January 14, 2002
AG SERVICES OF AMERICA INC (ASV)
Quarterly Report (SEC form 10-Q)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
Results of Operations
The following table sets forth percentages of net revenues represented by the selected items in the unaudited condensed statements of income of the Company for the three and nine months ended November 30, 2001 and 2000. In the opinion of management, all normal and recurring adjustments necessary for a fair statement of the results for such periods have been included. The operating results for any period are not necessarily indicative of results for any future period.
Percentage Percentage
of Net Revenues of Net Revenues
------------------ ------------------
Three Months Ended Nine Months Ended
November30, November 30,
------------------ ------------------
2001 2000 2001 2000
-------- -------- -------- --------
Net Revenues:
Farm inputs 70.3% 60.6% 92.5% 90.8%
Financing income 29.7% 39.4% 7.5% 9.2%
-------- -------- -------- --------
100.0% 100.0% 100.0% 100.0%
-------- -------- -------- --------
Cost of Revenues:
Farm inputs 63.0% 54.9% 88.3% 86.1%
Financing expense 14.9% 23.4% 3.9% 4.9%
Provision for doubtful
notes 1.9% 1.8% 1.8% 1.8%
-------- -------- -------- --------
79.8% 80.1% 94.0% 92.8%
-------- -------- -------- --------
Income before
operating expenses and
income taxes 20.2% 19.9% 6.0% 7.2%
Operating expenses 12.3% 12.9% 3.2% 3.3%
-------- -------- -------- --------
Income before
income taxes 7.9% 7.0% 2.8% 3.9%
Federal and state income
taxes 2.7% 2.8% 1.1% 1.5%
-------- -------- -------- --------
Net income 5.2% 4.2% 1.7% 2.4%
======== ======== ======== ========
Net Revenues
Net revenues increased $1.5 million or 6.3% during the three months ended November 30, 2001, compared with the three months ended November 30, 2000. Net revenues increased $16.6 million or 5.9% during the nine months ended November 30, 2001, compared with the nine months ended November 30, 2000. The increase in net revenues was primarily the result of greater volume under the Company's AgriFlex Credit(R) Financing Program and increases in the Seed and Chemical Financing Program. Year-to-date revenue has been impacted significantly by changes in crops planted by customers and reduced interest rates. The delay in spring crop planting throughout much of the Company's primary market area caused many customers to switch crop plans and leave a portion of acres unplanted which decreased the Company's seed, chemical and fertilizer sales. Financing income as a percentage of net revenues decreased to 29.7% and 7.5% for the three and nine months ended November 30, 2001, respectively, from 39.4% and 9.2% for the same periods of the previous year. The decrease in financing margin was primarily the result of a decrease in the prime lending rate, as compared to the same period one year ago, by approximately 388 and 263 basis points, respectively, over the three and nine months ended November 30, 2001.
Cost of Revenues
The total cost of revenues decreased slightly to 79.8% for the three months ended November 30, 2001, as compared to 80.1% for the three months ended November 30, 2000. Total cost of revenues increased to 94.0% for the nine months ended November 30, 2001, as compared to 92.8% for the nine months ended November 30, 2000. The gross margin on the sale of farm inputs increased to 10.4% for the three months ended November 30, 2001, compared to 9.5% for the three months ended November 30, 2000 and decreased to 4.6% for the nine months ended November 30, 2001, compared to 5.1% for the nine months ended November 30, 2000. The increase in gross margin on the sale of farm inputs for the three months ended November 30, 2001 was due to the increased volume in the Company's crop insurance program. The decrease in gross margin on the sale of farm inputs for the nine months ended November 30, 2001 was the result of a sales mix shift into lower margin inputs which was caused by the delay in spring crop planting described above that reduced seed, chemical and fertilizer sales. Gross margins on the sale of farm inputs were also reduced as a result of increasing the reserve for program discounts as discounts earned by customers have increased due to an improving customer portfolio and competitive influences. Concerning the gross margin on financing income alone, the percentage increased to 49.8% for the three months ended November 30, 2001 from 40.6% for the three months ended November 30, 2000 and increased to 48.0% for the nine months ended November 30, 2001, from 46.7% for the nine months ended November 30, 2000. The decrease in financing margin dollars was primarily a result of a decrease in the prime lending rate by approximately 388 and 263 basis points for the three and nine months ended November 30, 2001, as compared to a year ago. Attributing to the decrease in financing margin was the impact of an interest rate swap agreement as discussed in Note 3. The provision for doubtful notes remained relatively constant at 1.9% and 1.8% of net revenues for the three and nine months ended November 30, 2001, as compared to 1.8% for the three and nine months ended November 30, 2000.
Operating Expenses
Operating expenses decreased, as a result of management's efforts to control costs, to 12.3% and 3.2% of net revenues for the three and nine months ended November 30, 2001, as compared to 12.9% and 3.3% for the three and nine months ended November 30, 2000. The increase in the dollar amount of operating expenses is attributed to the Company's growth. Payroll and payroll related expenses increased to $2.2 million for the three months ended November 30, 2001 from $2.0 million for the three months ended November 30, 2000 and increased to $6.6 million for the nine months ended November 30, 2001 from $6.2 million for the nine months ended November 30, 2000.
Net Income
Net income increased 30.0% to $1.3 million for the three months ended November 30, 2001 from $1.0 million for the three months ended November 30, 2000 and decreased 24.8% to $5.2 million for the nine months ended November 30, 2001 from $6.9 million for the nine months ended November 30, 2000. The increase in net income for the three months is primarily attributable to an increase in volume under the Company's crop insurance program. The decline in net income for the nine month period was primarily due to the decrease in financing income resulting from the decrease in prime lending rate as discussed above. Also attributing to the decline in net income was the cool, wet weather conditions throughout the Company's primary market area during the first quarter of Fiscal 2002 which delayed the current crop growing season and reduced seed, chemical and fertilizer sales
Powerfarm
Powerfarm.com, the Company's e-commerce website, has compiled one of the most comprehensive assortment of agriculture products, services and credit options available on the Internet today. Products currently available include seed, fertilizer and crop protection chemicals, along with headline ag news, market quotes and weather. Growers can shop at their convenience day or night for products and sign up for additional services like crop insurance, grain marketing programs, crop scouting and soil sampling services. Within the Powerfarm Community, growers can post questions for the Company's agronomists and Certified Crop Advisors. The Company continues discussions with additional suppliers serving the $250 billion agriculture industry.
Inflation
The Company does not believe the Company's net revenues and net income were significantly impacted by inflation or changing prices in Fiscal 2001 or the first nine months of Fiscal 2002.
Seasonality
The Company's revenues and income are directly related to the growing cycle for crops. Accordingly, quarterly revenues and income vary during each fiscal year. The following tables show the Company's quarterly net revenues and net income for Fiscal 2001 and the first three quarters of Fiscal 2002. This information is derived from unaudited consolidated financial statements, which include, in the opinion of management, all normal and recurring adjustments which management consider necessary for a fair statement of results of those periods. The operating results for any quarter are not necessarily indicative of the results for any future period.
Fiscal 2002 Quarter Ended
May 31 August 31 November 30 February 28
----------- ----------- ----------- -----------
(Dollars in thousands)
Net revenues $164,160 $110,310 $25,104
Net income $1,834 $2,025 $1,297
Fiscal 2001 Quarter Ended
May 31 August 31 November 30 February 28
----------- ----------- ----------- -----------
(Dollars in thousands)
Net revenues $155,802 $103,530 $23,626 $62,696
Net income $3,125 $2,733 $998 $598
Wet weather conditions in much of the Company's primary market area reduced seed, chemical and fertilizer sales in Fiscal 2002 from expected levels.
Liquidity and Capital Resources
At November 30, 2001 the Company had working capital of $53.8 million, a decrease of $1.9 million over a year ago and an increase of $1.7 million since February 28, 2001. The components of this net increase, since February 28, 2001, were (i) $4.1 million resulting from operating activities, consisting of approximately, $5.2 million in net income, $0.5 million in depreciation, $0.3 million in amortization, and the remainder from a net change in other working capital items, (ii) capital expenditures of approximately $3.0 million related to the acquisition of equipment, furniture and the construction of new corporate headquarters, and (iii) net proceeds of $0.7 million from the issuance of common stock upon exercise of options.
The Company entered into an asset backed securitized financing program through Fiscal 2004, with a maximum available borrowing amount of $345 million. Under the terms of the facility, the Company sells and may continue to sell or contribute certain notes receivable to Ag Acceptance Corporation ("Ag Acceptance"), a wholly owned, special purpose subsidiary of the Company. Ag Acceptance pledges its interest in these notes receivable to a commercial paper market conduit entity on $275 million of the facility which incurs interest at variable rates in the commercial paper market (current effective rates range from 2.05% to 2.36% at November 30, 2001) and the remaining $70 million is a three-year term note with interest at a variable cost of LIBOR plus 25 basis points (current effective rate is 2.36% at November 30, 2001). The agreement contains various restrictive covenants, including, among others, restrictions on mergers, issuance of stock, declaration or payment of dividends, transactions with affiliates, and requires the Company to maintain certain levels of equity and pretax earnings. Advances under the facility are made subject to portfolio performance, financial covenant restrictions and borrowing base calculations. At November 30, 2001, the Company had approximately $210 million outstanding under the asset backed securitized financing program and had a maximum additional amount available of approximately $0.7 million, based on borrowing base computations as provided by the agreement.
During August of 2000, the Company negotiated a new $30 million term loan. The term loan will be due in four equal annual installments beginning in July of 2002 through maturity in July of 2005. All borrowings are collateralized by substantially all assets of the Company. Additional terms of the agreement allow two variable interest rate alternatives based on prime or LIBOR (current effective rates range from 4.032% to 5.25% at November 30, 2001). The agreement also contains various restrictive covenants, including, among others, restrictions on mergers, issuance of stock, declaration or payment of dividends and loans to stockholders, and requires the Company to maintain certain levels of equity and pretax earnings. At November 30, 2001, the Company had $30 million outstanding under the term loan.
The Company has an interest rate swap agreement that effectively limits the exposure to increasing interest rates on the above term note. The interest rate swap agreement matures in July of 2005 and has a notional amount of $30 million at November 30, 2001 and decreases as the principal amount is repaid. The agreement has effectively fixed the interest rate on the Company's $30 million term note at 9.78%. Although the Company is exposed to credit loss in the event of nonperformance by the counter-party on the interest rate swap agreement, management does not expect nonperformance. The Company is currently involved in negotiations with the counter-party of this transaction to reduce the liability that has accrued under this agreement.
In conjunction with the securitized financing program and the term loan, the Company maintains a $15 million revolving bank line of credit through July 2003. The line of credit is accessible to cover any potential deficiencies in available funds financed through the securitization program. All borrowings are collateralized by substantially all assets of the Company. The terms of the agreement allow for two variable interst rate alternatives based on prime or LIBOR (current effective rates range from 4.032% to 5.25% at November 30, 2001). The agreement also contains various restrictive covenants, including, among others, restrictions on mergers, issuance of stock, declaration or payment of dividends and loans to stockholders, and requires the Company to maintain certain levels of equity and pretax earnings. Advances under the line of credit agreement are also subject to portfolio performance, financial covenant restrictions, and borrowing base calculations. At November 30, 2001 the Company had $5 million outstanding under the agreement and had a maximum additional amount available of approximately $10 million based on borrowing base computations as provided by the agreement.
The Company subsequently closed on a new financing agreement following the end of the third quarter in Fiscal 2002. Under the terms of the agreement, the Company may borrow up to $3.9 million, with a declining balance provision, on a revolving line of credit through April 2022. This credit agreement will be used to finance construction costs of the Company's new coporate headquarters at a fixed interest rate of 5.74% for five years. The agreement also contains various restrictive covenants, including among others, requirements to maintain certain levels of equity and pretax earnings.
Management believes that the financial resources available to it, including its bank lines of credit, asset backed securitization program, five-year term note, construction loan, trade credit, its equity and internally generated funds, will be sufficient to finance the Company and its operations in the foreseeable future.
The Company currently has contracted with a company to construct a building to replace the Company's corporate headquarters. The new facility will have approximately 60,000 square feet of office space with adequate land for future expansion. The construction of the new office facility has started with an estimated cost of $4.5 million and completion projected for February of 2002.
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995
Information contained in this report, other than historical information, should be considered forward looking, which reflect Management's current views of future events and financial performance that involve a number of risks and uncertainties. The factors that could cause actual results to differ materially include, but are not limited to, the following: general economic conditions within the agriculture industry; competitive factors and pricing pressures; changes in product mix; changes in the seasonality of demand patterns; changes in weather conditions; changes in agricultural regulations; technological problems; the amount and availability under its asset backed securitization program; unknown risks; and other risks detailed in the Company's Securities and Exchange Commission filings.
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