| 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” or “AVD”) 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 and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The Company operates within a single operating category. All U.S. dollar amounts reflected in the notes to the consolidated financial statements are presented in thousands, except per share data. The Company is closely monitoring the impact of the novel coronavirus (COVID-19) pandemic on all aspects of its business, including how the pandemic has impacted, and will likely impact, its customers, business partners, and employees. The Company is considered an essential business by most governments in the jurisdictions and territories in which the Company operates and, as a result, did not incur significant disruptions from the COVID-19 pandemic during the year ended December 31, 2020. However, the Company can identify a number of effects on its overall performance as a result of the coronavirus. While none of them alone is material, taken together, they would constitute several million dollars in lost sales opportunities and an indeterminate level of profitability. First, while the Company has recorded strong sales of new products, particularly soybean and rice herbicides, the Company believes that those sales would likely have been higher but for the fact that the Company was constrained from holding in-person meetings with existing and potential new customers to promote those products. Second, demand for certain commodities – specifically, corn, potatoes and fruits and vegetables – have experienced a drop from restaurants that have been closed (in whole or in part) due to the coronavirus. This, in turn, has softened demand for some of the Company’s products that are used on those crops and could affect future contracts. Third, local currencies in Brazil, Mexico and Australia suffered a significant decline in value versus the US dollar during the first quarter of the year, which, in turn, has affected both sales and to a lesser extent profitability of our international business. These key currencies (from the Company’s perspective) somewhat stabilized and partially recovered during the second, third, and fourth quarter of the year. Further, while it is not possible to identify all of the reasons for the fluctuation in exchange rates with certainty, it is not unreasonable to include the pandemic among its causes. Looking forward, the Company is unable to predict the impact that the pandemic may have on its future financial condition, results of operations and cash flows due to numerous uncertainties. The extent to which the COVID-19 pandemic impacts the Company’s operations and those of its customers in the near term will depend on future developments, which are highly uncertain and, beyond extrapolating our experience over the past year, cannot be predicted with confidence. The Company continues to monitor its business for adverse impacts of the pandemic, including volatility in the foreign exchange markets, demand, supply-chain disruptions in certain markets, and increased costs of employee safety, among others. We believe that the combination of our cash flows from future operations, current cash on hand and the availability under the Company’s credit facility will be sufficient to meet our working capital and capital expenditure requirements and will provide us with adequate liquidity to meet our anticipated operating needs for at least the next 12 months from the issuance of the Annual Report. Although operating activities are expected to provide cash, to the extent of growth in the future, our operating and investing activities will use cash and, consequently, this growth may require us to access some or all of the availability under the credit facility. It is also possible that additional sources of finance may be necessary to support additional growth. Based on similar economic and operational characteristics, the Company’s business is aggregated into one reportable category. Selective enterprise information is as follows:
2020
2019
2018
Net sales:
U.S. crop
$
223,167
$
220,635
$
240,855
U.S. non-crop
48,557
61,590
59,459
Total U.S.
271,724
282,225
300,314
International
186,980
185,961
153,958
Total net sales
$
458,704
$
468,186
$
454,272
Gross profit:
U.S. crop
$
98,340
$
95,429
$
110,172
U.S. non-crop
22,225
29,713
30,714
Total U.S.
120,565
125,142
140,886
International
52,025
52,212
41,745
Total gross profit
$
172,590
$
177,354
$
182,631
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— Cost of sales is the Company’s capitalized cost of inventory procurement and production that is sold in the respective periods. These costs include direct labor, materials, and manufacturing overhead, Additionally 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.
2020
2019
2018
Selling
$
42,389
$
45,121
$
39,585
General and administrative
48,828
46,593
42,981
Research, product development and regulatory
26,310
24,070
26,428
Freight, delivery and warehousing
36,812
35,349
34,616
$
154,339
$
151,133
$
143,610
Advertising Expense— The Company expenses advertising costs in the period incurred. Advertising expenses, which include promotional costs, are recognized in operating expenses (specifically in selling expenses) in the consolidated statements of operations and were $4,833, $5,520 and $4,865 in 2020, 2019 and 2018, respectively Cash and cash equivalents— The Company’s 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”) or average cost method, including material, labor, factory overhead and subcontracting services. The Company writes down 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 actual cost. The Company recorded an inventory reserve allowance of $2,868 and $2,130 at December 31, 2020 and 2019, respectively. The components of inventories, net of reserve allowance, consist of the following:
2020
2019
Finished products
$
149,415
$
151,917
Raw materials
14,369
11,396
$
163,784
$
163,313
Leases — The Company has operating leases for warehouses, manufacturing facilities, offices, cars, railcars and certain equipment. On January 1, 2019, the Company adopted the accounting and adoption guidance in Accounting Standards Codification (“ASC”) 842, Leases, for its operating leases resulting in the recognition of operating lease right-of-use (“ROU”) assets and lease liabilities on the effective date. The Company measures ROU assets throughout the lease term at the carrying amount of the lease liability, plus initial direct costs, plus (minus) any prepaid (accrued) lease payments, less the unamortized balance of lease incentives received. The lease liabilities are measured at the present value of the unpaid lease payments at the lease commencement date. Leases that include both lease and non-lease components are accounted for as a single lease component for each asset class, except for warehouse leases. The minimum payments under operating leases are recognized on a straight-line basis over the lease term in the consolidated statements of operations. Operating lease expenses related to variable lease payments are recognized in cost of sales or as operating expenses in a manner consistent with the nature of the underlying lease and as the events, activities, or circumstances in the lease agreement occur. Leases with a term of less than 12 months are not recognized on the consolidated balance sheets, and the related lease expenses are recognized in the consolidated statements of operations on a straight-line basis over the lease term. The accounting for leases requires management to exercise judgment and make estimates in determining the applicable discount rate, lease term and payments due under a lease. Most of our leases do not provide an implicit interest rate, nor is it available to us from our lessors. As an alternative, the Company uses our estimated incremental borrowing rate, which is derived from information available at the lease commencement date, including publicly available data, in determining the present value of lease payments. The Company also estimated the fair value of the lease and non-lease components for some of our warehouse leases based on market data and cost data. The lease term includes the non-cancellable period of the lease plus any additional periods covered by either an option to extend (or not terminate) that the Company is reasonably certain to exercise. The Company has leases with a lease term ranging from 1 year to 20 years. The operating leases of the Company do not contain major restrictions or covenants such as those relating to dividends or additional financial obligations. Finance leases are immaterial to the consolidated financial statements. There were no lease transactions with related parties during 2020 and 2019. The operating lease expense for the years ended December 31, 2020 and 2019 was $5,662 and $5,547, respectively. Lease expenses related to variable lease payments and short-term leases were immaterial. Additional information related to operating leases are as follows:
Year Ended December 31, 2020
Year Ended December 31, 2019
Cash paid for amounts included in the measurement of lease liabilities
$
5,657
$
5,398
ROU assets obtained in exchange for new liabilities
$
6,309
$
3,580
The weighted-average remaining lease term and discount rate related to the operating leases as of December 31, 2020 and 2019 were as follows:
December 31, 2020
December 31, 2019
Weighted-average remaining lease term (in years)
4.62
3.18
Weighted-average discount rate
3.81
%
3.68
% Future minimum lease payments under non-cancellable operating leases as of December 31, 2020 were as follows:
December 31, 2020
2021
$
4,536
2022
2,879
2023
1,914
2024
1,192
2025
1,001
Thereafter
2,020
Total lease payments
$
13,542
Less: imputed interest
1,177
Total
$
12,365
Amounts recognized in the consolidated balance sheets:
Operating lease liabilities, current
$
4,188
Operating lease liabilities, long term
$
8,177
Revenue Recognition — The Company recognizes revenue when control of the promised goods or services is transferred to its customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. The Company sells its products mainly to distributors and retailers. The products include insecticides, herbicides, soil fumigants, fungicides and biologicals. In addition, the Company recognizes royalty income related to licensing arrangements which qualify as functional licenses rather than symbolic licenses. Upon signing a new licensing agreement, the Company typically receives up-front fees, which are generally characterized as non-refundable royalties. These fees are recognized as revenue upon the execution of the license agreements. Minimum royalty fees are recognized once the Company has an enforceable right for payment. Sales-based royalty fees are typically recognized when the sales occur. The Company calculate s and accrue s estimated royalties based on the agreement terms and correspondence with the licensees regarding actual sales. 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:
2020
2019
Net sales:
U.S. crop
$
223,167
$
220,635
U.S. non-crop
48,557
61,590
Total U.S.
271,724
282,225
International
186,980
185,961
Total net sales
$
458,704
$
468,186
Timing of revenue recognition:
Goods and services transferred at a point in time
$
455,726
$
464,967
Goods and services transferred over time
2,978
3,219
Total net sales
$
458,704
$
468,186
Performance Obligations — A performance obligation is a promise in a contract or sales order to transfer a distinct good or service to the customer. 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 either at a point in time or over time as work progresses. On December 31, 2020, the Company had $43,611 of remaining performance obligations, which are comprised of deferred revenue and services not yet delivered. The Company expects to recognize all these remaining performance obligations as revenue in fiscal 2021. Practical Expedients — The Company has 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 and (ii) treat shipping and handling activities that occur after control of the good transfers to the customer as fulfillment activities. Contract Balances — The contract assets are included in other receivables on the consolidated balance sheets and relate to royalties earned on certain functional licenses granted for the use of the Company’s intellectual property, and a contract manufacturing agreement for the production of products without alternative use. The contract manufacturing agreement was terminated in 2020 and the balance outstanding in 2019 was settled. Deferred Revenue — The timing of revenue recognition, billings and cash collections may result in deferred revenue in the consolidated balance sheets. The Company sometimes receives payments from its customers in advance of goods and services being provided, in return for participation in its pre-payments related cash incentive program. These pre-payments are held on the Company’s consolidated balance sheets as deferred revenue until control of the related performance obligations has passed to the customers, which is generally upon shipment of products. There is no significant financing component related to the pre-payments since the Company expects to transfer the products within one year from the date payment is received. More customers participated in the Company’s cash incentive program in 2020, and at an increased average level, which resulted in a significant increase in the Company’s deferred revenue balance as of December 31, 2020 compared to the prior year.
December 31, 2020
December 31, 2019
Contract assets
$
3,200
$
6,091
Deferred revenue
$
43,611
$
6,826
Revenue recognized for the years ended December 31, 2020 and 2019, that was included in the deferred revenue balance at the beginning of 20 20 and 2019 was $ 5,652 and $ 20,043 , respectively . Allowance for Doubtful Accounts— The Company maintains an allowance to cover its Current Expected Credit Losses ("CECL") on its trade receivables, other receivables and contract assets arising from the failure of customers to make contractual payments. The Company estimates credit losses expected over the life of its trade receivables, other receivables and contract assets based on historical information combined with current conditions that may affect a customer’s ability to pay and reasonable and supportable forecasts. In most instances, the Company’s policy is to write-off trade receivables when they are deemed uncollectible. The vast majority of the Company's trade receivables, other receivables and contract assets are less than 365 days. Under the CECL impairment model, the Company develops and documents its allowance for credit losses on its trade receivables based on multiple portfolios. The determination of portfolios is based primarily on geographical location, type of customer and aging. 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, which are usually made at the end of a growing season, to distributors, retailers or growers. The Company describes these payments as “Programs.” Programs are a critical part of doing business in both the U.S. crop and non-crop chemicals marketplaces. These discount Programs represent variable consideration. Revenues from sales are recorded at the net sales price, which is the transaction price net of the impact of Programs 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 liabilities have been incurred. Once this initial calculation is made for the specific quarter, sales and marketing management, along with executive and financial management, review the accumulated Program balance and, for volume driven payments, make assessments of whether or not customers are tracking in a manner that indicates that they will meet the requirements set out in agreed upon terms and conditions attached to each Program. Following this assessment, management will make adjustments to the accumulated accrual to properly reflect the Company’s best estimate of the liability at the balance sheet date. 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. 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 operations. All plant and equipment are depreciated using the straight-line method, utilizing the estimated useful property lives. See note 1 for useful lives Intangible Assets — The primary identifiable intangible assets of the Company relate to assets associated with its product and business acquisitions. All of the Company’s intangible assets have finite lives and are amortized. The estimated useful life of an identifiable intangible asset to the Company is based upon a number of factors including the effects of demand, competition, and expected changes in the marketability of the Company’s products. Business Combinations — The Company uses its best estimates and assumptions to assign fair value to the tangible and intangible assets acquired and liabilities assumed at the acquisition date. The Company’s estimates are inherently uncertain and subject to refinement. During the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the fair value of these tangible and intangible assets acquired and liabilities assumed, with the corresponding offset to goodwill or an adjustment to the gain from a bargain purchase. In addition, uncertain tax positions and tax-related valuation allowances are initially recorded in connection with a business combination as of the acquisition date. The Company continues to collect information and reevaluates these estimates and assumptions quarterly and records any adjustments to the Company’s preliminary estimates to goodwill or an adjustment to the gain from a bargain purchase, provided that the Company is within the measurement period. Upon the conclusion of the measurement period or final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the Company’s consolidated statement of operations. In the event that the Company acquires an entity in which the Company previously held a non-controlling investment, the difference between the fair value and carrying value of the investment as of the date of the acquisition is recorded as a gain or loss and recorded within net income (loss) on equity method investments in the consolidated statement of operations. Certain of our acquisition agreements include contingent earn-out arrangements, which are generally based on the achievement of future income thresholds. The fair values of these earn-out arrangements are included as part of the purchase price of the acquired companies on their respective acquisition dates. For each transaction, the Company engages third-party valuation specialists to assist it in making estimates the fair value of contingent earn-out payments, both as part of the initial purchase price and at each subsequent financial statement date until the end of the related performance period. The Company records the estimated fair value of contingent consideration as a liability on the consolidated balance sheets. We review and re-assess the estimated fair value of contingent consideration on a quarterly basis, and the updated fair value could be materially different from the initial estimates or prior quarterly amounts. Changes in the estimated fair value of our contingent earn-out liabilities are reported in operating results . Asset Acquisitions — If an acquisition of an asset or group of assets does not meet the definition of a business, the transaction is accounted for as an asset acquisition rather than a business combination. An asset acquisition does not result in the recognition of goodwill and transaction costs are capitalized as part of the cost of the asset or group of assets acquired. The Company uses its best estimates and assumptions to assign fair value to the tangible and intangible assets acquired and liabilities assumed at the acquisition date. The acquisitions costs are allocated to the assets acquired on a relative fair value basis. Impairment — The carrying values of long-lived assets other than goodwill are reviewed for impairment annually and/or whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. The Company evaluates recoverability of an asset group by comparing the carrying value to the future undiscounted cash flows that it expects to generate from the asset group. If the comparison indicates that the carrying value of an asset group is not recoverable, measurement of the impairment loss is based on the fair value of the asset. There were no circumstances that would indicate any impairment of the carrying value of these long-lived assets and no material impairment losses were recorded in 2020, 2019 or 2018. The Company reviews goodwill for impairment utilizing either a qualitative or quantitative assessment. If the Company decides that it is appropriate to perform a qualitative assessment and concludes that the fair value of a reporting unit more likely than not exceeds its carrying value, no further evaluation is necessary. If the Company performs a quantitative assessment, the Company compares the fair value of a reporting unit with its carrying amounts and recognizes an impairment charge for the amount that the carrying amount exceeds the reporting unit’s fair value. The Company annually tests goodwill for impairment in beginning of the fourth quarter, or earlier if triggering events occur. The Company did not record any impairment losses in 2020, 2019 or 2018. Fair Value of Financial Instruments— The accounting standard for fair value measurements provides a framework for measuring fair value and requires expanded disclosures regarding fair value measurements. Fair value is defined as the price that would be received for an asset or the exit price that would be paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. This accounting standard established a fair value hierarchy, which requires an entity to maximize the use of observable inputs, where available. The following summarizes the three levels of inputs required:
•
Level 1 – Quoted prices in active markets for identical assets or liabilities.
•
Level 2 – Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
•
Level 3 – Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability. The carrying amount of the Company’s financial instruments, which principally include cash and cash equivalents, short-term investments, accounts receivable, long-term investments, accounts payable and accrued expenses approximates fair value because of the relatively short maturity of such instruments. The carrying amount of the Company’s short-term and long-term borrowings, which are considered Level 2 liabilities, approximates fair value based upon current rates and terms available to the Company for similar debt. We measure our contingent earn-out liabilities in connection with acquisitions at fair value on a recurring basis using significant unobservable inputs classified within Level 3 of the fair value hierarchy. We may use various valuation techniques depending on the terms and conditions of the contingent consideration including a Monte-Carlo simulation. This simulation uses probability distribution for each significant input to produce hundreds or thousands of possible outcomes and the results are analyzed to determine probabilities of different outcomes occurring. Refer to Note 9 for a reconciliation of the Company’s deferred consideration. Foreign Currency Translation— Certain international operations use the respective local currencies as their functional currency, while other international operations use the U.S. Dollar as their functional currency. The Company considers the U.S. dollar as its reporting currency. Translation adjustments for subsidiaries where the functional currency is its local currency are included in other comprehensive income (loss). Foreign currency transaction gains (losses) resulting from exchange rate fluctuation on transactions denominated in a currency other than the functional currency are reported in earnings. Assets and liabilities of the foreign operations denominated in local currencies are translated at the rate of exchange at the balance sheet date. Revenues and expenses are translated at the weighted average rate of exchange during the period. Translations of intercompany loans of a long-term investment nature are included as a component of translation adjustment in other comprehensive income (loss). Income 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, 2020 and 2019, the Company recorded unrecognized tax benefits of $3,222 and $4,395, respectively. Per Share Information— Basic earnings per share (“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:
2020
2019
2018
Numerator:
Net income attributable to American Vanguard
$
15,242
$
13,601
$
24,195
Denominator:
Weighted average shares outstanding—basic
29,450
29,030
29,326
Dilutive effect of stock options and grants
543
626
722
Weighted average shares outstanding—diluted
29,993
29,656
30,048
For the years ended December 31, 2020, 2019, and 2018, no options or grants were excluded from the computation. Use of 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 (including those related to litigation), and revenues, 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, assets acquired, and liabilities assumed in connections with business combinations and asset acquisitions, accrued program costs, and stock-based compensation and income taxes. Actual results could materially differ from those estimates. Total comprehensive income (loss)— In addition to net income, total comprehensive income (loss) |
