AMERICAN VANGUARD CORP (AVD)

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; tariffs on imported goods; the potential for attaining the full benefits of our transformation initiatives; product development and commercialization difficulties; capacity and supply constraints or difficulties; availability of capital resources; the impact of, and our ability to remediate, the identified material weaknesses in our internal controls over financial reporting; and 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 2024, as compared to 2023, appears below.

MANAGEMENT OVERVIEW

During 2024, AVD took decisive and necessary measures to transform its entire enterprise into a platform for stronger growth and profitability. First, the Company engaged third party consultants to initiate a business transformation on multiple fronts (e.g., driving down supply chain cost, optimizing manufacturing, establishing strategic go-to-market approach and structural reorganization). These transformation efforts are expected to yield substantial benefits by 2026. Second, working with ERP provider QAD, the Company initiated a global-wide digital transformation to put all our businesses on one ERP platform with standardized processes. Third, the Company recruited and hired a new CEO to help expedite the transformation, following a charge to "simplify, execute and deliver." Fourth, in the process of examining its investments, inventory trends and assets, the Company concluded that certain assets - primarily, the Company’s investment in SIMPAS, and two herbicide products - were impaired. Taken together with the goodwill impairment, various business transformation related expenses, the expenses associated with the decision to voluntarily recall Dacthal products, and certain inventory write downs, the Company incurred nonrecurring charges of $117,355 during 2024. That said, the vast majority of business transformation expenses were incurred in 2024, and in subsequent years, the Company will be advancing the implementation plan largely through internal resources. Further, the Company proceeds into 2025 with an improved balance sheet and strong, focused leadership for realizing the benefits from our transformation efforts.

Turning to financial performance, the Company’s overall performance in 2024 declined as compared to 2023 due in part to the uneven impact of nonrecurring charges as described in the immediately preceding paragraph and in part to persistently low commodity prices and high input costs which negatively impacted the agricultural economy. Supply chains are beginning to normalize, but given the current economic backdrop it may be some time before consumers are inclined to meaningfully increase their inventory levels. Some pockets of strength are present, with biofertilizers, biostimulants and biochemicals growing much faster than the broader agricultural economy. The Company has made significant investment in these areas of growth, has benefited from this investment and expects to do so in the future. Across the broader agricultural economy, the company expects a gradual recovery looking forward from 2024, during which channel inventory was higher-than-historically normal.

Within this context, the Company experienced a drop in overall sales of approximately 5% during 2024, with domestic sales down 9% and international sales increasing by 1%. Most of the underperformance in sales was driven by two factors - a 40% drop in sales of the granular insecticide Aztec following unusually high sales in the prior year as a result of a period of product unavailability, and the impact of the voluntary cancellation and recall of the herbicide Dacthal.

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Cost of sales remained high, increasing by 7% to end at 78% of net sales. The increase is attributed to the impact of the Dacthal recall which resulted in approximately $12,200 in credits to customers and $3,153 in inventory write downs and disposal costs, the decision to record additional reserves in the amount of $21,417 regarding obsolete and slow-moving inventories resulting from the Company's strategic review of its product portfolio to identify areas that were not positively contributing to generating shareholder value. and, where relevant, the estimated disposal costs. Further, the Company experienced some pockets of generic pressure in our international markets resulting in lowering prices to maintain market position. In addition, the Company incurred higher raw material costs as a result of inflationary pressure on raw material input prices. Finally, factory performance generated a higher net expense, as compared to 2023, as the Company worked to manage inventory levels in the face of market destocking activity. As a result, gross margin dropped to 22% in 2024 from 31% as compared to the prior year.

Operating expenses rose by about 42% in 2024, as compared to 2023, due primarily to certain non-cash asset impairment charges and our digital and structural transformation strategy. Primarily as a result of the nonrecurring impairment charges, operating expenses rose as a percentage of net sales to 40% in 2024, as compared to 27% in 2023.

With continued comparative lower sales and higher inventory level, during 2024, the Company’s average indebtedness increased to $195,160, as compared to $167,976 during 2023 and, coupled with higher interest rates, interest expense for the year rose. Net sales improved in the fourth quarter and, coupled with customer prepayment activity, enabled the Company to reduce inventory and indebtedness by December 31, 2024.

On a full-year basis, the Company generated net loss of $126,340 (or $4.50 per share), as compared to generating a net income of $7,519 (or $0.26 per share) during 2023. Details of our financial performance are set forth below.

Results of Operations

2024 Compared with 2023:

Net sales of our U.S. crop business were 15% lower than those of the prior year. The three key factors driving performance lower were the recall of Dacthal, lower sales of Aztec and lower agriculture acreage planted. During 2024, the Company halted manufacturing and then voluntarily cancelled the product registration for Dacthal following USEPA's preliminary findings of a potential adverse effect based upon a single study. The product recall associated with this cancellation negatively impacted 2024 revenue and profitability. With respect to Aztec, customer purchases exceeded end-user demand in 2023, and these customers worked down excess inventory in 2024, negatively impacting sales of this high-margin product. We expect demand patterns for Aztec to normalize over 2025. Further, negatively impacting results were the number of agriculture acres planted, as compared to 2023, with corn acres 4% lower than the prior year. Weak agricultural commodity prices, leading to lower farm net-income, were the reason that fewer acres were planted in 2024.

Net sales of our U.S. non-crop business were 9% higher than those of the previous year. This improvement was driven by our business-to-business technical sales, along with growth in mosquito vector solutions. The company expects the non-crop business to continue to grow over the coming quarters driven by business-to-business gains and growth across all segments.

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Net sales of our International businesses were 1% higher than those of the previous year. Granular soil insecticides sales, our largest international product category, exhibited strength, increasing by 10% as compared to the prior period, while herbicide sales decreased by approximately 27%. Generic crop protection products continued to create a difficult pricing environment for many of our products, and results were negatively impacted near the year-end by strength in the U.S. Dollar and the attendant effect of foreign currency exchange.

Overall costs of sales increased by 7% across our U.S. crop, U.S. non-crop and International. The increased cost of sales can be attributed to elevated raw material prices, which were fueled by broad-based inflationary pressures. In addition, as part of its strategic review, the Company has completed a comprehensive assessment of its inventories and determined that a number of items are either obsolete or slow moving and has taken a write down of $21,417 to reflect the net realizable value of these items.

Operating expenses increased by $66,003 in 2024 to $221,872, as compared to $155,869 in 2023. The differences in operating expenses by department are as follows:

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Selling, general and administrative expenses increased to end at $106,295 for the year ended December 31, 2024, as compared to $103,605 in 2023. Included within this expense, the Company's leadership team made the decision to pay a modest bonus to all employees as a recognition of the steadfast support for the Company’s transformation efforts during a challenging year.

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Amortization ended the year at $13,339 which was slightly up in comparison to the prior year and included accelerated amortization of $179 associated with two small assets.

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Research, product development and regulatory expenses decreased by 13% to $32,662 in 2024, as compared to $38,025 in 2023. The costs were reduced by lower spending as the Company made the decision to stop investing in the development and commercialization of the SIMPAS proprietary delivery systems.

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Transformation cost of $20,162 relate to the Company’s digital and structural transformation project. The digital transformation effort is intended to ensure that business process owners have access to current and complete data that has been generated through standardized processes. The structural transformation effort is intended to improve operating leverage by applying business analytics to current operations, structures, products and services. Included in these costs, the Company made the decision that it was necessary to recruit a new CEO to drive the business transformation. During 2024, third party consultants were engaged by the Company to assist it in navigating the project to gain the maximum benefit at the earliest possible time.

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Asset impairments of $50,414 includes costs associated with the Company’s determination that its investment in its SIMPAS technology is impaired. The impairment impacted fixed and intangible assets and resulted in a non-cash charges of $17,683. In addition, the Company recorded non-cash impairment charges related to its domestic and international goodwill assets in the amount of $27,049. Secondly, the Company concluded that there was an asset impairment related to the purchase of two herbicide products. The market for these two products has been greatly reduced by weed resistance and competitive products. As such, the Company has decided to no longer market the product, and recorded a non-cash impairment charge of $5,682.

On April 1, 2020, the Company made a strategic investment in Clean Seed Inc. (Clean Seed) in the amount of $1,190. The investment is carried at fair value and is included in other assets on the Company’s consolidated balance sheets. The Company recorded a gain related to Clean Seed’s change in fair value in the amount of $513 during 2024, as compared to losses of $359 in 2023. These gains and losses are included in change in fair value of equity investments on the Company’s consolidated statements of operations.

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Net interest expense was $16,243 in 2024, as compared to $12,639 in 2023. Interest costs are summarized in the following table:

The Company’s average debt for the year ended December 31, 2024, was $195,160, as compared to $167,976 for the year ended December 31, 2023. The increase in average debt can be in large part attributed to the global agriculture market continuing to focus on buying smaller individual order quantities frequently and closer to the time of use and with enhanced focus on their own inventory levels. This effective destocking of the channel is a global agricultural market reaction to high interest rates and the drive by distribution to push working capital back to manufacturers. Our effective interest rate on our senior credit facility increased to 8.0%, as compared to 7.2% in 2023.

Our provision for income taxes for 2024 was $5,882, as compared to $2,778 for 2023. The effective tax rate for 2024 was negative 4.9%, as compared to 27.0% in 2023. The decrease of the effective tax rate in 2024, as compared to 2023, was primarily due to the establishment of a valuation allowance recorded against the U.S. net deferred tax assets during 2024.

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 2021 through 2023 tax years. State income tax returns are subject to examination for the 2020 through 2023 tax years. The Company has other foreign income tax returns subject to examination.

Net loss was $126,340 or $4.50 per basic share and diluted share in 2024, as compared to a net income of $7,519 or $0.27 per basic and $0.26 per diluted share in 2023.

Comprehensive loss was $139,170 in 2024, as compared to a comprehensive income of $13,738 in 2023. In addition to net (loss) income, foreign currency translation adjustment, net of tax is included in comprehensive (loss) income. The foreign currency translation adjustment, net of tax, was negative $13,824 in 2024, as compared to a positive $6,219 in 2023. The negative adjustment in 2024 was driven by the US Dollar getting stronger compared to the local currencies of the Company's international operations in Mexico, Brazil, and Australia, which use the respective local currencies as their functional currency.

Liquidity and Capital Resources

Cash in operating activities provided $3,923 during the year ended December 31, 2024, as compared to cash used in operating activities of $58,748 in the prior year. Included in the $3,923 are net loss of $126,340, plus non-cash depreciation, amortization of intangibles and other long-term assets in the amount of $22,548, amortization of deferred loan fees and discounted liabilities of $536, gain on disposal of property, plant and equipment of $1,000, impairment of assets including fixed assets, intangible assets and goodwill of $50,414, and provision for bad debts in the amount of $2,319. In addition, stock-based compensation of $4,412, change in value of deferred income taxes of $1,462, change in value for uncertain tax positions or unrecognized tax benefits of $1,547, change in fair value of investments of $2,356, non-cash lease expense of $37, and net foreign currency adjustment of $804, resulted in net cash used in operating activities (prior to changes in assets and liabilities associated with operations, net of business combinations) of $44,083, as compared to net cash provided by operating activities of $29,713 for the same period of 2023.

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The Company’s working capital decreased by $54,983 at December 31, 2024. Included in this change, accounts receivable increased by $11,073 as a result of timing of orders, mix of customers, products and jurisdictions, inventories decreased by $35,213 as a result of a hard drive to reduce inventories and the result of recording certain inventory write downs, tax receivable increased by $3,775 driven by losses recorded at the end of 2024, and prepaid expenses increased by $654. Customer prepayments decreased by $12,882, driven by customer decisions to make early payments in return for future discounts on product purchases as part of the Company’s early cash incentive programs and their choices about when to utilize the prepaid amounts. Our accounts payable balances increased by $3,714 primarily due to timing of supplier invoice due dates and the drive by the Company to reduce inventory in the final quarter of the year. Program accruals increased by $1,775, and other payables and accrued expenses increased by $17,202.

With regard to our program accrual, the year-over-year change is primarily driven by the mix of product line sales and customers in 2024, 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 August 31st of each year. During 2024, the Company made accruals in the amount of $93,301 and payments in the amount of $92,188. During 2023, the Company made accruals in the amount of $93,264 and payments in the amount of $85,931.

Cash used for investing activities amounted to $6,623 for the year ended December 31, 2024, as compared to $17,017 in 2023. In 2024, the Company spent $7,279 on capital expenditures primarily focused on continuing to invest in manufacturing infrastructure focused on safety and improvement of production efficiency and capabilities. Furthermore, the Company spent $409 on registrations and patents and received $1,065 in disposal of fixed assets. In 2024, the Company did not make any business acquisitions.

During the year ended December 31, 2024, financing activities provided $4,540 as compared to $66,737 provided during the prior year. This included increasing net borrowings by $8,431, as compared to an increase of $86,600 in 2023. The Company paid $850 in deferred loan fees during the year ended December 31, 2024. During 2024, the Company paid dividends to stockholders amounting to $2,510, as compared to $3,384 in 2023. Further, the Company did not repurchase common stock in 2024, as compared to using $15,539 to repurchase common stock in 2023. The Company made no payments for contingent consideration in 2024 or 2023.

The Company has long-term debt as of December 31, 2024 and 2023 relating to a senior credit facility as summarized in the following table:

The deferred loan fees as of December 31, 2024 and 2023 are included in other assets on the consolidated balance sheets.

The Company and certain of its affiliates are parties to a senior credit facility agreement entitled the “Third Amended and Restated Loan and Security Agreement” dated as of August 5, 2021 (the “Credit Agreement”), which is a senior secured lending facility among AMVAC, the Company’s principal operating subsidiary, as Agent (including the Company and AMVAC BV), as "Borrowers", on the one hand, and a group of commercial lenders led by BMO Bank, N.A. (formerly Bank of the West) as administrative agent, documentation agent, syndication agent, collateral agent and sole lead arranger, on the other hand. The Credit Agreement consists of a line of credit of up to $275,000, an accordion feature of up to $150,000, a letter of credit and swingline sub-facility (each having limits of $25,000) and has a maturity date of August 5, 2026. The Credit Agreement amended and restated the previous credit facility, which had a maturity date of June 30, 2022. With respect to key financial covenants, the Credit Agreement contains two: namely, borrowers are required to maintain a Total Leverage (“TL”) Ratio of no more than 3.5-to-1, during the first three years, stepping down to 3.25-to-1 as of December 31, 2024, and a Fixed Charge Coverage Ratio ("FCCR") of at least 1.25-to-1. In addition, to the extent that it completes acquisitions totaling $15,000 or more in any 90-day period, AMVAC may step-up the TL Ratio by 0.5-to-1, not to exceed 4.00-to-1, for the next three full consecutive quarters. Acquisitions below $50,000 did not require Agent consent.

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The Company’s borrowing capacity varies with its financial performance, measured in terms of Consolidated EBITDA as defined in the Credit Agreement, for the trailing twelve-month period. Under the Credit Agreement, revolving loans bear interest at a variable rate based, at borrower’s election with proper notice, on either (i) London Interbank Offered Rate ("LIBOR") plus the “Applicable Margin” which is based upon the Total Leverage (“TL”) Ratio (“LIBOR Revolver Loan”) or (ii) the greater of (x) the Prime Rate, (y) the Federal Funds Rate plus 0.5%, and (z) the Daily One-Month LIBOR Rate plus 1.00%, plus, in the case of (x), (y) or (z) the Applicable Margin (“Adjusted Base Rate Revolver Loan”). The Company and the Lenders entered into an amendment to the Credit Agreement, effective March 9, 2023, whereby LIBOR was replaced by the Secured Overnight Financing Rate ("SOFR") with a credit spread adjustment of 10.0 bps for all SOFR periods. The revolving loans now bear interest at a variable rate based at our election with proper notice, on either (i) SOFR plus 0.1% per annum and the “Applicable Margin” or (ii) the greater of (x) the Prime Rate, (y) the Federal Funds Rate plus 0.5%, and (z) the Daily One-Month SOFR Rate plus 1.10%, plus, in the case of (x), (y) or (z) the Applicable Margin (“Adjusted Base Rate Revolver Loan”). Interest payments for SOFR Revolver Loans are payable on the last day of each interest period (either one-, three- or six- month periods, as selected by the Company) and the maturity date, while interest payments for Adjusted Base Rate Revolver Loans are payable on the last business day of each month and the maturity date.

On November 7, 2023, the Company entered into Amendment Number Six to the Third Amended Loan and Security Agreement that provided relief in respect of both financial covenants. On August 8, 2024, the Company and the lenders entered into Amendment Number Seven to the Credit Agreement, effective June 30, 2024, under which the Maximum Total Leverage Ratio was modified to 4.25 for the period ended June 30, 2024; 5.0 for the period ended September 30, 2024; 4.5 for the period ended December 31, 2024, 4.5 for the period ending March 31, 2025, 4.25 for the period ending June 30, 2025; 4.0 for the period ending September 30, 2025, and returning to 3.25 for the periods ending December 31, 2025 and thereafter. The Minimum Fixed Charge Coverage Ratio remains the same, and a new covenant (added as part of Amendment Number seven), the Minimum Modified Current Ratio of not less than 1.5 (defined as the ratio of (i) Accounts Receivable plus Inventory, to (ii) Funded Debt of the Company and its Subsidiaries on a consolidated basis). In addition, the Company may not repurchase shares, pay cash dividends to shareholders or make Permitted Acquisitions without Lenders’ consent. In addition, for purposes of calculating Consolidated EBITDA, the basket for transformation and one-time (cash and non-cash charges (which are excluded from such measure) has been increased from $5,000 to $12,500 in second quarter 2024, $45,000 (in third quarter 2024, fourth quarter 2024 and first quarter 2025), $42,500 in second quarter 2025, $15,000 in third quarter 2025 and $7,500 in fourth quarter 2025, as measured on a four-quarter trailing basis. Finally, the interest rates for the Credit Agreement, as amended, were increased by 25bps to the extent the Total Leverage Ratio equals or exceeds 4.0 and remains at the rates set forth in the Amendment Number Six to the extent the Total Leverage Ratio is below 4.0.

On March 12, 2025, the Company entered into Amendment Number Eight to the Third Amended Loan and Security Agreement that provided relief in respect of both financial covenants, under which the Maximum Total Leverage Ratio was modified to 6.25 for the period ending March 31, 2025; 6.25 for the period ending June 30, 2025; 5.75 for the period ending September 30, 2025 and returning to 3.25 for the periods ending December 31, 2025 and thereafter. The Minimum Fixed Charge Coverage Ratio is changed to 1.15 for the period ending March 31, 2025, and returning to 1.25 for the period ending June 30, 2025 and thereafter. In addition, the Applicable Margins for the Revolver Loans are changed to 3.75% for SOFR and 2.75% as the Adjusted Base Rate; the Unused Line Fee Rate is 0.35% and the Letter of Credit Fee is 3.75%. Further, notwithstanding financial performance, the borrowing capacity is capped below the facility’s previous maximum ($275,000) by $50,000 through June 30, 2025, then by $40,000 through December 31, 2025, and then by $75,000 through the expiration of the facility. Finally, the definition of Consolidated EBITDA was changed to exclude non-recurring non-cash charges as well as cash charges that do not exceed various sums in various categories over the balance of the term.

On May 27, 2025, the Company and the lenders entered into Amendment Number Eleven to the Third Amended Loan and Security Agreement, under which events of default arising from the failure of Borrowers to be in compliance with both the Total Leverage Ratio and the Fixed Charge Coverage Ratio as of March 31, 2025, were waived. In addition, the Total Revolver Commitment was reduced from $275,000 to the following: $245,000, effective from the Closing Date through November 29, 2025; $225,000 effective from November 30, 2025, through December 30, 2025; and $200,000 from December 31, 2025, through the expiration of the agreement. In addition, the due date for audited fiscal year-end financial statements was extended to one hundred fifty-seven (157) days (after the end of the fiscal year) for 2025 only, and the due date for first quarter financial statements was extended to sixty-seven (67) days after March 31, 2025. In addition, the Maximum Total Leverage Ratio covenant was suspended for the quarters ending on June 30, 2025, September 30, 2025, and December 31, 2025, and set at 4.00 to 1.00 for the quarter ending March 31, 2026, and thereafter. Further, the Fixed Charge Coverage Ratio covenant was

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suspended for the quarter ending June 30, 2025, then set at 1.00 to 1.00 for the quarter ending September 30, 2025, then set at 1.25 to 1:00 for the quarter ending December 31, 2025, and thereafter.

In addition, under the terms of the Eleventh Amendment, two new covenants were added. First, commencing June 30, 2025, Borrowers must maintain Liquidity measured on a monthly basis of not less than: $30,000 for the month ending June 30, 2025; $35,000 for the month ending July 31, 2025; $4,042 for the month ending August 31, 2025; $25,000 for the month ending September 30, 2025; $3,000 for the month ending October 31, 2025; $9,292 for the month ending November 30, 2025; and $20,000 for the month ending December 31, 2025, it being understood that Liquidity will include the sum of Borrowers’ cash, plus 50% of cash held in accounts outside of the U.S. plus the amount by which the revolver commitments exceed the revolver balance (net of letters of credit). Second, Borrowers must attain minimum, year-to-date Consolidated EBITDA (reflecting the exclusion of non-recurring non-cash charges and certain other charges as per the Eighth Amendment) as measured quarterly in the following amounts: $4,500 as of June 30, 2025; $9,500 as of September 30, 2025; and $35,000 as of December 31, 2025. With these changes, with respect to Revolver Loans, the Applicable Margins for SOFR are set at 3.75% from the Closing through September 30, 2025, and then rises to 4.75% as of October 1, 2025, and thereafter, while the Adjusted Base Rate increases to 2.75% and 3.75% during those respective periods.

At December 31, 2024, by virtue of Amendment Number Eight to the Third Amended Loan and Security Agreement, the Company is deemed to be in compliance with its financial covenants. According to the terms of the Credit Agreement and based on our performance against the most restrictive covenant, the Company had the capacity to increase its borrowings by up to $28,623, as compared to $115,002 as of December 31, 2023. Furthermore, at December 31, 2024, the Company’s leverage, as defined in the credit facility agreement was 3.57. Under the terms of the latest amendment to the credit facility agreement, currently, the Company may not repurchase shares, pay cash dividends to shareholders or make Permitted Acquisitions without Lenders’ consent.

The Company believes that the combination of its cash flows from future operations, current cash on hand and the availability under the Company’s credit facility will be sufficient to meet its working capital and capital expenditure requirements and will provide the Company with adequate liquidity to meet its anticipated operating needs for at least the next 12 months from the issuance of these consolidated financial statements. Although operating activities are expected to provide cash, to the extent of growth in the future, its operating and investing activities will use cash and, consequently, this growth may require the Company 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.

Recently Issued Accounting Guidance

Please refer to Note 1 of the Notes to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for recently issued and adopted accounting standards.

CRITICAL ACCOUNTING ESTIMATES

The preparation of our consolidated financial statements requires us to make estimates that affect the reported amounts of assets, liabilities, sales and expenses, and related disclosure of contingent assets and liabilities. We base our estimates and judgments on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates. Resolution of such uncertainties in a manner inconsistent with our estimates could have a material effect on our financial condition and operating results.

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The Company’s critical accounting estimates include:

Current Expected Credit Losses —The Company maintains an allowance to cover its Current Expected Credit Losses ("CECL") on its trade receivables, other receivables and contract assets arising from the failure of customers to make contractual payments. The Company estimates credit losses expected over the life of its trade receivables, other receivables and contract assets based on historical information combined with current conditions that may affect a customer’s ability to pay and reasonable and supportable forecasts. In most instances, the Company’s policy is to write-off trade receivables when they are deemed uncollectible. The vast majority of the Company's trade receivables, other receivables and contract assets are less than 365 days. Under the CECL impairment model, the Company develops and documents its allowance for credit losses on its trade receivables based on multiple portfolios. The determination of portfolios is based primarily on geographical location, type of customer and receivables aging.

Inventories — The Company values its inventories at lower of cost or net realizable value. Cost is determined by the first-in, first-out (“FIFO”) or average cost method, including, as appropriate, raw materials, labor, factory overhead and subcontracting services. The Company writes down its inventory to the net realizable value following assessments of slow-moving and obsolete inventory and other annual adjustments to ensure that our standard costs continue to closely reflect actual manufacturing cost. During the years ended December 31, 2024 and 2023, the Company recorded inventory adjustments of $21,417 and $2,700, respectively.

Intangible Assets—The primary identifiable intangible assets of the Company relate to assets associated with its product and business acquisitions. All of the Company’s intangible assets have finite lives and are amortized. The estimated useful life of an identifiable intangible asset is based upon a number of factors including the effects of demand, competition, and expected changes in the marketability of the Company’s products. During the year ended December 31, 2024, the Company recorded intangible asset impairment charges in the amount of $9,345. There were no such charges in 2023.

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 re-evaluates 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 in the Company’s consolidated statement of operations.

From time to time, 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.

The Company reviews and re-assesses the estimated fair value of contingent consideration on a quarterly basis until the contingent period ends, and the updated fair value could be materially different from the initial estimates or prior quarterly amounts. Changes in the estimated fair value of our contingent earn-out liabilities are reported in operating results.

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. In most cases, the Company engages third party valuation specialists to assist the Company in its assessment. The acquisitions costs are allocated to the assets acquired on a relative fair value basis. From time to time, certain of our acquisition agreements include contingent

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earn-out arrangements, which are recognized only when the contingency is resolved, and the consideration is paid or becomes payable.

Goodwill—The Company reviews goodwill for impairment triggers 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 value 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 determinations require considerable judgment and are sensitive to inherent uncertainties and changes in estimates and assumptions regarding revenue growth rates, gross margins, expenses, capital expenditures, working capital requirements, tax rates, terminal growth rates, discount rates, and synergies available to market participants. As of October 1, 2024, the Company conducted its most recent annual impairment test by quantitatively testing goodwill assigned to its domestic and international reporting units. Based on the results of the quantitative test, the Company concluded that goodwill related to its domestic reporting unit in the amount of $9,131 was fully impaired. The carrying value of the international reporting unit exceeded its respective fair value by $17,918. As a result, the Company recorded impairment charges to its goodwill balance in the amount of $27,049 during the year ended December 31, 2024. The remaining carrying value of the international reporting unit is mainly sensitive to discount rates, the projected net sales growth rates, gross margin improvements, and terminal growth rates. After recording the goodwill impairment, the carrying value of the international reporting unit equaled its fair value. Therefore, any negative deviations from the Company’s projections and changes in assumptions used in its quantitative impairment test may result in further impairments of the international reporting unit's remaining goodwill balance which amounted to $19,701 at December 31, 2024.

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. In 2024, the Company determined that the carrying value related to some of its equipment and intangible assets was impaired. These included the following: The Company invested in developing the SIMPAS technology platform over more than a 10-year period. As part of the strategic review of capital allocation and operating leverage considerations that was conducted over the last 12 months and completed during the fourth quarter of 2024, the Company has found that, while the SIMPAS technology platform had attained full functionality and had been adopted by a small group of growers who use the Company’s products, its adoption slowed to a near halt in 2024 and further, that its primary market appeal was driven not by the technology itself, but, rather, by the products being dispensed by the system. The Company concluded that it does not have the wherewithal to achieve greater commercialization beyond incumbent users. While we continue to search for a partner that is better able to fund large-scale commercialization, the Company has concluded that continuing to invest in this technology will not generate a sufficient return on investment in a manner that would justify retaining such assets at full value. Secondly, the Company concluded that there was an asset impairment related to the purchase of two herbicide products. The market for these two products has been greatly reduced by weed resistance and competitive products. As a result, the Company recorded impairment charges of $23,365. No material impairment losses were recorded in 2023 and 2022.

Income taxes—Income tax expense, deferred tax assets and liabilities, and liabilities for unrecognized tax benefits reflect the Company’s best estimate of current and future taxes to be paid. The Company is subject to income taxes in the U.S. and several foreign jurisdictions. The Company assessed the ability to realize deferred tax assets and determined that based on the available evidence, including a history of taxable income and estimates of future taxable income, it is more likely than not that the net deferred tax assets relating to the Company’s operations in the United States, Brazil, Spain, Dominican Republic, Honduras, Hong Kong, and Ukraine will not be realized and a full valuation allowance has been recorded in those jurisdictions. Significant 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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Off-Balance Sheet Arrangements

As of December 31, 2024, we did not have any off-balance sheet arrangement.

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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 2023, as compared to 2022, appears below. As permitted by SEC rules, we have omitted the discussion and analysis of our financial condition and results of operations for 2022 compared to 2021. 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, 2022, filed on March 16, 2023 for this discussion.

MANAGEMENT OVERVIEW

The Company’s performance in 2023 declined as compared to the prior year due primarily to three factors: first customers in many regions implemented destocking directives in order to limit their carrying costs of inventory, second, weakening economic conditions in China manifested themselves in a glut of low-priced generic products in many regions, and third, supply chain constraints affecting one key product.

Within this context, the Company experienced a drop in overall sales of approximately 5%, with domestic sales down 6% and international sales down 4%. The unavailability of two high margin products, Aztec and Dacthal, due to supply issues in the first half of 2023, accounted for much of the drop in consolidated sales. With the resumption of production of those products, the Company’s US crop business, and the Company as a whole, generated much stronger sales performance in the fourth quarter of 2023.

Cost of sales dropped by about 4% on lower sales in 2023 compared to 2022. Factory performance generated higher net expense as compared to 2022, due largely to the unavailability of raw materials and reduced demand from destocking activity early in the year. As a result, gross margin percent dropped to 31% in 2023 from 32% as compared to the prior year.

Operating expenses rose by about 2% in 2023, as compared to 2022, due primarily to increased selling expenses and regulatory costs, partially offset by reduced general and administrative costs including recording no short-term incentive compensation expense. Further, operating expenses as a percent of net sales rose to 27% in 2022, compared to 25% in 2022. With lower sales during the first three quarters of 2023 in the face of reduced demand and product unavailability, the Company’s average indebtedness rose to $167,976 ($117,705 last year) and, coupled with significantly higher interest rates, interest expense for the year rose sharply. Sales activity in the fourth quarter coupled with customer pre-pay activity enabled the Company to lower inventory and reduce indebtedness by year-end. On a full-year basis, the Company generated net income of $7,519 (or $0.26 per share) which, while down from that of the prior year ($27,404 or $0.92 per share), represents a significant rebound from the first three quarters of 2023. Details of our financial performance are set forth below.

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Results of Operations

2023 Compared with 2022:

Net sales of our U.S. crop business were about 7% lower than those of the prior year. This performance was driven by several factors. The pacing of procurement in the domestic distribution channel relaxed from the strong purchasing practices of 2022 to more of a just-in-time approach in 2023, as higher interest rates increased the carrying cost of channel inventories, prompting distributors and retailers to respond with widespread destocking efforts. Additionally, our herbicide business was negatively affected by the supply-chain unavailability of Dacthal (for use on high-value crops, including onions) and increased competitive pressure on our Impact post-emergent corn herbicide brand caused by the steep decline in prices of many non-specific herbicides. Conversely, we experienced strong year-over-year sales of our granular soil insecticide products (including Aztec, Force, and Thimet). Our cotton products saw solid demand for our Bidrin foliar insecticides and a modest decline for our Folex harvest defoliant, as compared to 2022. We also recorded stronger sales of our soil fumigants (for use on a wide range of fruit and vegetables).

Net sales of our U.S. non-crop business were down about 2%. This decline was driven largely by a nationwide pattern of customer inventory destocking and purchasing control measures designed to deal with the challenge of high interest rate carrying costs. Net sales from our OHP nursery and ornamental business were slightly below those of 2022, as US consumer demand for plant materials softened. Sales of insecticides for commercial applications firmed during the year, as the professional pest-control market gradually regained more normal pre-pandemic levels.

Net sales of our international businesses decreased by 4% in 2023 vs. 2022. During 2023, our international group continued to integrate two important new businesses, AgNova in Australia and Agrinos biological products in more than a half dozen countries worldwide. We experienced a slight sales decline in our Central American businesses due to persistent drought conditions in Panama and a very significant influx of generic Chinese crop protection products which created a difficult pricing environment. Internationally, we experienced slightly lower demand for our soil fumigants due to increased Asian competition, partially offset by higher sales of herbicides. We saw a large increase in sales of our Counter nematicide in Brazil and in Mexico. Our Mocap brand improved sales in Mexico and Korea, while our Nemacur soil insecticide grew sales in Mexico, Argentina, and Taiwan.

Overall costs of sales declined by 4% across our U.S. crop, U.S. non-crop and international, which is roughly equivalent to the 5% average decline in net sales across those businesses.

Operating expenses increased by $4,132 in 2023, to $155,869 or 27% of net sales, as compared to $151,737 or 25% in 2022. The differences in operating expenses by department are as follows:

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Selling expenses increased by 7% to $56,015 for the year ended December 31, 2023, as compared to $52,512 in 2022. This included inflation related increased wages, additional people and expenses associated with the newly acquired AgriCenter business in Ecuador, and increased costs associated with travel expenses as the sales teams work to grow the global business.

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General and administrative expenses decreased by 10% to $47,049 for the year ended December 31, 2023, as compared to $51,671 in 2022. During the year, we increased our accruals for potential bad debts primarily related to our Latin American business. That increase in cost was more than offset by reduced incentive compensation expense driven by the Company's financial performance and lower legal costs.

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The Company spent $541 in fees associated with our Proxy defense activities in 2023, as compared to $1,785 for the year ended December 31, 2022.

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Amortization expense declined in 2023 as compared to 2022 as a result of fully amortized assets.

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Research, product development and regulatory expenses increased by 19% to $38,025 in 2023, as compared to $31,816 in 2022. The main drivers were increases in our product development costs, primarily resulting from increased international regulatory activities and work in support of our SIMPAS/ULTIMUS technology platform. In addition, wages and travel expenses increased in support of our business.

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Transformation costs relate to the Company’s digital and structural transformation project. The digital transformation effort is intended to ensure that business process owners have access to current and complete data that has been generated through standardized processes. The structural transformation effort is intended to improve operating leverage by applying business analytics to current operations, structures, products and services. The Company hired a Chief Transformation Officer to steer and drive the project. In addition, the Company engaged a Human Resources consultant to help plan, overhaul and update the Company's Human Resources processes. Further, Kearney Management Consulting is assisting the Company in navigating the project to gain the maximum benefit at the earliest possible time.

In July 2020, the Company made a strategic investment in Clean Seed Inc. (Clean Seed) in the amount of $1,190. The investment is carried at fair value and is included in other assets on the Company’s consolidated balance sheets. The Company recorded losses related to Clean Seed’s change in fair value in the amount of $359 and $732 in 2023 and 2022, respectively. These losses are included in change in fair value of equity investments on the Company’s consolidated statements of operations.

Net interest expense was $12,639 in 2023, as compared to $3,954 in 2022. Interest costs are summarized in the following table:

The Company’s average debt for the year ended December 31, 2023, was $167,976, as compared to $117,705 for the year ended December 31, 2022. The increase in average debt can be in large part attributed to the global agriculture market moving from buying early (during 2021 and 2022) to buying as close as possible to time of use. This effective destocking of the channel was a global Ag market reaction to high interest rates and the drive by distribution to push working capital back to manufacturers. Our effective interest rate on our senior credit facility increased to 7.4%, as compared to 3.6% in 2022.

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Our provision for income taxes for 2023 was $2,778, as compared to $8,561 for 2022. The effective tax rate for 2023 was 27.0%, as compared to 23.8% in 2022. The increase of the effective tax rate in 2023, as compared to 2022, was primarily due to reductions in income before provision for income taxes, release of certain uncertain tax positions due to statute of limitation expirations in 2022 and an increase in the change in valuation allowance recorded through the income statement in 2023, partially offset by a one-time tax benefit associated with the migration of certain Intellectual Property to the U.S..

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 2020 through 2022 tax years. State income tax returns are subject to examination for the 2019 through 2022 tax years. The Company has other foreign income tax returns subject to examination.

Net income was $7,519 or $0.27 per basic share and $0.26 per diluted share in 2023, as compared to $27,404 or $0.94 per basic share and $0.92 per diluted share in 2022.

Liquidity and Capital Resources

The Company used $58,748 of cash in operating activities during the year ended December 31, 2023, as compared to cash provided by operating activities of $57,105 in the prior year. Included in the $58,748 are net income of $7,519, plus non-cash depreciation, amortization of intangibles and other long-term assets in the amount of $23,534, amortization of deferred loan fees and discounted liabilities of $254, and provision for bad debts in the amount of $1,935. In addition, stock-based compensation of $6,139, change in fair value of investments of $359, change in value of deferred income taxes of $9,710, change in value for uncertain tax positions or unrecognized tax benefits of $508, non-cash lease expense of $256 and net foreign currency adjustment of $581, resulted in net cash provided by operating activities (prior to changes in assets and liabilities associated with operations, net of business combinations) of $29,713 as compared to $55,529 for the same period of 2022.

The Company’s working capital increased by $79,560 at December 31, 2023, accounts receivable increased by $20,278, inventories increased by $27,315, tax receivable, net decreased by $3,568, and prepaid expenses decreased by $1,269. Deferred revenue decreased by $45,079, driven by customer decisions to make early payments in return for early cash incentive programs. Our accounts payable balances decreased by $2,287, program accruals decreased by $7,244 and other payables and accrued expenses decreased by $5,066.

With regard to our program accrual, the year-over-year change is primarily driven by the mix of product line sales and customers in 2023, 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 August 31st of each year. During 2023, the Company made accruals in the amount of $93,264 and made payments in the amount of $85,931. During 2022, the Company made accruals in the amount of $111,649 and made payments in the amount of $114,151.

Cash used for investing activities amounted to $17,017 for the year ended December 31, 2023, as compared to $14,470 in 2022. In 2023, the Company spent $11,878 on capital expenditures primarily focused on continuing to invest in manufacturing infrastructure to expand production efficiency and capabilities, spent $186 on registrations and patents and received $242 in disposal of fixed assets. In 2023, the Company spent $5,195 in business acquisitions including intangible assets, goodwill, working capital and fixed assets as well as patent application costs and $650 in product acquisition.

During the year ended December 31, 2023, financing activities provided $66,737, as compared to $38,260 used during the prior year. This included making net borrowings of $86,600 on the Company’s senior credit facility during the year ended December 31, 2023, as compared to a net repayment of $1,000, in 2022. During 2023, the Company paid dividends to stockholders amounting to $3,384, as compared to $2,787 in 2022. Further, the Company used $15,539 to repurchase common stock in 2023, as compared to $34,002 in 2022. The Company also made payment of $68 in 2022 for contingent consideration where no such payment occurred in 2023.

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The Company has long-term debt as of December 31, 2023 and 2022 relating to a senior credit facility as summarized in the following table:

The deferred loan fees as of December 31, 2023 are included in other assets on the consolidated balance sheets.

The Company and certain of its affiliates are parties to a senior credit facility agreement entitled the “Third Amended and Restated Loan and Security Agreement” dated as of August 5, 2021 (the “Credit Agreement”), which is a senior secured lending facility among AMVAC, the Company’s principal operating subsidiary, as Agent (including the Company and AMVAC BV), as "Borrowers", on the one hand, and a group of commercial lenders led by BMO Bank, N.A. (formerly Bank of the West) as administrative agent, documentation agent, syndication agent, collateral agent and sole lead arranger, on the other hand. The Credit Agreement consists of a line of credit of up to $275,000, an accordion feature of up to $150,000, a letter of credit and swingline sub-facility (each having limits of $25,000) and has a maturity date of August 5, 2026. The Credit Agreement amended and restated the previous credit facility, which had a maturity date of June 30, 2022. With respect to key financial covenants, the Credit Agreement contains two: namely, borrowers are required to maintain a Total Leverage (“TL”) Ratio of no more than 3.5-to-1, during the first three years, stepping down to 3.25-to-1 as of December 31, 2024, and a Fixed Charge Coverage Ratio ("FCCR") of at least 1.25-to-1. In addition, to the extent that it completes acquisitions totaling $15 million or more in any 90-day period, AMVAC may step-up the TL Ratio by 0.5-to-1, not to exceed 4.00-to-1, for the next three full consecutive quarters. Acquisitions below $50 million do not require Agent consent.

The Company’s borrowing capacity varies with its financial performance, measured in terms of Consolidated EBITDA as defined in the Credit Agreement, for the trailing twelve-month period. Under the Credit Agreement, revolving loans bear interest at a variable rate based, at borrower’s election with proper notice, on either (i) London Interbank Offered Rate ("LIBOR") plus the “Applicable Margin” which is based upon the Total Leverage (“TL”) Ratio (“LIBOR Revolver Loan”) or (ii) the greater of (x) the Prime Rate, (y) the Federal Funds Rate plus 0.5%, and (z) the Daily One-Month LIBOR Rate plus 1.00%, plus, in the case of (x), (y) or (z) the Applicable Margin (“Adjusted Base Rate Revolver Loan”). The Company and the Lenders entered into an amendment to the Credit Agreement, effective March 9, 2023, whereby LIBOR was replaced by the Secured Overnight Financing Rate ("SOFR") with a credit spread adjustment of 10.0 bps for all SOFR periods. The revolving loans now bear interest at a variable rate based at our election with proper notice, on either (i) SOFR plus 0.1% per annum and the “Applicable Margin” or (ii) the greater of (x) the Prime Rate, (y) the Federal Funds Rate plus 0.5%, and (z) the Daily One-Month SOFR Rate plus 1.10%, plus, in the case of (x), (y) or (z) the Applicable Margin (“Adjusted Base Rate Revolver Loan”). Interest payments for SOFR Revolver Loans are payable on the last day of each interest period (either one-, three- or six- month periods, as selected by the Company) and the maturity date, while interest payments for Adjusted Base Rate Revolver Loans are payable on the last business day of each month and the maturity date.

On November 7, 2023, the Company entered into Amendment Number Six to the Third Amended Loan and Security Agreement that provided relief in respect of both financial covenants. Specifically, with respect to the Maximum Total Leverage Ratio, the existing ratio of 3.5 through September 30, 2024 and 3.25 through December 31, 2024 and thereafter was changed to 5.5 through September 30, 2023, 4.5 for the periods ending December 31, 2023 and March 31, 2024, 4.0 for the period ending June 30, 2024, 3.5 through September 30, 2024 and returning to 3.25 from December 31, 2024 and thereafter. In addition, the Minimum Fixed Charge Coverage Ratio was changed from 1.25 to 1.0 for the periods ending September 30, 2023, December 31, 2023 and March 31, 2024 and returning to 1.25 for the period ending June 30, 2024 and thereafter. Further, after the delivery of financial statements and a covenant compliance certificate for the period ended December 31, 2023 assuming Total Leverage is less than 2.75, then Borrowers may terminate the covenant modification period (“CMP”) and revert to the terms of the existing Credit Agreement. Further, for the duration of the CMP, the Company is restricted from making share repurchases. Finally, the Applicable Margin (SOFR and Adjusted Base Rate) and Letter of Credit fees increase by 0.50 basis points for each tier of interest during CMP. The interest rate on December 31, 2023, was 8.33%.

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As of December 31, 2023, the Company is deemed to be in compliance with its financial covenants.

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 $115,002 and $200,372 as of December 31, 2023 and December 31, 2022, respectively. Furthermore, at December 31, 2023, the Company’s leverage, as defined in the Credit Agreement, was 2.46.

The Company believes that the combination of its cash flows from future operations, current cash on hand and the availability under the Company’s credit facility will be sufficient to meet its working capital and capital expenditure requirements and will provide the Company with adequate liquidity to meet its anticipated operating needs for at least the next 12 months from the issuance of these consolidated financial statements. Although operating activities are expected to provide cash, to the extent of growth in the future, its operating and investing activities will use cash and, consequently, this growth may require the Company 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.

Recently Issued Accounting Guidance

Please refer to Note 1 of the Notes to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for recently issued and adopted accounting standards.

CRITICAL ACCOUNTING ESTIMATES

The preparation of our consolidated financial statements requires us to make estimates that affect the reported amounts of assets, liabilities, sales and expenses, and related disclosure of contingent assets and liabilities. We base our estimates and judgments on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.

The Company’s critical accounting estimates include:

Current Expected Credit Losses —The Company maintains an allowance to cover its Current Expected Credit Losses ("CECL") on its trade receivables, other receivables and contract assets arising from the failure of customers to make contractual payments. The Company estimates credit losses expected over the life of its trade receivables, other receivables and contract assets based on historical information combined with current conditions that may affect a customer’s ability to pay and reasonable and supportable forecasts. In most instances, the Company’s policy is to write-off trade receivables when they are deemed uncollectible. The vast majority of the Company's trade receivables, other receivables and contract assets are less than 365 days. Under the CECL impairment model, the Company develops and documents its allowance for credit losses on its trade receivables based on multiple portfolios. The determination of portfolios is based primarily on geographical location, type of customer and receivables aging.

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

Intangible Assets—The primary identifiable intangible assets of the Company relate to assets associated with its product and business acquisitions. All of the Company’s intangible assets have finite lives and are amortized. The estimated useful life of an identifiable intangible asset is based upon a number of factors including the effects of demand, competition, and expected changes in the marketability of the Company’s products.

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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 re-evaluates 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 in the Company’s consolidated statement of operations.

From time to time, 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.

The Company reviews and re-assesses the estimated fair value of contingent consideration on a quarterly basis until the contingent period ends, and the updated fair value could be materially different from the initial estimates or prior quarterly amounts. Changes in the estimated fair value of our contingent earn-out liabilities are reported in operating results.

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. In most cases, the Company engages third party valuation specialists to assist the Company in its assessment. The acquisitions costs are allocated to the assets acquired on a relative fair value basis. From time to time, 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.

Goodwill—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 value 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 determinations require considerable judgment and are sensitive to inherent uncertainties and changes in estimates and assumptions regarding revenue growth rates, gross margins, expenses, capital expenditures, working capital requirements, tax rates, terminal growth rates, discount rates, and synergies available to market participants. As of October 1, 2023, the Company conducted its most recent annual impairment test by quantitively testing goodwill assigned to its domestic and international reporting units. Based on the results of the quantitative test, the Company concluded that the fair value of both the domestic and international reporting units exceed their respective carrying value. The fair value of the domestic and international reporting units exceeded the carrying value by 18% and 9%, respectively. As of December 31, 2023, the goodwill related to the domestic and international reporting units amounted to $9,132 and $42,067, respectively. The carrying value of both reporting units is mainly sensitive to discount rates, the projected net sales growth rates, gross margin improvements, and terminal growth rates. Negative deviations from the Company’s projections and assumptions used in its quantitative impairment test may result in an impairment.

Impairment—The carrying values of long-lived assets other than goodwill are reviewed for impairment annually and/or whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. The Company evaluates recoverability of an asset group by comparing the carrying value to the future undiscounted cash flows that it expects to generate from the asset group. If the comparison indicates that the carrying value of an asset group is not recoverable, measurement of the impairment loss is based on the fair value of the asset. There were no circumstances that would indicate any impairment of the carrying value of these long-lived assets and no material impairment losses were recorded in 2023, 2022, or 2021.

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Income taxes—Income tax expense, deferred tax assets and liabilities, and liabilities for unrecognized tax benefits reflect management’s best estimate of current and future taxes to be paid. The Company is subject to income taxes in the U.S. and several foreign jurisdictions. The Company assessed the ability to realize deferred tax assets and determined that based on the available evidence, including a history of taxable income and estimates of future taxable income, it is more likely than not that the net deferred tax assets relating to the Company’s operations in Brazil, Spain, Singapore and Ukraine will not be realized and a full valuation allowance has been recorded in those jurisdictions. 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.

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 2022, as compared to 2021 appears below. As permitted by SEC rules, we have omitted the discussion and analysis of our financial condition and results of operations for 2021 compared to 2020. 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, 2021, for this discussion.

MANAGEMENT OVERVIEW

The Company’s performance in 2022 was stronger in most all respects as compared to the prior year. The domestic agricultural economy continued its second upcycle year following a multi-year downcycle that concluded at the end of 2020. With that trend, commodity prices for many crops, including corn, soybeans and cotton, rose and remained strong. Further, with greater confidence in the post-pandemic agricultural and chemical market and improved availability within the shipping industry, growers and distribution relaxed their procurement patterns from a mode of ordering months in advance of the planting season (in 2021) to more of a just-in-time approach (in 2022). While the Company had enjoyed a strong growth trajectory for the first three quarters of 2022, that curve flattened during the fourth quarter, as temporary supply chain disruptions (described below) prevented the production and sale of the Company’s leading corn soil insecticide during that period. It is also worth noting that, while shipping services had become more readily available during 2022, the cost of freight rose to its highest point since the start of the pandemic. We expect that those costs will recede to more normalized levels in 2023.

In summary, net sales for 2022 rose 9%, as compared to 2021 (to $609,615 from $557,676), and net income was up about 43% (to $26,618 from $18,587). Operating income rose 31% (to $40,651 in 2022 from $30,946 in 2021). With respect to our businesses, net sales of our U.S. Crop rose by 9%, while gross profit rose 22%. In the U.S., non-Crop net sales declined by 2%, while gross profit dropped by 6%. Our international business increased net sales by 13% and gross profit by 9%.

As a result of the sales dynamics just described, gross profit during 2022 was approximately 13% above that of 2021 ($241,352 vs. $214,047). Further, gross profit when expressed as a percentage of sales was 40%, as compared to 38% in the prior year. Operating expenses increased by 10% ending at $200,701 as compared to $183,272 in 2021. Further, operating expenses (which include outbound freight) as a percent of net sales remained flat at 33%, as compared to 2021.

Despite numerous increases in the interest rate by the Federal Open Market Committee over the course of the year, our interest expense remained approximately even with that of the prior year ($3,954 in 2022 vs. $3,687 in 2021). This performance was due to timing of our borrowings, continued strong cash generated from increased sales, continued focus on working capital management and a high level of participation by customers in our prepayment programs. For 2022, our effective tax rate decreased (at 23.8% in 2022 vs. 30.1% in 2021). Our net income was $27,404 in 2022, as compared to $18,587 in 2021, which represents an increase of about 47%.

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When considering the consolidated balance sheets, long-term debt decreased to $51,477 as of December 31, 2022, from $52,240 as of December 31, 2021. The decreased level of debt was driven by the Company’s strong cash management during 2022, including a continued strong response from the Company’s largest customers to our early-pay programs, offset by the decision to repurchase $34,002 of the Company's stock. The Company’s liquidity position improved to $200,372 as of December 31, 2022, as compared to $178,705 as of December 31, 2021.

Results of Operations

2022 Compared with 2021:

Net sales of our U.S. crop business were about 9% higher than those of the prior year ($288,624 vs. $263,632). With the second full year of high commodity prices and a strong farm economy, the Company experienced strong demand for its crop protection products. The pacing of procurement practices in the distribution channel, however, relaxed from advance purchasing in 2021 (for the 2021-2022 season) to more of a just-in-time approach in 2022 (for the 2022-2023 season). The Company experienced strong sales of its corn products, particularly soil insecticides and post-emergent herbicides (Impact, Impact Core, Sinate, and Impact Z) notwithstanding a 20% drop in sales of our leading corn soil insecticide, Aztec, which we were unable to make and sell in the fourth quarter of 2022, due to unavailability of a key intermediate from both a domestic supplier (which experienced capacity constraints) and a China-based supplier (which experienced widespread COVID infection followed by a temporary shutdown). With respect to our cotton products, strong commodity prices stimulated demand for our Bidrin foliar insecticides and Folex harvest defoliant, which together generated sales that were up 33%, as compared to those of 2021. We also recorded stronger sales of our soil fumigants (for use on a wide range of fruit and vegetables), Thimet (for use of peanuts and sugar beets), our herbicide, Dacthal (for use on high-value crops, including onions) and our soybean herbicide products.

Cost of sales within the domestic crop business was flat compared to 2021, on sales that increased 9%, gross profit improved by 21% ($132,509 in 2022 vs. $109,568 in 2021), and gross margin was 46% of sales as compared to 42% last year.

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Net sales of our U.S. non-crop business were down about 2% ($76,709 in 2022 vs. $78,605 in 2021). This decline was driven primarily by the nationwide consumer pest-control market, which dropped by 30% year-over-year, due to US workers returning to the workplace post-COVID. Net sales from our OHP nursery and ornamental business were about even with those of 2021, as US consumer demand for plant materials remained level. During 2022, we posted relatively flat Dibrom® mosquito adulticide sales. By contrast, sales of insecticides for commercial applications rose during the year, as the professional pest-control market began to regain its footing. Finally, TyraTech/Envance extended the scope of a license agreement in 2021 and benefited from a one-time non-refundable up-front fee.

Cost of sales in our U.S. non-crop business remained flat with the prior year and gross profit decreased by 6% (to $35,257 in 2022 from $37,443 in 2021), and gross margin percentage decreased to 46% in 2022, as compared to 48% in 2021.

Net sales of our international businesses increased by 13% in 2022 ($244,282 vs. $215,439 in 2021). During 2022, our international group continued to successfully integrate two important new businesses, AgNova in Australia, and Agrinos biological products in more than a half dozen countries worldwide. We enjoyed strong demand for our soil fumigants, particularly in Mexico and Australia, and experienced increased sales of our Counter nematicide in Brazil. Further, we experienced higher sales in our AgriCenter Central American distribution business and achieved a record $100 million in net sales from our LATAM region. Expansion of our Green Solutions product portfolio has significantly enhanced our penetration of international markets and drawn us much closer to many key customers.

Cost of sales in our international business increased by 15% (to $170,696 in 2022 from $148,403 in 2021) on sales that increased 13%, gross profit rose 10% from the prior year (to $73,586 in 2022 from $67,036 in 2021), and gross margin percentage ended at 30% in 2022, as compared to 31% in 2021.

Operating expenses (which include outbound freight costs) increased by $17,429 in 2022, to $200,701 or 33% of net sales, as compared to $183,272 or 33% in 2021. The differences in operating expenses by department are as follows:

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Selling expenses increased by 6% to $52,512 for the year ended December 31, 2022, as compared to $49,409 in 2021. This included increased costs associated with travel expenses (as the in-person business interactions with customers continue to increase), inflation related increased wages, increased spending on advertising and promoting the Company’s products, and the cost of commissions associated with sales growth in Brazil. These increased costs were somewhat offset by beneficial exchange rate movement in key currencies.

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General and administrative expenses increased by 8% to $51,671 for the year ended December 31, 2022, as compared to $47,971 in 2021. The main drivers were the net increase in short-term and long-term incentive compensation, as a result of improved financial performance and increased bad debt expenses related to our businesses in Central America. In addition, wages, travel expense and other administrative costs increased in support of our growing business.

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The Company spent $1,785 in fees associated with our Proxy defense activities; there were no such fees in the comparative period of the prior year.

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Research, product development and regulatory expenses increased by 10% to $31,816 in 2022, as compared to $28,855 in 2021. The main drivers were increases in our product development costs, primarily resulting from increased international regulatory activities and work in support of our SIMPAS/ULTIMUS technology platform. In addition, wages and travel expenses increased in support of our growing business.

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•
Freight, delivery and warehousing costs for the year ended December 31, 2022, increased by 13% (on sales up 9%) to $48,964, as compared to $43,324 in 2021. This is mainly due to increases in freight rates, and changes in volume, product mix and customer destinations. When expressed as a percentage of sales, freight costs remained essentially flat at 8% of net sales.

In July 2020, the Company made a strategic investment in Clean Seed Inc. (Clean Seed) in the amount of $1,190. The investment is carried at fair value on the Company’s consolidated balance sheets. The Company recorded losses to Clean Seed’s fair value in the amount of $732 and $391 in 2022 and 2021, respectively.

In February 2016, AMVAC BV made an equity investment of $3,283 in Biological Products for Agriculture (“Bi-PA”). The Company has elected to measure the investment at cost less impairment, if any, and to record an increase or decrease for changes resulting from observable price changes in orderly transactions for the identical or a similar investment of Bi-PA. The Company recorded an impairment in the amount of $399 during the year ended December 31, 2021. No impairment was recorded for the year ended December 31, 2022.

Net interest expense was $3,954 in 2022, as compared to $3,687 in 2021. Interest costs are summarized in the following table:

The Company’s average debt for the year ended December 31, 2022, was $134,158, as compared to $142,238 for the year ended December 31, 2021. The decrease in average debt can be attributed to improved cash management, partially offset by the Company repurchasing $34,002 of its common stock. On a gross basis, after adjustments related to capitalized interest and expenses related to the amortization of deferred liabilities, our effective interest rate on our working capital revolver increased to 2.9%, as compared to 2.4% in 2021 due to increases in the LIBOR rate driven by U.S. fiscal policy.

Our provision for income taxes for 2022 was $8,561, as compared to $8,166 for 2021. The effective tax rate for 2022 was 23.8%, as compared to 30.1% in 2021. The decrease of the effective tax rate in 2022, as compared to 2021, was primarily due to a non-cash charge related to a valuation allowance associated with a deferred tax asset in Brazil established in 2021.

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 2019 through 2021 tax years. State income tax returns are subject to examination for the 2018 through 2021 tax years. The Company has other foreign income tax returns subject to examination.

Net income was $27,404 or $0.94 per basic share and $0.92 per diluted share in 2022, as compared to $18,587 or $0.62 per basic share and $0.61 per diluted share in 2021.

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Liquidity and Capital Resources

The Company generated $57,105 of cash from operating activities during the year ended December 31, 2022, as compared to $86,361 in the prior year. Included in the $57,105 are net income of $27,404, plus non-cash depreciation, amortization of intangibles and other long-term assets in the amount of $25,711, loss on disposal of property, plant and equipment of $268, amortization of deferred loan fees and discounted liabilities of $289, provision for bad debts in the amount of $1,171, provision for inventory obsolescence in the amount of $340, and revisions of contingent consideration of $610. In addition, stock-based compensation of $5,684, change in fair value of investments of $732, change in value of deferred income taxes of $5,278, change in liabilities for certain tax positions or unrecognized tax benefits of $1,441, non-cash lease expense of $68 and net foreign currency adjustment of $29, resulted in net cash provided by operating activities (prior to changes in assets and liabilities associated with operations, net of business combinations) of $55,529 as compared to $50,989 for the same period of 2021.

The Company’s working capital increased by $3,027 at December 31, 2022, as comparted to the prior year ($121,966 compared to $118,939). Accounts receivables increased by $6,447, inventories increased by $29,560, tax receivable, net increased by $4,910, and prepaid expenses increased by $3,082. Deferred revenue increased by $47,551, driven by customer decisions to make early payments in return for early cash incentive programs. Our accounts payable balances increased by $1,704, program accruals decreased by $2,449 and other payables and accrued expenses increased by $90. The Company also paid $1,321 in contingent consideration (in addition to $68 included in cash used in financing activities).

With regard to our program accrual, the year-over-year change is primarily driven by the mix of product line sales and customers in 2022, 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 August 31st of each year. During 2022, the Company made accruals in the amount of $111,649 and made payments in the amount of $114,151. During 2021, the Company made accruals in the amount of $99,482 and made payments in the amount of $81,678.

Because the estimate for the program accrual is a material component 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 $14,470 for the year ended December 31, 2022, as compared to $20,042 in 2021. In 2022, the Company spent $13,261 on capital expenditures primarily focused on continuing to invest in manufacturing infrastructure to expand production efficiency and capabilities. In addition, the Company made a payment of $1,000 to Clean Seed to amend a license agreement under which royalty-bearing license rights were converted to fully paid-up, royalty-free, perpetual license rights, and spent $293 on registrations and patents. In 2021, the Company spent $10,524 in business and product acquisitions including intangible assets, goodwill, working capital and fixed assets as well as patent application costs, and $9,518 on capital expenditures primarily focused on our manufacturing facilities.

During the year ended December 31, 2022, financing activities used $38,260, as compared to $65,871 during the prior year. This included making repayments of $254,000 and borrowings of $253,000 on the Company’s senior credit facility during the year ended December 31, 2022. During 2021, the Company made repayments in the amount of $186,569 and borrowings of $131,000. During 2022, the Company paid dividends to stockholders amounting to $2,787, as compared to $2,382 in 2021. Furthermore, the Company paid contingent consideration in the amount of $68 (in addition to the $1,321 included in cash provided by operating activities) and $1,301 for the years ended December 31, 2022 and 2021, respectively. Finally, the Company used $34,002 to repurchase common stock in 2022, as compared to $4,579 in 2021.

The Company has long-term debt as of December 31, 2022 and 2021 relating to a revolving line of credit as summarized in the following table:

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

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

The Company’s borrowing capacity varies with its financial performance, measured in terms of Consolidated EBITDA as defined in the Credit Agreement, for the trailing twelve-month period. Under the Credit Agreement, revolving loans bear interest at a variable rate based, at borrower’s election with proper notice, on either (i) LIBOR plus the “Applicable Margin” which is based upon the Total Leverage (“TL”) Ratio (“LIBOR Revolver Loan”) or (ii) the greater of (x) the Prime Rate, (y) the Federal Funds Rate plus 0.5%, and (z) the Daily One-Month LIBOR Rate plus 1.00%, plus, in the case of (x), (y) or (z) the Applicable Margin (“Adjusted Base Rate Revolver Loan”). Interest payments for LIBOR Revolver Loans are payable on the last day of each interest period (either one-, three- or six- months, as selected by the borrower) and the maturity date, while interest payments for Adjusted Base Rate Revolver Loans are payable on the last business day of each month and the maturity date. The interest rate on December 31, 2022, was 5.67%.

At December 31, 2022, 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 $200,372. This compares to an available borrowing capacity of $178,705 as of December 31, 2021. 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 and the Lenders entered into an amendment to the Credit Agreement (“Amendment”), effective March 9, 2023, whereby LIBOR was replaced by SOFR with a credit spread adjustment of 10.0 bps for all SOFR periods. The revolving loans now bear interest at a variable rate based at borrower’s election with proper notice, on either (i) SOFR plus 0.1% per annum and the “Applicable Margin” or (ii) the greater of (x) the Prime Rate, (y) the Federal Funds Rate plus 0.5%, and (z) the Daily One-Month SOFR Rate plus 1.10%, plus, in the case of (x), (y) or (z) the Applicable Margin (“Adjusted Base Rate Revolver Loan”). In addition, the Amendment waived the minimum fixed charge coverage ratio (“FCCR”) requirement for the year ended December 31, 2022, and adjusted the terms of the FCCR for the periods ending March 31, 2023 and June 30, 2023. The Company was in compliance with all other debt covenants as of December 31, 2022.

We believe that the combination of our cash flows from future operations, current cash on hand and the availability under the Company’s credit facility will be sufficient to meet our working capital and capital expenditure requirements and will provide us with adequate liquidity to meet our anticipated operating needs for at least the next 12 months from the issuance of the Annual Report. Although operating activities are expected to provide cash, to the extent of growth in the future, our operating and investing activities will use cash and, consequently, this growth may require us to access some or all of the availability under the credit facility. It is also possible that additional sources of finance may be necessary to support additional growth.

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

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Recently Issued Accounting Guidance

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

Foreign Exchange

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

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

Inflation

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

CRITICAL ACCOUNTING ESTIMATES

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:

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

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recognized when the sales occur. We calculate and accrue estimated royalties based on the agreement terms and correspondence with the licensees regarding actual sales.

Accrued Program Costs— The Company offers various discounts to customers based on the volume purchased within a defined period, other pricing adjustments, some grower volume incentives or other key performance indicator driven payments made to distributors, retailers or growers, usually at the end of a growing season. The Company describes these payments as “Programs.” Programs are a critical part of doing business in both the U.S. crop and non-crop chemicals marketplaces. These discount Programs represent variable consideration. Revenues from sales are recorded at the net sales price, which is the transaction price, less an estimate 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 adjust 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.

Allowance for Doubtful Accounts or Current Expected Credit Losses —The Company maintains an allowance to cover its Current Expected Credit Losses ("CECL") on its trade receivables, other receivables and contract assets arising from the failure of customers to make contractual payments. The Company estimates credit losses expected over the life of its trade receivables, other receivables and contract assets based on historical information combined with current conditions that may affect a customer’s ability to pay and reasonable and supportable forecasts. In most instances, the Company’s policy is to write-off trade receivables when they are deemed uncollectible. The vast majority of the Company's trade receivables, other receivables and contract assets are less than 365 days. Under the CECL impairment model, the Company develops and documents its allowance for credit losses on its trade receivables based on multiple portfolios. The determination of portfolios is based primarily on geographical location, type of customer and aging.

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

Leases —The Company has operating leases for warehouses, manufacturing facilities, offices, cars, railcars and certain equipment. The Company recognizes operating lease right-of-use (ROU) assets and lease liabilities for all leases. The Company measures ROU assets throughout the lease term at the carrying amount of the lease liability, plus initial direct costs, plus (minus) any prepaid (accrued) lease payments, less the unamortized balance of lease incentives received. The lease liabilities are measured at the present value of the unpaid lease payments at the lease commencement date. Leases that include both lease and non-lease components are accounted for as a single lease component for each asset class, except for warehouses. The minimum payments under operating leases are recognized on a straight-line basis over the lease term in the consolidated statements of operations. Operating lease expenses related to variable lease payments are recognized in cost of sales or as operating expenses in a manner consistent with the nature of the underlying lease and as the events, activities, or circumstances in the lease agreement occur. Leases with a term of less than 12 months are not recognized on the consolidated balance sheets, and the related lease expenses are recognized in the consolidated statements of operations on a straight-line basis over the lease term. The accounting for leases requires management to exercise judgment and make estimates in determining the applicable discount rate, effective 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.

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Intangible Assets—The primary identifiable intangible assets of the Company relate to assets associated with its product and business acquisitions. All of the Company’s intangible assets have finite lives and are amortized. The estimated useful life of an identifiable intangible asset is based upon a number of factors including the effects of demand, competition, and expected changes in the marketability of the Company’s products.

Business Combinations—The Company uses its best estimates and assumptions to assign fair value to the tangible and intangible assets acquired and liabilities assumed at the acquisition date. The Company’s estimates are inherently uncertain and subject to refinement. During the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the fair value of these tangible and intangible assets acquired and liabilities assumed, with the corresponding offset to goodwill or an adjustment to the gain from a bargain purchase. In addition, uncertain tax positions and tax-related valuation allowances are initially recorded in connection with a business combination as of the acquisition date. The Company continues to collect information and reevaluates these estimates and assumptions quarterly and records any adjustments to the Company’s preliminary estimates to goodwill provided that the Company is within the measurement period. Upon the conclusion of the measurement period or final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the Company’s consolidated statement of operations.

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

We review and re-assess the estimated fair value of contingent consideration on a quarterly basis until the contingent period ends, and the updated fair value could be materially different from the initial estimates or prior quarterly amounts. Changes in the estimated fair value of our contingent earn-out liabilities are reported in operating results.

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. From time to time, 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. In such circumstances, 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.

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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:

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Level 1 – Quoted prices in active markets for identical assets or liabilities.

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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.

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

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

Income taxes—Income tax expense, deferred tax assets and liabilities, and liabilities for unrecognized tax benefits reflect management’s best estimate of current and future taxes to be paid. The Company is subject to income taxes in the U.S. and several foreign jurisdictions. The Company assessed the ability to realize deferred tax assets and determined that based on the available evidence, including a history of taxable income and estimates of future taxable income, it is more likely than not that the net deferred tax assets relating to the Company’s operations in Brazil, Spain, and Ukraine will not be realized and a full valuation allowance was recorded in those jurisdictions. 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.

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

FORWARD-LOOKING STATEMENTS/RISK FACTORS:

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

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

MANAGEMENT OVERVIEW

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

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

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

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

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

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Results of Operations

2021 Compared with 2020:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Liquidity and Capital Resources

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

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

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

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

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

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

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

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

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

The Company’s borrowing capacity varies with its financial performance, measured in terms of Consolidated EBITDA as defined in the Credit Agreement, for the trailing twelve-month period. Under the Credit Agreement, revolving loans bear interest at a variable rate based, at borrower’s election with proper notice, on either (i) LIBOR plus the “Applicable Margin” which is based upon the Total Leverage (“TL”) Ratio (“LIBOR Revolver Loan”) or (ii) the greater of (x) the Prime Rate, (y) the Federal Funds Rate plus 0.5%, and (z) the Daily One-Month LIBOR Rate plus 1.00%, plus, in the case of (x), (y) or (z) the Applicable Margin (“Adjusted Base Rate Revolver Loan”). Interest payments for LIBOR Revolver Loans are payable on the last day of each interest period (either one-, three- or six- months, as selected by the borrower) and the maturity date, while interest payments for Adjusted Base Rate Revolver Loans are payable on the last business day of each month and the maturity date. The interest rate on December 31, 2021, was 1.98%.

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

We believe that the combination of our cash flows from future operations, current cash on hand and the availability under the Company’s credit facility will be sufficient to meet our working capital and capital expenditure requirements and will provide us with adequate liquidity to meet our anticipated operating needs for at least the next 12 months from the issuance of the Annual Report. Although operating activities are expected to provide cash, to the extent of growth in the future, our operating and investing activities will use cash and, consequently, this growth may require us to access some or all of the availability under the credit facility. It is also possible that additional sources of finance may be necessary to support additional growth.

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

Recently Issued Accounting Guidance

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

Foreign Exchange

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

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

Inflation

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

CRITICAL ACCOUNTING POLICIES

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

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The Company’s critical accounting policies and estimates include:

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

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

Allowance for Doubtful Accounts or Current Expected Credit Losses —The Company maintains an allowance to cover its Current Expected Credit Losses ("CECL") on its trade receivables, other receivables and contract assets arising from the failure of customers to make contractual payments. The Company estimates credit losses expected over the life of its trade receivables, other receivables and contract assets based on historical information combined with current conditions that may affect a customer’s ability to pay and reasonable and supportable forecasts. In most instances, the Company’s policy is to write-off trade receivables when they are deemed uncollectible. The vast majority of the Company's trade receivables, other receivables and contract assets are less than 365 days. Under the CECL impairment model, the Company develops and documents its allowance for credit losses on its trade receivables based on multiple portfolios. The determination of portfolios is based primarily on geographical location, type of customer and aging.

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

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

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

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

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

Intangible Assets—The primary identifiable intangible assets of the Company relate to assets associated with its product and business acquisitions. All of the Company’s intangible assets have finite lives and are amortized. The estimated useful life of an identifiable intangible asset is based upon a number of factors including the effects of demand, competition, and expected changes in the marketability of the Company’s products.

Business Combinations—The Company uses its best estimates and assumptions to assign fair value to the tangible and intangible assets acquired and liabilities assumed at the acquisition date. The Company’s estimates are inherently uncertain and subject to refinement. During the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the fair value of these tangible and intangible assets acquired and liabilities assumed, with the corresponding offset to goodwill or an adjustment to the gain from a bargain purchase. In addition, uncertain tax positions and tax-related valuation allowances are initially recorded in connection with a business combination as of the acquisition date. The Company continues to collect information and reevaluates these estimates and assumptions quarterly and records any adjustments to the Company’s preliminary estimates to goodwill provided that the Company is within the measurement period. Upon the conclusion of the measurement period or final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the Company’s consolidated statement of operations.

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

We review and re-assess the estimated fair value of contingent consideration on a quarterly basis until the contingent period ends, and the updated fair value could be materially different from the initial estimates or prior quarterly amounts. Changes in the estimated fair value of our contingent earn-out liabilities are reported in operating results.

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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:

The carrying amount of the Company’s financial instruments, which principally include cash and cash equivalents, short-term investments, accounts receivable, long-term investments, accounts payable and accrued expenses approximate fair value because of the relatively short maturity of such instruments. The carrying amount of the Company’s short-term and long-term borrowings, which are considered Level 2 liabilities, approximates fair value based upon current rates and terms available to the Company for similar debt.

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

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

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