would not be targeted in state or local legislation of this nature. Further, such legislation could have a material adverse effect upon the Company’s financial performance in future reporting periods.

Climate Change may adversely affect the Company’s business—Over the course of the past several years, global climate conditions have become increasingly inconsistent, volatile and unpredictable. Many of the regions in which the Company does business have experienced excessive moisture, cold, drought and/or heat of an unprecedented nature at various times of the year. In some cases, these conditions have either reduced, or obviated the need for, the Company’s products whether pre-plant, at-plant, post-emergent or at harvest. Due to the unpredictable nature of these conditions, growers and distributors have become increasingly conservative in procurement practices and the accumulation of inventory. Further, the random nature of climactic change has made it increasingly difficult to forecast market demand and, consequently, financial performance, from year-to-year. There is no guarantee that climate change will abate in the near future, and it is possible that such change will continue to hinder the Company’s ability to forecast its sales performance with accuracy and otherwise adversely affect the Company’s financial performance.

Tariff Activity—Over the course of the past two years, the U.S. and China have imposed a series of retaliatory tariffs against one another in respect of various products, ranging from metals to grains to chemicals. During that period, the Company was not materially adversely affected by these tariffs. While the two countries have apparently reached a détente on the issue, it is possible that either the U.S. or China could recommence the imposition of tariffs on one or more products that would cause either a disruption in the markets of the Company’s customers or an increase in the Company’s cost of goods which, either individually or in the aggregate, could have a material adverse effect upon the Company’s financial performance.    

The COVID-19 outbreak may interfere with the Company’s business—As reported over the past several weeks, an outbreak of coronavirus cases originating from Wuhan Province in China has spread into many regions of that country as well as into other parts of the world, including the U.S.. While governments, including that of China, are taking measures to contain further spread of the virus, the epidemic has led to quarantines within that country and has begun to affect scheduling of certain manufacturing facilities in China as well as the travel schedules of persons traveling to or from China. It is not clear at this point whether and to what extent this virus, which can be deadly, will spread further. Also, while the supply of goods and services from China to the Company has not been materially affected by the spread of this virus to date, it is possible that further spread of the COVID-19 could delay or interrupt such supply, in which case, the Company’s financial performance could be adversely affected.

The Company’s business may be adversely affected by weather effects—Demand for the Company’s products tends to vary with weather conditions and weather-related pressure from pests. This was true, for example, in the domestic market during planting season in 2019, when excessive rains and cold delayed and/or prevented planting and the use of many at-plant products. Adverse weather conditions, then, may 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.

USEPA has proposed further limitations on the continued registration of organophosphates— In September 2015, the USEPA published in the Federal Register a memorandum entitled, “Literature Review on Neurodevelopmental Effects & FQPA Safety Factor Determination for the Organophosphate Pesticides,” in which it adopted a position recommending 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. Since that time, in the face of objection from industry, the agency has applied this safety factor to all registered Organophosphate Pesticides (“Ops” or “OP”), including those owned by the Company, as they have come up for review or renewal. The Company, like many in our industry, believes that applying this safety factor is not based upon sound science and that the limited studies upon which the agency is relying (for which raw data is not available even to the agency) do not establish a 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. We have been joined in this effort by other companies that are similarly concerned about the potential impact of USEPA’s action. Nevertheless, there is no guarantee that the Company’s actions will alter the course that USEPA has proposed; 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.

9


Use of the Company’s products is subject to continuing challenges from activist groupsUse of agrochemical products, including the Company’s products, is regularly challenged by activist groups in many jurisdictions under a multitude of federal, state and foreign statutes, including FIFRA, the Food Quality Protection Act, Endangered Species Act (“ESA”) 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, state or foreign 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 regulatory agencies in the course of registration, re-registration or label expansion. The most prominent of these actions include a line of cases under which environmental groups have sought to suspend, cancel or otherwise restrict the use of pesticides that have been approved by USEPA on the ground that that agency failed to confer with the National Marine Fishery Service and/or the Fish and Wildlife Service under the ESA with respect to biological opinions relating to the use of such products. While industry has been active in defending registrations and proposing administrative and legislative approaches to address serious resource issues at the affected agencies, these cases continue to be brought.  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 or similar laws. 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 fulfilled on the Company’s products. The Company, on its behalf and also in joint efforts with other registrants, has furnished, and is currently furnishing certain required data relative to its products. There can be no assurance, however, that the USEPA or 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 which are located 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 laws and regulations imposed by relevant 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—The Company is fully committed toward minimizing the risk of discharge of materials into the environment and to complying with governmental regulations relating to protection of the environment, its neighbors and its workforce. Nevertheless, federal and state authorities may 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 entirely eliminate the risk of accidental contamination or injury from hazardous or regulated materials. Further, these various governmental agencies could, among other things, impose potential civil and criminal liability 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 consolidated financial condition, statements of operations and cash flows.

The Company is dependent upon 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 a number of its products. Certain of these raw materials are available solely from single sources either domestically or overseas. There is no guarantee that any of our suppliers 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 products, it is possible that the Company will not achieve its projected sales which, in turn, could adversely affect the Company's consolidated financial statements.

10


Newly acquired businesses or product lines may not generate forecasted resultsWhile the Company conducts due diligence on acquisitions and employs rigorous investment criteria before making acquisitions, there is no guarantee that a business or product line acquired by the Company will generate results that meet or exceed results that were forecasted by the Company in evaluating the acquisition. There are many factors that could affect the performance of a newly acquired business or product line. While the Company uses conservative assumptions in valuing a business or product line prior to concluding an acquisition, actual results generated post-closing could vary widely from the Company’s forecast and, as such, could have a material effect upon the Company’s overall financial performance.

The Company’s investment in foreign businesses may pose additional risks—With the expansion of its footprint internationally and, in particular, with the businesses acquired in Central America in 2017 and Brazil in 2019, the Company now carries on business at a material level in some jurisdictions that have a history of political or economic instability and customers with a potentially higher risk profile regarding collectivity compared to the Company’s legacy business. While such instability may not be present at the current time, there is no guarantee that conditions will not change in one or more jurisdictions quickly and without notice, nor is there any guarantee that the Company would be able to recoup its investment in such territories in light of such changes and potential losses due to the collectability risk from customers. Adverse changes of this nature could have a material effect upon the Company’s overall financial performance.

The Company’s investment in technology may not generate forecasted returns—The Company has had a history of investing in technological innovation, including with respect to product delivery systems, essential oil technology and biologicals, as one of its core strategies. These investments are based upon the premise that new technology will allow for safer handling or lower overall toxicity profile of the Company’s product portfolio, appeal to regulatory agencies and the market we serve, gain commercial acceptance and command a return that is sufficiently in excess of the investment. However, there is no guarantee that a new technology will be successfully commercialized, generate a material return or maintain market appeal for a substantial period of time. Further, many types of development costs must be expensed in the period in which they are incurred. This, in turn, tends to put downward pressure on period profitability. There can be no assurance that these expenses will be recovered through successful commercialization of a new technology.

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, including fluctuating market conditions, product life cycles, weather conditions, availability of raw materials, equipment failures, 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. Underutilization of such manufacturing resources could have a material adverse effect upon the Company’s financial performance.  

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 Company were 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 our 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. 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 when facing such generic competitors, or that such competitors will not offer generic versions of the Company’s products in the future.

11


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 U.S., 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. With the recent consolidation among domestic distribution companies, these considerations have become more pronounced. 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 be in position to realize greater economies of scale, offer more diverse portfolios and thereby exert 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 2019, 2018 and 2017, top three customers accounted for 39%, 29% and 33%, 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 consolidated financial statements.

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 consolidated financial statements.

The Company’s computing systems are subject to cyber security risks—In the course of its operations the Company relies on its computing systems, including access to the internet, the use of third-party applications and the storage and transmission of data through such systems. While the Company has implemented security measures to protect these systems, there is no guarantee that a third party will not penetrate these defenses and either compromise, corrupt or shut down these systems. Further, in the event of such incursion it is possible that confidential business information and private personal data could be taken. Such an event could adversely affect both the Company’s ability to operate, its reputation with key stakeholders and its overall financial performance

Reduced financial performance may limit the Company’s ability to borrow under its credit facility—The Company has historically grown net sales and net income through both expansion of current product lines, the acquisition of product lines from third parties and the acquisition of both domestic and international distributors with strong niche market positions. In order to finance such acquisitions, the Company has 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 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 acquisitions—Over the past few decades, the Company’s growth has been driven by acquisitions 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.

12


The Company is subject to taxation related risks in multiple jurisdictionsThe Company is a U.S. based multinational company subject to tax in multiple U.S. and foreign tax jurisdictions. Significant judgment is required in determining our global provision for income taxes, deferred tax assets or liabilities and in evaluating our tax positions on a worldwide basis. While we believe our tax positions are consistent with the tax laws in the jurisdictions in which we conduct our business, it is possible that these positions may be contested or overturned by jurisdictional tax authorities, which may have a significant impact on our global provision for income taxes. Tax laws are dynamic and subject to change as new laws are passed and new interpretations of the law are issued or applied. In 2017, the U.S. enacted significant tax reform, and in the long-term certain provisions of the new law may adversely affect us. In addition, governmental tax authorities are increasingly scrutinizing the tax positions of companies. Many countries in the EU, as well as a number of other countries and organizations such as the Organization for Economic Cooperation and Development (“OECD”), are actively considering changes to existing tax laws that, if enacted, could increase our tax obligations in countries where we do business. If U.S. or other foreign tax authorities change applicable tax laws, our overall taxes could increase, and our business, financial condition or results of operations may be adversely impacted.

The Company is subject to possible adverse impacts from the United Kingdom’s decision to end its membership in the EU—In June 2016, a majority of voters in the United Kingdom (“UK”) elected to withdraw from the European Union (“EU”) in a national referendum (“BREXIT”). Following a great deal of political activity, the government’s BREXIT bill passed both the House of Commons and the House of Lords and has obtained royal assent. The results of the UK’s BREXIT may cause volatility in global stock markets, currency exchange rate fluctuations and global economic uncertainty. Although it is unknown what the terms of the UK’s future relationship with the EU will be, it is possible that there will be higher tariffs or greater restrictions on imports and exports between the UK and the EU and increased regulatory complexities. The effects of BREXIT could potentially impact the Company’s operations primarily in mainland Europe, including financial, legal, tax, and trade.  

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 Bayer CropScience GmbH, a facility (the “Marsing Facility”) located in Marsing, ID, which consists of approximately 17 acres of improved real property. The Marsing Facility is engaged in the blending of liquid and powder raw materials and the packaging of some of the Company’s finished goods inventory in liquid, powder and pelletized formulations which are sold both in the U.S. and internationally. In addition, during 2019, the Company purchased approximately three acres of unimproved real estate immediately adjacent to the Marsing Facility for potential storage and operational use in the future.  

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. In 2018, FMC Corporation acquired from DuPont a business unit which held, among other things, the Axis Facility. Prior to expiration of the lease, AMVAC and FMC negotiated the terms of a new lease, which has a term of 15 years and the option to renew for two, 5-year periods.

13


AVD regularly adds chemical processing equipment to enhance or expand its production capabilities. The Company believes its facilities are in good operating condition, are suitable and adequate for current 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 credit facility agreements with its primary lender 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 on Form 10-K.

AVD 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. In September 2015 the lease was amended and was extended to expire on June 30, 2021. The premises have served as the Company’s corporate headquarters since 1994.

AMVAC BV’s, GemChem’s, AMVAC M’s, AMVAC CR Srl’s, AMVAC Sgpr’s, OHP’s and AgriCenter’s facilities consist of administration and/or sales offices which are leased. In addition, Defensive and Agrovant (the Company’s indirect, wholly-owned subsidiaries in Brazil) own and/or lease administration and sales offices and warehouse space in Jaboticabal, Brazil.

ITEM  3

LEGAL PROCEEDINGS

Please refer to Notes of Consolidated Financial Statements – Description of Business, Basis of Consolidation, Basis of Presentation and Significant Accounting Policies in the accompanying Notes to the Consolidated Financial Statements for legal proceedings.  

ITEM 4

MINE SAFETY DISCLOSURES

Not Applicable

14


PART II

ITEM  5

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

Market Information

Effective March 7, 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 6, 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. 

 

Holders

As of February 14, 2020, the number of stockholders of the Company’s Common Stock was approximately 4,496, 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 twenty-four years dating back to 1996. Cash dividends declared during the past three years are summarized in the table below.

 

Declaration Date

 

Distribution Date

 

Record Date

 

Dividend

Per Share

 

 

Total

Paid

 

December 9, 2019

 

January 9, 2020

 

December 26, 2019

 

$

0.020

 

 

$

582

 

September 16, 2019

 

October 17, 2019

 

October 3, 2019

 

 

0.020

 

 

 

582

 

June 10, 2019

 

July 12, 2019

 

June 28, 2019

 

 

0.020

 

 

 

580

 

March 6, 2019

 

April 10, 2019

 

March 27, 2019

 

 

0.020

 

 

 

580

 

Total 2019

 

 

 

 

 

$

0.080

 

 

$

2,324

 

December 10, 2018

 

January 10, 2019

 

December 27, 2018

 

$

0.020

 

 

$

581

 

September 18, 2018

 

October 17, 2018

 

October 3, 2018

 

 

0.020

 

 

 

588

 

June 11, 2018

 

July 12, 2018

 

June 28, 2018

 

 

0.020

 

 

 

587

 

March 8, 2018

 

April 13, 2018

 

March 30, 2018

 

 

0.020

 

 

 

586

 

Total 2018

 

 

 

 

 

$

0.080

 

 

$

2,342

 

December 12, 2017

 

January 10, 2018

 

December 27, 2017

 

$

0.015

 

 

$

438

 

September 18, 2017

 

October 19, 2017

 

October 5, 2017

 

 

0.015

 

 

 

439

 

June 15, 2017

 

July 14, 2017

 

June 30, 2017

 

 

0.015

 

 

 

437

 

March 16, 2017

 

April 15, 2017

 

March 31,2017

 

 

0.015

 

 

 

435

 

Total 2017

 

 

 

 

 

$

0.060

 

 

$

1,749

 

 

Share Repurchase Program

 

On November 5, 2018, pursuant to a Board of Directors resolution, the Company announced its intention to repurchase an aggregate amount of shares with a total purchase price not to exceed $20,000 of its common stock, par value $0.10 per share, in the open market, depending upon market conditions over the short to mid-term. The Shares Repurchase Program expired on March 8, 2019. During 2019 and 2018, the Company purchased a total of 610,406 shares for a total of $9,891 at an average price of $16.20 per share.  

 

Securities Authorized for Issuance under Equity Compensation Plans

 

Plan Category

 

Number of securities to

be issued upon exercise

of outstanding options,

warrants, and rights

 

 

Weighted-average

exercise price of

outstanding options,

warrants, rights

 

 

Number of securities

remaining available for

future issuance under

equity compensation plans

 

Equity compensation plans approved

   by security holders

 

 

453,605

 

 

$

9.76

 

 

 

1,171,059

 

Total

 

 

453,605

 

 

$

9.76

 

 

 

1,171,059

 

 

15


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, 2014. All calculations assume reinvestment of dividends. Returns over the indicated period should not be considered indicative of future returns.

 

 

16


ITEM 6

SELECTED FINANCIAL DATA

The following table set forth the Company’s selected consolidated financial data as of and for each of the five years ended December 31, 2019 and should be read in conjunction with our audited consolidated financial statements and notes thereto included under Part II, Item 8 of this annual report.

 

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

Net sales

 

$

468,186

 

 

$

454,272

 

 

$

355,047

 

 

$

312,113

 

 

$

289,382

 

Gross profit

 

$

177,354

 

 

$

182,631

 

 

$

147,392

 

 

$

128,288

 

 

$

111,902

 

Operating income

 

$

26,221

 

 

$

39,021

 

 

$

26,794

 

 

$

20,540

 

 

$

11,524

 

Income before provision for income taxes and loss on

   equity investments

 

$

19,012

 

 

$

33,596

 

 

$

24,853

 

 

$

18,917

 

 

$

8,962

 

Net income attributable to American Vanguard

 

$

13,601

 

 

$

24,195

 

 

$

20,274

 

 

$

12,788

 

 

$

6,591

 

Earnings per common share

 

$

0.47

 

 

$

0.83

 

 

$

0.70

 

 

$

0.44

 

 

$

0.23

 

Earnings per common share—assuming dilution

 

$

0.46

 

 

$

0.81

 

 

$

0.68

 

 

$

0.44

 

 

$

0.23

 

Total assets

 

$

670,098

 

 

$

593,587

 

 

$

535,592

 

 

$

429,956

 

 

$

435,270

 

Working capital

 

$

197,561

 

 

$

164,660

 

 

$

128,681

 

 

$

130,001

 

 

$

139,850

 

Long-term debt, excluding current installments

 

$

148,766

 

 

$

96,671

 

 

$

77,486

 

 

$

40,951

 

 

$

68,321

 

Stockholders’ equity

 

$

344,156

 

 

$

329,230

 

 

$

305,314

 

 

$

282,357

 

 

$

268,326

 

Weighted average shares outstanding—basic

 

 

29,030

 

 

 

29,326

 

 

 

29,100

 

 

 

28,859

 

 

 

28,673

 

Weighted average shares outstanding—assuming dilution

 

 

29,656

 

 

 

30,048

 

 

 

29,703

 

 

 

29,394

 

 

 

29,237

 

Dividends per share of common stock

 

$

0.08

 

 

$

0.08

 

 

$

0.06

 

 

$

0.03

 

 

$

0.02

 

 

(1)

The results for reporting periods beginning after January 1, 2018 are presented under Accounting Standards Codification (“ASC”) 606. Prior period results are not adjusted and continue to be reported in accordance with historic revenue recognition, ASC 605.

 

(2)

Effective January 1, 2019, the Company adopted ASC 842, Leases. See Description of Business, Basis of Consolidation, Basis of Presentation and Significant Accounting Policies in notes to the Consolidated Financial Statements. Prior period results are not adjusted and continue to be reported in accordance with ASC 840.

17


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.

The discussion and analysis of our financial condition and results of operations for 2019 compared to 2018 appears below. As permitted by SEC rules, we have omitted the discussion and analysis of our financial condition and results of operations for 2018 compared to 2017. See Item 7, “Management’s Discussions and Analysis of Financial Condition and Results of Operations”, in our Annual Report on Form 10-K for the year ended December 31, 2018, for this discussion.

MANAGEMENT OVERVIEW

The Company’s operating results in 2019 were mixed. With respect to the top line, net sales were up 3%, as compared to 2018 ($468,186 as compared to $454,272); however, gross profit declined by 3% year over year ($177,354 as compared to $182,631), and net income was down 44% ($13,601 as compared to $24,195).

Top line sales performance was driven largely by the addition of sales from newly acquired businesses, including Defensive and Agrovant in Brazil, and newly acquired product lines, such as the Assure II herbicide in Canada and several domestic products. Gross profit as a percentage of sales declined from 40% in 2018 to 38% in 2019. There were two factors driving that change. First, our factory performance in 2019 returned to the historical norm with lower utilization compared to 2018 (which was a record-setting year for factory output). Second, our mix of sales included higher volume of lower-margin products from our newly acquired Brazilian distribution businesses, and from our expanding sales in Central America through the AgriCenter group of distribution businesses.

Operating expenses rose on an absolute basis ($151,133 in 2019, as compared to $143,610 in 2018) due primarily to higher amortization costs and the addition of operating expenses (including salaries and other marketing expenses) relating to newly acquired businesses and product lines, partially offset by reduced expenses in both legal activities and global regulatory activities as a result of mix of specific studies conducted in the year. Notwithstanding this net increase, operating expenses as a percent of net sales remained flat at 32% year-over-year.

In light of lower gross profit and higher operating expenses described above, operating income for the 2019 year declined by 33%, as compared to 2018 (to $26,221 from $39,021). Due to our acquisition activities principally in the second half of 2018 and early in 2019, our average borrowings increased in 2019, as compared to 2018. As a result, net interest expense was $7,209 in 2019, as compared to $4,024 in 2018. During 2019, our effective tax rate remained flat at 27.4%, as compared to 27.2% in 2018. Net income decreased to $0.46 per diluted share ($0.47 per basic share), as compared to $0.81 per diluted share ($0.83 per basic share) in 2018.  

When considering the consolidated balance sheet, long-term debt increased by $52,095 to $148,766 at December 31, 2019, as compared to $96,671 at December 31, 2018. The increased level of debt was driven by the acquisitions completed during 2019. The Company’s borrowing capacity was $26,977 as of December 31, 2019, as compared to $112,150 at December 31, 2018. Furthermore, inventory increased by $3,418 ($163,313, as compared to $159,895) at year-end. This was driven primarily by inventory associated with acquisitions, partially offset by underlying reductions in inventory related to products and businesses owned prior to the start of 2019.

18


Results of Operations

2019 Compared with 2018:

 

 

 

2019

 

 

2018

 

 

$ Change

 

 

% Change

 

Net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Insecticides

 

$

153,448

 

 

$

150,595

 

 

$

2,853

 

 

 

2

%

Herbicides/soil fumigants/fungicides

 

 

181,686

 

 

 

183,350

 

 

 

(1,664

)

 

 

-1

%

Other, including plant growth regulators

 

 

67,266

 

 

 

58,360

 

 

 

8,906

 

 

 

15

%

Total crop

 

 

402,400

 

 

 

392,305

 

 

 

10,095

 

 

 

3

%

Non-crop

 

 

65,786

 

 

 

61,967

 

 

 

3,819

 

 

 

6

%

Total net sales

 

$

468,186

 

 

$

454,272

 

 

$

13,914

 

 

 

3

%

Cost of sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Insecticides

 

$

99,258

 

 

$

94,340

 

 

$

4,918

 

 

 

5

%

Herbicides/soil fumigants/fungicides

 

 

113,944

 

 

 

111,298

 

 

 

2,646

 

 

 

2

%

Other, including plant growth regulators

 

 

48,392

 

 

 

35,681

 

 

 

12,711

 

 

 

36

%

Total crop

 

 

261,594

 

 

 

241,319

 

 

 

20,275

 

 

 

8

%

Non-crop

 

 

29,238

 

 

 

30,322

 

 

 

(1,084

)

 

 

-4

%

Total cost of sales

 

$

290,832

 

 

$

271,641

 

 

$

19,191

 

 

 

7

%

Gross profit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Insecticides

 

$

54,190

 

 

$

56,255

 

 

$

(2,065

)

 

 

-4

%

Herbicides/soil fumigants/fungicides

 

 

67,742

 

 

 

72,052

 

 

 

(4,310

)

 

 

-6

%

Other, including plant growth regulators

 

 

18,874

 

 

 

22,679

 

 

 

(3,805

)

 

 

-17

%

Gross profit crop

 

 

140,806

 

 

 

150,986

 

 

 

(10,180

)

 

 

-7

%

Gross profit non-crop

 

 

36,548

 

 

 

31,645

 

 

 

4,903

 

 

 

15

%

Total gross profit

 

$

177,354

 

 

$

182,631

 

 

$

(5,277

)

 

 

-3

%

Gross margin crop

 

 

35

%

 

 

38

%

 

 

 

 

 

 

 

 

Gross margin non-crop

 

 

56

%

 

 

51

%

 

 

 

 

 

 

 

 

Total gross margin

 

 

38

%

 

 

40

%

 

 

 

 

 

 

 

 

Net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S.

 

$

282,225

 

 

$

300,314

 

 

$

(18,089

)

 

 

-6

%

International

 

 

185,961

 

 

 

153,958

 

 

 

32,003

 

 

 

21

%

Total net sales

 

$

468,186

 

 

$

454,272

 

 

$

13,914

 

 

 

3

%

 

Domestic sales for the year ended December 31, 2019 were $282,225, as compared to $300,314 in 2018, a decrease of 6%. Sales were adversely affected by several factors. Unusually hot and dry autumn weather in the Southeastern U.S. followed by an early frost in Texas resulted in much lower demand for our U.S. cotton defoliant Folex®. In addition, sales of our soil fumigant products declined in light of record-setting rainfall across multiple regions, particularly in California and the Pacific Northwest, during the first half of the year, followed by snow and rain in the upper Midwest during the second half of the year. Additionally, full-year sales of several products (paraquat, abamectin and chlorothalonil) acquired in 2017 declined as a result of unfavorable weather, supply chain disruptions and competitive market pressures. In addition, we experienced a slight decline in sales of our mosquito adulticide Dibrom® to more normal annual levels, following the exceptional hurricane-driven demand of 2017 and 2018. These declines were partially offset by strong demand for our cotton foliar insecticide Bidrin® and certain of our premium Midwest corn products.

International sales increased 21% ($185,961 in 2019 as compared to $153,958 in 2018). The improved sales performance was driven by our new Brazilian distribution businesses that were acquired in January 2019. In addition, the AgriCenter businesses in Central America recorded a 14% growth in sales led by increased mineral oil sales (into high-value fruit crops), fungicides (to control black sigatoka), Mocap® (for use on pineapples), nematicide sales in Panama, and herbicides (primarily for use on rice crops in Panama and Nicaragua). Further, sales of the Assure II herbicide largely into canola, pulse and soybeans in Canada also contributed to the international top-line growth. These gains were partially offset by decreased sales of granular nematicides into banana crops as part of the multi-year rotation typically employed by large plantations and by challenging market conditions and slightly declining year-over-year sales of our products Mocap (due to non-renewal of its registration in the EU), Nemacur®, Counter® and Thimet®.

19


The relative sales performance of our crop and non-crop businesses is as follows: Net sales of our crop business in 2019 were $402,400, which constitutes an increase of 3%, as compared to net sales of $392,305 in 2018. Net sales of our non-crop products in 2019 were $65,786, which is an increase of approximately 6%, as compared to $61,967 in 2018. A more detailed discussion of our sales performance in 2019, as compared to 2018, for each of the crop and non-crop businesses appears below.

In our crop business, net sales of insecticides in 2019 ended up $2,853 at $153,448, as compared to sales of $150,595 in 2018. This sales performance was driven primarily by the addition of sales of our Brazilian distribution businesses (Defensive and Agrovant) that were acquired on January 2019, the increased sales of our Central American distribution business and the strong 2019 performance of our Bidrin foliar insecticide for cotton in the U.S. due to increased cotton acres. These gains were offset by a reduction in net sales of several granular soil insecticides, most particularly Mocap and Nemacur sold primarily in our international markets, particularly in the countries of the EU. Despite lower planted corn acres in the U.S., we recorded improved year-over-year sales of Aztec® and SmartChoice®, arising largely from corn rootworm pressure in the Midwest coupled with low channel inventories at the start of the year. Sales of our nematicide Counter were down slightly year-over-year due to decreased corn acreage in the U.S.. Similarly, Thimet experienced a slight decline in sales due to lower peanut plantings in the Southeast U.S.

Within the product group of herbicides/soil fumigants/fungicides, our crop net sales ended at $181,686 in 2019, as compared to $183,350 in 2018 (a reduction of 1%). Our fumigant product line decreased slightly as unfavorable wet weather conditions inhibited seasonal applications in both the Pacific Northwest and North Central regions. In the herbicide portion of this group, we had stronger performance from our traditional post-emergent corn herbicide Impact® and the addition of sales from our newly acquired Assure II herbicide, which were partially offset by slightly reduced sales of Dacthal® in a variety of crops. Further, in the category of fungicides, chlorothalonil sales declined year-over-year as dry weather during late spring reduced demand in peanuts and potatoes, while supply in the channel was unusually high, following industry-wide imports in advance of tariffs on Chinese products in 2018. These changes were effectively offset by the addition of sales of our newly acquired Brazilian distribution businesses.

Within our other product group (which includes plant growth regulators, molluscicides, third party manufacturing activity, we experienced an increase of 15% with net sales ending at $67,266 in 2019, as compared to $58,360 in 2018. The main drivers of this performance were the inclusion of the Brazilian businesses, and increased toll manufacturing in 2019. These increases were partially offset by a 2019 decline in our Folex® cotton defoliant, as covered above.

Within our non-crop business, net sales in 2019 increased by 6% to $65,786, as compared to $61,967 in 2018. This improved performance benefited from growth in sales of OHP, our niche horticultural business, and from our traditional commercial and consumer pest strip product lines. Finally, sales of our Dibrom brand mosquito adulticide were reduced in comparison to sales recorded in 2018 and 2017, which experienced exceptionally heavy demand following the significant hurricanes of 2017. Notwithstanding those market pressures, sales were solid in comparison to the usual level of annual sales of this premium product range.

Our cost of sales for 2019 was $290,832 or 62% of sales. This compared to $271,641 or 60% of sales for 2018. The Company aggregates a number of key variable, semi-variable and fixed cost components within reported cost of sales. The raw materials element of our cost of sales increased slightly (up 0.4%), as compared to last year. The overall increased cost of sales was expected and relates to the change in sales mix driven by the products and distribution businesses acquired in December 2018 and in January 2019 (that recorded essentially a full year of sales in 2019), as compared to 2018. In general terms the cost of sales related to the products and businesses acquired in the last 2-3 years tends to be higher than those of our pre-existing portfolio, because those businesses are selling fully marked up, third-party products, while the Company’s core portfolio benefits from the upstream manufacturing activity. Our manufacturing performance for the year was in-line with our targets; however, output was down (as expected), as compared to 2018. In 2019, factory cost amounted to 2.6% of sales, which is in line with our long-term target. This compared to the 0.4% of sales achieved in 2018.   

Gross profit decreased by $5,277 or 3% to end at $177,354 for the year ended December 31, 2019 as compared to $182,631 for the prior year. Gross margin as a percent of net sales was 38% for 2019, as compared to 40% in 2018. In 2019, the Company experienced lower factory output (noted above) and the strong growth of lower margin sales in Central and South America. These negative trends were partially offset by a strong performance managing raw material purchases.

20


Operating expenses in 2019 increased by $7,523 to $151,133 or 32% of sales, as compared to $143,610 or 32% in 2018. The differences in operating expenses by department are as follows:

 

 

 

2019

 

 

2018

 

 

Change

 

 

% Change

 

Selling

 

$

45,121

 

 

$

39,585

 

 

$

5,536

 

 

 

14

%

General and administrative

 

 

46,593

 

 

 

42,981

 

 

 

3,612

 

 

 

8

%

Research, product development and regulatory

 

 

24,070

 

 

 

26,428

 

 

 

(2,358

)

 

 

-9

%

Freight, delivery and warehousing

 

 

35,349

 

 

 

34,616

 

 

 

733

 

 

 

2

%

 

 

$

151,133

 

 

$

143,610

 

 

$

7,523

 

 

 

5

%

 

 

Selling expenses increased by 14% to $45,121 for the year ended December 31, 2019, as compared to $39,585 in 2018. The main drivers were an increase in activities from the products and businesses acquired in late 2018 and during 2019 including the distribution businesses in Brazil, and the Assure II business in Canada and the U.S.. Included in this increase are the costs related to the transitional service agreement on one of the acquired businesses. We are continuing to invest in the growth of our international businesses and increased advertising and marketing activities in both our domestic and international regions.

 

General and administrative expenses increased by 8% to $46,593 for the year ended December 31, 2019, as compared to $42,981 in 2018. The increase was driven by the administrative expenses including amortization expenses associated with the activities of the newly acquired businesses and products, and the reassessment (reduction in expense) of the fair value related to deferred consideration for the acquired businesses in the amount of $4,120, as compared to $6,050 in prior year. These increases were partially offset by decreases in legal costs of approximately $2,418.  

 

Research, product development and regulatory expenses decreased by 9% to $24,070 for the year ended December 31, 2019, as compared to $26,428 in 2018. The main drivers for the decrease were timings related to third party product defense studies and lower business development expenses as we have reached the commercialization phase of a key part of our SIMPAS project.

 

Freight, delivery and warehousing costs for the year ended December 31, 2019 increased by 2% to $35,349, as compared to $34,616 in 2018. This is mainly due to product mix and locations of customers. When expressed as a percentage of sales, freight costs decreased slightly year over year to 7.5% in 2019, as compared to 7.6% in 2018.

Net interest expense was $7,209 in 2019, as compared to $4,024 in 2018. Interest costs are summarized in the following table:

 

 

 

2019

 

 

2018

 

Average Indebtedness and Interest expense

 

Average

Debt

 

 

Interest

Expense

 

 

Interest

Rate

 

 

Average

Debt

 

 

Interest

Expense

 

 

Interest

Rate

 

Working capital revolver

 

$

166,828

 

 

$

6,857

 

 

 

4.1

%

 

$

93,346

 

 

$

3,327

 

 

 

3.6

%

Interest income

 

 

 

 

 

(182

)

 

 

 

 

 

 

 

 

(174

)

 

 

 

Amortization of deferred loan fees

 

 

 

 

 

534

 

 

 

 

 

 

 

 

 

235

 

 

 

 

Amortization of other deferred liabilities

 

 

 

 

 

149

 

 

 

 

 

 

 

 

 

395

 

 

 

 

Other interest expense

 

 

 

 

 

166

 

 

 

 

 

 

 

 

 

326

 

 

 

 

Subtotal

 

 

166,828

 

 

 

7,524

 

 

 

4.5

%

 

 

93,346

 

 

 

4,109

 

 

 

4.4

%

Capitalized interest

 

 

 

 

 

(315

)

 

 

 

 

 

 

 

 

(85

)

 

 

 

Total

 

$

166,828

 

 

$

7,209

 

 

 

4.3

%

 

$

93,346

 

 

$

4,024

 

 

 

4.3

%

 

The Company’s average overall debt for the year ended December 31, 2019 was $166,828, as compared to $93,346 for the year ended December 31, 2018. On a gross basis, our effective interest rate increased on our working capital revolver to 4.1%, as compared to 3.6% in 2018. This increase was driven by increases in the LIBOR rate. After adjustments related to capitalized interest and expenses related to the amortization of deferred liabilities, the overall effective rate was 4.3% for 2019 and 2018.

 

Our provision for income taxes for 2019 was $5,202, as compared to $9,145 for 2018. The effective tax rate for 2019 was 27.4%, as compared to 27.2% in 2018.

The Company is subject to U.S. federal income tax as well as to income tax in multiple state jurisdictions. Federal income tax returns of the Company are subject to Internal Revenue Service (“IRS”) examination for the 2016 through 2018 tax years. State income tax returns are subject to examination for the 2015 through 2018 tax years. The Company has other foreign income tax returns subject to examination.

21


For the year ended December 31, 2019, the Company recorded net losses on its equity investments of $209. For 2018, the Company recorded losses on its equity investments of $389.

Non-controlling interest represents the share of net income or loss that is attributable to the non-controlling stockholder of our majority owned subsidiary, Envance. During the period from January 1, 2018 to November 8, 2018, a loss of $133 was attributed to non-controlling interest. Envance became a wholly owned subsidiary on November 9, 2018.

Net income attributable to American Vanguard ended was $13,601 or $0.46 per diluted share in 2019 as compared to $24,195 or $0.81 per diluted share in 2018.

Liquidity and Capital Resources

The Company generated $9,403 of cash from operating activities during the year ended December 31, 2019, as compared to $11,346 in the prior year. Included in the $9,403 are net income of $13,601, plus non-cash depreciation, amortization of intangibles and other assets and discounted future liabilities, in the amount of $22,922, provision for bad debts in the amount of $1,035, less reassessment of deferred compensation of $4,120. In addition, stock-based compensation of $7,160, loss from equity method investments of $209 and change in value of deferred income taxes of $2,616, present further net adjustments to reconcile net income to net cash provided by operating activities of $43,567, as compared to $48,995 for the same period of 2018.

During 2019, the Company increased working capital by $32,901, as compared 2018. This increase excluded working capital related to the products and businesses acquired during 2019. Included in this change: accounts receivables increased by $11,383, inventories decreased by $3,817, income taxes increased by $6,855, and prepaid expenses increased by $876. Deferred revenue increased by $13,355, as compared to December 31, 2018, driven by individual customer decisions to make early payments in return for early cash incentive programs. Our accounts payable balances decreased by $7,977, program accruals were increased by $5,797 and other payables and accrued expenses decreased by $3,337.  

With regard to our program accrual, the change primarily reflects acquired liabilities as part of acquisitions agreements and by our mix of sales and customers in 2019, as compared to the prior year. The Company accrues programs in line with the growing season upon which specific products are targeted. Most of our programs relate to domestic sales. Typically, domestic crops have a growing season that ends on September 30th of each year. During 2019, the Company made accruals for programs in the amount of $63,579, acquired liabilities as part of domestic acquisitions in the amount of $7,247 and made payments in the amount of $60,476. During 2018, the Company made accruals in the amount of $61,114 and made payments in the amount of $62,819.

Cash used for investing activities amounted to $54,837 for the year ended December 31, 2019, as compared to $27,697 in 2018. The Company spent $41,852 in business and product acquisitions including intangible assets, goodwill, working capital and fixed assets as well as patent application costs.  In addition, $12,985 was spent on capital expenditures primarily focused on continuing to invest in manufacturing infrastructure.

During the year ended December 31, 2019, financing activities provided $46,406, principally from the borrowings on the Company’s senior credit facility, as compared to providing $11,133 for the year ended December 31, 2018. This included net borrowings of $51,900 from our credit facility in 2019, as compared to net borrowings of $18,975 in 2018. During the year, we paid dividends to stockholders amounting to $2,323, as compared to $2,199 in 2018. The Company paid $850 deferred consideration relating to the acquisition made during the year. Finally, the Company repurchased common stock at market for $2,604, as compared to $7,287 in prior year.  

The Company has various loans in place that together constitute the long-term loan balances shown in the consolidated balance sheets as at December 31, 2019 and 2018. These are summarized in the following table:

 

Indebtedness

 

2019

 

 

2018

 

Revolving line of credit

 

$

149,300

 

 

$

97,400

 

Debt issuance costs

 

 

(534

)

 

 

(729

)

Total indebtedness

 

$

148,766

 

 

$

96,671

 

 

The Company’s main bank is Bank of the West, a wholly-owned subsidiary of the French bank, BNP Paribas. Bank of the West has been the Company’s bank for more than 30 years and is the syndication manager for the Company’s loans.

22


As of June 30, 2017, AMVAC Chemical Corporation (“AMVAC”), the Company’s principal operating subsidiary, as borrower, and affiliates (including the Company, AMVAC CV and AMVAC BV), as guarantors and/or borrowers, entered into a Third Amendment to Second Amended and Restated Credit Agreement with a group of commercial lenders led by Bank of the West as agent, swing line lender and Letter of Credit issuer. As of November 27, 2019, AMVAC, as borrower and certain affiliates, on the one hand, entered into a Fourth Amendment to Second Amended and Restated Credit Agreement with a group of commercial lenders led by Bank of the West as agent, swing line lender and Letter of Credit under the terms of which the maximum limits for both Permitted Acquisitions and Investments in Foreign Subsidiaries were increased and new language was added with respect to Eurocurrency Rates, LIBOR Rates and ERISA. The Third and Fourth Amendments, taken together, constitute the Credit Agreement.

The Credit Agreement is a senior secured lending facility, consisting of a line of credit of up to $250,000, an accordion feature of up to $100,000 and a maturity date of June 30, 2022. The Credit Agreement contains two key financial covenants; namely, borrowers are required to maintain a Consolidated Funded Debt Ratio of no more than 3.25-to-1 and a Consolidated Fixed Charge Covenant Ratio of at least 1.25-to-1. The Company’s borrowing capacity varies with its financial performance, measured in terms of EBITDA as defined in the Credit Agreement, for the trailing twelve-month period. Under the Credit Agreement, revolving loans bear interest at a variable rate based, at borrower’s election with proper notice, on either (i) LIBOR plus the “Applicable Rate” which is based upon the Consolidated Funded Debt Ratio (“Eurocurrency Rate Loan”) or (ii) the greater of (x) the Prime Rate, (y) the Federal Funds Rate plus 0.5%, and (z) the Daily One-Month LIBOR Rate plus 1.00%, plus, in the case of (x), (y) or (z) the Applicable Rate (“Alternate Base Rate Loan”). Interest payments for Eurocurrency Rate Loans are payable on the last day of each interest period (either one, two, three or six months, as selected by the borrower) and the maturity date, while interest payments for Alternate Base Rate Loans are payable on the last business day of each month and the maturity date. The interest rate on December 31, 2019 was 3.74%.

At December 31, 2019, according to the terms of the Credit Agreement and based on our performance against the most restrictive covenant listed above, the Company had the capacity to increase its borrowings by up to $26,977. This compares to an available borrowing capacity of $112,150 as of December 31, 2018. The level of borrowing capacity is driven by three factors: (1) our financial performance, as measured in EBITDA for trailing twelve-month period, (2) the inclusion of proforma EBITDA related to acquisitions completed during the preceding twelve months and (3) the leverage covenant (being the number of times EBITDA the Company may borrow under its credit facility agreement). The Company was in compliance with all the debt covenants as of December 31, 2019.

We believe that the combination of our cash flows from future 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 from the issuance of the Annual Report. 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.

Contractual Obligations and Off-Balance Sheet Arrangements

The following summarizes our contractual obligations at December 31, 2019, 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

 

$

149,300

 

 

$

 

 

$

149,300

 

 

$

 

 

$

 

Estimated interest liability (1)

 

 

18,364

 

 

 

6,121

 

 

 

12,243

 

 

 

 

 

 

 

Deferred earn outs on business acquisitions

 

 

1,790

 

 

 

277

 

 

 

1,513

 

 

 

 

 

 

 

Employment agreements

 

 

2,106

 

 

 

685

 

 

 

1,421

 

 

 

 

 

 

 

Operating leases—rental properties and equipment

 

 

9,610

 

 

 

3,811

 

 

 

4,004

 

 

 

1,001

 

 

 

794

 

Operating leases—vehicles

 

 

2,550

 

 

 

1,389

 

 

 

1,117

 

 

 

44

 

 

 

 

Transition taxes (2)

 

 

783

 

 

 

 

 

 

198

 

 

 

585

 

 

 

 

 

 

$

184,503

 

 

$

12,283

 

 

$

169,796

 

 

$

1,630

 

 

$

794

 

 

(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. $149,300) throughout the remaining term. All of our debt is linked to LIBOR rates.

There were no significant other off-balance sheet arrangements as of December 31, 2019.

Under the terms of the credit facility, all debt outstanding is due when the agreement expires on June 30, 2022.

23


In addition to the above contractual obligations, $4,597 of unrecognized tax benefits and $6,855 of accrued penalties and interest have been recorded as long term liabilities as of December 31, 2019. We are uncertain as to if or when such amounts may be settled or any tax benefits realized.

(2)

The Company elected to pay the transition tax related to the Tax Reform Act over an eight-year period.  Total amount has been adjusted to reflect 2017 income tax overpayment applied to transition tax.

Recently Issued Accounting Guidance

Please refer to Notes of Consolidated Financial Statements – Description of Business, Basis of Consolidation, Basis of Presentation and Significant Accounting Policies in the accompanying Notes to the Consolidated Financial Statements for recently issued and adopted accounting standards.  

Foreign Exchange

The Company faces market risk to the extent that changes in foreign currency exchange rates affect our non-U.S. dollar functional currency foreign subsidiaries’ revenues, expenses, assets and liabilities. We currently do not engage in hedging activities with respect to such exchange rate risks.

Assets and liabilities outside the U.S. are located in regions where we have subsidiaries or joint ventures: Central America, South America, North America, Europe Asia, and Australia. Our investments in foreign subsidiaries and joint ventures with a functional currency other than the U.S. dollar are generally considered long-term. Accordingly, we do not hedge these net investments.

Inflation

Management believes inflation has had minimal impact on the Company's operations during the past two years. The Company is working diligently with its critical raw material suppliers to control inflationary pressures, conducting contract negotiations with focus on the following: reducing or delaying price increases due to higher environmental costs from suppliers mainly in China and India, managing the tariff impacts by sourcing and leveraging alternate geographies where possible, and lastly, monitoring strengths of the U.S. dollar vs other currencies in order to secure benefits and balance tariff effects. The Company recognizes there is long-term pressure on demand for raw materials in the developing world and is utilizing its expertise to minimize inflationary pressure. The Company has been able to push back on many of the proposed price increases for actives and intermediates that are shipped to our U.S. factories, to either avoid, minimize or forestall them.

CRITICAL ACCOUNTING POLICIES

Certain of the Company’s policies require the application of judgment by management in selecting the appropriate assumptions for calculating financial estimates. These judgments are based on historical experience, terms of existing contracts, commonly accepted industry practices and other assumptions that the Company believes are reasonable under the circumstances. These estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the consolidated financial statements in the period that revisions are determined to be necessary. Actual results may differ from these estimates under different outcomes or conditions.

The Company’s critical accounting policies and estimates include:

Principles of Consolidation—The Company’s consolidated financial statements include the accounts of the Company and its subsidiaries. Less than wholly owned subsidiaries, including joint ventures, are consolidated when it is determined that the Company has a controlling financial interest, which is generally determined when the Company holds a majority voting interest. When protective rights, substantive rights or other factors exist, further analysis is performed in order to determine whether or not there is a controlling financial interest. The consolidated financial statements reflect the assets, liabilities, revenues and expenses of consolidated subsidiaries and the non-controlling parties’ ownership share is presented as a non-controlling interest. All significant intercompany accounts and transactions are eliminated.

24


Revenue Recognition and Allowance for Doubtful Accounts Prior to January 1, 2018, revenues from sales were recognized at the time title and the risks of ownership passed. This was when the customer had made the fixed commitment to purchase the goods, the products were shipped per the customer’s instructions, the sales price was fixed and determinable, and collection was reasonably assured. Starting January 1, 2018, revenues from sales are recognized at the time control is transferred to the customer. This is typically the case when the customer has made the fixed commitment to purchase the goods, the products are shipped per the customer’s instructions, the sales price can be identified, and collection is probable. The Company has adopted procedures to ensure that revenues are recognized when earned. The procedures are subject to management’s review and from time to time certain revenues are excluded until it is clear that the title has passed and there is no further recourse to the Company. We also have some arrangements whereby revenues are recognized over time for certain products that are deemed to have no alternative use accompanied by an enforceable right to payment for performance completed to date. From time to time, the Company may offer a program to eligible customers, in good standing, that provides extended payment terms on a portion of the sales on selected products. The Company analyzes these extended payment programs in connection with its revenue recognition policy to ensure all revenue recognition criteria are satisfied at the time of sale. The Company also earns royalty income from its licensing arrangements which qualify as functional licenses rather than symbolic licenses. Upon signing a new licensing agreement, we typically receive up-front fees, which are generally characterized as non-refundable royalties. These fees are recognized as revenue upon the execution of the license agreements. Minimum royalty fees are recognized once the Company has an enforceable right for payment. Sales-based royalty fees are typically recognized when the sales occur. We calculate and accrue estimated royalties based on the agreement terms and correspondence with the licensees regarding actual sales. Allowance for doubtful accounts is established based on estimates of losses related to customer receivable balances. Estimates are developed using either standard quantitative measures based on historical losses, adjusted for current economic conditions, or by evaluating specific customer accounts for risk of loss.

Accrued Program Costs The Company offers various discounts to customers based on the volume purchased within a defined time period, other pricing adjustments, some grower volume incentives or other key performance indicator driven payments made to distributors, retailers or growers, usually at the end of a growing season. The Company describes these payments as “Programs.” Programs are a critical part of doing business in both the U.S. crop and non-crop chemicals marketplaces. These discount Programs represent variable consideration. In accordance with ASC 606, revenues from sales are recorded at the net sales price, which is the transaction price, and includes estimates of variable consideration. Variable consideration includes amounts expected to be paid to its customers using the expected value method. Each quarter management compares individual sale transactions with Programs to determine what, if any, estimated program liabilities have been incurred. Once this initial calculation is made for the specific quarter, sales and marketing management, along with executive and financial management, review the accumulated Program balance and, for volume driven payments, make assessments of whether or not customers are tracking in a manner that indicates that they will meet the requirements set out in agreed upon terms and conditions attached to each Program. Following this assessment, management will make adjustments to the accumulated accrual to properly reflect the Company’s best estimate of the liability at the balance sheet date. The majority of adjustments are made at, or close to, the end of the crop season, at which time customer performance can be more fully assessed. Programs are paid out predominantly on an annual basis, usually in the final quarter of the financial year or the first quarter of the following year. The Company recorded accrued programs of $47,699 at December 31, 2019, as compared to $37,349 at December 31, 2018.

Inventories — The Company values its inventories at lower of cost or net realizable value. Cost is determined by the first-in, first-out (“FIFO”) or average cost method, including, as appropriate, material, labor, factory overhead and subcontracting services. The Company writes down and makes adjustments to its inventory net realizable value following assessments of slow moving and obsolete inventory and other annual adjustments to ensure that our standard costs continue to closely reflect manufacturing cost.

Property, Plant and Equipment and Depreciation— Property, plant and equipment includes the cost of land, buildings, machinery and equipment, office furniture and fixtures, automobiles, construction projects and significant improvements to existing plant and equipment. Interest costs related to significant construction projects are capitalized at the Company’s current weighted average effective interest rate. Expenditures for minor repairs and maintenance are expensed as incurred. When property or equipment is sold or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts and the gain or loss realized on disposition is reflected in earnings. All plant and equipment assets are depreciated using the straight-line method, utilizing the estimated useful property lives. Once placed into service, building lives range from 10 to 30 years; machinery and equipment lives range from 3 to 15 years. During the years ended December 31, 2019, 2018 and 2017 the Company eliminated from assets and accumulated depreciation $868, $4,057, and $6,317, respectively, of fully depreciated assets.  

25


Leases The Company has operating leases for warehouses, manufacturing facilities, offices, cars, railcars and certain equipment. On January 1, 2019, the Company adopted the accounting and adoption guidance in ASC 842, Leases, for its operating leases resulting in the recognition of operating lease right-of-use (ROU) assets and lease liabilities on the effective date. The Company measures ROU assets throughout the lease term at the carrying amount of the lease liability, plus initial direct costs, plus (minus) any prepaid (accrued) lease payments, less the unamortized balance of lease incentives received. The lease liabilities are measured at the present value of the unpaid lease payments at the lease commencement date. Leases that include both lease and non-lease components are accounted for as a single lease component for each asset class, except for warehouses. The minimum payments under operating leases are recognized on a straight-line basis over the lease term in the consolidated statements of operations. Operating lease expenses related to variable lease payments are recognized in cost of sales or as operating expenses in a manner consistent with the nature of the underlying lease and as the events, activities, or circumstances in the lease agreement occur. Leases with a term of less than 12 months are not recognized on the consolidated balance sheets, and the related lease expenses are recognized in the consolidated statements of operations on a straight-line basis over the lease term. The accounting for leases requires management to exercise judgment and make estimates in determining the applicable discount rate, lease term and payments due under a lease. Most of our leases do not provide an implicit interest rate, nor is it available to us from our lessors. As an alternative, we use our estimated incremental borrowing rate, which is derived from information available at the lease commencement date, including publicly available data, in determining the present value of lease payments. We also estimated the fair value of the lease and non-lease components for some of our warehouse leases based on market data and cost data. The lease term includes the non-cancellable period of the lease plus any additional periods covered by either an option to extend (or not terminate) that the Company is reasonably certain to exercise. The Company has leases with a lease term ranging from 1 year to 20 years. The operating leases of the Company do not contain major restrictions or covenants such as those relating to dividends or additional financial obligations. Finance leases are immaterial to the condensed consolidated financial statements

Intangible AssetsThe primary identifiable intangible assets of the Company relate to assets associated with its product and business acquisitions. All of the Company’s intangible assets have finite lives and are amortized. The estimated useful life of an identifiable intangible asset to the Company is based upon a number of factors including the effects of demand, competition, and expected changes in the marketability of the Company’s products.

Business CombinationsThe Company uses its best estimates and assumptions to assign fair value to the tangible and intangible assets acquired and liabilities assumed at the acquisition date. The Company’s estimates are inherently uncertain and subject to refinement. During the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the fair value of these tangible and intangible assets acquired and liabilities assumed, with the corresponding offset to goodwill. In addition, uncertain tax positions and tax-related valuation allowances are initially recorded in connection with a business combination as of the acquisition date. The Company continues to collect information and reevaluates these estimates and assumptions quarterly and records any adjustments to the Company’s preliminary estimates to goodwill provided that the Company is within the measurement period. Upon the conclusion of the measurement period or final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the Company’s consolidated statement of operations.

In the event that the Company acquires an entity in which the Company previously held a non-controlling investment, the difference between the fair value and carrying value of the investment as of the date of the acquisition is recorded as a gain or loss and recorded within net income (loss) on equity method investments in the consolidated statement of operations.

Certain of our acquisition agreements include contingent earn-out arrangements, which are generally based on the achievement of future income thresholds. The fair values of these earn-out arrangements are included as part of the purchase price of the acquired companies on their respective acquisition dates. For each transaction, we estimate the fair value of contingent earn-out payments as part of the initial purchase price and record the estimated fair value of contingent consideration as a liability on the consolidated balance sheets.

We review and re-assess the estimated fair value of contingent consideration on a quarterly basis, and the updated fair value could be materially different from the initial estimates or prior quarterly amounts. Changes in the estimated fair value of our contingent earn-out liabilities are reported in operating results.

Asset AcquisitionsIf an acquisition of an asset or group of assets does not meet the definition of a business, the transaction is accounted for as an asset acquisition rather than a business combination. An asset acquisition does not result in the recognition of goodwill and transaction costs are capitalized as part of the cost of the asset or group of assets acquired. The Company uses its best estimates and assumptions to assign fair value to the tangible and intangible assets acquired and liabilities assumed at the acquisition date. The acquisitions costs are allocated to the assets acquired on a relative fair value basis. Certain of our acquisition agreements include contingent earn-out arrangements, which are recognized only when the contingency is resolved and the consideration is paid or becomes payable.

26


Impairment—The carrying values of long-lived assets other than goodwill are reviewed for impairment annually and/or whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. The Company evaluates recoverability of an asset group by comparing the carrying value to the future undiscounted cash flows that it expects to generate from the asset group. If the comparison indicates that the carrying value of an asset group is not recoverable, measurement of the impairment loss is based on the fair value of the asset. There were no circumstances that would indicate any impairment of the carrying value of these long-lived assets and no material impairment losses were recorded in 2019 or 2018.

The Company reviews goodwill for impairment utilizing either a qualitative or quantitative assessment. If the Company decides that it is appropriate to perform a qualitative assessment and concludes that the fair value of a reporting unit more likely than not exceeds its carrying value, no further evaluation is necessary. If the Company performs a quantitative assessment, the Company compares the fair value of a reporting unit with its carrying amounts and recognizes an impairment charge for the amount that the carrying amount exceeds the reporting unit’s fair value. The Company annually tests goodwill for impairment at the beginning of the fourth quarter, or earlier if triggering events occur. The Company did not record any impairment losses in 2019 or 2018.

Fair Value of Financial Instruments—The accounting standard for fair value measurements provides a framework for measuring fair value and requires expanded disclosures regarding fair value measurements. Fair value is defined as the price that would be received for an asset or the exit price that would be paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. This accounting standard established a fair value hierarchy, which requires an entity to maximize the use of observable inputs, where available. The following summarizes the three levels of inputs required:

 

 

Level 1 – Quoted prices in active markets for identical assets or liabilities.

 

Level 2 – Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3 – Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability.

The carrying amount of the Company’s financial instruments, which principally include cash and cash equivalents, short-term investments, accounts receivable, long-term investments, accounts payable and accrued expenses approximates fair value because of the relatively short maturity of such instruments. The carrying amount of the Company’s short-term and long-term borrowings, which are considered Level 2 liabilities, approximates fair value based upon current rates and terms available to the Company for similar debt.

 

We measure our contingent earn-out liabilities in connection with acquisitions at fair value on a recurring basis using significant unobservable inputs classified within Level 3 of the fair value hierarchy. We may use various valuation techniques depending on the terms and conditions of the contingent consideration including a Monte-Carlo simulation. This simulation uses probability distribution for each significant input to produce hundreds or thousands of possible outcomes and the results are analyzed to determine probabilities of different outcomes occurring.

Foreign Currency Translation—Certain international operations use the respective local currencies as their functional currency, while other international operations use the U.S. Dollar as their functional currency. The Company considers the U.S. dollar as its reporting currency. Translation adjustments for subsidiaries where the functional currency is its local currency are included in other comprehensive income (loss). Foreign currency transaction gains (losses) resulting from exchange rate fluctuation on transactions denominated in a currency other than the functional currency are reported in earnings. Assets and liabilities of the foreign operations denominated in local currencies are translated at the rate of exchange at the balance sheet date. Revenues and expenses are translated at the weighted average rate of exchange during the period. Translations of intercompany loans of a long-term investment nature are included as a component of translation adjustment in other comprehensive income (loss).

Income taxesIncome tax expense, deferred tax assets and liabilities, and liabilities for unrecognized tax benefits reflect management’s best estimate of current and future taxes to be paid. The Company is subject to income taxes in the U.S. and a number of foreign jurisdictions. The Company assessed the ability to realize deferred tax assets and determined that based on the available evidence, including a history of taxable income and estimates of future taxable income, it is more likely than not that the deferred tax assets will be realized. Significant management judgment is required in determining the provision for income taxes and deferred tax assets and liabilities. In the event that actual results differ from these estimates, we will adjust these estimates in future periods, which may result in a change in the effective tax rate in a future period. Accounting for income taxes involves uncertainty and judgment on how to interpret and apply tax laws and regulations within the Company’s annual tax filings. Such uncertainties from time to time may result in a tax position that may be challenged and overturned by a tax authority in the future, which could result in additional tax liability, interest charges and possibly penalties. The Company classifies interest and penalties as a component of income tax expense.

27


ITEM 7A

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to market risk related to changes in interest rates, primarily from its borrowing activities. The Company’s indebtedness to its primary lender is evidenced by a line of credit with a variable rate of interest, which fluctuates with changes in the lender’s reference rate (LIBOR). The Company may use derivative financial instruments for trading purposes to protect trading performance from exchange rate fluctuations on material contracts, though there are no such instruments in place during any periods presented in this Annual Report.

The Company conducts business in various foreign currencies, primarily when doing business in Europe, Mexico, Central and South America. Therefore, changes in the value of the currencies of such countries or regions affect the Company’s financial position and cash flows when translated into U.S. Dollars. The Company has mitigated, and will continue to mitigate, a portion of its currency exchange exposure through natural hedges based on the operation of decentralized foreign operating companies in which the majority of all costs are local-currency-based. A 10% change in the value of all foreign currencies would have an immaterial effect on the Company’s financial position and cash flows. As part of an on-going process of assessing business risk, management has identified risk factors which are disclosed in Item 1A. Risk Factors of this Report on Form 10-K.

ITEM 8

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Financial Statements and Supplementary Data required by this item are listed at Part IV, Item 15, Exhibits, and Financial Statement Schedules.

28


ITEM 9

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A

CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Management, under the supervision of the Company’s Chief Executive Officer and Chief Financial Officer, periodically evaluate the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based upon this evaluation, as of December 31, 2019, the Chief Executive Officer and the Chief Financial Officer have concluded that these disclosure controls and procedures are effective in ensuring that the information required to be disclosed in reports filed under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported on a timely basis, and (ii) accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Management’s Report on Internal Control over Financial Reporting

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934 for the Company. The Company’s internal control system over financial reporting is designed to provide reasonable assurance to management and the Board of Directors as to the fair, reliable and timely preparation and presentation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America filed with the SEC.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even processes determined to be effective can provide only reasonable assurance with respect to the financial statement preparation and presentation.

Management conducted an evaluation of the Company’s internal controls over financial reporting based on a framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated Framework (2013). This evaluation included review of the documentation of controls, evaluation of the design effectiveness of controls, testing of the effectiveness of controls and a conclusion on the evaluation. Based on this evaluation, management believes that as of December 31, 2019, the Company’s internal control over financial reporting is effective.

BDO USA, LLP, the independent registered public accounting firm that audited the consolidated financial statements included in the Annual Report on Form 10-K, was engaged to attest to and report on the effectiveness of AVD’s internal control over financial reporting as of December 31, 2019. Its report is included herein.

Changes in Internal Controls over Financial Reporting

There were no changes in internal controls over financial reporting during the year ended December 31, 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

29


Report of Independent Registered Public Accounting Firm

Shareholders and Board of Directors

American Vanguard Corporation

Newport Beach, California

Opinion on Internal Control over Financial Reporting

We have audited American Vanguard Corporation’s (the “Company’s”) internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Company as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2019, and the related notes and financial statement schedule listed in the accompanying index and our report dated March 10, 2020 expressed an unqualified opinion thereon.

 

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A, Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ BDO USA, LLP

Costa Mesa, California

March 10, 2020

 

 

30


AMERICAN VANGUARD CORPORATION

AND SUBSIDIARIES

ITEM 9B

OTHER INFORMATION

None.

PART III

ITEM 10

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information set forth under the captions “Executive Officers of the Company,” “Election of Directors,” “Information about the Board of Directors and Committees of the Board” and “Transactions with Management and Others—Section 16(a) Beneficial Ownership Reporting Compliance” in our definitive proxy statement for our Annual Meeting of Stockholders to be held on June 5, 2020 (the “Proxy Statement”), which will be filed with the SEC within 120 days of the end of our fiscal year ended December 31, 2019, is incorporated herein by reference.

ITEM 11

EXECUTIVE COMPENSATION

Except as specifically provided, the information set forth under the captions “Compensation of Executive Officers” and “Information about the Board of Directors and Committees of the Board—Compensation of Directors” in the Proxy Statement is incorporated herein by reference.

ITEM 12

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The disclosure contained in Part II, Item 5 under “Equity Compensation Plan Information” is incorporated herein by reference. Information regarding security ownership of certain beneficial owners and management is incorporated by reference to the information set forth under the caption “Security Ownership of Certain Beneficial Owners and Management” in the Proxy Statement.

ITEM 13

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information set forth under the captions “Transactions with Management and Others” and “Information about the Board of Directors and Committees of the Board” in the Proxy Statement is incorporated herein by reference.

ITEM 14

PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information regarding principal accountant fees and services is incorporated herein by reference to the information set forth under the caption “Ratification of the Selection of Independent Registered Public Accounting Firm—Relationship of the Company with Independent Registered Public Accounting Firm” in the Proxy Statement.

31


AMERICAN VANGUARD CORPORATION

AND SUBSIDIARIES

 

PART IV

ITEM 15

EXHIBITS AND FINANCIAL STATEMENT SCHEDULE

 

(a)

The following documents are filed as part of this report:

Index to Consolidated Financial Statements and Supplementary Data:

 

 

(b)

Exhibits Index

32


AMERICAN VANGUARD CORPORATION

AND SUBSIDIARIES

 

EXHIBIT INDEX

ITEM 15

 

Exhibit

Number

 

Description of Exhibit

 

 

 

  3.1

 

Amended and Restated Certificate of Incorporation of American Vanguard Corporation (filed as Exhibit 3.1 to the Company’s Form 10-K for the year ended December 31, 2003, which was filed on March 30, 2004 with the Securities Exchange Commission and incorporated herein by reference).

 

 

 

  3.2

 

Certificate of Amendment of Amended and Restated Certificate of Incorporation of American Vanguard Corporation (filed as Exhibit 3.2 to the Company’s Form 10-Q/A for the period ended June 30, 2004, which was filed with the Securities Exchange Commission on February 23, 2005 and incorporated herein by reference).

 

 

 

  3.3

 

Amended and Restated Bylaws of American Vanguard Corporation dated as of June 5, 2014 (filed as Exhibit 99.1 to the Company’s Form 8-K, which was filed with the Securities Exchange Commission on June 7, 2014 and incorporated herein by reference.)

 

 

 

  4

 

Form of Indenture (filed as Exhibit 4.4 to the Company’s Registration Statement on Form S-3 (File No. 333-122981) and incorporated herein by reference).

 

 

 

10.1

 

American Vanguard Corporation Employee Stock Purchase Plan (filed as Appendix A to the Company’s Proxy Statement filed with the Securities and Exchange Commission on April 23, 2018 and incorporated herein by reference).

 

 

 

10.2

 

American Vanguard Corporation Amended and Restated Stock Incentive Plan as of June 8, 2016 (filed as Appendix A to the Company’s Proxy Statement filed with the Securities and Exchange Commission on April 25, 2016 and incorporated herein by reference).

 

 

 

10.3

 

Form of Incentive Stock Option Agreement under the American Vanguard Corporation Fourth Amended and Restated Stock Incentive Plan , (filed as Exhibit 10.3 with the Company’s Annual Report on Form 10-K for the period ended December 31, 2004, which was filed with the Securities and Exchange Commission on March 16, 2005 and incorporated herein by reference).