Alpha Pro Tech, Ltd. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. The unaudited filing covers a manufacturer and marketer of building weatherization products, disposable protective apparel, and infection-control products, sold primarily in the United States.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $11.779 million | $12.176 million | $36.334 million | $34.925 million |
| Gross profit / margin | $4.516 million / 38.3% | $4.806 million / 39.5% | $13.302 million / 36.6% | $12.546 million / 35.9% |
| Operating income / margin | $1.205 million / 10.2% | $0.718 million / 5.9% | $2.927 million / 8.1% | $1.040 million / 3.0% |
| Net income / margin | $1.019 million / 8.7% | $0.306 million / 2.5% | $2.323 million / 6.4% | $0.741 million / 2.1% |
| Diluted EPS | $0.06 | $0.02 | $0.14 | $0.04 |
| Operating cash flow | Not presented separately for the quarter | $6.016 million | $2.057 million |
Q3 sales fell 3.3%, while nine-month sales increased 4.0%. Nine-month operating income rose 181.4% and net income rose 213.5%. SG&A declined 18.7% in Q3 and 9.4% for the nine months; lower costs included the absence of a $601,000 former-CEO retirement accrual recorded in 2015. Q3 gross margin was lower year over year, partly reflecting a favorable U.S. customs duty refund that benefited Q3 2015; nine-month gross margin improved.
Segments and material comparisons
- Building Supply: Q3 sales decreased 5.6% to $7.022 million, mainly due to a 15.6% decline in synthetic roof underlayment. Nine-month sales increased 6.8% to a reported first-nine-month record of $21.700 million.
- Disposable Protective Apparel: Q3 sales were nearly flat at $3.698 million; nine-month sales decreased 0.2% to $11.147 million.
- Infection Control: Q3 sales increased 0.8% to $1.059 million; nine-month sales increased 1.6% to $3.487 million. Shield sales grew while mask sales declined in both comparison periods.
- Equity income from unconsolidated affiliate Harmony was $242,000 in Q3 versus a $165,000 loss in Q3 2015, and $433,000 for the first nine months versus $50,000 in 2015. The prior-year quarterly loss was attributed primarily to a revision of Indian government export incentives.
Liquidity, cash flow, and capital
- At September 30, cash was $11.772 million, investments $617,000, working capital $29.392 million, and current ratio 11:1. Working capital was down 5.0% from year-end 2015; cash was up $2.091 million.
- Nine-month operating cash flow of $6.016 million was supported in part by a $4.544 million inventory reduction, offset by a $1.953 million increase in trade receivables. Investing cash use was $253,000; financing cash use was $3.672 million.
- Inventory declined 27.7% to $11.854 million, which management attributed to a strategic decision to hold fewer inventory days. Receivables increased 70.9% to $4.734 million; reported days sales outstanding improved to 29 from 39 at December 31, 2015.
- No borrowings were outstanding under the $3.5 million Wells Fargo revolving credit facility, which expires in May 2018. The company said it did not anticipate using the facility in the near future and believed cash and available credit would cover foreseeable working capital and planned capital expenditures. The filing reports no other debt balance.
- The company repurchased 1,564,400 shares for $3.689 million during the first nine months; $2.589 million remained available under the repurchase program at September 30. Shares outstanding were 16,301,056, versus 17,850,456 at December 31, 2015.
Outlook, risks, and other notable items
- Management expected Building Supply growth for the remainder of 2016 to be similar to its year-to-date rate, and gross margin to remain in a similar range for the balance of 2016. It also cited ongoing efforts to reduce product costs. These are forward-looking expectations, not guarantees.
- Management described Q3 as a challenging quarter for the nationwide roofing market; lower underlayment sales tracked the market downturn. The filing does not provide formal quantitative earnings or revenue guidance.
- Key exposures include market demand, inventory obsolescence and valuation estimates, customer collection risk, and the performance of Harmony. Harmony is an unconsolidated affiliate in which the company holds a 41.66% interest; the company reported no impairment at September 30, 2016.
- The company disclosed $194,000 in uncertain tax position liability and related-party legal fees of $145,000 for the nine months, with $275,000 outstanding to the director-associated law firm at period end.
- Management reported effective disclosure controls as of September 30, 2016 and no material change in internal control over financial reporting during the quarter. No subsequent events requiring accounting or disclosure were identified through the filing date.
- Management was evaluating the potential effects of several forthcoming accounting standards, including revenue recognition, inventory measurement, deferred tax classification, financial instruments, leases, and stock compensation; impacts had not been determined.
Important facts for investors to verify
- Whether the Q3 slowdown in synthetic roofing underlayment persisted after September and whether management’s year-end Building Supply growth expectation was achieved.
- How much of the earnings improvement reflected recurring cost control versus the nonrecurrence of the 2015 retirement accrual and affiliate-related comparison effects.
- Whether lower inventory levels were sustainable without affecting product availability, and whether the receivables increase converted to cash.
- Harmony’s results, export-incentive exposure, and contribution to reported earnings and product supply.
- Subsequent share repurchases, remaining authorization, and the company’s cash and credit availability.