Alpha Pro Tech, Ltd. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited. The company develops and sells building-supply weatherization products, disposable protective apparel, and infection-control products, primarily in the U.S.
Financial results
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $10.751 million | $11.847 million | Down 9.3% |
| Gross profit / margin | $4.294 million / 39.9% | $4.245 million / 35.8% | Profit up 1.2%; margin up 4.1 percentage points |
| Operating income | $666,000 | $634,000 | Up 5.0% |
| Income before taxes | $772,000 | $733,000 | Up 5.3% |
| Net income / net margin | $550,000 / 5.1% | $507,000 / 4.3% | Up 8.5% |
| Basic and diluted EPS | $0.04 | $0.03 | Up $0.01 |
| Operating cash flow | $162,000 | $(659,000) | Improved |
SG&A was $3.474 million, up 0.5%; as a share of sales it rose to 32.3% from 29.2%. The effective tax rate was 28.8%, versus 30.8%.
Segment performance
- Building Supply: Sales of $5.939 million, down 12.1%. Synthetic roof underlayment sales fell 23.1%, partly offset by housewrap growth of 8.9%. Segment income was $962,000, versus $1.012 million.
- Disposable Protective Apparel: Sales of $3.295 million, down 13.9%, mainly reflecting lower sales to an international supply-chain partner and a regional distributor; management attributed some weakness to timing. Segment income rose to $458,000 from $335,000.
- Infection Control: Sales of $1.517 million, up 19.6%; mask and shield sales increased. Segment income rose to $596,000 from $455,000.
Cash, liquidity, and capital allocation
- Cash was $7.884 million at quarter-end, down $1.572 million from year-end. Working capital was $25.6 million; the current ratio was 14:1.
- Operating cash flow of $162,000 was offset by $584,000 of capital spending and $1.150 million of share repurchases, resulting in a $1.572 million net cash decrease.
- Accounts receivable, including affiliate receivables, totaled $5.623 million, up $801,000 from year-end. Management linked the increase to extended payment terms on most Building Supply sales; most related receivables were expected to be collected in Q2. Days sales outstanding rose to 44 from 30.
- Inventory was $10.679 million, down $315,000 from year-end. Accounts payable and accrued liabilities totaled $2.042 million, down $423,000.
- No borrowings were outstanding. The company had a $3.5 million asset-based credit facility, expiring May 2018, with $3.5 million borrowing capacity available at March 31. Management believes cash and facility availability will cover foreseeable working-capital needs and planned capital expenditures.
- The company repurchased 362,700 shares for $1.150 million during the quarter; $1.355 million remained available under the program at March 31.
Outlook, notable items, and risks
- Management expected Building Supply growth in the latter half of 2017, following a soft re-roofing market and distributor inventory reductions. Apparel sales were expected to pick up in coming months. These are expectations, not formal full-year guidance.
- Management expected gross margin for the balance of 2017 to remain in a range similar to the approximately 38% achieved in the second half of 2016, and expected the effective tax rate to remain in the high-20% range.
- Q1 adoption of stock-compensation guidance resulted in a one-time $866,000 transfer from additional paid-in capital to retained earnings. This was an equity reclassification, not reported Q1 income or cash flow; adoption also increased dilutive shares and may reduce future tax rates when excess option tax benefits arise.
- The company recorded $105,000 of equity income from Harmony, its 41.66%-owned unconsolidated Indian joint venture, and purchased $3.627 million of inventory from it during the quarter.
- Pending and threatened litigation arose in the ordinary course of business. Management, after consulting counsel, did not anticipate a material effect, while noting ultimate liability could not be determined with certainty. No subsequent events requiring disclosure were reported.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether extended customer payment terms convert to cash as expected and whether receivables and days sales outstanding normalize.
- Whether Building Supply underlayment demand and distributor orders recover in the second half, and whether Apparel sales rebound after timing-related declines.
- Whether the higher gross margin is sustainable amid sales weakness and ongoing product-cost reduction efforts.
- Capital-spending needs, continued share repurchases, and cash generation relative to the company’s liquidity expectations.
- The effects of stock-compensation accounting changes on diluted share count and future tax expense, and the financial performance and related-party exposure associated with Harmony.