Alpha Pro Tech, Ltd. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. The company manufactures and markets building weatherization products, disposable protective apparel, and infection-control products, primarily in the United States.
Financial performance and liquidity
| Metric | Q1 2016 | Q1 2015 / comparator |
|---|---|---|
| Net sales | $11.847 million | $10.654 million; up 11.2% |
| Gross profit / margin | $4.245 million / 35.8% | $3.825 million / 35.9% |
| Operating income / margin | $634,000 / 5.4% | $77,000 / 0.7% |
| Income before taxes | $733,000 | $176,000 |
| Net income / net margin | $507,000 / 4.3% | $148,000 / 1.4% |
| Basic and diluted EPS | $0.03 | $0.01 |
| Operating cash flow | $(659,000) | $(4.021) million |
- Sales increased across all three segments: Building Supply $6.754 million (+16.2%); Disposable Protective Apparel $3.825 million (+4.9%); Infection Control $1.268 million (+6.1%).
- SG&A declined 3.4% to $3.457 million, while depreciation and amortization declined to $154,000. Operating income rose primarily because of higher gross profit and lower operating expenses.
- Cash was $8.247 million at March 31, down $1.434 million from year-end. Working capital was $30.625 million, and the reported current ratio was 15:1. Total liabilities were $2.946 million; the filing reports no outstanding borrowings.
- The company had a $3.5 million revolving credit facility with borrowing capacity of $3.5 million at quarter-end, priced at prime plus 0.5%; the facility was due to expire in May 2016. Management said it did not anticipate using it in the near future.
- Operating cash use reflected a $3.434 million increase in accounts receivable, partly offset by a $1.643 million inventory decrease and a $570,000 decrease in prepaid and other current assets. Receivables rose largely because of extended payment terms on Building Supply sales; most were expected to be collected in Q2.
- Investing cash use was $96,000. Financing cash use was $679,000, all for repurchases of 395,000 shares. The company had $600,000 remaining under its repurchase authorization.
Changes, outlook, and notable items
- Building Supply sales reached a first-quarter record. Management attributed growth to a milder winter, continued distribution-network expansion, and higher housewrap and synthetic roof underlayment sales. Management was optimistic the segment would continue growing through 2016 at a pace similar to Q1; no consolidated earnings or revenue guidance was provided.
- Gross margin was nearly unchanged year over year, while SG&A as a share of sales improved to 29.2% from 33.6%. The effective tax rate increased to 30.8% from 15.9%.
- Marketable securities were $551,000 at quarter-end. The quarter included a $96,000 after-tax unrealized loss in other comprehensive income; this did not reduce reported net income.
- The company’s 41.66%-owned unconsolidated affiliate, Harmony Plastics, contributed $98,000 of equity income in each comparative quarter. Alpha Pro Tech purchased $2.822 million of inventory from Harmony in Q1 2016, versus $3.058 million a year earlier. Management reported no impairment of the investment.
- Management stated existing cash and the credit facility should cover projected working capital and planned capital expenditures for the foreseeable future. Results for the quarter are not necessarily indicative of full-year results. Forward-looking statements remain subject to risks and uncertainties.
- Management identified no subsequent events requiring disclosure. Disclosure controls were deemed effective, and no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether the $3.5 million credit facility was renewed or replaced before its May 2016 expiration.
- Collection timing and credit quality of the elevated receivables, including the effect of extended customer payment terms on future operating cash flow.
- Whether Building Supply growth continued beyond the favorable Q1 weather and whether management’s segment outlook translated into full-year results.
- Continuing marketable-security valuation changes and the related accumulated other comprehensive loss.
- The ongoing scale and terms of purchases from Harmony, a related unconsolidated affiliate, and the affiliate’s contribution to earnings.
- Remaining share-repurchase authorization and the balance between repurchases, liquidity needs, and planned capital expenditures.