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EX-32.1 - EX-32.1 - AMERICAN VANGUARD CORPavd-ex321_6.htm
EX-31.2 - EX-31.2 - AMERICAN VANGUARD CORPavd-ex312_8.htm
EX-31.1 - EX-31.1 - AMERICAN VANGUARD CORPavd-ex311_10.htm
EX-23 - EX-23 - AMERICAN VANGUARD CORPavd-ex23_11.htm
EX-21 - EX-21 - AMERICAN VANGUARD CORPavd-ex21_7.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, 2017

OR

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

For The Transition Period From                      To                      

Commission file number 001-13795

 

AMERICAN VANGUARD CORPORATION

 

 

Delaware

 

95-2588080

(State or other jurisdiction of

Incorporation or organization)

 

(I.R.S. Employer

Identification Number)

 

 

 

4695 MacArthur Court, Newport Beach, California

 

92660

(Address of principal executive offices)

 

(Zip Code)

(949) 260-1200

(Registrant’s telephone number, including area code)

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

 

Title of each class:

 

Name of each exchange on which registered:

Common Stock, $.10 par value

 

New York Stock Exchange

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

NONE

 

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, 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

 

  (Do not check if a smaller reporting company)

  

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 $513.4 million. This figure is estimated as of June 30, 2017 at which date the closing price of the registrant’s Common Stock on the New York Stock Exchange was $17.25 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, 2017, was 29,761,490. The number of shares of $.10 par value Common Stock outstanding as of February 16, 2018 was 29,848,921.

 

 

 


AMERICAN VANGUARD CORPORATION

AND SUBSIDIARIES

ANNUAL REPORT ON FORM 10-K

December 31, 2017

 

 

 

 

 

Page No.

 

 

PART I

 

 

 

 

 

 

 

Item 1.

 

Business

 

1

 

 

 

 

 

Item 1A.

 

Risk Factors

 

7

 

 

 

 

 

Item 1B.

 

Unresolved Staff Comments

 

10

 

 

 

 

 

Item 2.

 

Properties

 

10

 

 

 

 

 

Item 3.

 

Legal Proceedings

 

12

 

 

 

 

 

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

 

18

 

 

 

 

 

Item 7.

 

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

 

19

 

 

 

 

 

Item 7A.

 

Quantitative and Qualitative Disclosures About Market Risk

 

32

 

 

 

 

 

Item 8.

 

Financial Statements and Supplementary Data

 

32

 

 

 

 

 

Item 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

32

 

 

 

 

 

Item 9A.

 

Controls and Procedures

 

32

 

 

 

 

 

Item 9B.

 

Other Information

 

35

 

 

 

 

 

 

 

PART III

 

 

 

 

 

 

 

Item 10.

 

Directors, Executive Officers and Corporate Governance

 

35

 

 

 

 

 

Item 11.

 

Executive Compensation

 

35

 

 

 

 

 

Item 12.

 

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

 

35

 

 

 

 

 

Item 13.

 

Certain Relationships and Related Transactions, and Director Independence

 

35

 

 

 

 

 

Item 14.

 

Principal Accountant Fees and Services

 

35

 

 

 

 

 

 

 

PART IV

 

 

 

 

 

 

 

Item 15.

 

Exhibits and Financial Statement Schedules

 

36

 

 

 

 

 

Item 16.

 

Form 10-K Summary

 

36

 

 

 

 

 

SIGNATURES AND CERTIFICATIONS

 

40

 

 

i


AMERICAN VANGUARD CORPORATION

AND SUBSIDIARIES

(Dollars in thousands, except per share data)

PART I

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

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

ITEM 1

BUSINESS

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”), 2110 Davie Corporation (“DAVIE”), Quimica Amvac de Mexico S.A. de C.V. (“AMVAC M”), AMVAC Mexico Sociedad de Responsabilidad Limitada (“AMVAC M Srl”), AMVAC de Costa Rica Sociedad de Responsabilidad Limitada (“AMVAC CR Srl”), AMVAC Switzerland GmbH (“AMVAC S”), AMVAC do Brasil Representácoes Ltda (“AMVAC B”), AMVAC C.V. (“AMVAC CV”), AMVAC Netherlands BV (“AMVAC BV”), Envance Technologies, LLC (“Envance”) and AMVAC Singapore Pte, Ltd (“AMVAC Sgpr”) and Huifeng AMVAC Innovation Co. Limited (“Hong Kong JV”), OHP Inc. (“OHP”) and Grupo AgriCenter (including the parent AgriCenter S.A. and its subsidiaries (“AgriCenter”)).

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

AMVAC

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

On October 27, 2017, the Company’s Netherlands-based subsidiary, AMVAC BV, completed the purchase of 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 existing 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 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.  

1


AMERICAN VANGUARD CORPORATION

AND SUBSIDIARIES

(Dollars in thousands, except per share data)

 

On June 6, 2017, the Company’s principal operating subsidiary, 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, the Company 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.

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.

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

On April 29, 2015, the registrant’s international subsidiary, AMVAC CV, completed the acquisition of certain assets related to the bromacil herbicide product line from DuPont Crop Protection. The assets acquired included the Hyvar® and Krovar® trademarks, product registrations, trade names, customer lists and associated inventory. The territory included all markets outside North America.  

On April 6, 2015, the registrant’s international subsidiary, AMVAC CV, completed the acquisition of certain assets related to the Nemacur® insecticide/nematicide product line from Adama Agricultural Solutions Ltd (“Adama”). The assets acquired include product registrations, trademarks, customer lists, manufacturing know-how and associated inventory. The territories include European countries.

On March 25, 2013, AVD made an equity investment in TyraTech Inc. (“TyraTech”), a Delaware corporation that specializes in developing, marketing and selling pesticide products containing natural oils and other natural ingredients. As of December 31, 2017, the Company’s ownership position in TyraTech was approximately 15.11%.  At a special meeting conducted on December 27, 2017, TyraTech shareholders approved the sale of its Vamouse product line to Alliance Pharmaceuticals, Ltd and the use of some of the proceeds from such sale for a tender offer for TyraTech shares.  That tender offer was concluded in January 2018.  AMVAC elected not to exercise its right to sell into such tender offer and, as a result, the Company’s ownership interest in TyraTech increased to approximately 35% at the conclusion of that transaction.  

Seasonality

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

Backlog

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

Customers

The Company’s largest three customers accounted for 13%, 10% and 10% of the Company’s sales in 2017; 15%, 11% and 8%  in 2016; and 14%, 11% and 10% in 2015.

2


AMERICAN VANGUARD CORPORATION

AND SUBSIDIARIES

(Dollars in thousands, except per share data)

 

Distribution

AMVAC predominantly distributes its products domestically through national distribution companies and buying groups or co-operatives, which purchase AMVAC’s goods on a purchase order basis and, in turn, sell them to retailers/growers/end-users. The Company manages its international sales through AMVAC BV, which has sales offices in Mexico and Costa Rica 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 AMVAC products vary by region, target crop, use and type of distribution channel. AMVAC’s customers are experts at addressing these various markets.

As more fully described above, during 2017, the Company acquired two distribution companies: the first, OHP, a domestic company operating in the turf and ornamental market, and the second, AgriCenter, which operates in several countries within Central America.  Both of these businesses primarily market and distribute the formulated end-use product of third parties under either the brand of the third party or as a private label product. Prior to being acquired by the Company, both OHP and AgriCenter distributed small quantities of the Company’s products.

Competition

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

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

Manufacturing

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

Raw Materials

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

Intellectual Property

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

EPA Registrations

In the United States, AMVAC’s products also receive protection afforded by the terms of the Federal Insecticide, Fungicide and Rodenticide Act (“FIFRA”) legislation. The legislation makes it unlawful to sell any pesticide in the United States, unless such

3


AMERICAN VANGUARD CORPORATION

AND SUBSIDIARIES

(Dollars in thousands, except per share data)

 

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

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

Under FIFRA, the federal government requires registrants to submit a wide range of scientific data to support U.S. registrations. This requirement results in operating expenses in such areas as regulatory compliance, with USEPA and other such bodies in the markets in which the Company sells its products. In addition, the Company is required to generate new formulations of existing products or to produce new products in order to remain compliant. AMVAC expensed $14,232, $11,544, and $9,831 during 2017, 2016 and 2015 respectively, on these activities.

 

 

 

2017

 

 

2016

 

 

2015

 

Registration

 

$

9,450

 

 

$

7,750

 

 

$

6,375

 

Product development

 

 

4,782

 

 

 

3,794

 

 

 

3,456

 

 

 

$

14,232

 

 

$

11,544

 

 

$

9,831

 

 

Environmental

During 2017, 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.

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 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 intends 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 to be incurred in connection with the RAP will be material and has not recorded a loss contingency for these activities.

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

4


AMERICAN VANGUARD CORPORATION

AND SUBSIDIARIES

(Dollars in thousands, except per share data)

 

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, 2017, the Company employed 605 employees. This includes 130 employees that joined the Company following the acquisitions completed during the final quarter of 2017.  The Company employed 395 employees as of December 31, 2016 and 369 employees as of December 31, 2015. From time to time, due to the seasonality of its business, AMVAC uses temporary contract personnel to perform certain duties primarily related to packaging of its products. None of the Company’s employees are subject to a collective bargaining agreement. The Company believes it maintains positive relations with its employees.

Domestic operations

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

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

DAVIE owns real estate for corporate use only. See also Part I, Item 2 of this Annual Report on Form 10-K. DAVIE is a wholly owned subsidiary of AVD.

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

On October 2, 2017, AMVAC, through a wholly-owned acquisition subsidiary, subsequently renamed OHP, 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 the third party brand 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 2017, the international business sold the Company’s products in 63 countries, as compared to 59 countries in 2016.

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

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

5


AMERICAN VANGUARD CORPORATION

AND SUBSIDIARIES

(Dollars in thousands, except per share data)

 

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 the stock of AgriCenter, located in Costa Rica, 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.

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

 

 

 

2017

 

 

2016

 

 

2015

 

International sales

 

$

98,905

 

 

$

83,259

 

 

$

77,295

 

Percentage of net sales

 

 

27.9

%

 

 

26.7

%

 

 

26.7

%

 

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 three members of the Board and meets regularly. All members of the Board are invited to and typically 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. 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. Over the course of 2017, the Company continued to implement its enterprise risk management program, which extends to all areas of potential risk and is a permanent feature in the Company’s operation. In addition, the Company continually evaluates insurance levels for product liability, property damage and other potential areas of risk. Management believes its facilities and equipment are adequately insured against loss from usual business risks including cyber-terrorism.

Available Information

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

6


AMERICAN VANGUARD CORPORATION

AND SUBSIDIARIES

(Dollars in thousands, except per share data)

 

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 older chemistries, including many of the Company’s products and, in some cases, have initiated or entertained challenges to these uses. The challenge of the regulatory climate is even more pronounced in certain other geographical regions where the Company faces resistance to the continued use of certain of its products. For example, the 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 these regulatory challenges.

USEPA has proposed further limitations on the continued registration of organophosphates—On September 25, 2015 the USEPA published in the Federal Register draft human health risk assessments for four of the Company’s organophosphate (“OP”) compounds (marketed under the names Bidrin®, Counter®, Folex® and Mocap®) in which it recommends the application of a 10X safety factor under the FQPA (Food Quality Protection Act) in light of the alleged possibility of neurodevelopmental harm to women and children based on epidemiological data. Since that time, in the face of objection from industry, the agency has applied this safety factor to all registered OPs, as they have come up for review or renewal. The Company, like many in our industry, believes that the basis for 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 and, if the agency’s position becomes final, some uses of the company’s OP products could be limited or cancelled. Such action could have a material adverse effect upon the Company’s financial performance in future reporting periods.

Use of the Company’s products is subject to continuing challenges from activist groups—Use of agrochemical products, including the Company’s products is regularly challenged by activist groups in many jurisdictions under a multitude of federal, 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 performed on the Company’s products. The Company, on its behalf and also in joint efforts with other registrants, has and is currently furnishing certain required data relative to its products. There can be no assurance, however, that the USEPA or 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.

7


AMERICAN VANGUARD CORPORATION

AND SUBSIDIARIES

(Dollars in thousands, except per share data)

 

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 state and local authorities. The manufacturing of key ingredients for certain of the Company’s products occurs at the Facilities. An inability to renew or maintain a license or permit, or a significant increase in the fees for such licenses or permits, could impede the Company’s manufacture of one or more of its products and/or increase the cost of production; this, in turn, would materially and adversely affect the Company’s ability to provide customers with its products in a timely and affordable manner.

The Company may be subject to environmental liabilities—While the Company expends substantial funds to minimize the risk of discharge of materials into the environment and to comply with governmental regulations relating to protection of the environment and its workforce, federal and state authorities may nevertheless seek fines and penalties for any violation of the various laws and governmental regulations. In addition, while the Company continually adapts its manufacturing processes to the environmental control standards of regulatory authorities, it cannot completely eliminate the risk of accidental contamination or injury from hazardous or regulated materials. Further, these various governmental agencies could, among other things, impose 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.

Newly acquired businesses may not generate forecasted results.  While 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 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 business acquired in Central America in 2017, the Company now carries on business at a material level in some jurisdictions that have a history of political instability, including civil unrest, government takings without reimbursement, and the imposition of penalties without due process of law. 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. 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 primarily focused on product delivery systems as one of its core strategies. We have focused on technology in closed delivery systems, fumigant application and precision application, to name a few.  These investments are based upon the premise that new technology will allow for safer handling of the Company’s products, 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.

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

The Company is dependent upon certain sole source suppliers for certain of its raw materials and active ingredients— There are a limited number of suppliers of certain important raw materials used by the Company in many of its products. Certain of these raw materials are available solely from single sources either domestically or overseas. Starting January 1, 2017, the Chinese

8


AMERICAN VANGUARD CORPORATION

AND SUBSIDIARIES

(Dollars in thousands, except per share data)

 

government has placed significant restrictions on chemical manufacturing in the People's Republic of China.  This, in turn, has led to closure of multiple manufacturing plants and scarcity of supply for certain products that are imported by the Company.  In conjunction with the purchase and/or licensing of certain product lines, the Company has entered into multi-year supply arrangements under which such counterparties are the sole source of either active ingredients and/or formulated end-use product and, in some cases, the manufacturer has entered the market as a competitor. The Company is actively pursuing new supply agreements to mitigate the risk of product supply from the People’s Republic of China, by either approving new suppliers outside of China, or conversely by pursuing new Chinese suppliers who have a stronger in situ backward integration position. 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 suppliers, it is possible that the Company will not realize its projected sales which, in turn, could adversely affect the Company's consolidated financial statements.

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.

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, particularly that of corn. In fact, many growers that have chosen to use GMO seeds have reduced their use of the types of pesticides sold by the Company. At the same time, the demand for organically-produced food, which, generally speaking, is made without the use of synthetic chemicals (which constitute most of the Company’s products) continues to increase.  There is no guarantee that the Company will maintain its market share or pricing levels in sectors that are subject to competition from companies that market new technologies.  Further, it is possible that increased demand for organic crops may, over time, reduce the demand for the Company’s products.

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

The Company’s key customers typically carry competing product lines and may be influenced by the Company’s larger competitors—A significant portion of the Company’s products are sold to national distributors in the United States, which also carry product lines of competitors that are much larger than the Company. Typically, revenues from the sales of these competing product lines and related program incentives constitute a greater part of our distributors’ income than do revenues from sales and program incentives arising from the Company’s product lines. 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,

9


AMERICAN VANGUARD CORPORATION

AND SUBSIDIARIES

(Dollars in thousands, except per share data)

 

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 2017 and 2016, three customers accounted for 33% and 34%, 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 may 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 confiscated. Such an event could adversely affect both the Company’s ability to operate 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 through both expansion of current product lines, the acquisition of product lines from third parties and, during 2017, 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 acquisition—Over the past few decades, the Company’s growth has been driven by acquisition and licensing of both established and developmental products from third parties. There is no guarantee that acquisition targets or licensing opportunities meeting the Company’s investment criteria will remain available or will be affordable. If such opportunities do not present themselves, then the Company may be unable to record consistent growth in future years.

ITEM 1B.

UNRESOLVED STAFF COMMENTS

None

ITEM  2

PROPERTIES

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

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

10


AMERICAN VANGUARD CORPORATION

AND SUBSIDIARIES

(Dollars in thousands, except per share data)

 

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, 15 of which are owned by AMVAC and two of which AMVAC leases from the City of Marsing for a term of 25 years. The Marsing Facility is engaged in the blending of liquid and powder raw materials and the packaging of some of the Company’s finished goods inventory in liquid, powder and pelletized formulations which are sold both in the US and internationally.  With this acquisition, AMVAC acquired the ability to formulate flowable materials. In connection with the acquisition, AMVAC and BCS LP agreed to enter into a master processor agreement under which AMVAC provides certain third party manufacturing services to BCS LP on an ongoing basis that continued into 2015. Following the termination of the master supply agreement, AMVAC and BCS LP have continued to trade on a normal commercial basis.

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

AMVAC regularly adds chemical processing equipment to enhance or expand its production capabilities. AMVAC believes its facilities are in good operating condition, are suitable and adequate for current needs, 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.

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

The Company leases approximately 19,953 square feet of office space located at 4695 MacArthur Court in Newport Beach, California. 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 M Srl’s, AMVAC CR Srl’s, AMVAC Sgpr’s, OHP’s and AgriCenter’s facilities consist of administration and/or sales offices which are leased.

11


AMERICAN VANGUARD CORPORATION

AND SUBSIDIARIES

(Dollars in thousands, except per share data)

 

ITEM  3

LEGAL PROCEEDINGS

A. DBCP Cases

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

At present, there are three domestic lawsuits and approximately 85 Nicaraguan lawsuits filed by former banana workers in which AMVAC has been named as a party. Only two of the Nicaraguan actions have actually been served on AMVAC.  With respect to Nicaraguan matters, there was no change in status during 2017. As described more fully below, activity in domestic cases during 2017 is as follows.  The one case remaining in Delaware includes 57 plaintiffs who have appealed a lower court finding that the matter was barred by the statute of limitations; this matter has been stayed pending a ruling by the Delaware Supreme Court on the question of when or if the statute of limitations has run out.  In Hawaii, in the matter of Patrickson, et. al. v. Dole Food Company, following the appellate court’s remand to the trial court for adjudication in 2016, there has been no activity; while in Adams, there has been no activity since 2014, when the court granted dismissal of co-defendant Dole on the basis of a worker’s compensation bar and gave plaintiffs leave to amend their complaint in light of that ruling.

Nicaraguan Matters

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

Delaware DBCP Cases

Abad Castillo and Marquinez.  On or about May 31, 2012, two cases (captioned Abad Castillo and Marquinez) were filed with the United States District Court for the District of Delaware (USDC DE No. 1:12-CV-00695-LPS) involving claims for physical injury arising from alleged exposure to DBCP over the course of the late 1960’s through the mid-1980’s on behalf of 2,700 banana plantation workers from Costa Rica, Ecuador, Guatemala, and Panama.  Defendant Dole brought a motion to dismiss 22 plaintiffs from Abad Castillo on the ground that they were parties in cases that had been filed by HendlerLaw, P.C. in Louisiana.  On September 19, 2013, the appeals court granted, in part, and denied, in part, the motion to dismiss, holding that 14 of the 22 plaintiffs should be dismissed.  On May 27, 2014, the district court granted Dole’s motion to dismiss the matter without prejudice on the ground that the applicable statute of limitations had expired in 1995.  Then, on August 5, 2014, the parties stipulated to summary judgment in favor of defendants (on the same ground as the earlier motion) and the court entered judgment in the matter.  Plaintiffs were given an opportunity to appeal; however, only 57 of the 2,700 actually entered an appeal.  Thus, at this stage, only 57 plaintiffs remain in the action.  On or about June 18, 2017, the Third Circuit Court submitted a certified question of law to the Delaware Supreme Court on the question of when the tolling period ended. The Delaware Supreme Court heard oral argument on January 17, 2018 and is expected to issue a ruling within 90 days. During the pendency of this question, these matters will be effectively stayed.  At any rate, the Company believes that a loss is neither probable nor reasonably estimable in these matters and has not recorded a loss contingency.  

12


AMERICAN VANGUARD CORPORATION

AND SUBSIDIARIES

(Dollars in thousands, except per share data)

 

Hawaiian DBCP Matters

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

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

B. Other Matters

EPA FIFRA/RCRA Matter.  On November 10, 2016, the Company was served with a grand jury subpoena out of the U.S. District Court for the Southern District of Alabama in which the U.S. Department of Justice (“DoJ”) sought production of documents relating to the Company’s reimportation of depleted Thimet containers from Canada and Australia.  The Company has retained defense counsel and has substantially completed the production during the course of which it incurred approximately $2,350 in legal costs and fees responding to this subpoena.  During the third quarter of 2017, the Company received a request from DoJ to interview several individuals who may be knowledgeable of the matter.  Those interviews are likely to take place during the second quarter of 2018. At this stage, DoJ has not made clear its intentions with regard to either its theory of the case or potential criminal or civil enforcement.  Thus, it is too early to tell whether a loss is probable or reasonably estimable. Accordingly, the Company has not recorded a loss contingency on this matter.

Walker v. AMVAC.  On or about April 10, 2017, the Company was served with a summons and complaint that had been filed with the United State District Court for the Eastern District of Tennessee under the caption Larry L. Walker v. AMVAC (as No. 4:17-cv-00017).  Plaintiff seeks contract damages, correction of inventorship, accounting and injunctive relief arising from for the Company’s alleged misuse of his confidential information to support a patent application (which was subsequently issued) for a post-harvest corn herbicide that the Company has not commercialized.  Plaintiff claims further that he, not the Company, should be identified as the inventor in such application.  The Company believes that these claims are without merit and intends to defend vigorously.  On May 24, 2017, the Company filed a motion to dismiss this action, or in the alternative, for transfer of venue, on the ground that (i) the complaint fails to state claim upon which relief can be granted, (ii) the contracts cited by plaintiff in his complaint include a forum selection clause requiring that disputes are to be adjudicated in the U.S. District Court for the Central District of California, and (iii) the doctrine of forum non conveniens applies.  The District Court in Tennessee has yet to rule on the motion. At this stage in the proceedings, it is too early to determine whether a loss is probable or reasonably estimable; accordingly, the Company has not recorded a loss contingency.  

Harold Reed v. AMVAC et al.  During January 2017, the Company was served with two Statements of Claim that had been filed on March 29, 2016 with the Court of Queen’s Bench of Alberta, Canada (as case numbers 160600211 and 160600237) in which plaintiffs Harold Reed (an applicator) and 819596 Alberta Ltd. dba Jem Holdings (an application equipment rental company) allege physical injury and damage to equipment, respectively, arising from a fire that occurred during an application of the Company’s potato sprout inhibitor, SmartBlock, at a potato storage facility in Coaldale, Alberta on April 2, 2014.  Plaintiffs allege, among other things, that AMVAC was negligent and failed to warn them of the risks of such application.  Reed seeks damages of $250 for pain and suffering, while Jem Holdings seeks $60 in lost equipment; both plaintiffs also seek unspecified damages as well.  Also during

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AMERICAN VANGUARD CORPORATION

AND SUBSIDIARIES

(Dollars in thousands, except per share data)

 

January 2017, the Company received notice that four related actions relating to the same incident were filed with the same court: (i) Van Giessen Growers, Inc. v Harold Reed et al (No. 160303906)(in which grower seeks $400 for loss of potatoes); (ii) James Houweling et al. v. Harold Reed et al. (No. 160104421)(in which equipment owner seeks damages for lost equipment); (iii) Chin Coulee Farms, etc. v. Harold Reed et al. (No. 150600545)(in which owner of potatoes and truck seeks $530 for loss thereof); and (iv) Houweling Farms v. Harold Reed et al. (No. 15060881)(in which owner of several Quonset huts seeks damages for lost improvements, equipment and business income equal to $4,300).  The Company was subsequently named as cross-defendant in those actions by Reed. During the third quarter of 2017, counsel for the Company filed a Statement of Defence (the Canadian equivalent of an answer), alleging that Reed was negligent in his application of the product and that the other cross-defendants were negligent for using highly flammable insulation and failing to maintain sparking electrical fixtures in the storage units affected by the fire.  The Company believes that the claims against it in these matters are without merit and intends to defend them vigorously.  At this stage in the proceedings, however, it is too early to determine whether a loss is probable or reasonably estimable; accordingly, the Company has not recorded a loss contingency.

Galvan v. AMVAC In an action entitled Graciela Galvan v. AMVAC filed on April 7, 2014 with the Superior Court for the State of California for the County of Orange (No. 00716103CXC), plaintiff, a former employee, alleges violations of wages and hours requirements under the California Labor Code. The Company completed the deposition of putative class representative and participated in mediation on the matter. In February 2016, the court granted plaintiff’s motion for class certification with respect to only one of the seven original claims (namely, that allegedly discretionary bonus payments made to class members during the subject period should have been taken into account when calculating overtime).  The Company believes that such bonus payments were discretionary and, as such, were properly excluded from overtime calculations.  Nevertheless, in the interest of saving defense costs, the Company engaged in settlement discussions with plaintiff’s counsel over the course of several months.  During the third quarter of 2016, the Company recorded a loss contingency to cover the estimated amount of settlement.  During December 2016, the parties reached agreement on terms of settlement, and, on February 9, 2018, the court gave its final approval to the terms of the class settlement.  The settlement was not material to the Company’s consolidated financial statements and the Company is to provide the court with a report of administration of the settlement proceeds to the class in August 2018, after which the Company expects that the matter will be dismissed with prejudice.

ITEM 4

MINE SAFETY DISCLOSURES

Not Applicable

14


AMERICAN VANGUARD CORPORATION

AND SUBSIDIARIES

(Dollars in thousands, except per share data)

 

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.

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

 

 

 

High

 

 

Low

 

Calendar 2017

 

 

 

 

 

 

 

 

First quarter

 

$

19.35

 

 

$

14.65

 

Second quarter

 

 

18.80

 

 

 

15.20

 

Third quarter

 

 

23.35

 

 

 

17.10

 

Fourth quarter

 

 

24.00

 

 

 

18.01

 

Calendar 2016

 

 

 

 

 

 

 

 

First quarter

 

$

17.07

 

 

$

9.63

 

Second quarter

 

 

17.41

 

 

 

12.60

 

Third quarter

 

 

17.92

 

 

 

14.45

 

Fourth quarter

 

 

20.00

 

 

 

14.20

 

 

Holders

As of February 16, 2018, the number of stockholders of the Company’s Common Stock was approximately 4,744, 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-two 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 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 8, 2016

 

January 6, 2017

 

December 23, 2016

 

$

0.010

 

 

$

289

 

October 11, 2016

 

November 11, 2016

 

October 28, 2016

 

 

0.010

 

 

 

289

 

June 13, 2016

 

July 12, 2016

 

June 30, 2016

 

 

0.010

 

 

 

289

 

Total 2016

 

 

 

 

 

$

0.030

 

 

$

867

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 16, 2015

 

April 17, 2015

 

April 3, 2015

 

$

0.020

 

 

$

572

 

Total 2015

 

 

 

 

 

$

0.020

 

 

$

572

 

 

15


AMERICAN VANGUARD CORPORATION

AND SUBSIDIARIES

(Dollars in thousands, except per share data)

 

Purchases of Equity Securities by the Issuer

None

 

Securities Authorized for Issuance Under Equity Compensation Plans

 

Plan Category

 

Number of securities to be issued upon exercise

of outstanding options,

warrants, and rights

 

 

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

 

 

554,449

 

 

$

9.60

 

 

 

2,000,579

 

Total

 

 

554,449

 

 

$

9.60

 

 

 

2,000,579

 

 

16


AMERICAN VANGUARD CORPORATION

AND SUBSIDIARIES

(Dollars in thousands, except per share data)

 

Stock Performance Graph

The following graph presents a comparison of the cumulative, five-year total return for the Company, the S&P 500 Stock Index, and a peer group (Specialty Chemical Industry). The graph assumes that the beginning values of the investments in the Company, the S&P 500 Stock Index, and the peer group of companies each was $100 on December 31, 2012. All calculations assume reinvestment of dividends. Returns over the indicated period should not be considered indicative of future returns.

 


17


AMERICAN VANGUARD CORPORATION

AND SUBSIDIARIES

(Dollars in thousands, except per share data)

 

ITEM 6

SELECTED FINANCIAL DATA

The selected consolidated financial data set forth below with respect to each of the calendar years in the five-year period ended December 31, 2017, have been derived from the Company’s consolidated financial statements and are qualified in their entirety by reference to the more detailed consolidated financial statements and the independent registered public accounting firm’s reports thereon, which are included elsewhere in this Report on Form 10-K as of December 31, 2017 and 2016 and for each of the three years in the period ended December 31, 2017. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

 

 

2017

 

 

2016

 

 

2015

 

 

2014

 

 

2013

 

Net sales

 

$

355,047

 

 

$

312,113

 

 

$

289,382

 

 

$

298,634

 

 

$

381,021

 

Gross profit

 

$

147,392

 

 

$

128,288

 

 

$

111,902

 

 

$

114,496

 

 

$

171,347

 

Operating income

 

$

26,794

 

 

$

20,540

 

 

$

11,524

 

 

$

6,710

 

 

$

55,735

 

Income before provision for income taxes and loss on

   equity investments

 

$

24,853

 

 

$

18,917

 

 

$

8,962

 

 

$

3,644

 

 

$

53,834

 

Net income attributable to American Vanguard

 

$

20,274

 

 

$

12,788

 

 

$

6,591

 

 

$

4,841

 

 

$

34,449

 

Earnings per common share

 

$

0.70

 

 

$

0.44

 

 

$

0.23

 

 

$

0.17

 

 

$

1.22

 

Earnings per common share—assuming dilution

 

$

0.68

 

 

$

0.44

 

 

$

0.23

 

 

$

0.17

 

 

$

1.19

 

Total assets (1)

 

$

535,592

 

 

$

429,956

 

 

$

435,270

 

 

$

463,590

 

 

$

439,917

 

Working capital (1)

 

$

128,681

 

 

$

130,001

 

 

$

139,850

 

 

$

197,073

 

 

$

132,486

 

Long-term debt, excluding current installments

 

$

77,486

 

 

$

40,951

 

 

$

68,321

 

 

$

98,605

 

 

$

50,671

 

Stockholders’ equity

 

$

305,314

 

 

$

282,357

 

 

$

268,326

 

 

$

261,003

 

 

$

257,795

 

Weighted average shares outstanding—basic

 

 

29,100

 

 

 

28,859

 

 

 

28,673

 

 

 

28,436

 

 

 

28,301

 

Weighted average shares outstanding—assuming dilution

 

 

29,703

 

 

 

29,394

 

 

 

29,237

 

 

 

28,912

 

 

 

28,899

 

Dividends per share of common stock

 

$

0.06

 

 

$

0.03

 

 

$

0.02

 

 

$

0.17

 

 

$

0.22

 

 

 

(1)

The Company’s consolidated balance sheets as of December 31, 2015, 2014, and 2013 reflects certain reclassifications for deferred income taxes and income taxes payables.  

18


AMERICAN VANGUARD CORPORATION

AND SUBSIDIARIES

(Dollars in thousands, except per share data)

 

ITEM  7

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

FORWARD-LOOKING STATEMENTS/RISK FACTORS:

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

MANAGEMENT OVERVIEW

The Company’s operating results in 2017 were improved over those of 2016, with net sales up 14% ($355,047 compared to $312,113, year over year), net income attributable to American Vanguard up 58% ($20,274 v. $12,788), gross profit up about 15% ($147,392 v. $128,288), gross margin slightly up to 42% of net sales and operating expenses up about 12% ($120,598 v. $107,748), but down as a percentage of sales to 34% in 2017 as compared to 35% in 2016.  

Top line sales performance was driven in part by growth of certain existing product lines, particularly domestic cotton products (in light of increase cotton acreage and pest pressure) and vector control products (following heightened hurricane activity), and the addition of new sales from the four acquisitions that the Company completed largely in the second half of 2017. Gross profit increased as a result of continued improvement in factory performance, organic growth in the Company’s sales and the addition of products and businesses acquired during 2017. Operating expenses rose on an absolute basis, as the Company continued to invest in the maintenance of registrations of several important products, professional fees related to acquisitions, continued development of our SIMPAS precision application technology and litigation related to the DoJ proceedings against us, but dropped as a percentage of sales. Due to our acquisition activities, our borrowings increased in 2017 as compared to 2016. As a result, net interest expense was $1,941 in 2017, as compared to $1,623 in 2016.  Our provision for income taxes included a one-time benefit of $3,433 in connection with the enactment of the Tax Cuts and Jobs Act (“Tax Reform Act”) on December 22, 2017. Our effective tax rate decreased to 18% in 2017, as compared to 30% in 2016. Net income increased to $0.68 per diluted share ($0.70 per basic share), as compared to $0.44 per diluted (and basic) share in 2016.  

When considering the consolidated balance sheet, long-term debt increased by $36,535 to $77,486 at December 31, 2017, as compared to $40,951 this time last year.  The increased level of debt was driven by four acquisitions completed during the financial year and particularly in the final quarter of the year. Notwithstanding the increase in long term debt, the Company’s borrowing capacity increased to $139,241 as of December 31, 2017 as compared to $104,853 at the same time in 2016, and inventory, including goods purchased with our acquisitions, increased only slightly ($123,124 v. $120,576) at year-end.

19


AMERICAN VANGUARD CORPORATION

AND SUBSIDIARIES

(Dollars in thousands, except per share data)

 

Results of Operations

2017 Compared with 2016:

 

 

 

2017

 

 

2016

 

 

$ Change

 

 

% Change

 

Net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Insecticides

 

$

132,137

 

 

$

119,226

 

 

$

12,911

 

 

 

11

%

Herbicides/soil fumigants/fungicides

 

 

121,581

 

 

 

123,540

 

 

 

(1,959

)

 

 

-2

%

Other, including plant growth regulators

 

 

47,691

 

 

 

29,438

 

 

 

18,253

 

 

 

62

%

Total crop

 

 

301,409

 

 

 

272,204

 

 

 

29,205

 

 

 

11

%

Non-crop

 

 

53,638

 

 

 

39,909

 

 

 

13,729

 

 

 

34

%

Total net sales

 

$

355,047

 

 

$

312,113

 

 

$

42,934

 

 

 

14

%

Cost of sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Insecticides

 

$

84,008

 

 

$

78,945

 

 

$

5,063

 

 

 

6

%

Herbicides/soil fumigants/fungicides

 

 

67,558

 

 

 

66,299

 

 

 

1,259

 

 

 

2

%

Other, including plant growth regulators

 

 

31,951

 

 

 

19,139

 

 

 

12,812

 

 

 

67

%

Total crop

 

 

183,517

 

 

 

164,383

 

 

 

19,134

 

 

 

12

%

Non-crop

 

 

24,138

 

 

 

19,442

 

 

 

4,696

 

 

 

24

%

Total cost of sales

 

$

207,655

 

 

$

183,825

 

 

$

23,830

 

 

 

13

%

Gross profit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Insecticides

 

$

48,129

 

 

$

40,281

 

 

$

7,848

 

 

 

19

%

Herbicides/soil fumigants/fungicides

 

 

54,023

 

 

 

57,241

 

 

 

(3,218

)

 

 

-6

%

Other, including plant growth regulators

 

 

15,740

 

 

 

10,299

 

 

 

5,441

 

 

 

53

%

Gross profit crop

 

 

117,892

 

 

 

107,821

 

 

 

10,071

 

 

 

9

%

Gross profit non-crop

 

 

29,500

 

 

 

20,467

 

 

 

9,033

 

 

 

44

%

Total gross profit

 

$

147,392

 

 

$

128,288

 

 

$

19,104

 

 

 

15

%

Gross margin crop

 

 

39

%

 

 

40

%

 

 

 

 

 

 

 

 

Gross margin non-crop

 

 

55

%

 

 

51

%

 

 

 

 

 

 

 

 

Total gross margin

 

 

42

%

 

 

41

%

 

 

 

 

 

 

 

 

Net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S

 

$

256,142

 

 

$

228,854

 

 

$

27,288

 

 

 

12

%

International

 

 

98,905

 

 

 

83,259

 

 

 

15,646

 

 

 

19

%

Total net sales

 

$

355,047

 

 

$

312,113

 

 

$

42,934

 

 

 

14

%

 

Following is a more detailed discussion of our sales performance by category.  Domestic sales finished the year at $256,142, as compared to $228,854 in 2016, an increase of 12%. Sales were positively impacted by strong growth in our US cotton products Bidrin® and Folex®; a stable Midwest corn soil insecticide market where procurement in the distribution channel appears to have normalized; hurricane-driven demand for our superior mosquito adulticide, Dibrom®; and $21,978 in incremental sales of newly acquired products and businesses primarily in the second half of the year. Offsetting these increases, we experienced significant competitive pricing pressure in the US post-emergent corn herbicide market for our product Impact®, and slightly lower annual sales from our soil fumigant products mainly driven by wet weather in the early part of the year in the western states.

International sales increased 19% year-over year ($98,905 in 2017 as compared to $83,259 in 2016), driven by increased sales associated with the key AgriCenter acquisition, made in October 2017, strong tolling revenues, and increased sales of Counter and Aztec. These gains were offset by slower sales of our Mocap® and Nemacur® insecticides.

The relative sales performance of our crop and non-crop businesses is as follows: Net sales of our crop business in 2017 were $301,409, which constitutes an increase of 11% as compared to net sales of $272,204 in 2016. Net sales of our non-crop products in 2017 were $53,638, which is an increase of approximately 34% as compared to $39,909 in 2016. A more detailed discussion of product groups and products having an effect on net sales for each of the crop and non-crop businesses appears below.

In our crop business, net sales of insecticides in 2017 ended at $132,137, which was an 11% increase as compared to sales of $119,226 in 2016. For the same period, annual net sales of our granular soil insecticides were up 8% above 2016. We saw increased

20


AMERICAN VANGUARD CORPORATION

AND SUBSIDIARIES

(Dollars in thousands, except per share data)

 

year-over-year sales from our Thimet® used in peanuts, sugar cane and potatoes, along with increased domestic sales of our cotton foliar insecticide, Bidrin®. We saw modest sales increases in our domestic corn soil insecticides Aztec®, SmartChoice® and Counter® offset by some modest sales declines in our international sales of Mocap® and Nemacur®.  We also benefitted from the mid-year acquisition of abamectin which added net sales of approximately $2,000 to our results. In general, our overall agricultural insecticide business showed a solid performance in 2017.

Within the product group of herbicides/soil fumigants/fungicides, our crop net sales in 2017 ended at $121,581, as compared to $123,540 in 2016. Our fumigant product line continued to perform well despite a slight year-over-year decline in revenue caused by wet weather in both the Western and Southeastern regions of the US which inhibited some on-ground application of this liquid product. In the midwest, we experienced an intensely competitive environment during the year in the post-emergent corn herbicide market and sales of our Impact® herbicide declined when compared to the prior year. This performance was substantially offset by strong performances of both our newly acquired paraquat herbicide and our chlorothalonil fungicide. These products were acquired in mid-year and contributed over $14,000 to this category.

Within our other product group (which includes plant growth regulators, molluscicides and third party manufacturing activity) we experienced an increase of 62% in net sales, ending at $47,691 in 2017, as compared to $29,438 in 2016. The main drivers of this performance were stronger year-over-year sales of our cotton defoliant Folex® due to the 20% increase in U.S. cotton acreage in 2017 as compared to the prior year, an increase in toll manufacturing activity, and the inclusion of sales in Latin America by our newly acquired AgriCenter business.

Within our non-crop business, 2017 net sales increased by 34% to $53,638 as compared to $39,909 in 2016.  The sales increase resulted from sales in the last three months of the year following the acquisition of OHP, our new niche horticultural distribution business. In addition, our core non crop product portfolio had a very solid year led by naled sales (our Dibrom® brand mosquito adulticide) which rose 69% in 2017, as a result of the intense hurricane season, headlined by the persistent torrential rains of Harvey over the eastern Texas coastal region. In response to the emergency, AMVAC ramped up production significantly, FEMA utilized all available Dibrom inventories (both from the Company and in the market) and the resulting mosquito control operation was successful. We also recorded a 92% increase in our PCNB product sales as we continue to build our market position, an 18% increase in our Pest Strip® products, and modest increases in several of our other commercial pest control products.  This performance was offset by the short-term decline in our pharmaceutical products arising from customers having ordered additional product in 2016 in light of uncertain supply conditions.

Our cost of sales for 2017 was $207,655 or 58% of sales. This compared to $183,825 or 58% of sales for 2016. 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 remained approximately flat as compared to last year. During the year, our Impact product line endured increased competition resulting in some weakening of market price and accordingly, increased cost of sales when compared to sales revenue as a result. Furthermore, the distribution businesses acquired in the final quarter performed well and added to net sales, as indicated above. In general terms the cost of sales related to distribution activities tends to be higher than those of our core business 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 strong and in-line with our targets; specifically, our factory underabsorption costs dropped to $12,865 or 3.6% of net sales in 2017 as compared to $17,739 or 5.7% of net sales in 2016.  

Gross profit for 2017 improved by $19,104 or 15% to end at $147,392 for the year ended December 31, 2017, as compared to $128,288 for the prior year. Gross margin as a percent of net sales, however, was 42% for 2017 as compared to 41% in 2016. While the Company experienced continuous improvement in factory performance and factory cost recovery and strong performance on raw material purchasing, these benefits were offset by competitive pricing pressure in the Midwest herbicide market and a larger volume of lower-margin sales through newly acquired distribution businesses.

21


AMERICAN VANGUARD CORPORATION

AND SUBSIDIARIES

(Dollars in thousands, except per share data)

 

Operating expenses in 2017 increased by $12,850 to $120,598 or 34% of sales as compared to $107,748 or 35% in 2016. The differences in operating expenses by department are as follows:

 

 

 

2017

 

 

2016

 

 

Change

 

 

% Change

 

Selling

 

$

29,112

 

 

$

27,442

 

 

$

1,670

 

 

 

6

%

General and administrative

 

 

37,660

 

 

 

32,128

 

 

 

5,532

 

 

 

17

%

Research, product development and regulatory

 

 

26,076

 

 

 

21,298

 

 

 

4,778

 

 

 

22

%

Freight, delivery and warehousing

 

 

27,750

 

 

 

26,880

 

 

 

870

 

 

 

3

%

 

 

$

120,598

 

 

$

107,748

 

 

$

12,850

 

 

 

12

%

 

 

Selling expenses increased by $1,670 to $29,112 for the year ended December 31, 2017, as compared to $27,442 in 2016. The main drivers for the increased expenses are expanded activities in both international and domestic sales operations resulting from acquisitions.  However, selling expenses as a percent of net sales actually decreased from 8.8% in 2016 to 8.2% in 2017.

 

General and administrative expenses increased by $5,532 to $37,660 for the year ended December 31, 2017, as compared to $32,128 in 2016. The main drivers for the increase are driven by an increase in legal expenses related to the DoJ proceedings against the Company of approximately $1,200, expenses of $1,821 incurred in professional fees in connection with the product and business acquisitions completed in 2017 including; the expense of the acquisition process, increased amortization expenses as a result of the valuation of the acquisitions, and the administrative operating expenses of such acquisitions from the closing date of the respective acquisitions.  

 

Research, product development and regulatory expenses increased by $4,778 to $26,076 for the year ended December 31, 2017, as compared to $21,298 in 2016. The increase is driven by additional regulatory activity defending our expanded portfolio of products, product development studies, driven by our expanded portfolio and continued progress on the development of our SIMPAS technology.

 

Freight, delivery and warehousing costs for the year ended December 31, 2017 increased by $870 to $27,750, as compared to $26,880 in 2016. When expressed as a percentage of sales, freight costs decreased slightly year over year to 7.8% in 2017, as compared to 8.6% in 2016.  This is mainly due to product mix and locations of customers.

Net interest expense was $1,941 in 2017, as compared to $1,623 in 2016. Interest costs are summarized in the following table:

 

 

 

2017

 

 

2016

 

Average Indebtedness and Interest expense

 

Average

Debt

 

 

Interest

Expense

 

 

Interest

Rate

 

 

Average

Debt

 

 

Interest

Expense

 

 

Interest

Rate

 

Working capital revolver

 

$

51,103

 

 

$

1,547

 

 

 

3.0

%

 

$

59,897

 

 

$

1,382

 

 

 

2.3

%

Notes payable

 

 

 

 

 

 

 

 

 

 

 

20

 

 

 

1

 

 

 

5.0

%

Interest income

 

 

 

 

 

(41

)

 

 

 

 

 

 

 

 

(7

)

 

 

 

Amortization of debt issuance costs

 

 

 

 

 

293

 

 

 

 

 

 

 

 

 

250

 

 

 

 

Amortization of other deferred liabilities

 

 

 

 

 

82

 

 

 

 

 

 

 

 

 

37

 

 

 

 

Other interest expense

 

 

 

 

 

143

 

 

 

 

 

 

 

 

 

44

 

 

 

 

Subtotal

 

 

51,103

 

 

 

2,024

 

 

 

4.0

%

 

 

59,917

 

 

 

1,707

 

 

 

2.8

%

Capitalized interest

 

 

 

 

 

(83

)

 

 

 

 

 

 

 

 

(84

)

 

 

 

Total

 

$

51,103

 

 

$

1,941

 

 

 

3.8

%

 

$

59,917

 

 

$

1,623

 

 

 

2.7

%

 

The Company’s average overall debt for the year ended December 31, 2017 was $51,103 as compared to $59,917 for the year ended December 31, 2016. On a gross basis, our effective interest rate increased on our working capital revolver to 3.0%, as compared to 2.3% in 2016. This increase was driven by increases in the LIBOR rate. After adjustments related to capitalized interest and including expenses related to the amortization of deferred liabilities, the overall effective rate was 3.8% for 2017 as compared to 2.7% in 2016.

 

On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Reform Act”) was signed into law.  The legislation significantly changes U.S. tax law by, among other things, lowering corporate income tax rates, implementing a territorial tax system and imposing a tax on deemed repatriated earnings of foreign subsidiaries.  The Tax Reform Act reduces the U.S. corporate income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018. As a result of the reduction in the U.S. corporate income tax rate, we

22


AMERICAN VANGUARD CORPORATION

AND SUBSIDIARIES

(Dollars in thousands, except per share data)

 

revalued our ending net deferred tax assets and liabilities at December 31, 2017, provisionally resulting in a deferred tax benefit of $4,683 that is included in the provision for income taxes for the year ended December 31, 2017. The Tax Reform Act also provided for a one-time deemed mandatory repatriation of Post-1986 undistributed foreign subsidiary earnings and profits (“E&P”) through the year ended December 31, 2017.  We have performed a review of our foreign entities and have estimated that the amount of deemed repatriated income amounts to $30,085, on which the Company has estimated that there will be a tax expense of $1,250. That amount is also included in the provision for income taxes for the year ended December 31, 2017.  The net tax benefits from the Tax Reform Act are reflected in our financial results in accordance with Staff Accounting Bulletin No. 118 (SAB 118), which was issued to address the application of US GAAP in situations when the registrant does not have the necessary information available, prepared or analyzed (including computation) in reasonable detail to complete the accounting for uncertain income tax effects of the Tax Reform Act. Additional work is necessary for a more detailed analysis of our deferred tax assets and liabilities and of the impact of the deemed repatriation. Any subsequent adjustment to these amounts will be recorded to income tax expense in the quarter of 2018 when the analysis is complete.

Our provision for income taxes for 2017 was $4,443, as compared to $5,540 for 2016. The effective tax rate for 2017 was 18%, as compared to 30% in 2016. The decrease in the effective tax rate was primarily driven by the inclusion of the one-time net tax benefit associated with the Tax Reform Act enacted on December 22, 2017, in the amount of $3,433. The decrease is partially offset by lower percentage of earnings in jurisdictions with lower income tax rate.

The Company has effectively settled its examination with the Internal Revenue Service (“IRS”) for the tax years ended December 31, 2012 through 2014.  The Company’s 2015 and 2016 federal income tax returns are still subject to IRS examination.  The Company has other state and foreign income tax returns subject to examination.

For the year ended December 31, 2017, the Company recorded losses on its equity investment of $49. For the same period of 2016, the Company recorded losses on its equity investment of $353. In 2017, our net income was reduced by $87, as compared to $236 in 2016, representing the share of net income of our majority owned subsidiary that was charged to the non-controlling interest.  

Net income attributable to American Vanguard ended at $20,274 or $0.68 per diluted share in 2017 as compared to $12,788 or $0.44 per diluted share in 2016.

Liquidity and Capital Resources

The Company generated $59,001 of cash from operating activities provided during the year ended December 31, 2017, as compared to $46,406 in the prior year.  Included in the $59,001 are net income of $20,361, plus non-cash depreciation, amortization of intangibles and other assets and discounted future liabilities, in the amount of $22,290.  Stock based compensation of $4,714, loss from equity method investment of $49 and change in value of deferred income taxes of $398, provided net cash inflows of $47,812, as compared to $37,843 for the same period of 2016.

During 2017 the Company generated $11,189 from reducing working capital, as compared to generating $8,563 during 2016. This change excluded increases in working capital related to the products and businesses acquired during 2017. Included in this change; inventories reduced by $16,183 as a result of consistent efforts from our sales, inventory and operations planning team to balance manufacturing cost recovery, plant capacity and customer needs.  Deferred revenue as of December 31, 2017 increased by $10,726, as compared to December 31, 2016 primarily as a result of customer decisions to make early payments in return for early cash incentive programs. Our accounts payable balances increased by $3,322 driven by increased manufacturing activity and capital spending in the final quarter of the year.  In addition accounts receivables and prepaid expenses reduced by $754 and $647 respectively. Offsetting these positive changes, the Company made payments to the IRS following the concluding of the 2012 to 2014 audit in the amount of $12,073 and accrued programs reduced year-on-year by $4,529. Finally other payables decreased by $3,841.

With regard to program accrual, these reduced as noted above, primarily reflecting our mix of sales and customers in 2017 as compared to the prior year. The Company accrues programs in line with the growing season upon which specific products are targeted. Typically crop products have a growing season that ends on September 30th of each year. During 2017, the Company made accruals for programs in the amount of $59,806 and made payments in the amount of $63,682. During the prior year, the Company made accruals in the amount of $70,448 and made payments in the amount of $71,889.

In 2016, inventory reduced by $15,901, accounts payables increased by $9,015, other payables increased by $4,631 and income tax receivable reduced by $1,186.  Offsetting these positive changes, accounts receivables increased by $11,817, prepaid expenses increased by $3,872, deferred revenues decreased by $5,040 and program costs by $1,441.  

23


AMERICAN VANGUARD CORPORATION

AND SUBSIDIARIES

(Dollars in thousands, except per share data)

 

Cash used for investing activities was $89,512 for the year ended December 31, 2017 as compared to $14,137 in 2016. The Company spent $81,896 in business acquisitions including intangible assets, goodwill, working capital and fixed assets.  In addition, $6,666 was spent on fixed assets primarily focused on continuing to invest in manufacturing infrastructure and $950 on an investment.

During the year ended December 31, 2017 financing activities provided $33,935, principally from the borrowings on the Company’s senior credit facility, as compared to utilizing $28,545 for the year ended December 31, 2016. This included a net borrowing of $37,025 from our credit facility in 2017, as compared to a net repayment of $27,600 in 2016.  We paid $751 in debt issuance costs related to the amendment of our credit facility.  In 2017, we paid dividends to stockholders amounting to $1,600, as compared to $578 in 2016.  

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, 2017 and 2016. These are summarized in the following table:

 

Indebtedness

 

2017

2016

 

 

$000’s

 

Long-term

 

 

Long-term

 

 

Revolving line of credit

 

$

78,425

 

 

$

41,400

 

 

Debt issuance costs

 

 

(939

)

 

 

(449

)

 

Total indebtedness

 

$

77,486

 

 

$

40,951

 

 

 

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.

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 (the “Credit Agreement”) with a group of commercial lenders led by Bank of the West as agent, swing line lender and Letter of Credit (“L/C”) issuer.  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.

At December 31, 2017, according to the terms of the Credit Agreement and based on our performance against the most restrictive covenants listed above, the Company had the capacity to increase its borrowings by up to $139,241. This compares to an available borrowing capacity of $104,853 as of December 31, 2016. The level of borrowing capacity is driven by three factors: (1) our financial performance, as measured in EBITDA for trailing twelve month period, which has improved, (2) the inclusion of proforma EBITDA related to acquisitions completed during 2017 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, 2017.

Contractual Obligations and Off-Balance Sheet Arrangements

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

24


AMERICAN VANGUARD CORPORATION

AND SUBSIDIARIES

(Dollars in thousands, except per share data)

 

The following summarizes our contractual obligations at December 31, 2017, 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

 

$

78,425

 

 

$

 

 

$

 

 

$

78,425

 

 

$

 

Estimated interest liability (1)

 

 

8,118

 

 

 

1,804

 

 

 

3,608

 

 

 

2,706

 

 

 

 

Licensing obligations

 

 

589

 

 

 

127

 

 

 

240

 

 

 

222

 

 

 

 

Deferred earn outs on business acquisitions

 

 

10,741

 

 

 

5,263

 

 

 

5,478

 

 

 

 

 

 

 

Employment agreements

 

 

2,427

 

 

 

896

 

 

 

1,531

 

 

 

 

 

 

 

Operating leases—rental properties

 

 

6,762

 

 

 

1,520

 

 

 

2,984

 

 

 

1,608

 

 

 

650

 

Operating leases—vehicles

 

 

1,361

 

 

 

730

 

 

 

615

 

 

 

16

 

 

 

 

Transition taxes (2)

 

 

1,250

 

 

 

100

 

 

 

200

 

 

 

200

 

 

 

750

 

 

 

$

109,673

 

 

$

10,440

 

 

$

14,656

 

 

$

83,177

 

 

$

1,400

 

 

(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. $78,425) throughout the remaining term. All of our debt is linked to LIBOR rates.

There were no other off-balance sheet arrangements as of December 31, 2017.

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

In addition to the above contractual obligations, $2,118 of unrecognized tax benefits and $2,257 of accrued penalties and interest have been recorded as long term liabilities as of December 31, 2017. We are uncertain as to if or when such amounts may be settled or any tax benefits may be realized.

(2)

The Company elected to pay the transition tax in an eight-year period.

 

25


AMERICAN VANGUARD CORPORATION

AND SUBSIDIARIES

(Dollars in thousands, except per share data)

 

Results of Operations

2016 Compared with 2015:

 

 

 

2016

 

 

2015

 

 

$ Change

 

 

% Change

 

Net sales: