# AMERICAN VANGUARD CORP (AVD) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from AMERICAN VANGUARD CORP's 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/5981/000156459022009941/avd-10k_20211231.htm
Accession: 0001564590-22-009941
Filing date: 2022-03-14
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/AVD/
All MD&A years: /company/AVD/mda/
Next year: /company/AVD/mda/fy2022/ (FY 2022)

ITEM 7 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS/RISK FACTORS:

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

The discussion and analysis of our financial condition and results of operations for 2021, as compared to 2020 appears below. As permitted by SEC rules, we have omitted the discussion and analysis of our financial condition and results of operations for 2020 compared to 2019. See Item 7, “Management’s Discussions and Analysis of Financial Condition and Results of Operations”, in our Annual Report on Form 10-K for the year ended December 31, 2020, for this discussion.  

MANAGEMENT OVERVIEW

The Company’s performance in 2021 was stronger in most all respects as compared to the prior year. The domestic agricultural economy continued an upcycle that started at the end of 2020 following several years in a downcycle. With that trend, commodity prices for many crops, including corn, soybeans and cotton, rose and remained strong. Both growers and the distribution channel, which had previously worked down inventory to very low levels, began to replenish their stocks of crop inputs. At the same time, pandemic restrictions were relieved in many regions and were only partially reinstated with the emergence at the end of 2021 of the Omicron variant of the coronavirus. Despite supply chain disruptions and some associated cost escalation, particularly on in-bound freight, and the year-end pandemic surge, the markets for the Company’s products were more robust. Net sales for 2021 rose 21%, as compared to 2020 ($556,872, as compared to $458,704), and net income was up about 22% ($18,587, as compared to $15,242). It is also interesting to note that operating income rose 35% (to $30,946 in 2021 from $22,908 in 2020) and that, but for the one-time benefit in 2020 of $4,657 arising from a bargain purchase gain relating to the Agrinos acquisition, the improvement in operating income would have been 65% year-over-year.

In summary, our results for 2021 were as follows. Net sales performance was improved across all our businesses. The top line of our U.S. Crop segment was up by 25%, led by strong demand for soil insecticides and cotton products. Sales of our U.S. Non-Crop business was up 30% due largely to strong demand for our mosquito adulticide product, as customers replenished channel inventory. International sales rose with the addition of businesses that had been acquired late in 2020 (Agrinos and AgNova), continued strong performance in Mexico and overall strong performance in other regions.  

As a result of the sales dynamics just described, gross profit during 2021 was approximately 24% above that of 2020 ($213,243 vs. $172,590). Further, gross profit when expressed as a percentage of sales was 38%, which was in line with the prior year. Operating expenses increased by 18% ending at $182,468, as compared to $154,339 in 2020; however, operating expenses (which include outbound freight) as a percent of net sales decreased to 33% from 34% compared to 2020.

With a lower average debt level and a decrease in the effective interest rate, our interest expense dropped by about 29% (to $3,687 in 2021 from $5,178 in 2020) due to timing of our borrowings, continued strong cash generated from increased sales, customer prepayment programs and a reduction in effective interest rates. For 2021, we reported income before provision for income taxes and loss on equity method investment of $27,141, as compared to $18,447 in 2020. Despite a higher effective tax rate and income taxes, our net income was $18,587 in 2021 as compared to $15,242, which represents an increase of about 22%.

When considering the consolidated balance sheet, long-term debt decreased to $52,240 as of December 31, 2021, from $107,442 as of December 31, 2020. The decreased level of debt was driven by the Company’s strong cash management during 2021, including a continued strong response from the Company’s biggest customers to our early-pay programs. The Company’s liquidity position improved with a closing borrowing availability of $178,705 as of December 31, 2021, as compared to $86,736 as of December 31, 2020. Furthermore, inventories decreased to $154,306, as of December 31, 2021, as compared to inventories of $163,784, as of December 31, 2020.

18

Results of Operations

2021 Compared with 2020:

[[GREPCENT_TABLE]]
[["","","2021","","","2020","","","$ Change","","","% Change"],["Net sales:"],["U.S. crop","","$","263,632","","","$","211,357","","","$","52,275","","","25%"],["U.S. non-crop","","","78,605","","","","60,367","","","","18,238","","","30%"],["Total U.S.","","","342,237","","","","271,724","","","","70,513","","","26%"],["International","","","214,635","","","","186,980","","","","27,655","","","15%"],["Total net sales","","$","556,872","","","$","458,704","","","$","98,168","","","21%"],["Cost of sales:"],["U.S. crop","","$","154,064","","","$","118,634","","","$","35,430","","","30%"],["U.S. non-crop","","","41,162","","","","32,525","","","","8,637","","","27%"],["Total U.S.","","","195,226","","","","151,159","","","","44,067","","","29%"],["International","","","148,403","","","","134,955","","","","13,448","","","10%"],["Total cost of sales","","$","343,629","","","$","286,114","","","$","57,515","","","20%"],["Gross profit:"],["U.S. crop","","$","109,568","","","$","92,723","","","$","16,845","","","18%"],["U.S. non-crop","","","37,443","","","","27,842","","","","9,601","","","34%"],["Total U.S.","","","147,011","","","","120,565","","","","26,446","","","22%"],["International","","","66,232","","","","52,025","","","","14,207","","","27%"],["Total gross profit","","$","213,243","","","$","172,590","","","$","40,653","","","24%"],["Gross margin:"],["U.S. crop","","42%","","","44%"],["U.S. non-crop","","48%","","","46%"],["Total U.S.","","43%","","","44%"],["International","","31%","","","28%"],["Total gross margin","","38%","","","38%"]]
[[/GREPCENT_TABLE]]

Net sales of our U.S. crop business were about 25% higher than those of the prior year ($263,632 vs. $211,357). Reopening of the economy, transportation needs fueling ethanol, and improving grower profitability due to higher crop commodity prices, all contributed to strong demand for AVD’s crop protection products. Despite the second year of challenging COVID-19 pandemic conditions characterized by the Delta variant and, at the end of the year, the Omicron variant and supply chain disruptions, overall demand in the U.S. crop segment continued the steady improvement that had started with the 2019-2020 crop season, and our customers in the distribution channel gradually returned to more normal procurement practices. We had very strong performance in corn, with sales of soil insecticides and post-emergent herbicides posting a 45% year-over-year increase.  Similarly in cotton, a strong commodity price stimulated demand for our foliar insecticides and harvest defoliant which generated sales that were up 84%, as compared to those of 2020. We also recorded stronger sales in our soybean products, Thimet for peanuts, and Dacthal for a wide range of fruits and vegetables. Partially offsetting these increases, sales of our soil fumigant business declined slightly due to year-end logistics difficulties in transporting this large volume liquid product, particularly in the Pacific Northwest region.

Cost of sales within the domestic crop business was higher in 2021 (up 30% to $154,064 from $118,634 in 2020), on sales that increased 25%, gross profit improved by 18% ($109,568 in 2021 vs. $92,723 in 2020), and gross margin was 42% of sales as compared to 44% last year.

Net sales of our U.S. non-crop business were up about 30% ($78,605 in 2021 vs. $60,367 in 2020) largely due to our Dibrom® mosquito adulticide sales, which nearly doubled in 2021, as demand from mosquito control distributors was driven by significant tropical storm and hurricane activity and the normal need to refill channel inventory in readiness for the next season. Net sales of pest strips and other commercial pest control products increased strongly in 2021, as restaurants, schools, malls, and many other commercial enterprises reopened with the lifting of pandemic restrictions. Net sales from our OHP nursery and ornamental business were 19% higher than 2020, as demand for homeowner garden and landscape products accelerated during the year at retail locations around the country. Finally, our TyraTech/Envance revenues grew over 71% driven by both direct product sales and royalty income which exceeded prior year performance.

Cost of sales in our U.S. non-crop business rose by 27% in comparison to the prior year ($41,162 in 2021 vs. $32,525 in 2020), gross profit increased by 34% (from $27,842 in 2020 to $37,443 in 2021), and gross margin percentage increased to 48% in 2021, as compared to 46% in 2020.

19

Net sales of our international businesses increased by 15% in 2021 ($214,635 vs. $186,980 in 2020). During 2021, our international group successfully integrated two important new businesses. Our AgNova acquisition more than doubled our existing business in Australia, while our Agrinos biological products expanded our footprint in more than a half dozen countries worldwide. We enjoyed strong demand for our soil fumigants and our bromacil herbicides, particularly in Mexico, and experienced steady sales of our Counter nematicide in Central America and Brazil. Further, we experienced slightly higher sales in our AgriCenter Central American distribution business, despite supply chain challenges, limited customer access (in light of coronavirus protocols), and competitive market conditions.

Cost of sales in our international business increased by 10% (to $148,403 in 2021 from $134,955 in 2020), on sales that increased 15%, gross profit rose 27% from the prior year (to $66,232 in 2021 vs. $52,025 in 2020), and gross margin improved to 31%, as compared to 28% reported in 2020.

On a consolidated basis, gross profit for the year increased by 24% (ending at $213,243 in 2021, as compared to $172,590 in 2020) on sales up 21%. Total gross margin percentage remained the same as prior year at 38%.        

Operating expenses (which include outbound freight costs) increased by $28,129 in 2021, to $182,468 or 33% of sales, as compared to $154,339 or 34% in 2020. The differences in operating expenses by department are as follows:

[[GREPCENT_TABLE]]
[["","","2021","","","2020","","","Change","","","% Change"],["Selling","","$","48,604","","","$","42,389","","","$","6,215","","","","15","%"],["General and administrative","","","61,685","","","","48,828","","","","12,857","","","","26","%"],["Research, product development and regulatory","","","28,855","","","","26,310","","","","2,545","","","","10","%"],["Freight, delivery and warehousing","","","43,324","","","","36,812","","","","6,512","","","","18","%"],["Total Operating Expenses","","$","182,468","","","$","154,339","","","$","28,129","","","","18","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u2022","Selling expenses increased by 15% to $48,604 for the year ended December 31, 2021, as compared to $42,389 in 2020. The main drivers were the costs associated with the activities from the businesses acquired in the last quarter of 2020, increased labor costs related to inflation plus some key staff additions and, increases in travel and entertainment expenses as pandemic restrictions eased in most territories in which we operate."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u2022","General and administrative expenses increased by 26% to $61,685 for the year ended December 31, 2021, as compared to $48,828 in 2020. The main drivers were the costs in the amount of $1,833 associated with the addition of the entities acquired in the final quarter of 2020, the increase in short-term and long-term incentive compensation of $3,110, as a result of improved financial performance, additional legal expenses of $2,151 largely arising from the Department of Justice investigation, increased bad debt expenses of $649 related to our businesses in Central America, and adverse foreign exchange costs associated with our businesses in Central and South America. Finally, the Australian business we acquired in the final quarter of 2020 has performed above expectations and as a result we recorded an expense of $758 related to the increase to the fair value of the associated contingent consideration."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u2022","Research, product development and regulatory expenses increased by 10% to $28,855 in 2021, as compared to $26,310 in 2020. The main drivers were increases in our product development costs, primarily resulting from increased activities in our newly acquired businesses and work in support of our SIMPAS/ULTIMUS technology platform."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u2022","Freight, delivery and warehousing costs for the year ended December 31, 2021, increased by 18% (on sales up 21%) to $43,324, as compared to $36,812 in 2020. This is mainly due to volume increases, product mix and locations of customers. When expressed as a percentage of sales, freight costs decreased slightly year over year to 7.8% in 2021, as compared to 8.0% in 2020. This was achieved despite the global inflation being seen in freight costs."]]
[[/GREPCENT_TABLE]]

In July 2020, the Company made a strategic investment in Clean Seed Inc., in the amount of $1,190. Subsequent to the initial investment, the Company recorded a loss to its fair value in the amount of $391 in 2021 and gain in the amount of $717 in 2020, respectively.

In February 2016, AMVAC BV made an equity investment of $3,283 in Biological Products for Agriculture (“Bi-PA”). The Company has elected to measure the investment at cost less impairment, if any, and to record an increase or decrease for changes resulting from observable price changes in orderly transactions for the identical or a similar investment of Bi-PA. The Company recorded an impairment in the amount of $399 during the year ended December 31, 2021. No impairment was recorded for the year ended December 31, 2020.

20

Net interest expense was $3,687 in 2021, as compared to $5,178 in 2020. Interest costs are summarized in the following table:

[[GREPCENT_TABLE]]
[["","","2021","","","2020"],["Average Indebtedness and Interest expense","","Average Debt","","","Interest Expense","","","Interest Rate","","","Average Debt","","","Interest Expense","","","Interest Rate"],["Working capital revolver","","$","142,238","","","$","3,414","","","","2.4","%","","$","170,801","","","$","5,158","","","","3.0","%"],["Interest income","","","\u2014","","","","(65",")","","","\u2014","","","","\u2014","","","","(89",")","","","\u2014"],["Amortization of deferred loan fees","","","\u2014","","","","367","","","","\u2014","","","","\u2014","","","","300","","","","\u2014"],["Amortization of other deferred liabilities","","","\u2014","","","","(4",")","","","\u2014","","","","\u2014","","","","23","","","","\u2014"],["Other interest expense","","","\u2014","","","","218","","","","\u2014","","","","\u2014","","","","110","","","","\u2014"],["Subtotal","","","142,238","","","","3,930","","","","2.8","%","","","170,801","","","","5,502","","","","3.2","%"],["Capitalized interest","","","\u2014","","","","(243",")","","","\u2014","","","","\u2014","","","","(324",")","","","\u2014"],["Total","","$","142,238","","","$","3,687","","","","2.6","%","","$","170,801","","","$","5,178","","","","3.0","%"]]
[[/GREPCENT_TABLE]]

The Company’s average debt for the year ended December 31, 2021, was $142,238, as compared to $170,801 for the year ended December 31, 2020. On a gross basis, after adjustments related to capitalized interest and expenses related to the amortization of deferred liabilities, our effective interest rate on our working capital revolver decreased to 2.6%, as compared to 3.0% in 2020. This improvement was driven by U.S. fiscal policy and decreases in the LIBOR rate, and improved cash management.

Our provision for income taxes for 2021 was $8,166, as compared to $3,080 for 2020. The effective tax rate for 2021 was 30.0%, as compared to 16.7% in 2020. The increase of the effective tax rate in 2021 was due to a non-cash charge related to a valuation allowance associated with a deferred tax asset in Brazil.

The Company is subject to U.S. federal income tax as well as to income tax in multiple state jurisdictions. Federal income tax returns of the Company are subject to Internal Revenue Service (“IRS”) examination for the 2018 through 2020 tax years. State income tax returns are subject to examination for the 2017 through 2020 tax years. The Company has other foreign income tax returns subject to examination.

For the years ended December 31, 2021 and 2020, the Company recorded net losses on its equity investments of $388 and $125, respectively.

Net income was $18,587 or $0.62 per basic share and $0.61 per diluted share in 2021 as compared to $15,242 or $0.52 per basic share and $0.51 per diluted share in 2020.

Liquidity and Capital Resources

The Company generated $86,361 of cash from operating activities during the year ended December 31, 2021, as compared to $90,324 in the prior year. Included in the $86,361 are net income of $18,587, plus non-cash depreciation, amortization of intangibles and other assets and discounted future liabilities, in the amount of $26,164, loss on disposal of property, plant and equipment of $194, amortization of deferred loan fees of $367, revision of contingent consideration of $758, and provision for bad debts in the amount of $649. In addition, stock-based compensation of $6,880, loss from equity method investments of $388, change in fair value of investments of $790, change in value of deferred income taxes of $2,090, change in reserves for uncertain tax positions of $1,783, adjustment to bargain purchase gain on business acquisition in the amount of $171, decrease in environmental liability of $167, and net foreign currency adjustment of $225, resulted in net cash provided by operating activities of $49,669, as compared to $39,931 for the same period of 2020.

During 2021, the Company decreased working capital by $39,987, as compared to the position at December 31, 2020. Included in this change: accounts receivables net increased by $24,347, inventories decreased by $8,130, tax receivable, net increased by $6,051, and prepaid expenses increased by $3,354. Deferred revenue increased by $19,280, as compared to December 31, 2020, driven by individual customer decisions to make early payments in return for early cash incentive programs. Our accounts payable balances increased by $8,783, program accruals increased by $17,877 and other payables and accrued expenses increased by $3,986.  

With regard to our program accrual, the year-over-year change is primarily driven by the mix of sales and customers in 2021, as compared to the prior year. The Company accrues programs in line with the growing season upon which specific products are targeted. Most of our programs relate to domestic sales. Typically, domestic crops have a growing season that ends on September 30th of each year. During 2021, the Company made accruals in the amount of $99,482 and made payments in the amount of $81,678. During 2020, the Company made accruals in the amount of $66,622 and made payments in the amount of $68,880.

21

Because the estimate for the program accrual is a material component of the presentation of the Company’s overall financial performance, the Company believes that the process it uses is critical in setting the accrual at the appropriate level. The Company’s process for developing the estimate involves a detailed review of each related transaction and includes the input of a significant number of senior employees to enable the Company to set the accrual using consistently applied judgements, subject to the particular circumstances of any individual transaction.  

Cash used for investing activities amounted to $20,042 for the year ended December 31, 2021, as compared to $35,795 in 2020. In 2021, the Company spent $10,524 in business and product acquisitions and on patents applications associated with its TyraTech and Envance technology solutions. In addition, in 2021, $9,518 was spent on capital expenditures primarily focused on continuing to invest in manufacturing infrastructure to expand production efficiency and capabilities. In 2020, the Company spent $23,356 in business and product acquisitions including intangible assets, goodwill, working capital and fixed assets as well as patent application costs, and $11,249 on capital expenditures primarily focused on our manufacturing facilities. Furthermore in 2020, the Company spent $1,190 on an equity investment.

During the year ended December 31, 2021, financing activities used $65,871, as compared to $44,440 during the prior year. This included making repayments on the Company’s senior credit facility in the amount of $55,569 during the year ended December 31, 2021. During 2020, the Company made similar repayments in the amount of $41,624.  During 2021, the Company paid dividends to stockholders amounting to $2,382, as compared to $1,168 in 2020. Furthermore, the Company paid for contingent consideration in the amount of $1,301 and $1,227 for the years ended December 31, 2021 and 2020, respectively. Finally, the Company used $4,579 to repurchase common stock in 2021. The Company did not repurchase stock in 2020.

The Company has various loans in place that together constitute the long-term loan balances shown in the consolidated balance sheets as of December 31, 2021 and 2020. These are summarized in the following table:

[[GREPCENT_TABLE]]
[["Indebtedness","","2021","","","2020"],["Revolving line of credit","","$","53,300","","","$","107,900"],["Debt issuance costs","","","(1,060",")","","","(458",")"],["Total indebtedness","","$","52,240","","","$","107,442"]]
[[/GREPCENT_TABLE]]

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

The Company and certain of its affiliates are parties to a revolving line of credit agreement entitled the “Third Amended and Restated Loan and Security Agreement” dated as of August 5, 2021 (the “Credit Agreement”), which is a senior secured lending facility among AMVAC, the Company’s principal operating subsidiary, as Borrower Agent (including the Company and AMVAC BV), as  Borrowers, on the one hand, and a group of commercial lenders led by Bank of the West as administrative agent, documentation agent, syndication agent, collateral agent, sole lead arranger and book runner, on the other hand. The Credit Agreement consists of a line of credit of up to $275,000, an accordion feature of up to $150,000, a letter of credit and swingline sub-facility (each having limits of $25,000) and has a maturity date of August 5, 2026. The Credit Agreement amends and restates the previous credit facility, which had a maturity date of June 30, 2022. With respect to key financial covenants, the Credit Agreement contains two: namely, borrowers are required to maintain a Total Leverage (“TL”) Ratio of no more than 3.5-to-1, during the first three years, stepping down to 3.25-to-1 as of September 30, 2024, and a Fixed Charge Coverage Ratio of at least 1.25-to-1. In addition, to the extent that it completes acquisitions totaling $15 million or more in any 90-day period, AMVAC may step-up the TL Ratio by 0.5-to-1, not to exceed 4.00-to-1, for the next three full consecutive quarters. Acquisitions below $50 million do not require Agent consent.

The Company’s borrowing capacity varies with its financial performance, measured in terms of Consolidated 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 Margin” which is based upon the Total Leverage (“TL”) Ratio (“LIBOR Revolver 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 Margin (“Adjusted Base Rate Revolver Loan”). Interest payments for LIBOR Revolver Loans are payable on the last day of each interest period (either one-, three- or six- months, as selected by the borrower) and the maturity date, while interest payments for Adjusted Base Rate Revolver Loans are payable on the last business day of each month and the maturity date. The interest rate on December 31, 2021, was 1.98%.  

22

At December 31, 2021, according to the terms of the Credit Agreement, as amended, and based on our performance against the most restrictive covenant listed above, the Company had the capacity to increase its borrowings by up to $178,705. This compares to an available borrowing capacity of $86,736 as of December 31, 2020. The level of borrowing capacity is driven by three factors: (1) our financial performance, as measured in EBITDA for trailing twelve-month period, (2) the inclusion of proforma EBITDA related to acquisitions completed during the preceding twelve months and (3) the leverage covenant (being the number of times EBITDA the Company may borrow under its credit facility agreement). The Company was in compliance with its debt covenants as of December 31, 2021.

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.

Substantially all the Company’s assets are pledged as collateral under the Credit Agreement, as amended.  

Recently Issued Accounting Guidance

Please refer to Note 3 of the Notes to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report for recently issued and adopted accounting standards.  

Foreign Exchange

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

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

Inflation

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

CRITICAL ACCOUNTING POLICIES

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

23

The Company’s critical accounting policies and estimates include:

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

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

Allowance for Doubtful Accounts or Current Expected Credit Losses —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.

Deferred Revenue - From time to time, the Company receives pre-payments from customers which are recorded as deferred revenue on the Company’s consolidated balance sheets. The Company does not recognize revenue on any such payments unless and until the customer places binding purchase orders, the goods are shipped, and control is transferred to the customer.  

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

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

24

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

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

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 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 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.

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

We review and re-assess the estimated fair value of contingent consideration on a quarterly basis until the contingent period ends, 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.

25

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. Certain of our acquisition agreements include contingent earn-out arrangements, which are recognized only when the contingency is resolved, and the consideration is paid or becomes payable.

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.

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 values and recognizes an impairment charge for the amount that the carrying amount exceeds the reporting unit’s fair value. The Company annually tests goodwill for impairment at the beginning of the fourth quarter, or earlier if triggering events occur.

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:

[[GREPCENT_TABLE]]
[["","\u2022","Level 1 \u2013 Quoted prices in active markets for identical assets or liabilities."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","Level 2 \u2013 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."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","Level 3 \u2013 Inputs that are generally unobservable and typically reflect management\u2019s estimate of assumptions that market participants would use in pricing the asset or liability."]]
[[/GREPCENT_TABLE]]

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 approximate fair value because of the relatively short maturity of such instruments. The carrying amount of the Company’s short-term and long-term borrowings, which are considered Level 2 liabilities, approximates fair value based upon current rates and terms available to the Company for similar debt.

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

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

26

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