Notes to Condensed Consolidated Financial Statements
(In thousands, except share data)
(Unaudited)
1. The accompanying unaudited condensed consolidated financial statements of American Vanguard Corporation and Subsidiaries (“AVD”) have been prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by US GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.
2. Revenue Recognition—The Company recognizes revenue from the sale of its products, which include insecticides, herbicides, soil fumigants, and fungicides. The Company sells its products to customers, which include distributors and retailers. In addition, the Company recognizes royalty income from the sale of intellectual property. Based on similar economic and operational characteristics, the Company’s business is aggregated into one reportable segment. Selective enterprise information of
sales disaggregated by category and geographic region
is as follows:
|
|
Three Months Ended
March 31, 2018
|
|
|
|
As reported
|
|
|
Without adoption of ASC 606
|
|
Net sales:
|
|
|
|
|
|
|
|
|
Crop:
|
|
|
|
|
|
|
|
|
Insecticides
|
|
$
|
41,293
|
|
|
$
|
41,317
|
|
Herbicides/soil fumigants/fungicides
|
|
|
32,185
|
|
|
|
32,185
|
|
Other, including plant growth regulators and distribution
|
|
|
17,840
|
|
|
|
17,840
|
|
|
|
|
91,318
|
|
|
|
91,342
|
|
Non-crop, including distribution
|
|
|
12,790
|
|
|
|
12,790
|
|
Total net sales:
|
|
$
|
104,108
|
|
|
$
|
104,132
|
|
Net sales:
|
|
|
|
|
|
|
|
|
US
|
|
$
|
69,815
|
|
|
$
|
69,839
|
|
International
|
|
|
34,293
|
|
|
|
34,293
|
|
Total net sales:
|
|
$
|
104,108
|
|
|
$
|
104,132
|
|
Timing of revenue recognition:
|
|
|
|
|
|
|
|
|
Goods transferred at a point in time
|
|
$
|
103,705
|
|
|
$
|
104,132
|
|
Goods and services transferred over time
|
|
|
403
|
|
|
|
—
|
|
Total net sales:
|
|
$
|
104,108
|
|
|
$
|
104,132
|
|
In May 2014, Financial Accounting Standards Board, (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09,
Revenue from Contracts with Customers
(Accounting Standards Codification “ASC” 606). ASU 2014-09 outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. This new revenue recognition model provides a five-step analysis in determining when and how revenue is recognized. The new model requires revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration a company expects to receive in exchange for those goods or services. In March 2016, FASB issued an amendment to the standard, ASU 2016-08, to clarify the implementation guidance on principal versus agent considerations. Under the amendment, an entity is required to determine whether the nature of its promise is to provide the specified good or service itself (that is, the entity is a principal) or to arrange for that good or service to be provided by the other party (that is, the entity is an agent). In April 2016, FASB issued another amendment to the standard, ASU 2016-10, to clarify identifying performance obligations and the licensing implementation guidance, which retaining the related principles for those areas. The standard and the amendments are effective for annual periods beginning after December 15, 2017, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). These
8
amendments are effective upon adoption of ASC 606. This standard also requires enhanced disclosures regarding the nature, amount, timing, and uncertainty of revenue and cash flows.
The Company adopted ASC 606 using the modified retrospective method, therefore, the comparative information has not been adjusted and continues to be reported under ASC 605.
The Company determined that for certain products that are deemed to have no alternative use accompanied by an enforceable right to payment for performance completed to date, recognition will change from point in time, to over time. These sales were previously recognized upon delivery, and are now recognized over time utilizing an output method. In addition, the Company earns royalties on certain licenses granted for the use of its intellectual property, which were previously recognized over time. For certain licenses that are considered functional intellectual property, revenue recognition is now at a point in time.
As part of the Company's adoption of ASC 606, the Company elected to use the following practical expedients (i) not to adjust the promised amount of consideration for the effects of a significant financing component when the Company expects, at contract inception, that the period between the Company's transfer of a promised product or service to a customer and when the customer pays for that product or service will be one year or less (ii)
allowing entities the option to treat shipping and handling activities that occur after control of the good transfers to the customer as fulfillment activities.
For all of the Company’s sales and distribution channels, revenue is recognized when control of the product is transferred to the customer (i.e., when the Company’s performance obligation is satisfied), which typically occurs at shipment for product sales, but also occurs over time for certain products that are deemed to have no alternative use accompanied by an enforceable right to payment for performance completed to date. For revenue recognized over time, the Company uses an output measure, units produced, to measure progress. From time to time, the Company may offer a program to eligible customers, in good standing, that provides extended payment terms on a portion of the sales on selected products. The Company analyzes these extended payment programs in connection with its revenue recognition policy to ensure all revenue recognition criteria are satisfied at the time of sale.
Performance Obligations
—
A performance obligation is a promise in a contract or sales order to transfer a distinct good or service to the customer, and is the unit of account in ASC 606. A transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Certain of the Company’s sales orders have multiple performance obligations, as the promise to transfer individual goods or services is separately identifiable from other promises in the sales orders. For sales orders with multiple performance obligations, the Company allocates the sales order’s transaction price to each performance obligation based on its relative stand-alone selling price. The stand-alone selling prices are determined based on the prices at which the Company separately sells these products. The Company’s performance obligations are satisfied at a point in time or over time as work progresses.
At March 31, 2018, the Company had $44,079 of remaining performance obligations, which is comprised of deferred revenue and services not yet delivered. The Company expects to recognize approximately all of its remaining performance obligations as revenue in fiscal 2018.
Contract Balances
—
The timing of revenue recognition, billings and cash collections results in deferred revenue in the consolidated balance sheet. The Company sometimes receives payments from its customers in advance of goods and services being provided in return for early cash incentive programs, resulting in deferred revenues. These liabilities are reported on the consolidated balance sheet at the end of each reporting period.
The following table provides information about receivables and contract liabilities from contracts with customers:
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
Total receivables, net
|
|
$
|
122,403
|
|
|
$
|
109,605
|
|
Contract assets
|
|
|
3,000
|
|
|
|
—
|
|
Deferred revenue
|
|
|
11,858
|
|
|
|
14,574
|
|
Revenue recognized for the three months ended March 31, 2018, that was included in the deferred revenue balance at the beginning of 2018 was $12,740.
9
Adjustments to Previously Reported Financial Statements from the Adoption of Accounting Pronouncements
The following table presents the effect of the adoption of ASU 2014-09 on our condensed consolidated balance sheet (unaudited) as of December 31, 2017, (in thousands):
|
|
As of December 31, 2017
|
|
|
|
As previously reported
|
|
|
Adjustment due to adoption of ASC 606
|
|
|
As adjusted
|
|
Total assets
|
|
$
|
535,592
|
|
|
$
|
3,000
|
|
|
$
|
538,592
|
|
Deferred income tax liabilities, net
|
|
|
16,284
|
|
|
|
786
|
|
|
|
17,070
|
|
Retained earnings
|
|
|
238,953
|
|
|
|
2,214
|
|
|
|
241,167
|
|
In accordance with ASC 606, the disclosure of the impact of adoption to our consolidated statements of operations was $24 reduction in net sales. This revenue will move from being recognized at point in time to be recognized over time. As such, the net sales will be reported as sales in a later quarter.
In accordance with ASC 606, the disclosure of the impact of adoption to our condensed consolidated balance sheet was as follows:
|
|
As of March 31, 2018
|
|
|
|
As reported
|
|
|
Balances without adoption of ASC 606
|
|
|
Impact
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract assets
|
|
$
|
3,000
|
|
|
$
|
—
|
|
|
$
|
3,000
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue
|
|
|
11,858
|
|
|
|
11,834
|
|
|
|
24
|
|
Deferred income tax liabilities
|
|
|
786
|
|
|
|
—
|
|
|
|
786
|
|
Stockholders' equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
|
245,056
|
|
|
|
242,842
|
|
|
|
2,214
|
|
3. Property, plant and equipment at March 31, 2018 and December 31, 2017 consists of the following:
|
|
March 31,
2018
|
|
|
December 31,
2017
|
|
Land
|
|
$
|
2,458
|
|
|
$
|
2,458
|
|
Buildings and improvements
|
|
|
16,732
|
|
|
|
16,678
|
|
Machinery and equipment
|
|
|
108,250
|
|
|
|
107,722
|
|
Office furniture, fixtures and equipment
|
|
|
5,179
|
|
|
|
4,713
|
|
Automotive equipment
|
|
|
1,010
|
|
|
|
735
|
|
Construction in progress
|
|
|
2,027
|
|
|
|
1,917
|
|
Total
|
|
|
135,656
|
|
|
|
134,223
|
|
Less accumulated depreciation
|
|
|
(87,077
|
)
|
|
|
(84,902
|
)
|
Property, plant and equipment, net
|
|
$
|
48,579
|
|
|
$
|
49,321
|
|
The Company recognized depreciation expense related to property and equipment of $2,303 and $1,950 for the three months ended March 31, 2018 and 2017, respectively. During the three months ended March 31, 2018 and 2017, the Company eliminated from assets and accumulated depreciation $128 and $1,175, respectively, of fully depreciated assets.
Substantially all of the Company’s assets are pledged as collateral with its lender banks.
4. Inventories are stated at the lower of cost or net realizable value. Cost is determined using the first-in, first-out method. The components of inventories consist of the following:
|
|
March 31,
2018
|
|
|
December 31,
2017
|
|
Finished products
|
|
$
|
125,498
|
|
|
$
|
107,595
|
|
Raw materials
|
|
|
17,733
|
|
|
|
15,529
|
|
|
|
$
|
143,231
|
|
|
$
|
123,124
|
|
As of March 31, 2018, we believe our inventories are valued at lower of cost or net realizable value.
10
In July 2015, FASB issued ASU
2015-11, Inventory (ASC 330).
ASC 330 previously required an entity to measure inventory at the lower of cost or market, where market could be replacement cost, net realizable value, or net realizable value less an approximately normal profit margin. This ASU limits the scope to invent
ory that is measured using first-in, first-out (FIFO) or average cost and requires inventory be measured at the lower of costs or net realizable value. The new standard is effective for fiscal years beginning after December 15, 2016, including interim peri
ods within those fiscal years. The Company adopted this new standard effective January 1, 2017. There was no impact on this adoption.
5. Based on similar economic and operational characteristics, the Company’s business is aggregated into one reportable segment. Selective enterprise information is as follows:
|
|
Three Months Ended
March 31
|
|
|
|
2018
|
|
|
2017
|
|
Net sales:
|
|
|
|
|
|
|
|
|
Crop:
|
|
|
|
|
|
|
|
|
Insecticides
|
|
$
|
41,293
|
|
|
$
|
37,942
|
|
Herbicides/soil fumigants/fungicides
|
|
|
32,185
|
|
|
|
20,021
|
|
Other, including plant growth regulators and distribution
|
|
|
17,840
|
|
|
|
3,392
|
|
|
|
|
91,318
|
|
|
|
61,355
|
|
Non-crop, including distribution
|
|
|
12,790
|
|
|
|
9,318
|
|
Total net sales:
|
|
$
|
104,108
|
|
|
$
|
70,673
|
|
Net sales:
|
|
|
|
|
|
|
|
|
US
|
|
$
|
69,815
|
|
|
$
|
52,244
|
|
International
|
|
|
34,293
|
|
|
|
18,429
|
|
Total net sales:
|
|
$
|
104,108
|
|
|
$
|
70,673
|
|
6.
Accrued Program Costs
—
The Company offers various discounts to customers based on the volume purchased within a defined time period, other pricing adjustments, some grower volume incentives or other key performance indicator driven payments made to distributors, retailers or growers, at the end of a growing season. The Company describes these payments as “Programs.” Programs are a critical part of doing business in both the US agricultural and non-crop chemicals market places. These discount Programs represent variable consideration. In accordance with ASC 606, revenue from sales is recorded at the net sales price, which is the transaction price, and includes estimates of variable consideration. Variable consideration includes amounts expected to be paid to its customers estimated using the expected value method. Each quarter management compares individual sale transactions with programs to determine what, if any, estimated program liability has been incurred. Once this initial calculation is made for the specific quarter, sales and marketing management, along with executive and financial management, review the accumulated program balance and, for volume driven payments, make assessments of whether or not customers are tracking in a manner that indicates that they will meet the requirements set out in agreed upon terms and conditions attached to each Program. Following this assessment, management will make adjustments to the accumulated accrual to properly reflect the Company’s best estimate of the liability at the balance sheet date. The majority of adjustments are made at, or close to, the end of the crop season, at which time customer performance can be more fully assessed. Programs are paid out predominantly on an annual basis, usually in the final quarter of the financial year or the first quarter of the following year. No significant changes in estimates were made during the three months ended March 31, 2018 and 2017, respectively.
7. The Company has declared and paid the following cash dividends in the periods covered by this Form 10-Q:
Declaration Date
|
|
Record Date
|
|
Distribution Date
|
|
Dividend
Per Share
|
|
|
Total
Paid
|
|
March 8, 2018
|
|
March 30, 2018
|
|
April 13, 2018
|
|
$
|
0.020
|
|
|
$
|
586
|
|
December 12, 2017
|
|
December 27, 2017
|
|
January 10, 2018
|
|
$
|
0.015
|
|
|
$
|
438
|
|
8. ASC 260
Earnings Per Share (“EPS”)
requires dual presentation of basic EPS and diluted EPS on the face of the condensed consolidated statements of operations. Basic EPS is computed as net income divided by the weighted average number of shares of common stock outstanding during the period. Diluted EPS reflects potential dilution that could occur if securities or other contracts, which, for the Company, consist of options to purchase shares of the Company’s common stock, are exercised.
11
The components of basic and diluted earnings per share were as follows
:
|
|
Three Months Ended
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income attributable to AVD
|
|
$
|
4,655
|
|
|
$
|
3,452
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted averages shares outstanding-basic
|
|
|
29,282
|
|
|
|
28,947
|
|
Dilutive effect of stock options and grants
|
|
|
690
|
|
|
|
707
|
|
|
|
|
29,972
|
|
|
|
29,654
|
|
For the three months ended March 31, 2018 and 2017, no stock options were excluded from the computation of diluted earnings per share.
9. The Company has a revolving line of credit that is shown as long-term debt in the condensed consolidated balance sheets at March 31, 2018 and December 31, 2017. The Company has no short term debt as of March 31, 2018 and December 31, 2017. The debt is summarized in the following table:
Long-term indebtedness ($000's)
|
|
March 31,
2018
|
|
|
December 31, 2017
|
|
Revolving line of credit
|
|
$
|
91,225
|
|
|
$
|
78,425
|
|
Deferred loan fees
|
|
|
(900
|
)
|
|
|
(939
|
)
|
Total indebtedness
|
|
$
|
90,325
|
|
|
$
|
77,486
|
|
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 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 March 31, 2018, based on its performance against the most restrictive covenants listed above, the Company had the capacity to increase its borrowings by up to $124,936, according to the terms of the Credit Agreement. This compares to an available borrowing capacity of $119,994 as of March 31, 2017. The level of borrowing capacity is driven by three factors: (1) our financial performance, as measured in EBITDA for both the trailing twelve month period and proforma basis arising from acquisitions, which have improved, (2) net borrowings, which have increased and (3) the leverage covenant (being the number of times EBITDA the Company may borrow under its credit facility agreement).
10. Reclassification—Certain items may have been reclassified in the prior period condensed consolidated financial statements to conform with the March 31, 2018 presentation.
11. Total comprehensive income includes, in addition to net income, changes in equity that are excluded from the condensed consolidated statements of operations and are recorded directly into a separate section of stockholders’ equity on the condensed consolidated balance sheets. For the three month period ended March 31, 2018, total comprehensive income consisted of net income attributable to American Vanguard and foreign currency translation adjustments.
12. Stock Based Compensation—The Company accounts for stock-based awards to employees and directors in accordance with FASB ASC 718, “
Share-Based Payment,
” which requires the measurement and recognition of compensation for all share-based
12
payment awards made
to employees and directors including shares of common stock granted for services, employee stock options, and employee stock purchases related to the Employee Stock Purchase Plan (“employee stock purchases”) based on estimated fair values.
The following tables illustrate the Company’s stock based compensation, unamortized stock-based compensation, and remaining weighted average period for the three months ended March 31, 2018 and 2017.
|
|
Stock-Based
Compensation
for the Three
months ended
|
|
|
Unamortized
Stock-Based
Compensation
|
|
|
Remaining
Weighted
Average
Period (years)
|
|
March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock
|
|
$
|
666
|
|
|
$
|
7,956
|
|
|
|
2.0
|
|
Unrestricted Stock
|
|
$
|
96
|
|
|
$
|
64
|
|
|
|
0.2
|
|
Performance Based Restricted Stock
|
|
|
547
|
|
|
|
3,562
|
|
|
|
2.4
|
|
Total
|
|
$
|
1,309
|
|
|
$
|
11,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive Stock Options
|
|
$
|
84
|
|
|
$
|
293
|
|
|
|
0.8
|
|
Restricted Stock
|
|
|
581
|
|
|
|
5,388
|
|
|
|
2.3
|
|
Unrestricted Stock
|
|
|
75
|
|
|
|
50
|
|
|
|
0.2
|
|
Performance Based Restricted Stock
|
|
|
300
|
|
|
|
2,385
|
|
|
|
2.5
|
|
Performance Based Options
|
|
|
40
|
|
|
|
128
|
|
|
|
0.8
|
|
Total
|
|
$
|
1,080
|
|
|
$
|
8,244
|
|
|
|
|
|
Option activity within each plan is as follows:
|
|
Incentive
Stock Option
Plans
|
|
|
Weighted
Average Price
Per Share
|
|
Balance outstanding, December 31, 2017
|
|
|
472,783
|
|
|
$
|
9.38
|
|
Options exercised
|
|
|
(40,923
|
)
|
|
|
11.49
|
|
Options forfeited
|
|
|
—
|
|
|
|
—
|
|
Balance outstanding, March 31, 2018
|
|
|
431,860
|
|
|
$
|
9.19
|
|
All outstanding awards were vested as of March 31, 2018 and the intrinsic value was $4,757.
Information relating to stock options at March 31, 2018, summarized by exercise price is as follows:
|
|
Outstanding Weighted
Average
|
|
Exercise Price Per Share
|
|
Shares
|
|
|
Remaining
Life
(Months)
|
|
|
Exercise
Price
|
|
Incentive Stock Option Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
$7.50
|
|
|
249,050
|
|
|
|
32
|
|
|
$
|
7.5
|
|
$11.32—$14.49
|
|
|
182,810
|
|
|
|
77
|
|
|
$
|
11.49
|
|
|
|
|
431,860
|
|
|
51
|
|
|
$
|
9.19
|
|
13
Common stock grants
—
A summary of non-vested shares as of and for the three months ended March 31, 2018 and 2017 is presented below:
|
|
Three Months Ended
March 31, 2018
|
|
|
Three Months Ended
March 31, 2017
|
|
|
|
Number
of Shares
|
|
|
Weighted
Average
Grant
Date Fair
Value
|
|
|
Number
of Shares
|
|
|
Weighted
Average
Grant
Date Fair
Value
|
|
Nonvested shares at December 31
st
|
|
|
391,753
|
|
|
$
|
15.63
|
|
|
|
324,756
|
|
|
$
|
14.75
|
|
Granted
|
|
|
254,972
|
|
|
|
19.97
|
|
|
|
251,475
|
|
|
|
16.10
|
|
Vested
|
|
|
(8,800
|
)
|
|
|
12.07
|
|
|
|
(10,100
|
)
|
|
|
12.95
|
|
Forfeited
|
|
|
(5,265
|
)
|
|
|
16.51
|
|
|
|
(6,544
|
)
|
|
|
15.26
|
|
Nonvested shares at March 31
st
|
|
|
632,660
|
|
|
$
|
17.42
|
|
|
|
559,587
|
|
|
$
|
15.38
|
|
Common stock grants — During the three months ended March 31, 2018, the Company issued a total of 254,972 shares of restricted common stock to employees. The shares will cliff vest after three years of service. The shares granted in 2018 were average fair valued at $19.97 per share. The fair value was determined by using the publicly traded share price at market close as of the date of grant. The Company will recognize as expense the value of restricted shares over the required service period.
During the three months ended March 31, 2017, the Company issued a total of 251,475 shares of restricted common stock to employees. The shares will cliff vest after three years of service. The shares granted in 2017 were average fair valued at $16.10 per share. The fair value was determined by using the publicly traded share price at market close as of the date the grant was approved. The Company will recognize as expense the value of restricted shares over the required service period.
As of March 31, 2018 and 2017, the Company had approximately $7,956 and $5,388, respectively, of unamortized stock-based compensation related to unvested restricted shares. This amount will be recognized over the weighted-average period of 2.0 and 1.4 years. This projected expense will change if any restricted shares are granted or cancelled prior to the respective reporting periods or if there are any changes required to be made for estimated forfeitures.
Performance Based Shares
—
A summary of non-vested performance based shares as of and for the three months ended March 31, 2018 and 2017, respectively is presented below:
|
|
Three Months Ended
March 31, 2018
|
|
|
Three Months Ended
March 31, 2017
|
|
|
|
Number
of Shares
|
|
|
Weighted
Average
Grant
Date Fair
Value
|
|
|
Number
of Shares
|
|
|
Weighted
Average
Grant
Date Fair
Value
|
|
Nonvested shares at December 31
st
|
|
|
186,057
|
|
|
$
|
14.93
|
|
|
|
119,022
|
|
|
$
|
14.18
|
|
Granted
|
|
|
122,446
|
|
|
|
18.14
|
|
|
|
121,194
|
|
|
|
15.40
|
|
Vested
|
|
|
(14,625
|
)
|
|
|
11.09
|
|
|
|
—
|
|
|
|
—
|
|
Forfeited
|
|
|
(1,765
|
)
|
|
|
15.40
|
|
|
|
—
|
|
|
|
—
|
|
Nonvested shares at March 31
st
|
|
|
292,113
|
|
|
$
|
16.46
|
|
|
|
240,216
|
|
|
$
|
14.80
|
|
Performance Based Shares — During the three months ended March 31, 2018, the Company issued a total of 122,446 performance based shares to employees.
The shares granted during the first quarter of 2018 have an average fair value of $18.14. The fair value was determined by using the publicly traded share price at market close as of the date of grant. The Company will recognize as expense the value of the performance based shares over the required service period from grant date.
The shares will cliff vest on March 9, 2021 with a measurement period commencing January 1, 2018 and ending December 31, 2020. Eighty percent of these performance based shares are based upon the financial performance of the Company, specifically, an earnings before income tax (“EBIT”) goal weighted at 50% and a net sales goal weighted at 30%. The remaining 20% of performance based shares are based upon AVD stock price appreciation over the same performance measurement period. The EBIT and net sales goals measure the relative growth of the Company’s EBIT and net sales for the performance measurement period, as compared to the median growth of EBIT and net sales for an identified peer group. The stockholder return goal measures the relative growth of the fair market value of the Company’s stock price over the performance measurement period, as compared to that of the Russell 2000 Index and the median fair market value of the common stock of the comparator companies, identified in the Company’s 2017 Proxy Statement. All parts of these awards vest in
14
three years, but are subject to reduction to a minimum (or even zero) for recording less than the targeted performance and to increase to a
maximum of 200% for achieving in excess of the targeted performance.
During the three months ended March 31, 2017, the Company issued a total of 121,194 performance based shares to employees.
The shares granted during the first quarter of 2018 have an average fair value of $15.40. The fair value was determined by using the publicly traded share price at market close as of the date of grant. The Company will recognize as expense the value of the performance based shares over the required service period from grant date.
The shares will cliff vest on February 8, 2020 with a measurement period commencing January 1, 2017 and ending December 31, 2019. Eighty percent of these performance based shares are based upon the financial performance of the Company, specifically, an earnings before income tax (“EBIT”) goal weighted at 50% and a net sales goal weighted at 30%. The remaining 20% of performance based shares are based upon AVD stock price appreciation over the same performance measurement period. The EBIT and net sales goals measure the relative growth of the Company’s EBIT and net sales for the performance measurement period, as compared to the median growth of EBIT and net sales for an identified peer group. The stockholder return goal measures the relative growth of the fair market value of the Company’s stock price over the performance measurement period, as compared to that of the Russell 2000 Index and the median fair market value of the common stock of the comparator companies, identified in the Company’s 2016 Proxy Statement. All parts of these awards vest in three years, but are subject to reduction to a minimum (or even zero) for recording less than the targeted performance and to increase to a maximum of 200% for achieving in excess of the targeted performance.
As of March 31, 2018, performance based shares related to earnings before income tax (“EBIT”) and net sales have an average fair value of $19.95 per share. The fair value was determined by using the publicly traded share price at market close as of the date of grant. The performance based shares related to the Company’s stock price have an average fair value of $16.49 per share. The fair value was determined by using the Monte Carlo valuation method. For awards with performance conditions, the Company recognizes share-based compensation cost on a straight-line basis for each performance criteria over the implied service period.
As of March 31, 2018 and 2017, the Company had approximately $3,562 and $2,385, respectively, of unamortized stock-based compensation expense related to unvested performance based shares. This amount will be recognized over the weighted-average period of 2.4 and 1.3 years. This projected expense will change if any performance based shares are granted or cancelled prior to the respective reporting periods or if there are any changes required to be made for estimated forfeitures.
Performance Incentive Stock Options—During the three months ended March 31, 2018 and 2017, the Company did not grant any employees performance incentive stock options to acquire shares of common stock.
Performance option activity is as follows:
|
|
Incentive
Stock Option
Plans
|
|
|
Weighted
Average Price
Per Share
|
|
Balance outstanding, December 31, 2017 and March 31, 2018
|
|
|
81,666
|
|
|
$
|
11.49
|
|
All outstanding awards were vested as of March 31, 2018 and the intrinsic value was $711.
Information relating to stock options at March 31, 2018 summarized by exercise price is as follows:
|
|
Outstanding Weighted
Average
|
|
Exercise Price Per Share
|
|
Shares
|
|
|
Remaining
Life
(Months)
|
|
|
Exercise
Price
|
|
Performance Incentive Stock Option Plan:
|
|
|
81,666
|
|
|
|
81
|
|
|
$
|
11.49
|
|
In March 2016, FASB issued ASU 2016-09,
Compensation—Stock Compensation (ASC 718)
. The new standard changes the accounting for certain aspects of share-based payments to employees. The standard requires the recognition of the income tax effects of awards in the income statement when the awards vest or are settled, thus eliminating additional paid in capital (“APIC”) pools. The standard also allows for the employer to repurchase more of an employee’s shares for tax withholding purposes without triggering liability accounting. Cash paid by an employer when directly withholding shares for tax-withholding purposes should be classified as a financing activity in the statement of cash flows. In addition, the standard allows for a policy election to account for forfeitures as they occur rather than on an estimated basis. The new standard is effective for fiscal years beginning after December 15, 2016 with early adoption permitted. The Company adopted this new standard effective as of January 1, 2017. The impact of this adoption was not material.
15
13. Legal Proceedings— During the reporting period, there have been no material developments in legal proceedings that were reported in the Company’s Form 10-K for the year ended December 31, 2017, except as described below.
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 held 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, 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, on March 15, 2018 ruled on the matter, finding that federal court dismissal in 1995 on the grounds of forum non conveniens did not end class action tolling, and that such tolling ended when class action certification was denied in Texas state court in June 2010. This ruling has been transmitted to the Third Circuit Court. Presumably, then, the litigation will proceed at the district court. The Company believes that a loss is neither probable nor reasonably estimable in these matters and has not recorded a loss contingency.
Chavez.
In June, 2012, several matters were filed against AMVAC and several co-defendants with the United States District Court for the District of Delaware (DC-1-12-CV-00697 through 00702) under the lead name Chavez (which matters were later consolidated). These cases involve 219 claimants from Panama, Ecuador and Costa Rica who claim physical injury arising from the use of DBCP over the course of the late 1960’s through early 1980’s. In light of the fact that identical matters had been filed previously in the Louisiana courts, the District Court in Chavez dismissed the actions in August 2012. Plaintiffs appealed the dismissal, and, in September, 2016, the Third Circuit Court of Appeals vacated the dismissal, finding that it was improper for the trial court to have dismissed the matters, given that the cases in Louisiana had been dismissed before a ruling on the merits. The matter remained inactive and was stayed in June, 2017, when (as reported in Abad Castillo and Marquinez, above), the Third Circuit submitted a certified question of law to the Delaware Supreme Court on whether the tolling period for the statute of limitations had ended. In light of the ruling of the Delaware Supreme Court that the tolling period had not ended, the stay on the Chavez case is effectively lifted, and the matter will proceed to be litigated. No discovery has been conducted in Chavez. The Company intends to defend the matter vigorously. Further, the Company believes that a loss is neither probably nor reasonably estimable and has not recorded a loss contingency.
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 States 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. On March 21, 2018, the District Court in Tennessee ruled on the motion, granting the Company’s request to transfer venue to the United States District Court for the Central District of California (finding that the forum selection clauses in the relevant contracts applied), but denying the request to dismiss the matter. 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.
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. Four of those interviews took place at the end of April, 2018. At this stage, however, 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.
16
14.
Recently Issued Accounting Guidance— In
February 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-02,
Income Statement-Reporting Comprehensive Income (ASC 220)
. On December 22, 2017, the U.S federal government signed into law the Tax Cuts
and Jobs Act (the “Tax Reform Act”). The current generally accepted accounting principles (“GAAP”) requires deferred tax liabilities and assets to be adjusted for the effect of a change in tax laws or rates with the effect included in income from continui
ng operations in the reporting period that includes the enactment date. That guidance is applicable even in situations where the related income tax effects of items in accumulated other comprehensive income were originally recognized in other comprehensiv
e income (rather than in income from continuing operations). The standard allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Reform Act, eliminating the stranded tax e
ffects. The update does not affect the requirement on the effect of a change in tax laws or rates be included in income from continuing operations. The Company will evaluate the impact of this update.
In January 2018, the FASB released guidance on the accounting for tax on the global intangible low-taxed income (“GILTI”) provisions of the Tax Cuts and Jobs Act (the “Act”). The GILTI provisions imposed a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. The Company has considered options regarding the accounting treatment for any potential GILTI inclusions and has elected to treat such inclusions as period costs.
In January 2017, the FASB issued ASU 2017-04,
Intangibles-Goodwill and Other (ASC 350).
The FASB eliminated the Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Under this update, an entity should perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount the carrying amount exceeds the reporting unit’s fair value. This update is effective for fiscal years beginning after December 15, 2019 with early adoption permitted after January 1, 2017. The Company will evaluate the impact of this update.
In October 2016, FASB issued ASU 2016-16,
Income Taxes (ASC 740)
. Current US GAAP prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. Under the new standard, an entity is to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The new standard does not include new disclosure requirements; however, existing disclosure requirements might be applicable when accounting for the current and deferred income taxes for an intra-entity transfer of an asset other than inventory. The new standard is effective for annual periods beginning after December 15, 2017, including interim reporting periods within those annual periods. In the year beginning January 1, 2018, the Company adopted ASU 2016-16 and recorded the impact ($180) as an adjustment to retained earnings.
In August 2016, FASB issued ASU 2016-15,
Statement of Cash Flows (ASC 230)
. The new standard addresses eight specific classification issues within the current practice regarding the manner in which certain cash receipts and cash payments are presented. The new standard is effective for fiscal years beginning after December 15, 2017, with early adoption permitted. The Company adopted the standard for the year beginning January 1, 2018. There was no material impact on the Company’s statement of cash flows for the period ended March 31, 2018 and the Company does not expect any material impact going forward.
In February 2016, FASB issued ASU 2016-02,
Leases
.
The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the consolidated financial statements, with certain practical expedients available. We are currently evaluating our operating lease arrangements to determine the impact of this amendment on the consolidated financial statements,
but we expect this adoption will result in a material increase in the assets and liabilities on our consolidated balance sheet.
We have not determined if the adoption of this standard will materially impact our operating results. The evaluation will include an extensive review of our leases, which are primarily related to our manufacturing sites, regional sales offices, lease vehicles, and office equipment. The ultimate impact will depend on the Company’s lease portfolio at the time the new standard is adopted.
The Company will adopt ASU 2016-02 for the year beginning on January 1, 2019.
In January 2016, the FASB issued ASU 2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities." The amendment requires (i) equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income, (ii) public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes and (iii) separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables). This amendment eliminates the
17
requirement for public business entities to disclose the method(s) and significant assumpti
ons used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. This amendment is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within
those fiscal years. The Company adopted the provisions of ASU 2016-01 on January 1, 2018 and has elected to measure its cost method investment without a readily determinable fair value at its cost minus impairment, if any, plus or minus changes resulting
from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. There were no observable price changes in the quarter ended March 31, 2018. If there are any observable price changes related to this inve
stment or a similar investment of the same issuer in fiscal years beginning after December 15, 2017, the Company would be required to assess the fair value impact, if any, on each class of stock, and write the individual security interest up or down to its
estimated fair value, which could have a significant effect on the Company's financial position and results of operations.
In September 2015, FASB issued ASU 2015-16,
Business Combination (Topic 805).
Under a Business Combination, GAAP requires that during the measurement period, the acquirer retrospectively adjusts the provisional amounts recognized at the acquisition date with a corresponding adjustment to goodwill. Those adjustments are required when new information is obtained about facts and circumstances that existed as of the acquisition date that if known, would have affected the measurement of the amounts initially recognized or would have resulted in the recognition of additional assets or liabilities. The acquirer also must revise comparative information for prior periods presented in financial statements as needed, including revising depreciation, amortization, or other income effects as a result of changes made to provisional amounts. The amendments in this ASU eliminate the requirement to retrospectively account for those adjustments. The new standard is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The Company adopted the ASU 2015-16 as of January 1, 2016. During the first quarter of 2018, the Company completed the tax returns for its AgriCenter acquisition for the tax year ended December 31, 2017 and determined that it was liable for certain taxes associated with the transfer of assets as part of the acquisition. Furthermore, there was one minor item that was adjusted following negotiation with the seller and the Company adjusted goodwill by $799.
15. Fair Value of Financial Instruments—The carrying values of cash, receivables and accounts payable approximate their fair values because of the short maturity of these instruments. The fair value of the Company’s long-term debt payable to the bank is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. Such fair value approximates the respective carrying values of the Company’s long-term debt payable to bank.
16. Accumulated Other Comprehensive Income (“AOCI”)
—
The following table lists the beginning balance, annual activity and ending balance of accumulated other comprehensive loss, which consists of foreign currency translation adjustments:
|
|
Total
|
|
Balance, December 31, 2016
|
|
$
|
(4,851
|
)
|
FX translation
|
|
|
344
|
|
Balance, December 31, 2017
|
|
|
(4,507
|
)
|
FX translation
|
|
|
672
|
|
Balance, March 31, 2018
|
|
$
|
(3,835
|
)
|
17. Equity Method Investments
—
TyraTech Inc. (“TyraTech”) is a Delaware corporation that specializes in developing, marketing and selling pesticide products containing natural oils. In January 2018, TyraTech finalized a stock repurchase in which the Company’s ownership position in TyraTech increased from approximately 15.11% to 34.38%. The Company utilizes the equity method of accounting with respect to this investment. As a result, our net income includes income and losses from equity method investments, which represents our proportionate share of TyraTech’s estimated net losses for the current accounting period. For the three months ended March 31, 2018, the Company recognized net losses of $96 as a result of the Company’s ownership position in TyraTech. The Company recognized losses of $42 for the three months ended March 31, 2017.
On June 27, 2017, both Amvac Netherlands BV and Huifeng Agrochemical Company, Ltd (“Huifeng”) made individual capital contributions of $950 to the Huifeng Amvac Innovation Co. Ltd (“Hong Kong Joint Venture”). As of March 31, 2018, the Company’s ownership position in the Hong Kong Joint Venture was 50%. The Company utilizes the equity method of accounting with respect to this investment. On July 7, 2017, the Hong Kong Joint Venture purchased the shares of Profeng Australia, Pty Ltd.(“Profeng”), for a total consideration of $1,900. The purchase consists of Profeng Australia, Pty Ltd Trustee and Profeng Australia Unit Trust. Both Trust and Trustee were previously owned by Huifeng via its wholly owned subsidiary Shanghai Biological Focus center. For the three months ended March 31, 2018, the Company recognized losses of $121, as a result of the Company’s ownership position in the Hong Kong Joint Venture. There were no similar losses recognized in the prior year comparative period.
In February 2016, AMVAC Netherlands BV made an investment in Biological Products for Agriculture (“Bi-PA”). Bi-PA develops biological plant protection products that can be used for the control of pests and disease of agricultural crops. As of March
18
31, 2018, the Company’s ownership position in Bi-PA was 15%.
The Company adopted the provisions of ASU 2016-01 on January 1, 2018 and has elected to measure its cost method investment without a readily determinable fair value at its cost min
us impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. There were no observable price changes in the quarter ended March 31, 2018.
There w
ere no observable price changes in the quarter ended March 31, 2018. There was no impairment on the investment as of March 31, 2018. The investment is not material and is recorded within other assets on the condensed consolidated balance sheets.
18. Income Taxes – Income tax expense was $1,692 for the three months ended March 31, 2018, as compared to $1,380 for the three months ended March 31, 2017. The effective tax rate for the three months ended March 31, 2018 and 2017 was 26.0% and 28.5%, respectively. The effective tax rate is based on the projected income for the full year and is subject to ongoing review and adjustment by management.
In December 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) made broad and complex changes to the U.S. tax code, including, but not limited to, (i) reducing the U.S. federal corporate tax rate from 35 percent to 21 percent; and (ii) requiring companies to pay a one-time transition tax on certain unremitted earnings of foreign subsidiaries. The Tax Act also established new tax laws that affect 2018, including, but not limited to: (i) the reduction of the U.S. federal corporate tax rate discussed above; (ii) a general elimination of U.S. federal income taxes on dividends from foreign subsidiaries; (iii) a new provision designed to tax global intangible low-taxed income (“GILTI”); (iv) the repeal of the domestic production activity deductions; (v) limitations on the deductibility of certain executive compensation; and (vi) limitations on the use of foreign tax credits to reduce the U.S. income tax liability.
On December 22, 2017, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Act. For the three months ended March 31, 2018, the Company did not obtain additional information affecting the provisional amount initially recorded for the transition tax for the three months ended December 31, 2017. As a result, the Company has not recorded an adjustment to the transition tax. Additional work is still necessary for a more detailed analysis of the Company's deferred tax assets and liabilities and its historical foreign earnings as well as potential correlative adjustments. Any subsequent adjustment to these amounts will be recorded to current tax expense in the quarter of 2018 when the analysis is complete.
19