Alpha Pro Tech, Ltd. — Q3 2015 Form 10-Q
Business context and period. Unaudited results for the quarter and nine months ended September 30, 2015, compared with the corresponding 2014 periods. The company sells building weatherization products, disposable protective apparel, and infection-control products, primarily in the United States.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $12.176 million | $13.213 million | $34.925 million | $35.421 million |
| Gross profit / margin | $4.806 million / 39.5% | $4.886 million / 37.0% | $12.546 million / 35.9% | $13.005 million / 36.7% |
| Operating income | $718,000 | $1.400 million | $1.040 million | $2.485 million |
| Net income | $306,000 | $966,000 | $741,000 | $2.130 million |
| Diluted EPS | $0.02 | $0.05 | $0.04 | $0.11 |
| Operating cash flow | Not separately presented for the quarter | $2.057 million | $973,000 |
- Quarterly sales fell 7.8%; nine-month sales declined 1.4%. Building Supply sales decreased, partly offset by growth in Disposable Protective Apparel.
- Quarterly SG&A rose 18.1% to $3.882 million, including a $601,000 accrual related to the former CEO’s retirement and higher legal fees. Nine-month SG&A increased 10.3% to $10.979 million.
- Cash was $6.574 million at September 30, up from $5.495 million at year-end 2014. Working capital was $31.452 million and the current ratio was 15:1.
- Total liabilities were $3.238 million; the company reported no borrowings under its $3.5 million Wells Fargo credit facility, which expires in May 2016. The full $3.5 million borrowing capacity was available at quarter-end.
- Investments in marketable securities fell to $826,000 from $2.840 million at year-end. Nine-month comprehensive loss was $580,000, including a $1.321 million after-tax unrealized investment loss.
Changes, outlook, and risks
- Building Supply sales declined 13.0% in Q3 and 5.4% year to date. Management cited lower housewrap and synthetic-underlayment sales, competition, and a shift from premium products toward lower-priced products. The TECHNO underlayment family grew 43.1% in the first nine months.
- Disposable Protective Apparel sales grew 6.7% in Q3 and 5.3% year to date, helped by a major international supply-chain partner. Infection Control sales decreased 13.2% in Q3, partly because the prior-year quarter benefited from Ebola-related demand; nine-month sales rose 3.1%.
- Q3 gross margin benefited by 5.0 percentage points from a retroactive U.S. customs duty refund under the Generalized System of Preferences (GSP); the year-to-date benefit was 1.7 points. Management expected continued margin benefit while eligible products remained duty-free through at least December 31, 2017. Competitive pricing, higher rebates, and manufacturing costs were additional margin pressures.
- Other income included a $165,000 Q3 equity loss from Harmony, the unconsolidated Indian affiliate. Management attributed it primarily to a non-recurring revision of Indian export incentives. The nine-month 2014 comparison included $409,000 of investment and warrant gains that did not recur.
- Management expected inventory to decline in Q4, supporting cash, and believed cash plus available credit would cover foreseeable working-capital and planned capital-expenditure needs. It anticipated an effective tax rate in the mid-30% range on taxable income. No specific revenue or earnings guidance was provided.
- The company repurchased 664,100 shares for $1.518 million in the first nine months and had $1.870 million remaining under its program at quarter-end. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether building-product competition and the shift to lower-priced offerings affect sales and margins, and whether management’s expected REX product rebound materializes.
- How much of the Q3 margin improvement reflects the GSP refund versus underlying operating performance, and the refund program’s duration and eligibility.
- Whether inventory declines as expected and whether apparel inventory growth translates into sales and cash generation.
- The effect of the former CEO retirement accrual, legal costs, and any further Harmony-related incentive adjustments on future expenses and earnings.
- Changes in marketable-security values, given the substantial year-to-date unrealized loss, and the company’s continued use of cash for share repurchases.