| Description of Business, Basis of Consolidation, Basis of Presentation and Significant Accounting Policies | Description of Business, Basis of Consolidation, Basis of Presentation and Significant Accounting Policies American Vanguard Corporation (the “Company”) is primarily a specialty chemical manufacturer that develops and markets safe and effective products for agricultural, commercial and consumer uses. The Company manufactures and formulates chemicals for crops, human and animal protection. The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and Envance, its majority owned subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation. The Company operates within a single operating category. Based on similar economic and operational characteristics, the Company’s business is aggregated into one reportable category. Selective enterprise information is as follows:
2017
2016
2015
Net sales:
Insecticides
$
132,137
$
119,226
$
117,180
Herbicides/soil fumigants/fungicides
121,581
123,540
111,897
Other, including plant growth regulators
47,691
29,438
29,013
Total crop
301,409
272,204
258,090
Non-crop
53,638
39,909
31,292
$
355,047
$
312,113
$
289,382
Gross profit:
Crop
$
117,892
$
107,821
$
97,198
Non-crop
29,500
20,467
14,704
$
147,392
$
128,288
$
111,902
Due to elements inherent to the Company’s business, such as differing and unpredictable weather patterns, crop growing cycles, changes in product mix of sales and ordering patterns that may vary in timing, measuring the Company’s performance on a quarterly basis (for example, gross profit margins on a quarterly basis may vary significantly) even when such comparisons are favorable, is not as good an indicator as full-year comparisons. Reclassifications — Certain prior years’ amounts have been reclassified to conform to the current year’s presentation. Cost of Sales— In addition to normal cost centers (i.e., direct labor, raw materials), the Company also includes such cost centers as Health and Safety, Environmental, Maintenance and Quality Control in cost of sales. Operating Expenses— Operating expenses include cost centers for Selling, General and Administrative, Research, Product Development, and Regulatory, and Freight, Delivery and Warehousing.
2017
2016
2015
Selling
$
29,112
$
27,442
$
27,052
General and administrative
37,660
32,128
28,516
Research, product development and regulatory
26,076
21,298
19,116
Freight, delivery and warehousing
27,750
26,880
25,694
$
120,598
$
107,748
$
100,378
Advertising Expense— The Company expenses advertising costs in the period incurred. Advertising expenses, which include promotional costs, are recognized in operating costs (specifically in selling expenses) in the consolidated statements of operations and were $3,020 in 2017, $2,271 in 2016 and $3,535 in 2015. Cash and cash equivalents— The Company’s cash and cash equivalents consist primarily of certificates of deposit with an initial term of less than three months. For purposes of the consolidated statements of cash flows, the Company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents. Inventories — The Company values its inventories at lower of cost or net realizable value. Cost is determined by the first-in, first-out (“FIFO”) method, including material, labor, factory overhead and subcontracting services. The Company writes down and makes adjustments to its inventory carrying values as a result of net realizable value assessments of slow moving and obsolete inventory and other annual adjustments to ensure that our standard costs continue to closely reflect manufacturing cost. The Company recorded an inventory reserve allowance of $3,137 at December 31, 2017, as compared to $3,594 at December 31, 2016. The components of inventories consist of the following:
2017
2016
Finished products
$
107,595
$
103,832
Raw materials
15,529
16,744
$
123,124
$
120,576
Revenue Recognition and Allowance for Doubtful Accounts— Revenue from sales is recognized at the time title and the risks of ownership pass. This is when the customer has made the fixed commitment to purchase the goods, the products are shipped per the customer’s instructions, the sales price is fixed and determinable, and collection is reasonably assured. The Company has in place procedures to ensure that revenue is recognized when earned. The procedures are subject to management’s review and from time to time certain sales are excluded until it is clear that the title has passed and there is no further recourse to the Company. 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. Allowance for doubtful accounts is established based on estimates of losses related to customer receivable balances. Estimates are developed using either standard quantitative measures based on historical losses, adjusted for current economic conditions or by evaluating specific customer accounts for risk of loss. Accrued Program Costs— In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 605, the Company classifies certain payments to its customers as a reduction of sales revenues. The Company describes these payments as “Programs”. Programs are a critical part of doing business in the U.S. agricultural chemicals business market place. For accounting purposes, programs are recorded as a reduction in gross sales and include market pricing adjustments, volume take up or other key performance indicator driven payments made to distributors, retailers or growers predominantly at the end of a growing season. Each quarter management compares each sale transaction with program guidelines to determine what 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 make assessments of whether or not customers are tracking in a manner that indicates that they will meet the requirements set out in the terms and conditions attached to each program. If management believes that customers are falling short of or exceeding their previously anticipated annual goals, then periodic adjustments will be made 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 the end of the crop season, at which time customer performance can be fully assessed. Programs are paid out predominantly on an annual basis, usually in the final quarter of the financial year or the first quarter of the following year. The Company recorded accrued program costs of $39,054 at December 31, 2017, as compared to $42,930 at December 31, 2016. Long-lived Assets— Long-lived assets primarily consist of the costs of intangible assets and of proprietary returnable packaging assets including Smartbox and Lock and Load containers. The carrying value of long-lived assets is reviewed for impairment quarterly and/or whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. The Company evaluates recoverability of an asset group by comparing the carrying value to the future undiscounted cash flows that it expects to generate from the asset group. If the comparison indicates that the carrying value of an asset group is not recoverable, measurement of the impairment loss is based on the fair value of the asset. There were no circumstances that would indicate any impairment of the carrying value of these long-lived assets and no material impairment losses were recorded in 2017 or 2016. Property, Plant and Equipment and Depreciation— Property, plant and equipment includes the cost of land, buildings, machinery and equipment, office furniture and fixtures, automobiles, construction projects and significant improvements to existing plant and equipment. Interest costs related to significant construction projects are capitalized at the Company’s current weighted average effective interest rate. Expenditures for minor repairs and maintenance are expensed as incurred. When property or equipment is sold or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts and the gain or loss realized on disposition is reflected in earnings. All plant and equipment is depreciated using the straight-line method, utilizing the estimated useful property lives. See note 1 for useful lives. Foreign Currency Translation— Assets and liabilities of foreign subsidiaries, where the local currency is the functional currency, have been translated at period end exchange rates, and profit and loss accounts have been translated using weighted average yearly exchange rates. Adjustments resulting from translation have been recorded in the equity section of the balance sheet as cumulative translation adjustments in other comprehensive income (loss). The effects of foreign currency exchange gains and losses on transactions that are denominated in currencies other than the Company’s functional currency, including transactions denominated in the local currencies of the Company’s international subsidiaries where the functional currency is the U.S. dollar, are remeasured to the functional currency using the end of the period exchange rates. The effects of remeasurement related to foreign currency transactions are included in the consolidated statements of operations. Goodwill and Other Intangible Assets— The primary identifiable intangible assets of the Company relate to assets associated with its product and business acquisitions. The Company adopted the provisions of ASC 350, under which identifiable intangibles with finite lives are amortized and those with indefinite lives are not amortized. The estimated useful life of an identifiable intangible asset to the Company is based upon a number of factors including the effects of demand, competition, and expected changes in the marketability of the Company’s products. The Company re-evaluates whether these intangible assets are impaired on both a quarterly and an annual basis and anytime when there is a specific indicator for impairment, relying on a number of factors including operating results, business plans and future cash flows. Identifiable intangible assets that are subject to amortization are evaluated for impairment using a process similar to that used to evaluate long-lived assets. The impairment test for identifiable intangible assets not subject to amortization consists of either a qualitative assessment or a comparison of the fair value of the intangible asset with its carrying amount. An impairment loss, if any, is recognized for the amount by which the carrying value exceeds the fair value of the asset. Fair value is typically estimated using a discounted cash flow analysis. When determining future cash flow estimates, the Company considers historical results adjusted to reflect current and anticipated operating conditions. Estimating future cash flows requires significant judgment by the Company, in such areas as: future economic conditions, industry-specific conditions, product pricing and necessary capital expenditures. The use of different assumptions or estimates for future cash flows could produce different impairment amounts (or none at all) for long-lived assets, goodwill and identifiable intangible assets. The Company performed impairment reviews for the years ended December 31, 2017 and 2016 and recorded immaterial impairment losses. The Company reviews goodwill for impairment utilizing either a qualitative assessment or a two-step process. If the Company decides that it is appropriate to perform a qualitative assessment and concludes that the fair value of a reporting unit more likely than not exceeds its carrying value, no further evaluation is necessary. If the Company performs the two-step process, the first step of the goodwill impairment test is used to identify potential impairment by comparing the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired and the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step is performed to measure the amount of impairment by comparing the carrying amount of the goodwill to a determination of the implied value of the goodwill. If the carrying amount of goodwill is greater than the implied value, an impairment charge is recognized for the difference. The Company annually tests goodwill for impairment in beginning of the fourth quarter. Income Taxes— The Company utilizes the liability method of accounting for income taxes as set forth in ASC 740. Under the liability method, deferred taxes are determined based on the temporary differences between the financial statement and tax basis of assets and liabilities using tax rates expected to be in effect during the years in which the basis differences reverse. A valuation allowance is recorded when it is more likely than not that some of the deferred tax assets will not be realized. In determining the need for valuation allowances, the Company considers projected future taxable income and the availability of tax planning strategies. If in the future the Company determines that it would not be able to realize its recorded deferred tax assets, an increase in the valuation allowance would be recorded, decreasing earnings in the period in which such determination is made. The Company assesses its income tax positions and records tax benefits for all years subject to examination based upon the Company’s evaluation of the facts, circumstances and information available at the reporting date. For those tax positions where there is greater than 50% likelihood that a tax benefit will be sustained, the Company has recorded the largest amount of tax benefit that may potentially be realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where there is less than 50% likelihood that a tax benefit will be sustained, no tax benefit has been recognized in the consolidated financial statements. At December 31, 2017 and 2016, the Company recorded unrecognized tax benefits of $2,118 and $1,893, respectively. Per Share Information— FASB ASC 260 requires dual presentation of basic earnings per share (“EPS”) and diluted EPS on the face of all 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 to EPS that could occur if securities or other contracts, which, for the Company, consists of restricted stock grants and options to purchase shares of the Company’s common stock, are exercised as calculated using the treasury stock method. The components of basic and diluted earnings per share were as follows:
2017
2016
2015
Numerator:
Net income attributable to American Vanguard
$
20,274
$
12,788
$
6,591
Denominator:
Weighted average shares outstanding—basic
29,100
28,859
28,673
Dilutive effect of stock options and grants
603
535
564
29,703
29,394
29,237
For the years ended December 31, 2017, 2016, and 2015 no options were excluded from the computation. Accounting Estimates— The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses at the date that the consolidated financial statements are prepared. Significant estimates relate to the allowance for doubtful accounts, inventory reserves, impairment of long-lived assets, accrued program costs, and stock based compensation. Actual results could materially differ from those estimates. Total comprehensive income— In addition to net income, total comprehensive income includes changes in equity that are excluded from the consolidated statements of operations and are recorded directly into a separate section of stockholders’ equity on the consolidated balance sheets. For the years ended December 31, 2017, 2016, and 2015 total comprehensive income consisted of net income attributable to American Vanguard and foreign currency translation adjustments. Stock-Based Compensation— The Company accounts for stock-based awards to employees and directors pursuant to ASC 718. When applying the provisions of ASC 718, the Company also applies the provisions of Staff Accounting Bulletin (“SAB”) No. 107 and SAB No. 110. ASC 718 requires companies to estimate the fair value of share-based payment awards on the date of grant. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s Consolidated Statements of Operations. Stock-based compensation expense recognized during the period is based on the fair value of the portion of share-based payment awards that is ultimately expected to vest during the period. Stock-based compensation expense recognized is reduced for estimated forfeitures pursuant to ASC 718. Estimated forfeitures recognized in the Company’s Consolidated Statements of Operations reduced compensation expense by $177, $118, and $144 for the years ended December 31, 2017, 2016, and 2015, respectively. The Company estimates that 15.1% of all restricted stock grants, 15.1% of the performance based restricted shares and 4.5% of all stock option grants that are currently vesting will be forfeited. These estimates are reviewed quarterly and revised as necessary. The below tables illustrate the Company’s stock based compensation, unamortized stock-based compensation, and remaining weighted average period for the years ended December 31, 2017, 2016 and 2015. This projected expense will change if any stock options and restricted stock are granted or cancelled prior to the respective reporting periods, or if there are any changes required to be made for estimated forfeitures.
Stock-Based Compensation
Unamortized Stock-Based Compensation
Remaining Weighted Average Period (years)
December 31, 2017
Incentive Stock Options
$
345
$
—
—
Performance Based Options
416
—
—
Restricted Stock
2,705
3,788
1.0
Performance Based Restricted Stock
1,248
1,642
1.8
Total
$
4,714
$
5,430
December 31, 2016
Incentive Stock Options
$
354
$
397
1.0
Performance Based Options
188
178
1.0
Restricted Stock
1,630
2,153
1.6
Performance Based Restricted Stock
995
796
1.7
Total
$
3,167
$
3,524
December 31, 2015
Incentive Stock Options
$
431
$
887
2.0
Performance Based Options
149
331
2.0
Restricted Stock
2,972
2,153
1.3
Performance Based Restricted Stock
329
583
1.5
Total
$
3,881
$
3,954
The Company uses the Black-Scholes option-pricing model (“Black-Scholes model”) to value option grants using the following weighted average assumptions (i.e. risk free interest rate, dividend yield, volatility and average lives). There were no option shares granted during 2017, 2016 or 2015. The expected volatility and expected life assumptions are highly complex and use subjective variables. The variables take into consideration, among other things, actual and projected employee stock option exercise behavior. The Company estimates the expected term or vesting period using the “safe harbor” provisions of SAB 107 and SAB 110. The Company used historical volatility as a proxy for estimating expected volatility. The Company values restricted stock grants using the Company’s traded stock price on the date of grant. The weighted average grant-date fair values of restricted stock grants during 2017, 2016, and 2015 were $16.24, $15.22, and $12.68, respectively. 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 (Topic 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 continuing 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 comprehensive 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 effects. 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 update is effective for fiscal years beginning after December 15, 2018. The Company will evaluate the impact of this update for its adoption. In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350). In January 2017, the FASB issued ASU 2017-01, Business Combination (Topic 805). In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230) In August 2016, FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) In October 2016, FASB issued ASU 2016-16, Income Taxes (Topic 740) In February 2016, FASB issued ASU 2016-02, Leases In May 2014, FASB issued ASU 2014-09, Revenue from Contracts with Customers The Company will adopt the new revenue standard as of January 1, 2018 using the modified retrospective method. The Company has substantially completed its analysis of the effect of the adoption of Topic 606 on its revenue streams, which included a detailed contract review to evaluate whether the adoption will result in a change in the timing or amount of revenue recognition. As a result of the analysis performed thus far, 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 will now be 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 was previously recognized over time. For certain licenses that are considered functional intellectual property, the Company will change to a point in time recognition. The Company currently estimates that gross revenues of approximately $3,000, that would have otherwise been reflected in the consolidated statement of operations in future years, will be recorded in equity as part of a cumulative effect adjustment, and will increase retained earnings by approximately $2,370, net of taxes, when we adopt Topic 606 as of January 1, 2018. The new standard also requires enhanced disclosures related to the disaggregation of revenue, information about contract balances, and other disclosures about contracts with customers, including revenue recognition policies to identify performance obligations and significant judgments in measurement and recognition. The estimated impact of adopting Topic 606 is based on the Company’s best estimates at the time of the preparation of this Annual Report Form 10-K. The actual impact is subject to change and completion of the analysis prior to the first quarter 2018 Form 10-Q filing. |
