EDGAR 10-K Filing

Company CIK: 5981
Filing Year: 2021
Filename: 5981_10-K_2021_0001564590-21-017113.json

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ITEM 1. BUSINESS
ITEM 1
BUSINESS
American Vanguard Corporation (“AVD”) was incorporated under the laws of the State of Delaware in January 1969 and operates as a holding company. Unless the context otherwise requires, references to the “Company” or the “Registrant,” in this Annual Report refer to AVD. The Company conducts its business through its principle operating subsidiaries, including AMVAC Chemical Corporation (“AMVAC”) for its domestic business and AMVAC Netherlands BV (“AMVAC BV”) for its international business.
The subsidiaries in the U.S. include: AMVAC, GemChem, Inc. (“GemChem”), Envance Technologies, LLC (“Envance”), TyraTech Inc. (“TyraTech”) and OHP Inc. (“OHP”).
Internationally, the Company operates its business through the following subsidiaries: AMVAC BV, AMVAC C.V. (“AMVAC CV”), AMVAC Hong Kong Limited (“AMVAC Hong Kong”), AMVAC Mexico Sociedad de Responsabilidad Limitada (“AMVAC M”), AMVAC de Costa Rica Sociedad de Responsabilidad Limitada (“AMVAC CR Srl”), AMVAC Singapore Pte, Ltd (“AMVAC Sgpr”), Huifeng AMVAC Innovation Co. Limited (“Hong Kong JV”), Grupo AgriCenter (including the parent AgriCenter S.A. and its subsidiaries) (“AgriCenter”), AMVAC do Brasil Representácoes Ltda (“AMVAC do Brasil”), Agrovant Comércio de Produtos Agrícolas Ltda. (“Agrovant”), Defensive - Indústria, Comérico & Representação Comerial Ltda. (“Defensive”), American Vanguard Australia PTY Ltd (“AVD Australia”), AgNova Technologies PTY Ltd (“AgNova”), and the Agrinos group (“Agrinos”).
Based on similar economic and operational characteristics, the Company’s business is aggregated into one reportable segment. Refer to Part II, Item 7 for selective enterprise information.
AMVAC is a California corporation that traces its history from 1945 and is a specialty chemical manufacturer that develops and markets products for agricultural, commercial and consumer uses. It manufactures and formulates chemicals for crops, turf and ornamental plants, and human and animal health protection. These chemicals, which include insecticides, fungicides, herbicides, molluscicides, growth regulators, and soil fumigants, are marketed in liquid, powder, and granular forms. AMVAC primarily synthesizes, formulates, and distributes its own proprietary products or custom manufactures, formulates or distributes for others. In addition, the Company has carved out a leadership position in closed delivery systems, currently offers certain of its products in SmartBox, Lock ‘n Load and EZ Load systems, and is commercializing a precision application technology known as SIMPAS (see “Intellectual Property” below) which permits the delivery of multiple products (from AMVAC and/or other companies) at variable rates in a single pass. AMVAC has historically expanded its business through both the acquisition of established chemistries, the development and commercialization of new formulations or compounds through licensing arrangements and by expanding its distribution network to gain broader market access.
AMVAC BV is a Netherlands Corporation that was established in 2012 and is based in Utrecht, near Amsterdam in the Netherlands. AMVAC BV sells product both directly and through its network of subsidiaries in various international territories.
Below is a description of the Company’s acquisition/licensing activity over the past four years.
On October 8, 2020, the Company’s Australian subsidiary, AVD Australia, completed the purchase of all outstanding shares of AgNova. AgNova is an Australian company that sources, develops, and distributes specialty crop protection and production solutions for agricultural and horticultural producers and for selected non-crop users. AgNova has an established reputation for cost-effective product development from original concept through evaluation, registration, marketing, and sales, with new technologies flowing from its development pipeline. AgNova is committed to the provision of innovative, value-adding solutions for agriculture and related industries. The acquired assets included product registration, trade names and trademarks, customer lists, workforce, fixed assets, and existing working capital.
On October 2, 2020, the Company’s principal operating subsidiary, AMVAC, completed the purchase of all outstanding shares of the Agrinos Group Companies (Agrinos), except for Agrinos AS. Agrinos AS was taken under administration as a bankruptcy estate by the Norwegian bankruptcy court in Oslo. In addition to the shares of Agrinos, AMVAC acquired certain intellectual property rights. Agrinos is a fully integrated biological input supplier with proprietary technology, internal manufacturing, and global distribution capabilities. Its High Yield Technology® product platform works in conjunction with other nutritional crop inputs to increase crop yield, improve soil health and reduce the environmental footprint of traditional agricultural practices. The acquired assets included product registration, trade names and trademarks, customer lists, workforce, fixed assets, two factories and existing working capital.
On April 1, 2020, the Company’s principal operating subsidiary, AMVAC, acquired 6,250,000 common shares of Clean Seed Capital Group Ltd. (Clean Seed), representing an ownership of approximately 8%. In addition, AMVAC licensed from Clean Seed certain intellectual property rights related to Clean Seed’s SMART planting technologies.
On December 20, 2019, the Company’s principal operating subsidiary, AMVAC, completed the purchase of certain assets related to four herbicide products from E.I. du Pont de Nemours and Company, doing-business-as Corteva Agriscience and Dow Agrosciences, LLC., for use in the U.S.. The purchased assets included end-use registrations, registration data, trademarks (specifically, Classic®, First Rate®, Python® and Hornet®), on-hand inventory, commercial sales information, know-how and certain product supply arrangements.
On July 1, 2019, the Company completed the acquisition of three crop protection products for the U.S. market from Raymat Crop Science, Inc. and its affiliate, Esstar Crop Science, Inc. The acquired products are the miticide etoxazole, the insect growth regulator Diflubenzuron, and a rice herbicide bispyribac sodium (Arroz). The acquired assets included product registrations, trademarks and trade names, customer lists and associated on-hand inventory.
On January 10, 2019, the Company’s international subsidiary AMVAC do Brazil completed the purchase of Defensive and Agrovant, two distribution companies based in Brazil. Defensive and Agrovant market and distribute crop protection products and micronutrients with focus on the fruit and vegetable market segments throughout Brazil. The acquired entities are holding assets that consist, in part, of product registration, trade names and trademarks, customer lists, workforce, fixed assets, and existing working capital.
On December 28, 2018, the Company’s international subsidiary AMVAC BV completed the purchase of certain assets related to the Quizalofop product family from E.I. du Pont de Nemours and Company. Quizalofop is an herbicide marketed under the name Assure II for use on canola, soybeans and pulse (among other things) in Canada and the U.S.. The acquired assets included product rights, registration data, trademarks, and on-hand inventory. Subsequently, AMVAC BV transferred the acquired assets related to the U.S. market to AMVAC.
On December 14, 2018, AMVAC completed the purchase of certain assets related to the trichlorfon product line from Bayer AG and Bayer CropScience AG (“Bayer”). Trichlorfon is an insecticide marketed under the name Dylox in turf, ornamental and other markets. This transaction included product registrations, trademarks and manufacturing know-how. AMVAC manufactures and supplies formulated end use products to Bayer (for the professional turf market) and to SBM (for the consumer lawn market).
On November 9, 2018, AMVAC completed the purchase of all of the outstanding shares of TyraTech, Inc. and, in the process, delisted TyraTech from the AIM market of the London Stock Exchange. TyraTech develops non-toxic insecticides and green solutions for pest control. Their patented technology platform leverages synergistic essential oil combinations to target invertebrate pest receptors that are not active in humans and other mammals.
On June 20, 2018, AMVAC completed the purchase of certain intangible assets related to the bromacil product family including end use registrations in the U.S.. The assets were purchased from Bayer AG. Bromacil is a broad-spectrum residual herbicide used for non-agricultural industrial vegetation control and on many crops such as pineapples, citrus, agave and asparagus. Marketed under the Hyvar® and Krovar® brands, bromacil herbicides are valued and long-established weed control tools. Amvac already owned these registrations for markets outside the U.S. and Canada through a prior purchase.
Seasonality
The agricultural chemical industry, in general, is cyclical in nature. The demand for AVD’s products tends to be seasonal. Seasonal usage, however, does not necessarily follow calendar dates, but more closely follows growing patterns, weather conditions, geography, weather related pressure from pests and customer marketing programs.
Backlog
AVD primarily sells its products on the basis of purchase orders. The purchase orders are typically fulfilled within a short time frame. As a result, backlog is not considered a significant factor of AVD’s business.
Customers
The Company’s largest three customers accounted for 17%, 12% and 10% of the Company’s sales in 2020; 18%, 14% and 7% in 2019; and 12%, 9% and 8% in 2018.
Distribution
In the U.S. AMVAC predominantly distributes its products through national distribution companies and buying groups or co-operatives, which purchase AMVAC’s goods on a purchase order basis and, in turn, sell them to retailers/growers/end-users.
Internationally, AMVAC BV has sales offices or wholly owned distributors in Mexico, Central America, Brazil, Australia, and India, and sales force executives or sales agents in a number of other territories. The Company’s domestic and international distributors, agents and customers typically have long-established relationships with retailers/end-users, far-reaching logistics, transportation capabilities and/or customer service expertise. The markets for AVD products vary by region, target crop, use and type of distribution channel. AVD’s customers are experts at addressing these various markets.
Competition
In its many marketplaces, AVD faces competition from both domestic and foreign manufacturers. Many of our competitors are larger and have substantially greater financial and technical resources than AVD. AVD’s capacity to compete depends on its ability to develop additional applications for its current products and/or expand its product lines and customer base. AVD competes principally on the basis of quality, product efficacy, price, technical service and customer support. In some cases, AVD has positioned itself in smaller niche markets, which are no longer addressed by larger companies. In other cases, for example in the Midwest corn and soybean markets, the Company competes directly with larger competitors.
Manufacturing
Through its six manufacturing facilities (see Item 2, Properties), AVD synthesizes many of the technical grade active ingredients that are in its end-use products. Further, the Company formulates and packages its end use products at its own facilities or at the facilities of third-party formulators in the U.S. and at various international locations. Furthermore, we noted earlier that, in October 2020, the Company completed the purchase of Agrinos. That biological business owns two manufacturing sites, one in the U.S. and the second in Mexico, and has product manufactured at a third-party facility in India.
Raw Materials
AVD utilizes numerous companies to supply the various raw materials and components used in manufacturing its products. Many of these materials are readily available from domestic sources. In those instances where there is a single source of supply or where the source is not domestic, AVD seeks to secure its supply by either long-term (multi-year) arrangements or purchasing on long lead times from its suppliers. Further, where the availability or cost of certain raw materials may be subject to the effect of tariffs, the Company may order goods at times or in volumes out of the ordinary course in order to optimize pricing and to ensure supply.
Intellectual Property
AVD’s proprietary product formulations are protected, to the extent possible, as trade secrets and, to a lesser extent, by patents. Certain of the Company’s closed delivery systems are patented, and the Company has both pending and issued patents relating to its equipment portfolio, particularly with respect to its SIMPAS and Ultimus technology. Further, AVD’s trademarks bring value to its products in both domestic and foreign markets. AVD considers that, in the aggregate, its product registrations, trademarks, licenses, customer lists and patents constitute valuable assets. While it does not regard its current business as being materially dependent upon any single product registration, trademark, license, or patent, it believes that patents will play an increasingly important role in its developmental equipment technology in future years, including with respect to its Envance essential oils technology.
EPA Registrations
In the U.S., AVD’s products also receive protection afforded by the terms of the Federal Insecticide, Fungicide and Rodenticide Act (“FIFRA”), pursuant to which it is unlawful to sell any pesticide in the U.S., unless such pesticide has first been registered by the U.S. Environmental Protection Agency (“USEPA”). Most of the Company’s products that are sold in the U.S. are subject to USEPA registration and periodic re-registration requirements and are registered in accordance with FIFRA. This registration by USEPA is based, among other things, on data demonstrating that the product will not cause unreasonable adverse effects on human health or the environment, when used according to approved label directions. In addition, each state requires a specific registration before any of AVD’s products can be marketed or used in that state. State registrations are predominantly renewed annually with a smaller number of registrations that are renewed on a multiple year basis. Foreign jurisdictions typically have similar registration requirements by statute.
The USEPA, state, and foreign agencies have required, and may require in the future, that certain scientific data requirements be performed on registered products sold by AVD. AVD, on its own behalf and in joint efforts with other registrants, has furnished, and is currently furnishing, required data relative to specific products. Under FIFRA, the federal government requires registrants to submit a wide range of scientific data to support U.S. registrations. This requirement results in operating expenses in such areas as regulatory compliance, with USEPA and other such bodies in the markets in which the Company sells its products. In addition, at times, the Company is required to generate new formulations of existing products or to produce new products in order to remain compliant. The Company expensed $15,613, $13,989 and $16,047, during 2020, 2019 and 2018, respectively, on these activities.
Registration
$
10,914
$
9,046
$
10,749
Product development
4,699
4,943
5,298
$
15,613
$
13,989
$
16,047
Environmental
Commerce Site
During 2020, AMVAC continued activities to address environmental issues associated with its facility in Commerce, CA. (the “Facility”). An outline of the history of those activities follows.
In 1995, the California Department of Toxic Substances Control (“DTSC”) conducted a Resource Conservation and Recovery Act (“RCRA”) Facility Assessment (“RFA”) of those facilities having hazardous waste storage permits. In March 1997, the RFA culminated in DTSC accepting the Facility into its Expedited Remedial Action Program. Under this program, the Facility was required to conduct an environmental investigation and health risk assessment. This activity then took two paths: first, the RCRA permit closure and second, the larger site characterization.
With respect to the RCRA permit closure, in 1998, AMVAC began the formal process to close its hazardous waste permit at the Facility (which had allowed AMVAC to store hazardous waste longer than 90 days) as required by federal regulations. Formal regulatory closure actions began in 2005 and were completed in 2008, as evidenced by DTSC’s October 1, 2008 acknowledgement of AMVAC’s Closure Certification Report.
With respect to the larger site characterization, soil and groundwater characterization activities began in December 2002 in accordance with the Site Investigation Plan that was approved by DTSC. Additional activities were conducted from 2003 to 2014, with oversight provided by DTSC. In 2014, the Company submitted a remedial action plan (“RAP”) to DTSC, under the provisions of which, the Company proposed not to disturb sub-surface contaminants, but to continue monitoring, maintain the cover above affected soil, enter into restrictive covenants regarding the potential use of the property in the future, and provide financial assurances relating to the requirements of the RAP. In January 2017, the RAP was circulated for public comment. DTSC responded to those comments and, on September 29, 2017, approved the RAP as submitted by the Company. The Company continues to conduct groundwater monitoring and maintain the cover above affected soil and is working with DTSC to prepare an operation and maintenance plan, to record covenants on certain affected parcels and to obtain further clarification on financial assurance obligations relating to the RAP. At this stage, the Company does not believe that costs to be incurred in connection with the RAP will be material and has not recorded a loss contingency for these activities.
Other Environmental
AMVAC is subject to numerous federal and state laws and governmental regulations concerning environmental matters and employee health and safety at its six manufacturing facilities both in the U.S. and abroad. The Company continually adapts its manufacturing, storage, transportation, handling and disposal processes to the environmental control standards of the various regulatory and other agencies to which it is subject. The USEPA and other foreign, federal and state agencies have the authority to promulgate regulations that could have an impact on the Company’s operations.
AMVAC expends substantial funds to minimize the risk of discharge of materials in the environment and to comply with the governmental regulations relating to protection of the environment. Wherever feasible, the Company recovers and recycles raw materials and increases product yield in order to partially offset increasing pollution abatement costs.
The Company is committed to a long-term environmental protection program that reduces emissions of hazardous materials into the environment, as well as to the remediation of identified existing environmental concerns.
Human Capital Resources
We believe that, beyond being essential to our operations, our people have inestimable worth independent of our business. As outlined in our Human Rights Policy (see, www.american-vanguard.com under ESG tab), we believe that it is fundamental to our corporate responsibility and, indeed, to our humanity, that we recognize, respect and nurture the freedom and dignity of all persons. Accordingly, we have insinuated that belief throughout the fabric of our operations in our approach toward our employees. Indeed, the first two core values underlying our commitment to sustainability (see, 2017/2018 Sustainability Report, www.american-vanguard.com under ESG tab) are “Safety First” - which is a culture that begins with highly-regulated manufacturing plants, continues into the design of science-backed products and extends into market-leading delivery systems - and “Making a Difference” - under which, by rewarding achievement and giving our employees a voice, we attract diverse employees who want to make a difference in their careers, in the company and in the communities that we serve.
The most salient feature of success in managing human capital has been our ability to attract and retain excellent talent. We are not the largest company within our sector - in fact, we are possibly the smallest public company dedicated to crop inputs and precision application technology. However, we have consistently drawn high-achieving, successful personnel from much larger competitors, largely due to the fact that we are not only collegial and nimble, but also offer employees the chance to make a difference, to be themselves, to think creatively.
Another important practice in managing human capital is that we offer among the most generous healthy benefits in the industry - minimal employee contribution, copays, out-of-pocket limits. (See also the Compensation Discussion & Analysis in our 2020 Proxy Statement at www.american-vanguard.com, click on SEC filings). We also provide a comprehensive wellness program, with annual biometric testing and incentives for health coaching. These programs serve to keep the employee population and their families healthy. Further, these programs are, for the most part, self-insured and represent a direct and important investment in our people.
We are also one of the only public companies of which we are aware that gives awards of our common stock to the entire full-time workforce. Most public companies limit their stock awards to those in the highest echelon. We do not. Rather, we believe that all employees should share in our long-term success and that those who work for the company should have the perspective of both employee and shareholder. This practice also engenders a sense of greater permanency in the work relationship through which employees are more inclined to propose plans and solutions for the future. Similarly, unlike many public companies, we allocate our incentive compensation throughout the entire workforce, thereby rewarding their contribution to our companywide performance. As of December 31, 2020, the Company employed 771 employees. The Company employed 671 employees as of December 31, 2019 and 624 employees as of December 31, 2018. From time to time, due to the seasonality of its business, AVD uses temporary contract personnel to perform certain duties primarily related to packaging of its products. None of the Company’s employees are subject to a collective bargaining agreement. The Company believes it maintains positive relations with its employees.
Domestic operations
AMVAC is a California corporation that was incorporated under the name of Durham Chemical in August 1945. The name of the corporation was subsequently changed to AMVAC in January 1971. As the Company’s main operating subsidiary, AMVAC owns and/or operates the Company’s domestic manufacturing facilities. AMVAC manufactures, formulates, packages and sells its products in the U.S. and is a wholly owned subsidiary of AVD.
GemChem is a California corporation that was incorporated in 1991 and was subsequently purchased by the Company in 1994. GemChem sells into the pharmaceutical, cosmetic and nutritional markets and, in addition, purchases key raw materials for the Company. GemChem is a wholly owned subsidiary of AVD.
DAVIE owns real estate for corporate use only. The site is the home to the Company’s research center and also provides accommodation for the Company’s production control team. See also Part I, Item 2 of this Annual Report on Form 10-K. DAVIE is a wholly owned subsidiary of AVD.
On October 2, 2017, AMVAC purchased substantially all of the assets of OHP, a domestic distribution company specializing in products for the turf and ornamental market. OHP markets and sells end use products for third-parties, either under third-party brands or else as its own label products.
Envance is a Delaware Limited Liability Company and is a wholly owned subsidiary of the Company. It was formed in 2012 with joint venture partner, TyraTech. AMVAC’s initial shareholding was 60% which increased to 87% in 2015. Prior to November 8, 2018 the Company also owned 34.38% of TyraTech. On November 8, the Company acquired the remaining 65.62% of the shares of TyraTech Inc. and, as a result, TyraTech became a wholly owned subsidiary of the Company on November 9, 2018. Also, as a result of acquiring 100% of TyraTech, Envance became a wholly owned subsidiary of the Company. Envance has the rights to develop and commercialize pesticide products and technologies made from natural oils in global consumer, commercial, professional, crop protection and seed treatment markets and has begun bringing products to market and license its intellectual property to third-parties.
International operations
In July 2012, the Company formed AMVAC CV, which is incorporated in the Netherlands, for the purpose of managing foreign sales on behalf of the Company. AMVAC CV is owned jointly by AMVAC as the general partner, and AVD International, LLC (also formed in July 2012 as a wholly owned subsidiary of AMVAC), as the limited partner, and is therefore a wholly owned subsidiary of AMVAC.
AMVAC Hong Kong was formed in November 2019 and is wholly owned by AMVAC. AMVAC Hong Kong took over the role of AMVAC CV as of January 1, 2020.
AMVAC BV is a registered Dutch private limited liability company that was formed in July 2012. AMVAC BV is located in the Netherlands and is wholly owned by AMVAC CV. During 2020, the international business sold the Company’s products in 55 countries, as compared to 55 countries in 2019.
AMVAC M is a wholly owned subsidiary of AMVAC BV and was originally formed in 1998 (as Quimica Amvac de Mexico S.A. de C.V and subsequently changed to AMVAC Mexico Sociedad de Responsabilidad Limitada “AMVAC M”) to conduct the Company’s business in Mexico.
AMVAC Sgpr is a wholly owned subsidiary of AMVAC BV and was formed on April 12, 2016. This new entity was formed to conduct the Company’s business in the Asia Pacific and China region.
Hong Kong JV is a 50% owned joint venture with Huifeng (Hong Kong) Limited, a wholly owned subsidiary of Huifeng Agrochemical Company, Ltd, (“Huifeng”) a China based, basic chemical manufacturer. The Hong Kong JV was formed on August 2, 2016. The purpose of the joint venture is to be a technology transfer platform between the co-owners, including the development of proprietary agrochemical formulations and precision application systems for crop protection. Furthermore, it is intended to be used to develop both partners’ business in the region. This included, in 2017, the acquisition of 100% of the shares of Profeng.
On October 27, 2017, AMVAC BV purchased 100% of the stock of AgriCenter, which owned shares in subsidiaries located in Costa Rica, Panama, Nicaragua, Honduras, the Dominican Republic, Mexico, Guatemala, and El Salvador. These affiliated entities, collectively known as AgriCenter, market, sell and distribute end-use chemical and biological products throughout Central America primarily for crop applications.
On January 10, 2019, AMVAC BV acquired 100% of the stock of Defensive and Agrovant, two distribution companies based in Brazil. Defensive and Agrovant market and distribute crop protection products and micronutrients with focus on the fruit and vegetable market segments throughout Brazil.
On October 8, 2020, American Vanguard Australia Pty Ltd acquired 100% of the stock of AgNova, an Australian company that sources, develops, and distributes specialty crop protection and production solutions for agricultural and horticultural producers, and for selected non-crop users.
On October 2, 2020, the Company’s principal operating subsidiary, AMVAC, completed the purchase of all outstanding shares of Agrinos and certain intellectual property rights. Agrinos is a fully integrated biological input supplier with proprietary technology, internal manufacturing, and global distribution capabilities and has operating entities in the U.S., Mexico, India, Brazil, China, Ukraine, and Spain.
The Company classifies as international sales all products bearing foreign labeling shipped to a foreign destination.
International sales
$
186,980
$
185,961
$
153,958
Percentage of net sales
40.8
%
39.7
%
33.9
%
The Company’s Operations in a Pandemic
Having been categorized as a pandemic in March 2020 by the World Health Organization, the novel coronavirus (COVID-19) has since spread, at the time of this document, to infect over 100 million people and caused over 2 million fatalities worldwide. Like many other companies, we have had to adapt quickly and frequently to ensure the health and safety of the workplace while maintaining operations without disruption. Our mission was driven in part by our legal status. Under applicable federal guidelines (at https://www.cisa.gov), the Company is part of the nation’s “critical infrastructure” and falls within three of the 16 sectors that are specially permitted to operate: “Food and Agriculture” sector (engaged in “the production of chemicals and other substances used by the food and agriculture industry, including pesticides, herbicides etc.”), the “Chemical” sector (supporting the operation . . . of facilities (particularly those with high risk chemicals . . . whose work cannot be done remotely and requires the presence of highly trained personnel to ensure safe operations”) and the “Public Works and Infrastructure Support Services” sector (in support of public health including pest control and exterminators, landscapers and others who provide services to residences and businesses). In issuing guidance on Coronavirus, then President Donald J. Trump said, “If you work in a critical infrastructure industry, as defined by the Department of Homeland Security, such as healthcare services and pharmaceutical and food supply, you have a special responsibility to maintain your normal work schedule [emphasis added].” We have found that state COVID-19 orders and, indeed, even those of countries in which the outbreak has been most pronounced, have consistently excepted food supply as an area essential to the survival of its populations and, as such, had given special permission to companies, such as ours, to continue to operate during the pandemic.
In light of our status within the critical infrastructure, at the outset of the pandemic, the Company took swift action to understand, contain and mitigate the risks posed by this pandemic. Specifically, we formed a Pandemic Work Group to design and implement protocols for social distancing, make provisions for the workforce to work remotely where possible, establish quarantine, tracing and leave-of-absence policies for those who present COVID-like symptom or may have been in touch with those who have. Further, the group has kept current with local, state, federal and international laws and restrictions that could affect the business; provided real-time information to the workforce including with respect to testing and vaccinations; and drawn from political commentary and news statements concrete directions on how best to continue operations. We have also prepared contingency plans to permit the continued operation of our factories, in the event that there are critical staffing issues due to attrition. Further, we have continuously monitored supply chain, transport, logistics and border closures and have reached out to third-parties to make clear that we are continuing to operate, that we have our own policies relating to health and safety (e.g., all staff who can work remotely were instructed so to do and were provided with the necessary IT equipment, no third-party visitors, no face-to-face meetings) and are committed to compliance with COVID-19 policies of our business partners. Our CEO and the Pandemic Work Group have held regular “state of the company” calls with the functional heads of our businesses across the globe to ensure that our information is shared in a timely manner and that our direction is clear.
In keeping with our charge to operate as an essential business and by virtue of our efforts to contain and mitigate the risks posed by the pandemic, we have been able to manage our business with minimal disruption during the reporting period. As referred to in this Form 10-K (see Note 1 to the Consolidated Financial Statements), the coronavirus has affected our overall performance to a degree. Lost opportunities for certain new product launches, inability to meet both existing and potential new customers face-to-face, reduced demand for commodity crops sold to restaurants, and foreign exchange effects in Brazil, Mexico and Australia, have likely limited the Company’s top-line growth by up to several million dollars and the associated profitability, to an indeterminate degree, since the inception of the pandemic.
Risk Management
The Company regularly monitors matters, whether insurable or not, that could pose material risk to its operations, the safety of its employees and neighbors, and its financial performance. The Risk Committee of the Board of Directors (“Board”) was formed in 2010, consists of four members of the Board and meets regularly. However, all members of the Board are invited to and regularly attend Risk Committee meetings. Working with senior management, the committee continuously evaluates the Company’s risk profile, identifies mitigation measures and ensures that the Company is prudently managing these risks.
Further, in support of the Risk Committee, senior management has appointed a risk manager who is focused on addressing each of the most material risks facing the Company. The top risks identified by management (in no particular order) include: adverse political and regulatory climate; managing inventory and optimizing manufacturing efficiency; succession planning and bench strength; maintaining a competitive edge in the marketplace; the possibility of an environmental event; undervaluation of the Company; availability of acquisition and licensing targets and cyber-terrorism. In addition, the Company continually evaluates insurance levels for product liability, property damage and other potential areas of risk. Management believes its facilities and equipment are adequately insured against loss from usual business risks including cyber-terrorism.
Environmental, Social and Governance (“ESG”)
At the center of our ESG commitment is the principle of Sustainable Agriculture. While this concept has been used by many to mean many different things, we have given it a very clear meaning. In our parlance, Sustainable Agriculture is broad enough to encompass a comprehensive ESG program, but clear enough to give us direction in our outlook and purpose in our activities. Please click on the “ESG” tab at www.american-vanguard.com to access the documents mentioned below.
Access to food is a basic human right and is at the core of our commitment to sustainable agriculture. All people should be able to rely on a stable, affordable food supply both now and into the future. We are committed to meeting that need upon a foundation of social responsibility and equity. In that vein, we believe that sustainable agriculture must include these three principles:
Climate Equity - as outlined in our Climate Change Commitment, we are committed to making enterprise-wide, progressive and measurable efforts to do our part to help to arrest the trend of global warming. In making decisions, taking actions and conducting our operations we are mindful of climate equity, which holds that climate change has three primary effects - generational, regional and individual. To that end, we believe that reducing our carbon footprint and, through our products and services, enabling others to do so will advance climate equity consistent with the goal of a 2-degree warmer world, as outlined in the Paris Agreement. Whether in terms of eco-friendly products - such as natural oils from Envance (used in Proctor & Gamble’s Zevo product line), microbial High Yield solutions from Agrinos (that enhance soil health and promote carbon sequestration) or tailored bionutritional products from Greenplants - or delivery systems, such as our SIMPAS precision application system that maximizes yield while minimizing the environmental footprint - we are endeavoring to making the planet a better place than we found it.
Environmental Equity - we recognize that our planet has limited resources and that what we do with them has an effect on the habitat for both humans and other species, both for today and tomorrow. We also recognize that our activities can affect the environment generationally, regionally and individually. We are, therefore, committed to environmental equity in our operations. Specifically, and as more fully outlined in our sustainability reports, we seek to conserve finite resources such as water, land and energy while protecting the environment and enhancing biodiversity, so that these resources are available in amounts and quality to support our neighbors and future generations. In addition, we have committed significant resources toward supporting growers with precision application technology - like SIMPAS and Ultimus - that enable growers to manage, optimize and trace the use of crop and soil inputs, and to use only what is needed, precisely where it is needed. Furthermore, we are mindful of those who might be disproportionately affected by what we do, such as loaders and applicators of our products. To that end, we have been at the forefront of user-friendly, closed delivery systems (from Lock ‘n Load to SMARTBox to SIMPAS/SmartCartridges) to minimize exposure and maximize safety for those on-the-ground.
Food Equity - we are committed to the proposition that access to food is a basic human right. Implicit in that commitment is the principle of food equity, which has three aspects, once again, generational, regional and individual. First, food security - we believe it is essential to ensure the long-term sustainability and competitiveness of the global agricultural industry. We contribute toward food security by investing in eco-friendly solutions and in new technology, like SIMPAS, that give growers the best tools possible to ensure that their operations are viable, both today and tomorrow. Second, food availability - ensuring that food gets from field to table. As we saw in the pandemic, the supply chain for food can be broken, and those who suffer most are often those farthest from the fields. To that end, we support farm-to-field efforts and programs to reduce food waste. Third, food affordability - ensuring that food prices can be maintained for all, including the impoverished. We do this by giving farmers effective tools, including precision application equipment, that optimize their costs, boost their yield, and enable them to produce and market food at reasonable prices.
Social Responsibility - our discussion of Sustainable Agriculture would not be complete without specific mention of our commitment to social responsibility. This concept is inherent in all forms of equity, be they climate, environmental or food related. However, social responsibility gives us pause to consider factors of a more fundamental nature, such as human rights. Our Human Rights Policy details our essential belief that we respect and support human rights, both within and without our operations. We believe that it is fundamental to our corporate responsibility and, indeed, to our humanity, that we recognize, respect and nurture the freedom and dignity of all persons. To that end, we support the tenets of the International Bill of Human Rights, including the United Nations Universal Declaration of Human Rights, the UN framework on Corporate Responsibility to Respect Human Rights (which is one section of the UN Guiding Principles on Business and Human Rights) and the UN International Labor Organization on Fundamental Principles and Rights at Work.
Under the umbrella of Sustainable Agriculture, we are committed to operating our business with a sense of mindfulness - toward the climate, toward the environment and toward the good of humans and other species. We consider ourselves to be part of a broader mission - one of ensuring that people can rely upon a stable, affordable food supply both now and in the future. It is a privilege to be part of that mission. With that privilege comes responsibility, and we take that responsibility seriously.
Available Information
The Company makes available free of charge (through its website, www.american-vanguard.com), its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with the Securities and Exchange Commission (“SEC”). All reports filed with the SEC are available free of charge on the SEC website, www.sec.gov. Also available free of charge on the Company’s website are the Company’s Audit Committee, Compensation Committee, Finance Committee and Nominating and Corporate Governance Committee Charters, the Company’s Corporate Governance Guidelines, the Company’s Code of Conduct and Ethics, and the Company’s Employee Complaint Procedures for Accounting and Auditing Matters. Beneath the “ESG” tab at that site, you will also find links to the Company’s Corporate Sustainability Reports, Climate Change Commitment and Human Rights Policy. The Company’s Internet website and the information contained therein or incorporated therein are not intended to be incorporated into this Annual Report on Form 10-K.

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ITEM 1A. RISK FACTORS
ITEM 1A.
RISK FACTORS
Regulatory/Legislative/Litigation Risks
The regulatory climate remains challenging to the Company’s interests both domestically and internationally-Various agencies within the U.S. (both federal and state) and foreign governments continue to exercise increased scrutiny in permitting continued uses (or the expansion of such uses) of many chemistries, including several of the Company’s products and, in some cases, have initiated or entertained challenges to these uses. The challenge of the regulatory climate is more pronounced in certain geographical regions (outside the U.S.) where the Company faces resistance to the continued use of certain of its products. For example, the European Union (“EU”) employs a hazard-based analysis when considering whether product registrations can be maintained; under this approach, EU regulatory authorities typically do not weigh benefit against risk in their assessments and routinely cancel products for which a safer alternative is available, notwithstanding the benefit of the cancelled product. There is no guarantee that this regulatory climate will change in the near term or that the Company will be able to maintain or expand the uses of many of its products in the face of such regulatory challenges.
Product liability judgments on glyphosate by domestic courts present a litigation risk to companies in this industry-Multiple judgments have been rendered by domestic courts in product liability cases against Bayer/Monsanto in connection with injuries allegedly arising from exposure to the herbicide product, glyphosate. The basis was purported carcinogenicity based largely upon the findings of a certain international organization, in spite of significant scientific evidence to the contrary. While the Company does not sell glyphosate, the theory of these results could put one or more of the Company’s products at risk. There is no guarantee that one or more product liability actions would not be brought against the Company on a similar basis, and it is possible that adverse rulings in any such actions could have a material adverse effect upon the Company’s financial performance in future reporting periods.
The trend of passing pesticide “ban-bills” in various states could put one or more of the Company’s products at risk-In certain states, including Maryland and New York, state and/or local legislatures have passed legislation banning the use of specific pesticides, such as chlorpyrifos, in spite of valid registrations at USEPA and/or the equivalent state agency. While the Company does not sell chlorpyrifos products, there is no guarantee that one or more of its registered products would not be targeted in state or local legislation of this nature. Further, such legislation could have a material adverse effect upon the Company’s financial performance in future reporting periods.
Use of the Company’s products is subject to continuing challenges from activist groups-Use of agrochemical products, including the Company’s products, is regularly challenged by activist groups in many jurisdictions under a multitude of federal, state and foreign statutes, including FIFRA, the Food Quality Protection Act, Endangered Species Act (“ESA”) and the Clean Water Act, to name a few. These challenges typically take the form of lawsuits or administrative proceedings against the USEPA and/or other federal, state or foreign agencies, the filing of amicus briefs in pending actions, the introduction of legislation that is inimical to the Company’s interests, and/or adverse comments made in response to public comment invited by regulatory agencies in the course of registration, re-registration or label expansion. The most prominent of these actions include a line of cases under which environmental groups have sought to suspend, cancel or otherwise restrict the use of pesticides that have been approved by USEPA on the ground that that agency failed to confer with the National Marine Fishery Service and/or the Fish and Wildlife Service under the ESA with respect to biological opinions relating to the use of such products. While industry has been active in defending registrations and proposing administrative and legislative approaches to address serious resource issues at the affected agencies, these cases continue to be brought. It is possible that one or more of these challenges could succeed, resulting in a material adverse effect upon one or more of the Company’s products.
USEPA has proposed further limitations on the continued registration of organophosphates- In September 2015, the USEPA published in the Federal Register a memorandum entitled, “Literature Review on Neurodevelopmental Effects & FQPA Safety Factor Determination for the Organophosphate Pesticides,” in which it adopted a position recommending the application of a 10X safety factor under the FQPA (Food Quality Protection Act) in light of the alleged possibility of neurodevelopmental harm to women and children based on epidemiological data. Since that time, in the face of objection from industry, the agency has applied this safety factor to all registered Organophosphate Pesticides (“Ops” or “OP”), including those owned by the Company, as they have come up for review or renewal. The Company, like many in our industry, believes that applying this safety factor is not based upon sound science and that the limited studies upon which the agency is relying (for which raw data is not available even to the agency) do not establish a causal link between the perceived harm and the use of its products. Accordingly, the Company intends to take all action necessary to defend its registrations. We have been joined in this effort by other companies that are similarly concerned about the potential impact of USEPA’s action. Nevertheless, there is no guarantee that the Company’s actions will alter the course that USEPA has proposed; if the agency’s position becomes final, some uses of the Company’s OP products could be limited or cancelled. Such action could have a material adverse effect upon the Company’s financial performance in future reporting periods.
The distribution and sale of the Company’s products are subject to prior governmental approvals and thereafter ongoing governmental regulation-The Company’s products are subject to laws administered by federal, state and foreign governments, including regulations requiring registration, approval and labeling of its products. The labeling requirements restrict the use of, and type of, application for our products. More stringent restrictions could make our products less available, which would adversely affect our revenues and profitability. Substantially all of the Company’s products are subject to the USEPA (and/or similar agencies in the various territories or jurisdictions in which we do business) registration and re-registration requirements and are registered in accordance with FIFRA or similar laws. Such registration requirements are based, among other things, on data demonstrating that the product will not cause unreasonable adverse effects on human health or the environment when used according to approved label directions. All states, where any of the Company’s products are used, also require registration before products, such as the Company sells, can be marketed or used in that state. Governmental regulatory authorities have required, and may require in the future, that certain scientific data requirements be fulfilled on the Company’s products. The Company, on its behalf and also in joint efforts with other registrants, has furnished, and is currently furnishing certain required data relative to its products. There can be no assurance, however, that the USEPA or similar agencies will not request that certain tests or studies be repeated, or that more stringent legislation or requirements will not be imposed in the future. The Company can provide no assurance that any testing approvals or registrations will be granted on a timely basis, if at all, or that its resources will be adequate to meet the costs of regulatory compliance.
The manufacturing of the Company’s products is subject to governmental regulations- The Company currently owns and operates five manufacturing facilities which are located in Los Angeles, California; Axis, Alabama; Marsing, Idaho, Clackamas, Oregon, and Ethojoa, Mexico, and owns and has manufacturing services provided at an additional facility in Hannibal, Missouri, (the “Facilities”). The Facilities operate under the laws and regulations imposed by relevant country, state and local authorities. The manufacturing of key ingredients for certain of the Company’s products occurs at the Facilities. An inability to renew or maintain a license or permit, or a significant increase in the fees for such licenses or permits, could impede the Company’s manufacture of one or more of its products and/or increase the cost of production; this, in turn, would materially and adversely affect the Company’s ability to provide customers with its products in a timely and affordable manner.
Pandemic/Climate Risks
The COVID-19 pandemic may interfere with the Company’s business-Over the past year, the novel coronavirus pandemic has spread around the globe, infecting over 100 million persons and resulting in over 2 million fatalities. While the company has been able to operate without interruption, during the reporting period, and has seen comparative minimal impact on the markets that it serves, there is no guarantee that the pandemic, as it continues, will not disrupt our supply chain, customers or end-users of our products.
Climate Change may adversely affect the Company’s business-Over the course of the past several years, global climate conditions have become increasingly inconsistent, volatile and unpredictable. Many of the regions in which the Company does business have experienced excessive moisture, cold, drought and/or heat of an unprecedented nature at various times of the year. In some cases, these conditions have either reduced or obviated the need for the Company’s products, whether pre-plant, at-plant, post-emergent or at harvest. Due to the unpredictable nature of these conditions, growers and distributors appear to have become increasingly conservative in procurement practices and the accumulation of inventory. Further, the random nature of climactic change has made it increasingly difficult to forecast market demand and, consequently, financial performance, from year-to-year. There is no guarantee that climate change will abate in the near future, and it is possible that such change will continue to hinder the Company’s ability to forecast its sales performance with accuracy and otherwise adversely affect the Company’s financial performance.
The Company’s business may be adversely affected by weather effects-Demand for many of the Company’s products tends to vary with weather conditions and weather-related pressure from pests. Adverse weather conditions, then, may reduce the Company’s revenues and profitability. In light of the possibility of adverse seasonal effects, there can be no assurance that the Company will maintain sales performance at historical levels in any particular region.
The Company may be subject to environmental liabilities-The Company is fully committed toward minimizing the risk of discharge of materials into the environment and to complying with governmental regulations relating to protection of the environment, its neighbors and its workforce. Nevertheless, federal and state authorities may seek fines and penalties for any violation of the various laws and governmental regulations. In addition, while the Company continually adapts its manufacturing processes to the environmental control standards of regulatory authorities, it cannot entirely eliminate the risk of accidental contamination or injury from hazardous or regulated materials. Further, these various governmental agencies could, among other things, impose potential criminal liability arising in connection with the Company’s importation (transportation, handling, and storage) of depleted Thimet containers (see, “Legal Proceedings”). In short, the Company may be held liable for significant damages or fines relating to any environmental contamination, injury, or compliance violation which could have a material adverse effect on the Company’s consolidated financial condition, statements of operations and cash flows.
Acquisition/Investment Risks
Newly acquired businesses or product lines may not generate forecasted results-While the Company conducts due diligence using a combination of internal and third-party resources and applies what it believes to be appropriate criteria for each transaction before making acquisitions, there is no guarantee that a business or product line acquired by the Company will generate results that meet or exceed results that were forecasted by the Company when evaluating the acquisition. There are many factors that could affect the performance of a newly acquired business or product line. While the Company uses assumptions that are based upon due diligence and other market information in valuing a business or product line prior to concluding an acquisition, actual results generated post-closing could vary widely from the Company’s forecast and, as such, could have a material effect upon the Company’s overall financial performance.
The Company’s investment in foreign businesses may pose additional risks-With the expansion of its footprint internationally, the Company now carries on business at a material level in some jurisdictions that have a history of political, economic or currency-related instability and customers with a potentially higher risk profile regarding accounts receivable collectivity compared to the Company’s legacy business. While such instability may not be present at the current time, there is no guarantee that conditions will not change in one or more jurisdictions quickly and without notice, nor is there any guarantee that the Company would be able to recoup its investment in such territories in light of such changes and potential losses due to economic factors, devaluation of local currencies, or the collectability risk from customers. Adverse changes of this nature could have a material effect upon the Company’s overall financial performance.
The Company’s investment in technology may not generate forecasted returns-The Company has had a history of investing in technological innovation, including with respect to product delivery systems, essential oil technology and biologicals, as one of its core strategies. These investments are based upon the premise that new technology will allow for safer handling or lower overall toxicity profile of the Company’s product portfolio, appeal to regulatory agencies and the market we serve, gain commercial acceptance, and command a return that is sufficiently in excess of the investment. However, there is no guarantee that a new technology will be successfully commercialized, generate a material return or maintain market appeal. Further, many types of development costs must be expensed in the period in which they are incurred. This, in turn, tends to put downward pressure on period profitability. There can be no assurance that these expenses will be recovered through successful long-term commercialization of a new technology.
The Company’s growth has been fueled in part by acquisitions-Over the past few decades, the Company’s growth has been driven by acquisitions and licensing of both established and developmental products from third-parties. There is no guarantee that acquisition targets or licensing opportunities meeting the Company’s investment criteria will remain available or will be affordable. If such opportunities do not present themselves, then the Company may be unable to duplicate historical growth rates in future years.
The Company is dependent upon sole source suppliers for certain of its raw materials and active ingredients- There are a limited number of suppliers of certain important raw materials used by the Company in a number of its products. Certain of these raw materials are available solely from single sources either domestically or overseas. There is no guarantee that any of our suppliers will be willing or able to supply these products to the Company reliably, continuously and at the levels anticipated by the Company or required by the market. If these sources prove to be unreliable and the Company is not able to supplant or otherwise second source these products, it is possible that the Company will not achieve its projected sales which, in turn, could adversely affect the Company's consolidated financial statements.
The Company faces competition in certain markets from new technologies and demand for organically produced food- The Company faces competition from larger companies that market new chemistries and other similar technologies in certain of the crop protection sectors in which the Company competes. There is no guarantee that the Company will maintain its market share or pricing levels in sectors that are subject to competition from companies that market new technologies. Further, it is possible that increased demand for organic crops may, over time, reduce the demand for the Company’s products.
The Company faces competition from generic competitors that source product from countries having lower cost structures-The Company continues to face competition from competitors around the globe that may enter the market through either offers to pay data compensation, or similar means in foreign jurisdictions, and then subsequently source material from countries having lower cost structures (typically India and China). These competitors typically tend to operate at thinner gross margins and, with low costs of goods, tend to drive pricing and profitability of subject product lines downward. There is no guarantee that the Company will maintain market share and pricing when facing such generic competitors, or that such competitors will not offer generic versions of the Company’s products in the future.
The Company’s key customers typically carry competing product lines and may be influenced by the Company’s larger competitors-A significant portion of the Company’s products are sold to national distributors in the U.S., which also carry product lines of competitors that are much larger than the Company. Typically, revenues from the sales of these competing product lines and related program incentives constitute a greater part of our distributors’ income than do revenues from sales and program incentives arising from the Company’s product lines. With the recent consolidation among domestic distribution companies, these considerations have become more pronounced. In light of these facts, there is no assurance that such customers will continue to market our products aggressively or successfully, or that the Company will be able to influence such customers to continue to purchase our products instead of those of our competitors.
Industry consolidation may threaten the Company’s position in various markets-The global agricultural chemical industry continues to undergo significant consolidation. Many of the Company’s competitors have grown or are expected to grow through mergers and acquisitions. As a result, these competitors will tend to be in position to realize greater economies of scale, offer more diverse portfolios and thereby exert greater influence throughout the distribution channels. Consequently, the Company may find it more difficult to compete in various markets. While such merger activity may generate acquisition opportunities for the Company, there is no guarantee that the Company will benefit from such opportunities. Further, there is a risk that the Company’s future performance may be hindered by the growth of its competitors through consolidation.
The Company is dependent on a limited number of customers, which makes it vulnerable to the continued relationship with and financial health of those customers-In 2020, 2019 and 2018, our top three customers accounted for 39%, 39% and 29%, respectively, of the Company’s sales. The Company’s future prospects may depend on the continued business of such customers and on our continued status as a qualified supplier to such customers. The Company cannot guarantee that these key customers will continue to buy products from us at current levels. The loss of a key customer could have a material adverse effect on the Company’s consolidated financial statements.
General Risks
The carrying value of certain assets on the Company’s consolidated balance sheets may be subject to impairment depending upon market trends and other factors-The Company regularly reviews the carrying value of certain assets, including long-lived assets, inventory, fixed assets and intangibles. Depending upon the class of assets in question, the Company takes into account various factors including, among others, sales, trends, market conditions, cash flows, profit margins and the like. Based upon this analysis, where circumstances warrant the Company may leave such carrying values unchanged or adjust them as appropriate. There is no guarantee that these carrying values can be maintained indefinitely, and it is possible that one or more such assets could be subject to impairment which, in turn, could have an adverse impact upon the Company’s consolidated financial statements.
The Company’s computing systems are subject to cyber security risks-In the course of its operations the Company relies on its computing systems, including access to the internet, the use of third-party applications and the storage and transmission of data through such systems. While the Company has implemented security measures to protect these systems, there is no guarantee that a third-party will not penetrate these defenses through hacking, phishing or otherwise and either compromise, corrupt or shut down these systems. Further, in the event of such incursion it is possible that confidential business information and private personal data could be taken. Such an event could adversely affect both the Company’s ability to operate, its reputation with key stakeholders and its overall financial performance.
Reduced financial performance may limit the Company’s ability to borrow under its credit facility-The Company has historically grown net sales and net income through both expansion of current product lines, the acquisition of product lines from third-parties and the acquisition of both domestic and international distributors with strong niche market positions. In order to finance such acquisitions, the Company has drawn upon its senior credit facility. However, the Company’s borrowing capacity under the senior credit facility depends, in part, upon its satisfaction of a negative covenant that sets a maximum ratio of borrowed debt to earnings (as measured over the trailing 12-month period). There is no guarantee that the Company will continue to generate earnings necessary to ensure that it has sufficient borrowing capacity to support future acquisitions or that, when necessary, the lender group will amend the senior credit facility to provide for such borrowing capacity. Further, despite the Company’s long-standing relationship with its lenders, in light of the uncertainties in global financial markets there is no guarantee that the Company’s lenders will be either willing or able to continue lending to the Company at such rates and in such amounts as may be necessary to meet the Company’s working capital needs.
The Company is subject to taxation related risks in multiple jurisdictions-The Company is a U.S. based multinational company subject to tax in multiple U.S. and foreign tax jurisdictions. Significant judgment is required in determining our global provision for income taxes, deferred tax assets or liabilities and in evaluating our tax positions on a worldwide basis. While we believe our tax positions are consistent with the tax laws in the jurisdictions in which we conduct our business, it is possible that these positions may be contested or overturned by jurisdictional tax authorities, which may have a significant impact on our global provision for income taxes. Tax laws are dynamic and subject to change as new laws are passed and new interpretations of the law are issued or applied. In 2017, the U.S. enacted significant tax reform, and in the long-term certain provisions of the new law may adversely affect us. In addition, governmental tax authorities are increasingly scrutinizing the tax positions of companies. Many countries in the EU, as well as a number of other countries and organizations such as the Organization for Economic Cooperation and Development (“OECD”), are actively considering changes to existing tax laws that, if enacted, could increase our tax obligations in countries where we do business. If U.S. or other foreign tax authorities change applicable tax laws, our overall taxes could increase, and our business, financial condition or results of operations may be adversely impacted. In response to the economic situation of the COVID-19 pandemic, President Donald Trump signed into law The Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act, on March 27, 2020. The Company has considered both the income tax and non-income tax provisions of the CARES Act and has determined it has no significant impact.
To the extent that capacity utilization is not fully realized at its manufacturing facilities, the Company may experience lower profitability-While the Company endeavors continuously to maximize utilization of it manufacturing facilities, our success in these endeavors is dependent upon many factors, including fluctuating market conditions, product life cycles, weather conditions in our key markets, availability of raw materials, equipment failures, and regulatory constraints, among other things. There can be no assurance that the Company will be able to maximize the utilization of capacity at its manufacturing facilities. Underutilization of such manufacturing resources could have a material adverse effect upon the Company’s financial performance.
The Company’s continued success depends, in part, upon a limited number of key employees-Within certain functions, the Company relies heavily on a small number of key employees to manage ongoing operations and to perform strategic planning. In some cases, there are no internal candidates who are qualified to succeed these key personnel in the short term. In the event that the Company were to lose one or more key employees, there is no guarantee that Company could replace them with people having comparable skills. Further, the loss of key personnel could adversely affect the operation of our business.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None

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ITEM 2. PROPERTIES
ITEM 2
PROPERTIES
AMVAC owns in fee the Facility constituting approximately 152,000 square feet of improved land in Commerce, California (“Commerce”) on which its West Coast manufacturing, some of its warehouse facilities and some of its manufacturing administrative offices are located.
DAVIE owns in fee approximately 72,000 square feet of warehouse, office and laboratory space on approximately 118,000 square feet of land in Commerce, California, which is leased to AMVAC. In 2013, the Company made a significant investment in the Glenn A. Wintemute Research Center, which houses the Company’s primary research laboratory supporting synthesis, formulation and other new product endeavors.
In 2001, AMVAC completed the acquisition of a manufacturing facility (the “Axis Facility”) from E.I. DuPont de Nemours and Company (“DuPont”). The Axis Facility was one of three such units located on DuPont’s 510-acre complex in Axis, Alabama. The acquisition consisted of a long-term ground lease of 25 acres and the purchase of all improvements thereon. The facility is a multi-purpose plant designed for synthesis of active ingredients and formulation and packaging of finished products. In 2018, FMC Corporation acquired from DuPont a business unit, which held, among other things, the Axis Facility. Prior to expiration of the lease, AMVAC and FMC negotiated the terms of a new lease, which has a term of 15 years and the option to renew for two, 5-year periods.
On December 28, 2007, AMVAC purchased certain manufacturing assets relating to the production of Thimet and Counter and located at BASF’s multi-plant facility situated in Hannibal, Missouri (the “Hannibal Site”). Subject to the terms and conditions of the Agreement, AMVAC purchased certain buildings, manufacturing equipment, office equipment, fixtures, supplies, records, raw materials, intermediates and packaging constituting the “T/C Unit” of the Hannibal Site. The parties entered into a ground lease and a manufacturing and shared services agreement, under which BASF continues to supply various shared services to AMVAC for the Hannibal Site.
On March 7, 2008, AMVAC acquired from Bayer CropScience Limited Partnership, (“BCS LP”), a U.S. business of Bayer CropScience GmbH, a facility (the “Marsing Facility”) located in Marsing, ID, which consists of approximately 17 acres of improved real property. The Marsing Facility is engaged in the blending of liquid and powder raw materials and the packaging of some of the Company’s finished goods inventory in liquid, powder and pelletized formulations which are sold both in the U.S. and internationally. In addition, during 2019, the Company purchased approximately three acres of unimproved real estate immediately adjacent to the Marsing Facility for potential storage and operational use in the future.
On October 2, 2020, AMVAC completed the purchase of all outstanding shares of Agrinos which is a fully integrated biological input supplier with proprietary technology, internal manufacturing, and global distribution capabilities. Its High Yield Technology® product platform works in conjunction with other nutritional crop inputs to increase crop yield, improve soil health and reduce the environmental footprint of traditional agricultural practices. Agrinos has two primary biological production facilities, a state-of-the-art microbial fermentation facility based in Clackamas, Oregon, and a facility in Sonora, Mexico. The Clackamas and Sonora facilities are used as both manufacturing sites, and operational centers for global supply chain and logistics.
AVD regularly adds chemical processing equipment to enhance or expand its production capabilities. The Company believes its facilities are in good operating condition, are suitable and adequate for current needs, have flexibility to change products, and can produce at greater rates as required. Facilities and equipment are insured against losses from fire as well as other usual business risks. The Company knows of no material defects in title to, or encumbrances on, any of its properties except that substantially all of the Company’s assets are pledged as collateral under the Company’s credit facility agreements with its primary lender group. For further information, refer to note 2 of the Notes to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.
AVD owns approximately 42 acres of unimproved land in Texas for possible future expansion.
The Company leases approximately 19,953 square feet of office space located at 4695 MacArthur Court in Newport Beach, California. In September 2015, the lease was amended and was extended to expire on June 30, 2021. The premises have served as the Company’s corporate headquarters since 1994.
GemChem, OHP, Envance and TyraTech (Envance and TyraTech are co-located), AMVAC BV’s, AMVAC M’s, AMVAC CR Srl’s, AMVAC Sgpr’s, AgNova, Agrinos and AgriCenter’s facilities consist of administration, development centers (in the case of Envance and TyraTech) and/or sales offices which are leased. In addition, Defensive and Agrovant (the Company’s indirect, wholly owned subsidiaries in Brazil) own and/or lease administration and sales offices and warehouse space in Jaboticabal, Brazil.

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ITEM 3. LEGAL PROCEEDINGS
ITEM 3
LEGAL PROCEEDINGS
Please refer to Note 4 of the Notes to the Consolidated Financial Statements in Part II, item 8 of this Annual Report on Form 10-K.

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ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4
MINE SAFETY DISCLOSURES
Not Applicable
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Effective March 7, 2006, the Company listed its $0.10 par value common stock (“Common Stock”) on the New York Stock Exchange under the ticker symbol AVD. From January 1998 through March 6, 2006, the Common Stock was listed on the American Stock Exchange under the ticker symbol AVD. The Company’s Common Stock traded on The NASDAQ Stock Market under the symbol AMGD from March 1987 through January 1998.
Holders
As of February 12, 2021, the number of stockholders of the Company’s Common Stock was approximately 5,048, which includes beneficial owners with shares held in brokerage accounts under street name and nominees.
Dividends
The Company has issued a cash dividend in each of the last twenty-four years dating back to 1996. Cash dividends declared during the past three years are summarized in the table below.
Declaration Date
Distribution Date
Record Date
Dividend
Per Share
Total
Paid
December 7, 2020
January 6, 2021
December 23, 2020
$
0.020
$
March 9, 2020
April 16, 2020
March 26, 2020
0.020
Total 2020
$
0.040
$
1,178
December 9, 2019
January 9, 2020
December 26, 2019
$
0.020
$
September 16, 2019
October 17, 2019
October 3, 2019
0.020
June 10, 2019
July 12, 2019
June 28, 2019
0.020
March 6, 2019
April 10, 2019
March 27, 2019
0.020
Total 2019
$
0.080
$
2,324
December 10, 2018
January 10, 2019
December 27, 2018
$
0.020
$
September 18, 2018
October 17, 2018
October 3, 2018
0.020
June 11, 2018
July 12, 2018
June 28, 2018
0.020
March 8, 2018
April 13, 2018
March 30, 2018
0.020
Total 2018
$
0.080
$
2,342
Share Repurchase Program
On November 5, 2018, pursuant to a Board of Directors resolution, the Company announced its intention to repurchase an aggregate amount of shares with a total purchase price not to exceed $20,000 of its common stock, par value $0.10 per share, in the open market, depending upon market conditions over the short to mid-term. The Shares Repurchase Program expired on March 8, 2019. During 2019 and 2018, the Company purchased a total of 610,406 shares for a total of $9,891 at an average price of $16.20 per share.
Securities Authorized for Issuance under Equity Compensation Plans
Plan Category
Number of securities to
be issued upon exercise
of outstanding options,
warrants, and rights
Weighted-average
exercise price of
outstanding options,
warrants, rights
Number of securities
remaining available for
future issuance under
equity compensation plans
Equity compensation plans approved
by security holders
237,745
$
11.49
1,104,637
Total
237,745
$
11.49
1,104,637
Stock Performance Graph
The following graph presents a comparison of the cumulative, five-year total return for the Company, the S&P 500 Stock Index, and a peer group (Specialty Chemical Industry). The graph assumes that the beginning values of the investments in the Company, the S&P 500 Stock Index, and the peer group of companies each was $100 on December 31, 2015. All calculations assume reinvestment of dividends. Returns over the indicated period should not be considered indicative of future returns.

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ITEM 6. SELECTED FINANCIAL DATA
ITEM 6
SELECTED FINANCIAL DATA
The following table set forth the Company’s selected consolidated financial data as of and for each of the five years ended December 31, 2020 and should be read in conjunction with our audited consolidated financial statements and notes thereto included under Part II, Item 8 of this annual report.
Net sales
$
458,704
$
468,186
$
454,272
$
355,047
$
312,113
Gross profit
$
172,590
$
177,354
$
182,631
$
147,392
$
128,288
Operating income
$
22,908
$
26,221
$
39,021
$
26,794
$
20,540
Income before provision for income taxes and loss on
equity investments
$
18,447
$
19,012
$
33,596
$
24,853
$
18,917
Net income attributable to American Vanguard
$
15,242
$
13,601
$
24,195
$
20,274
$
12,788
Earnings per common share
$
0.52
$
0.47
$
0.83
$
0.70
$
0.44
Earnings per common share-assuming dilution
$
0.51
$
0.46
$
0.81
$
0.68
$
0.44
Total assets
$
680,293
$
670,098
$
593,587
$
535,592
$
429,956
Working capital
$
160,401
$
197,561
$
164,660
$
128,681
$
130,001
Long-term debt, excluding current installments
$
171,324
$
148,766
$
96,671
$
77,486
$
40,951
Stockholders’ equity
$
(18,160
)
$
344,156
$
329,230
$
305,314
$
282,357
Weighted average shares outstanding-basic
29,450
29,030
29,326
29,100
28,859
Weighted average shares outstanding-assuming dilution
29,993
29,656
30,048
29,703
29,394
Dividends per share of common stock
$
0.04
$
0.08
$
0.08
$
0.06
$
0.03
The results for reporting periods beginning after January 1, 2018 are presented under Accounting Standards Codification (“ASC”) 606. Prior period results are not adjusted and continue to be reported in accordance with historic revenue recognition, ASC 605.
Effective January 1, 2019, the Company adopted ASC 842, Leases. See Description of Business, Basis of Consolidation, Basis of Presentation and Significant Accounting Policies in notes to the Consolidated Financial Statements. Prior period results are not adjusted and continue to be reported in accordance with ASC 840.

---

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
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 2020, as compared to 2019 appears below. As permitted by SEC rules, we have omitted the discussion and analysis of our financial condition and results of operations for 2019 compared to 2018. 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, 2019, for this discussion.
MANAGEMENT OVERVIEW
Despite a prolonged pandemic which affected the general global business environment over most of the year, the Company’s performance in 2020 was steady, with a slight decline in the top line and an improvement in net income. While net sales were down 2%, as compared to 2019 ($458,704, as compared to $468,186), net income was up about 12% ($15,242, as compared to $13,601) due for the most part to the beneficial effect of both a business combination (specifically, a bargain purchase gain relating to the Agrinos acquisition) and the release of liabilities for uncertain tax positions (relating to acquisitions that were completed in 2017 and 2019). As the reader will note, many of the other factors (gross margin, factory performance and operating expenses) were in line with the prior year.
In summary, our results for 2020 were as follows. Net sales performance was mixed across our businesses. The top line of our U.S. Crop segment was up slightly, notwithstanding the restrictions placed on our activities by pandemic related protocols, which caused our customers and employees to operate on a virtual basis across the entire distribution channel. By contrast, sales of our U.S. Non-Crop business declined primarily due to reduced demand for our mosquito adulticide product, as customers worked down channel inventory. International sales rose with the addition of businesses that were acquired late in the year (Agrinos and AgNova) and improved performance in Mexico, partially offset by a restructuring in the supply channel in Central America and market softness in Brazil. Factory performance was in line with 2019.
As a result of the sales dynamics just described, absolute gross profit during 2020 was approximately 3% below that of 2019 ($172,590 vs. $177,354). Despite the sales driven decline, gross profit when expressed as a percentage of sales remained exactly in line with the prior year at 38%. Operating expenses increased by less than 2% ending at $154,339, as compared to $151,133 in 2019. This performance included multiple offsetting puts-and-takes. Within this category, selling expenses were down about 6%, while general and administrative increased by about 3%; however, that comparison is substantially impacted by the beneficial impact on 2019 expenses that did not recur in 2020, including: the fair value adjustments to contingent consideration associated with 2017 acquisitions ($3,866), and a break-up fee on an acquisition that did not complete ($500). On the other hand, in 2020, we did benefit from the release of environmental reserves established at the time of the 2019 acquisition of our Brazilian entity ($1,227), incurred a charge related to the change in fair value of certain liabilities associated with an acquisition ($250), offset by a profit on sale of some product registrations ($493). Expenses relating to Regulatory, R&D and Product Development rose by about 9%, primarily due to higher reregistration activity and continued work on our SIMPAS delivery system. Finally, freight rose by about 4% in light of increased sales of bulk products, such as soil fumigants. Overall, operating profit declined by about 13% (to $22,908 in 2020 from $26,221 in 2019).
During 2020, we benefitted from the recognition of a preliminary bargain purchase gain in the amount of $4,657 arising from the acquisition of Agrinos. Agrinos was acquired out of bankruptcy. This provided the Company with an opportunity to acquire Agrinos at an advantageous purchase price, which was below the preliminary fair value of the net assets acquired, resulting in the above-mentioned bargain purchase gain.
The Company also recorded a gain on change in fair value on a strategic equity investment in the amount of $717.
In spite of having a slightly higher average debt level, our interest expense dropped by about 28% (to $5,178 in 2020 from $7,209 in 2019) due both to timing of our borrowings and a drop in interest rates. This enabled us to report income before provision for income taxes of $18,447, as compared to $19,012 in 2019.
Our effective tax rate for 2020 ended at 16.7%, as compared to 27.4% in 2019. This improvement is primarily due to two factors; the bargain purchase gain (which is not taxable) and the net benefit of releasing liabilities (in the amount of $2,092) for uncertain tax positions related to current year positions and to acquisitions completed in 2017 and in 2019. All told, then, for the 2020 year we recorded net income up 12% at $15,242 (as compared to $13,601 in 2019) and earnings per diluted share of $0.51 (as compared to $0.46 in 2019).
When considering the consolidated balance sheet, long-term debt decreased to $107,442 as of December 31, 2020, from $148,766 as of December 31, 2019. The decreased level of debt was driven by the Company’s strong cash management during 2020, including a strong response from the Company’s biggest customers to our early-pay programs. The Company’s liquidity position improved with a closing borrowing capacity of $86,736 as of December 31, 2020, as compared to $26,977 as of December 31, 2019. Furthermore, inventories remain flat at $163,784, as of December 31, 2020, as compared to inventories of $163,313, this time last year. This included inventory associated with the two business acquisitions completed in the final three months of the year that amounted to approximately $8,340.
Results of Operations
2020 Compared with 2019:
$ Change
% Change
Net sales:
U.S. crop
$
223,167
$
220,635
$
2,532
1%
U.S. non-crop
48,557
61,590
(13,033
)
-21%
Total U.S.
271,724
282,225
(10,501
)
-4%
International
186,980
185,961
1,019
1%
Total net sales
$
458,704
$
468,186
$
(9,482
)
-2%
Cost of sales:
U.S. crop
$
124,827
$
125,206
$
(379
)
0%
U.S. non-crop
26,332
31,877
(5,545
)
-17%
Total U.S.
151,159
157,083
(5,924
)
-4%
International
134,955
133,749
1,206
1%
Total cost of sales
$
286,114
$
290,832
$
(4,718
)
-2%
Gross profit:
U.S. crop
$
98,340
$
95,429
$
2,911
3%
U.S. non-crop
22,225
29,713
(7,488
)
-25%
Total U.S.
120,565
125,142
(4,577
)
-4%
International
52,025
52,212
(187
)
0%
Total gross profit
$
172,590
$
177,354
$
(4,764
)
-3%
Gross margin:
U.S. crop
44%
43%
U.S. non-crop
46%
48%
Total U.S.
44%
44%
International
28%
28%
Total gross margin
38%
38%
Our U.S. crop business recorded net sales that were about 1% higher than those of the prior year period ($223,167 versus $220,635). After a brief period of anticipatory buying during the first few months of the pandemic, the distribution channel followed conservative procurement practices for the second and third quarters of 2020. Reduced ethanol demand, low crop commodity pricing, a strained farm economy and the COVID-19 pandemic all contributed to this approach. In the final quarter of the year, however, corn and soybean commodity price began to escalate, and Midwest purchasing patterns began to normalize, which, in turn, benefitted our soil insecticide product lines. We saw a strong performance in our soil fumigant business driven by a rebound in usage by potato growers, as pandemic-impacted restaurants and schools began to reopen. Newly acquired products, primarily for soybean, rice and corn applications, contributed to a year-over-year increase in sales and bolstered U.S. Crop gross margins as a result. Partially offsetting these increases, we recorded lower net sales of our foliar insecticide Bidrin due to low cotton commodity prices (and a concomitant decline of 11% in planted cotton acres - down 1.5 million acres to 12.2 million), unfavorable weather conditions, (drought in West Texas and hurricanes in the Southeast region) and reduced foliar pest pressure. Our cotton harvest defoliant Folex generated slightly lower sales following multiple hurricanes that struck the region destroying some harvestable acreage.
Cost of sales within the domestic crop business was slightly lower than 2019 (down to $124,827 from $125,206), gross profit improved by 3% ($98,340 in 2020 vs. $95,429 in 2019), and gross margin increased to 44% of sales as compared to 43% last year.
Sales of our U.S. non-crop business were down about 21% ($48,557 in 2020 vs. $61,590 in 2019). Our Dibrom® mosquito adulticide sales, which constitute a significant portion of overall non-crop sales, were down in 2020 as mosquito control distributors continued to work down channel inventory. Net sales of pest strips and other commercial pest control products were down significantly in 2020 as a result of widespread closure of restaurants, schools, malls and many other commercial enterprises due to pandemic restrictions. In addition, COVID protocols adversely impacted the activity of commercial pest control operators. Offsetting these factors, net sales from our OHP nursery and ornamental business were 9% higher than 2019, as demand for homeowner garden and landscape products accelerated during the second half of 2020 at retail locations around the country. Finally, our TyraTech/Envance revenues grew steadily with both direct product sales and royalty income exceeding the prior year performance.
Cost of sales in our U.S. non-crop business declined by 17% in comparison to the prior year ($26,332 in 2020 vs. $31,877 in 2019), gross profit declined by 25% ($22,225 in 2020 vs. $29,713 in 2019), and gross margin percentage declined slightly to 46% in 2020, as compared to 48% in 2019.
Net sales of our international businesses were increased by 1% in 2020 ($186,980 vs. $185,961 in 2019). During 2020, our international group successfully balanced several positive and negative factors. We enjoyed strong demand for our soil fumigants, our Counter nematicide and our bromacil herbicides, particularly in Mexico, while experiencing reduced sales of one of our traditional insecticides (Mocap) due to regulatory phase-out in the EU. We benefitted from the addition of an acquired biological products business (Agrinos) and an established Australian supplier/distributor (AgNova). However, these gains were offset in part by softer demand in Central America, primarily due to a restructuring in the supply channel, and in Brazil, primarily due to the devaluation of the Brazilian Real in comparison to last year, limited customer access (in light of coronavirus protocols), and competitive market conditions.
Cost of sales in our international business increased slightly (about 1%) to $134,955 in 2020 from $133,749 in 2019. Gross profit at approximately the same level as the prior year ($52,025 in 2020 vs. $52,212 in 2019), and gross margin held steady at 28% (as posted in both years).
On a consolidated basis, gross profit for the year decreased by 3% (ending at $172,590 in 2020, as compared to $177,354 in 2019). Gross margin percentage remained at 38%, exactly in line with the prior year.
Operating expenses in 2020 increased by $3,206 to $154,339 or 34% of sales, as compared to $151,133 or 32% in 2019. The differences in operating expenses by department are as follows:
Change
% Change
Selling
$
42,389
$
45,121
$
(2,732
)
%
General and administrative
48,828
46,593
2,235
%
Research, product development and regulatory
26,310
24,070
2,240
%
Freight, delivery and warehousing
36,812
35,349
1,463
%
Total Operating Expenses
$
154,339
$
151,133
$
3,206
%
•
Selling expenses decreased by 6% to $42,389 for the year ended December 31, 2020, as compared to $45,121 in 2019. The main drivers were the reduction in travel and entertainment expenses across all of our global operating subsidiaries, as a result of restrictions imposed in response to the COVID-19 pandemic. These reductions included the favorable impact of lower foreign currency exchange rates (as they relate to the translation to U.S. Dollars of operating expenses recorded in foreign currencies at our international subsidiaries). This performance was offset, in part, by the addition of activities of the newly acquired businesses.
•
General and administrative expenses increased by 5% to $48,828 for the year ended December 31, 2020, as compared to $46,593 in 2019. The main drivers for the slight increase were associated with the additional costs for the activities of businesses acquired in the final quarter of 2020, the beneficial impact on 2019 expenses of fair value adjustments to contingent consideration associated with 2017 acquisitions ($3,866) and a break-up fee ($500) arising from an unconsummated acquisition that did not re-occur in the current year. Although, these items that were not repeated in the current year, the negative effect was partially offset by the reduction in travel and entertainment expenses in response to the COVID-19 pandemic, a reduction in environmental reserves associated with our Brazilian business ($1,227), and a gain associated with the sales of certain registration ($485). The cost reductions just described were partly offset by an expense associated with a change in the fair value of contingent consideration in the amount of $250.
•
Research, product development and regulatory expenses increased by 9% to $26,310 in 2020, as compared to $24,070 in 2019. The main drivers were increases in our product defense and product development costs, primarily resulting from increased activities in our newly acquired businesses, partially offset by the general delays in activities with third-party service providers caused by pandemic related disruption.
•
Freight, delivery and warehousing costs for the year ended December 31, 2020 increased by 4% to $36,812, as compared to $35,349 in 2019. This is mainly due to product mix and locations of customers. When expressed as a percentage of sales, freight costs increased slightly year over year to 7.9% in 2020, as compared to 7.5% in 2019.
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 positive fair value adjustments in the amount of $717.
At the end of 2020 the Company completed on the acquisition of Agrinos. In addition to a manufacturing plant in California, Agrinos has operating entities in a number of foreign countries including a manufacturing site in Mexico. The Company acquired Agrinos out of bankruptcy and secured an economically advantageous purchase. The Company engaged a third-party valuation specialist to assist in establishing the preliminary fair value of the assets acquired. The valuation is mainly driven by future projected cash flows. The preliminary fair value of the net assets acquired, established with the assistance of a third-party valuation specialist, indicates that this acquisition resulted in a bargain purchase gain as the fair value of the acquired net assets exceeds the purchase price consideration. Accordingly, the Company has recorded a preliminary gain in the amount of $4,657 included in operating income in 2020.
Net interest expense was $5,178 in 2020, as compared to $7,209 in 2019. Interest costs are summarized in the following table:
Average Indebtedness and Interest expense
Average
Debt
Interest
Expense
Interest
Rate
Average
Debt
Interest
Expense
Interest
Rate
Working capital revolver
$
170,801
$
5,158
3.0
%
$
166,828
$
6,857
4.1
%
Interest income
-
(89
)
-
-
(182
)
-
Amortization of deferred loan fees
-
-
-
-
Amortization of other deferred liabilities
-
-
-
-
Other interest expense
-
-
-
-
Subtotal
170,801
5,502
3.2
%
166,828
7,524
4.5
%
Capitalized interest
-
(324
)
-
-
(315
)
-
Total
$
170,801
$
5,178
3.0
%
$
166,828
$
7,209
4.3
%
The Company’s average overall debt for the year ended December 31, 2020 was $170,801, as compared to $166,828 for the year ended December 31, 2019. On a gross basis, our effective interest rate decreased on our working capital revolver to 3.0%, as compared to 4.1% in 2019. This decrease was driven by decreases in the LIBOR rate. After adjustments related to capitalized interest and expenses related to the amortization of deferred liabilities, the overall effective interest rate was 3.0% for 2020 and 4.3% 2019.
Our provision for income taxes for 2020 was $3,080, as compared to $5,202 for 2019. The effective tax rate for 2020 was 16.7%, as compared to 27.4% in 2019.
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 2017 through 2019 tax years. State income tax returns are subject to examination for the 2016 through 2019 tax years. The Company has other foreign income tax returns subject to examination.
For the years ended December 31, 2020 and 2019, the Company recorded net losses on its equity investments of $125 and $209, respectively.
Net income attributable to American Vanguard was $15,242 or $0.51 per diluted share in 2020 as compared to $13,601 or $0.46 per diluted share in 2019.
Liquidity and Capital Resources
The Company generated $89,198 of cash from operating activities during the year ended December 31, 2020, as compared to $9,569 in the prior year. Included in the $89,198 are net income of $15,242, plus non-cash depreciation, amortization of intangibles and other assets and discounted future liabilities, in the amount of $23,849, amortization of deferred loan fees of $300, revision of contingent consideration of $250, provision for bad debts in the amount of $1,002. In addition, stock-based compensation of $6,561, loss from equity method investments of $125, change in investment fair value of $717, change in value of deferred income taxes of $969, change in reserves for uncertain tax positions of $2,092, a bargain purchase gain in the amount of $4,657 and other items amounting to $128, resulted in net cash provided by operating activities of $40,960, as compared to $43,686 for the same period of 2019.
During 2020, the Company decreased working capital by $37,160, as compared to the position at December 31, 2019. Included in this change: accounts receivables decreased by $15,559, inventories decreased by $7,421, income taxes increased by $287, and prepaid expenses decreased by $140. Deferred revenue increased by $36,803, as compared to December 31, 2019, driven by individual customer decisions to make early payments in return for early cash incentive programs. Our accounts payable balances decreased by $8,124, program accruals decreased by $2,517 and other payables and accrued expenses decreased by $775.
With regard to our program accrual, the year-over-year change is primarily driven by the mix of sales and customers in 2020, 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 2020, the Company made accruals in the amount of $66,622 and made payments in the amount of $68,880. During 2019, the Company made accruals in the amount of $63,579, acquired certain liabilities in the amount of $7,247 as part of an acquisition, and made payments in the amount of $60,476.
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 $35,795 for the year ended December 31, 2020, as compared to $54,837 in 2019. 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. The Company spent $1,190 on an equity investment. In addition, in 2020, $11,249 was spent on capital expenditures primarily focused on continuing to invest in manufacturing infrastructure. In 2019, the Company spent $41,852 in business and product acquisitions including intangible assets, goodwill, working capital and fixed assets as well as patent application costs, and $12,985 on capital expenditures primarily focused on our manufacturing facilities.
During the year ended December 31, 2020, financing activities used $43,213, principally making repayments on the Company’s senior credit facility, as compared to providing $46,406 for the year ended December 31, 2019. This included net repayments of $41,624 on our credit facility in 2020, as compared to net borrowings of $51,900 in 2019. During the year, we paid dividends to stockholders amounting to $1,168, as compared to $2,323 in 2019. Finally, the Company did not repurchase common stock at market in 2020, as compared to repurchases of $2,604 in prior year.
The Company has various loans in place that together constitute the long-term loan balances shown in the consolidated balance sheets as at December 31, 2020 and 2019. These are summarized in the following table:
Indebtedness
Revolving line of credit
$
107,900
$
149,300
Debt issuance costs
(458
)
(534
)
Total indebtedness
$
107,442
$
148,766
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 revolving line of credit agreement (the “Credit Agreement”) is a senior secured lending facility among AMVAC, the Company’s principal operating subsidiary, as borrower, and affiliates (including the Company, AMVAC CV and AMVAC BV), as guarantors and/or borrowers, on the one hand, and a group of commercial lenders led by Bank of the West as agent, swing line lender and Letter of Credit issuer on the other hand, consisting of a line of credit of up to $250,000, an accordion feature of up to $100,000 and a maturity date of June 30, 2022. The Credit Agreement contains two key financial covenants; namely, borrowers are required to maintain a Consolidated Funded Debt Ratio of no more than 3.25-to-1 and a Consolidated Fixed Charge Covenant Ratio of at least 1.25-to-1. The Company’s borrowing capacity varies with its financial performance, measured in terms of EBITDA as defined in the Credit Agreement, for the trailing twelve-month period. Under the Credit Agreement, revolving loans bear interest at a variable rate based, at borrower’s election with proper notice, on either (i) LIBOR plus the “Applicable Rate” which is based upon the Consolidated Funded Debt Ratio (“Eurocurrency Rate Loan”) or (ii) the greater of (x) the Prime Rate, (y) the Federal Funds Rate plus 0.5%, and (z) the Daily One-Month LIBOR Rate plus 1.00%, plus, in the case of (x), (y) or (z) the Applicable Rate (“Alternate Base Rate Loan”). Interest payments for Eurocurrency Rate Loans are payable on the last day of each interest period (either one, two, three or six months, as selected by the borrower) and the maturity date, while interest payments for Alternate Base Rate Loans are payable on the last business day of each month and the maturity date. The interest rate on December 31, 2020 was 2.75%.
As of April 22, 2020, AMVAC, as borrower, and certain affiliates amended the Credit Agreement., The Credit Agreement, as amended, has the same term and loan commitments, however the maximum permitted consolidated funded debt ratio (the “CFD Ratio”) has been increased from 3.25-to-1 to the following schedule: 4.00-to-1 through September 30, 2020, stepping down to 3.75-to-1 through December 31, 2020, 3.5-to-1 through March 31, 2021 and 3.25-to-1 thereafter. In addition, to the extent that it completes acquisitions totaling $15 million or more in any 90-day period, AMVAC may step-up the CFD Ratio by 0.5-to-1, not to exceed 4.25-to-1, for the next three full consecutive quarters. Finally, to the extent that a proposed acquisition is at least $30 million but less than $50 million, the consent of the Lead Agent is required. Larger acquisitions continue to require the consent of a majority of the Lenders.
At December 31, 2020, 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 $86,736. This compares to an available borrowing capacity of $26,977 as of December 31, 2019. 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 all the debt covenants as of December 31, 2020.
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 of the Company’s assets are pledged as collateral under the Credit Agreement, as amended.
Contractual Obligations and Off-Balance Sheet Arrangements
The following summarizes our contractual obligations at December 31, 2020, and the effects such obligations are expected to have on cash flows in future periods:
Payments Due by Period
Total
Less than
1 Year
1-3
Years
4-5
Years
After
5 Years
Long-term debt (1)
$
107,900
$
-
$
107,900
$
-
$
-
Estimated interest liability (2)
4,856
3,237
1,619
-
-
Contingent consideration on business acquisitions
2,468
1,004
1,464
-
-
Employment agreements
2,158
1,456
-
-
Operating leases-rental properties and equipment
10,542
3,014
3,405
2,103
2,020
Operating leases-vehicles
2,585
1,287
1,208
-
Transition taxes (3)
-
-
$
131,292
$
9,244
$
117,250
$
2,778
$
2,020
(1)
Under the terms of the credit facility, all debt outstanding is due when the agreement expires on June 30, 2022.
(2)
Estimated interest liability has been calculated using the average effective rate for 2020 for each category of debt over the remaining term of the debt and taking into account scheduled repayments. The revolving line has been assumed to be constant (i.e. $107,900) throughout the remaining term. All our debt is linked to LIBOR rates.
(3)
The Company elected to pay the transition tax related to the Tax Reform Act over an eight-year period. Total amount has been adjusted to reflect 2017 income tax overpayment applied to transition tax.
There were no significant other off-balance sheet arrangements as of December 31, 2020.
In addition to the above contractual obligations, $3,222 of unrecognized tax benefits and $4,195 of accrued penalties and interest have been recorded as long-term liabilities as of December 31, 2020. We are uncertain as to if or when such amounts may be settled, or any tax benefits realized.
Recently Issued Accounting Guidance
Please refer to Notes of Consolidated Financial Statements - Description of Business, Basis of Consolidation, Basis of Presentation and Significant Accounting Policies in the accompanying Notes to the Consolidated Financial Statements 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 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.
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.
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 and Allowance for Doubtful Accounts- 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.
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 and binding purchase order, 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 time 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, material, 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 manufacturing cost.
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. On January 1, 2019, the Company adopted the accounting and adoption guidance in 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 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 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 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, 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, 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. 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:
•
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.
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-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 a number of 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 deferred tax assets will be realized. 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.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk related to changes in interest rates, primarily from its borrowing activities. The Company’s indebtedness to its primary group of lenders is evidenced by a line of credit with a variable rate of interest, which fluctuates with changes in the lender’s reference rate (LIBOR). The Company may use derivative financial instruments for trading purposes to protect trading performance from exchange rate fluctuations on material contracts, though there are no such instruments in place during any periods presented in this Annual Report.
The Company conducts business in various foreign currencies, primarily when doing business in Europe, Mexico, Central and South America. Therefore, changes in the value of the currencies of such countries or regions affect the Company’s financial position and cash flows when translated into U.S. Dollars. The Company has mitigated, and will continue to mitigate, a portion of its currency exchange exposure through natural hedges based on the operation of decentralized foreign operating companies in which the majority of all costs are local-currency-based. A 10% change in the value of all foreign currencies would have an immaterial effect on the Company’s financial position and cash flows. As part of an on-going process of assessing business risk, management has identified risk factors which are disclosed in Item 1A. Risk Factors of this Report on Form 10-K.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and Supplementary Data required by this item are listed at Part IV, Item 15, Exhibits, and Financial Statement Schedules.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.

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ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9A
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Management, under the supervision of the Company’s Chief Executive Officer and Chief Financial Officer, periodically evaluate the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based upon this evaluation, as of December 31, 2020, the Chief Executive Officer and the Chief Financial Officer have concluded that these disclosure controls and procedures are effective in ensuring that the information required to be disclosed in reports filed under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported on a timely basis, and (ii) accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934 for the Company. The Company’s internal control system over financial reporting is designed to provide reasonable assurance to management and the Board of Directors as to the fair, reliable and timely preparation and presentation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America filed with the SEC.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even processes determined to be effective can provide only reasonable assurance with respect to the financial statement preparation and presentation.
Management conducted an evaluation of the Company’s internal controls over financial reporting based on a framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (2013). This evaluation included review of the documentation of controls, evaluation of the design effectiveness of controls, testing of the effectiveness of controls and a conclusion on the evaluation. Based on this evaluation, management believes that as of December 31, 2020, the Company’s internal control over financial reporting is effective.
Management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2020, excluded Agrinos and AgNova, which were both acquired by the Company in the fourth quarter of 2020. Total assets acquired constituted less than 5% of the Company’s consolidated total assets and revenue from Agrinos and AgNova included in the Company’s consolidated statements of operations amounted to less than 1%. Companies are allowed to exclude acquisitions from their assessment of internal control over financial reporting during the first year of an acquisition while integrating the acquired company under guidelines established by the SEC. The Company has elected to exclude these acquisitions from its assessment of internal controls over financial reporting.
BDO USA, LLP, the independent registered public accounting firm that audited the consolidated financial statements included in the Annual Report on Form 10-K, was engaged to attest to and report on the effectiveness of AVD’s internal control over financial reporting as of December 31, 2020. Its report is included herein.
Changes in Internal Controls over Financial Reporting
There were no changes in internal controls over financial reporting during the fourth quarter of the year ended December 31, 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
American Vanguard Corporation
Newport Beach, California
Opinion on Internal Control over Financial Reporting
We have audited American Vanguard Corporation’s (the “Company’s”) internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Company as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and financial statement schedule listed in the accompanying index and our report dated March 31, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A, Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
As indicated in the accompanying Item 9A, Management’s Report on Internal Control over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Agrinos and AgNova, which were acquired during the fourth quarter of 2020, and which are included in the consolidated balance sheet of the Company as of December 31, 2020, and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for the year then ended. Agrinos and AgNova constituted less than 5% of total assets as of December 31, 2020 and less than 1% of total sales for the year ended December 31, 2020. Management did not assess the effectiveness of internal control over financial reporting of Agrinos and AgNova because of the timing of the acquisition. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of Agrinos and AgNova.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ BDO USA, LLP
Costa Mesa, California
March 31, 2021
AMERICAN VANGUARD CORPORATION
AND SUBSIDIARIES

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ITEM 9B. OTHER INFORMATION
ITEM 9B
OTHER INFORMATION
None.
AMERICAN VANGUARD CORPORATION
AND SUBSIDIARIES
PART III

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 10
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information set forth under the captions “Executive Officers of the Company,” “Election of Directors,” “Information about the Board of Directors and Committees of the Board” and “Transactions with Management and Others-Section 16(a) Beneficial Ownership Reporting Compliance” in our definitive proxy statement for our Annual Meeting of Stockholders to be held on June 4, 2021 (the “Proxy Statement”), which will be filed with the SEC within 120 days of the end of our fiscal year ended December 31, 2020, is incorporated herein by reference.

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ITEM 11. EXECUTIVE COMPENSATION
ITEM 11
EXECUTIVE COMPENSATION
Except as specifically provided, the information set forth under the captions “Compensation of Executive Officers” and “Information about the Board of Directors and Committees of the Board-Compensation of Directors” in the Proxy Statement is incorporated herein by reference.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
ITEM 12
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The disclosure contained in Part II, Item 5 under “Equity Compensation Plan Information” is incorporated herein by reference. Information regarding security ownership of certain beneficial owners and management is incorporated by reference to the information set forth under the caption “Security Ownership of Certain Beneficial Owners and Management” in the Proxy Statement.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information set forth under the captions “Transactions with Management and Others” and “Information about the Board of Directors and Committees of the Board” in the Proxy Statement is incorporated herein by reference.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 14
PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information regarding principal accountant fees and services is incorporated herein by reference to the information set forth under the caption “Ratification of the Selection of Independent Registered Public Accounting Firm-Relationship of the Company with Independent Registered Public Accounting Firm” in the Proxy Statement.
AMERICAN VANGUARD CORPORATION
AND SUBSIDIARIES
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15
EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
(a)
The following documents are filed as part of this report:
Index to Consolidated Financial Statements and Supplementary Data:
Description
Page No
Financial Statement Schedule:
Schedule II_A Valuation and Qualifying Accounts
Financial Statements:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2020 and 2019
Consolidated Statements of Operations for the Years Ended December 31, 2020, 2019, and 2018
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2020, 2019, and 2018
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2020, 2019 and 2018
Consolidated Statements of Cash Flows for the Years Ended December 31, 2020, 2019, and 2018
Notes to Consolidated Financial Statements
(b)
Exhibits Index
AMERICAN VANGUARD CORPORATION
AND SUBSIDIARIES
EXHIBIT INDEX
ITEM 15
Exhibit
Number
Description of Exhibit
3.1
Amended and Restated Certificate of Incorporation of American Vanguard Corporation (filed as Exhibit 3.1 to the Company’s Form 10-K for the year ended December 31, 2003, which was filed on March 30, 2004 with the Securities Exchange Commission and incorporated herein by reference).
3.2
Certificate of Amendment of Amended and Restated Certificate of Incorporation of American Vanguard Corporation (filed as Exhibit 3.2 to the Company’s Form 10-Q/A for the period ended June 30, 2004, which was filed with the Securities Exchange Commission on February 23, 2005 and incorporated herein by reference).
3.3
Amended and Restated Bylaws of American Vanguard Corporation dated as of June 5, 2014 (filed as Exhibit 99.1 to the Company’s Form 8-K, which was filed with the Securities Exchange Commission on June 7, 2014 and incorporated herein by reference.)
Form of Indenture (filed as Exhibit 4.4 to the Company’s Registration Statement on Form S-3 (File No. 333-122981) and incorporated herein by reference).
10.1
American Vanguard Corporation Employee Stock Purchase Plan (filed as Appendix A to the Company’s Proxy Statement filed with the Securities and Exchange Commission on April 23, 2018 and incorporated herein by reference).
10.2
American Vanguard Corporation Amended and Restated Stock Incentive Plan as of June 8, 2016 (filed as Appendix A to the Company’s Proxy Statement filed with the Securities and Exchange Commission on April 25, 2016 and incorporated herein by reference).
10.3
Form of Incentive Stock Option Agreement under the American Vanguard Corporation Fourth Amended and Restated Stock Incentive Plan , (filed as Exhibit 10.3 with the Company’s Annual Report on Form 10-K for the period ended December 31, 2004, which was filed with the Securities and Exchange Commission on March 16, 2005 and incorporated herein by reference).
10.4
Form of Non-Qualified Stock Option Agreement under the American Vanguard Corporation Fourth Amended and Restated Stock Incentive Plan , (filed as Exhibit 10.4 with the Company’s Annual Report on Form 10-K for the period ended December 31, 2004, which was filed with the Securities and Exchange Commission on March 16, 2005 and incorporated herein by reference).
10.5
Employment Agreement between American Vanguard Corporation and Eric G. Wintemute dated January 15, 2008 (filed as Exhibit 10.5 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, which was filed with the Securities Exchange Commission on March 17, 2008 and incorporated herein by reference).
10.8
Form of Change of Control Severance Agreement, dated effective as of January 1, 2004, between American Vanguard Corporation and its executive and senior officers (filed as Exhibit 10.2 to the Company’s Form 10-Q for the period ended March 31, 2004, which was filed with the Securities Exchange Commission on May 17, 2004 and incorporated herein by reference.)
10.9
Form of Amendment of Change of Control Severance Agreement, dated effective as of July 11, 2008, between American Vanguard Corporation and named executive officers and senior officers (filed as Exhibit 99.1 to the Company’s Form 8-K, which was filed on July 11, 2008 with the Securities and Exchange Commission and incorporated herein by reference).
10.10
Form of Indemnification Agreement between American Vanguard Corporation and its Directors (as filed as Exhibit 10.7 to the Company’s Annual Report on Form 10-K for the period ended December 31, 2004, which was filed with the Securities and Exchange Commission on March 16, 2005 and incorporated herein by reference).
10.11
Description of Compensatory Arrangements Applicable to Non-Employee Directors (as set forth on page 34 of the Company’s Proxy Statement which was filed with the Securities and Exchange Commission on April 22, 2019 and incorporated herein by reference).
AMERICAN VANGUARD CORPORATION
AND SUBSIDIARIES
Exhibit
Number
Description of Exhibit
10.12
Form of Restricted Stock Agreement between American Vanguard Corporation and named executive officers dated as of November 13, 2020.*
10.14
Form of Performance-Based Restricted Stock Units Award Agreement between American Vanguard Corporation and named executive officer dated as of November 13, 2020.*
10.15
Form of American Vanguard Corporation Amended and Restated Stock Incentive Plan TSR-Based Restricted Stock Units Award Agreement dated June 6, 2013 (filed as Exhibit 10.15 to the Company’s 10-K, which was filed with the Securities Exchange Commission on February 28, 2014 and incorporated herein by reference).
10.16
Form of American Vanguard Corporation Amended and Restated Stock Incentive Plan Performance-Based Restricted Stock Units Award Agreement dated June 6, 2013 (filed as Exhibit 10.16 to the Company’s 10-K, which was filed with the Securities Exchange Commission on February 28, 2014 and incorporated herein by reference).
10.17
Third Amendment to Second Amended and Restated Credit Agreement dated as of June 30, 2017 among AMVAC and certain affiliates on the other hand, and a group of commercial lenders led by Bank of the West as agent, swing line lender, and letter of credit issuer, on the other hand (filed as Exhibit 10.1 to the Company’s Form 8-K, which was filed with the Securities Exchange Commission on July 6, 2017 and is incorporated herein by reference).
10.18
Fourth Amendment to Second Amended and Restated Credit Agreement dated as of November 27, 2019 among AMVAC and certain affiliates, on the one hand, and a group of commercial lenders led by Bank of the West as agent, swing line lender, and letter of credit issuer, on the other hand (filed with the Company’s Form 10-K for the period ended December 31, 2019).
List of Subsidiaries of the Company.*
Consent of BDO USA, LLP, Independent Registered Public Accounting Firm.*
31.1
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32.1
Certifications Pursuant to 18 U.S.C. Section 1350 as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
The following materials from American Vanguard Corp’s Annual Report on Form 10-K for the year ended December 31, 2020, formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Operations; (iii) Consolidated Statements of Stockholders’ Equity; (iv) Consolidated Statements of Comprehensive Income; (v) Consolidated Statements of Cash Flows; and (vi) Notes to Consolidated Financial Statements, tagged as blocks of text.*
101.INS
Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document.
101.SCH
Inline XBRL Taxonomy Extension Schema Document
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
Cover Page Interactive Data File (embedded within the Inline XBRL document)
*
Filed herewith.
AMERICAN VANGUARD CORPORATION
AND SUBSIDIARIES
(c)
Valuation and Qualifying Accounts:
Schedule II-A-Valuation and Qualifying Accounts
Allowance for Doubtful Accounts Receivable (in thousands)
Balance at
Additions
Charged to
Foreign
Balance at
Fiscal Year Ended
Beginning of
Period
Costs and
Expenses
exchange
impact
End of
Period
December 31, 2020
$
2,300
1,002
(5
)
$
3,297
December 31, 2019
$
1,263
1,035
$
2,300
December 31, 2018
$
1,216
$
1,263
Inventory Reserve (in thousands)
Balance at
Balance at
Fiscal Year Ended
Beginning of
Period
Additions
Deductions
End of
Period
December 31, 2020
$
2,130
1,120
(382
)
$
2,868
December 31, 2019
$
1,989
(432
)
$
2,130
December 31, 2018
$
3,137
(1,624
)
$
1,989
See accompanying report of independent registered public accounting firm on page 38 of this annual report.