Alpha Pro Tech, Ltd. — 2013 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2013, compared with fiscal 2012. The company develops and sells building weatherization products, disposable protective apparel, and infection-control products. Its sales are predominantly in the United States. Financial statements received an unqualified audit opinion; the auditor did not audit internal control effectiveness.
Financial results and year-over-year changes
| Metric | 2013 | 2012 |
|---|---|---|
| Net sales | $43.806 million | $41.058 million |
| Gross profit / margin | $16.232 million / 37.1% | $14.460 million / 35.2% |
| Operating income / margin | $2.395 million / 5.5% | $0.817 million / 2.0% |
| Income before tax | $2.964 million | $1.307 million |
| Net income / margin | $2.079 million / 4.7% | $0.977 million / 2.4% |
| Basic and diluted EPS | $0.11 | $0.05 |
| Cash from (used in) operations | $6.093 million | ($1.014 million) |
- Sales rose 6.7%; gross profit increased 12.3%, while operating income rose 193.1% and net income rose 112.8%.
- Building Supply sales increased 11.0% to $26.373 million, led by housewrap growth. Disposable Protective Apparel sales were essentially flat at $13.191 million; Infection Control sales increased 2.9% to $4.242 million.
- Operating expenses increased modestly, and SG&A declined as a share of sales to 29.9% from 31.4%. The effective tax rate increased to 29.9% from 25.2%; management expected a mid-30% rate going forward.
- Other income included a $350,000 gain from revaluing common-stock warrants. Equity income from the India affiliate fell to $210,000 from $480,000.
Cash, liquidity, debt, and capital allocation
- Year-end cash and cash equivalents were $8.215 million, up from $4.554 million. Working capital was $30.915 million, and the reported current ratio was 19:1.
- Operating cash flow improved by $7.107 million year over year, with lower accounts receivable and inventories contributing $1.279 million and $3.024 million, respectively. Inventory declined 17.6% to $14.140 million.
- The company reported no debt at year-end. Its $3.5 million asset-based credit facility was undrawn and scheduled to expire in May 2014; it bears interest at prime plus 0.5%. Management said cash and available credit were expected to cover foreseeable working capital and planned capital expenditures.
- Investing cash outflow was $350,000, primarily for property and equipment. Financing cash outflow was $2.082 million, including $3.134 million for share repurchases, partly offset by $1.052 million from option exercises. The company repurchased 1.931 million shares during 2013 and had $1.595 million remaining under the program at year-end.
- Investments included $1.256 million of marketable securities and $350,000 of warrants in one publicly traded entity. The securities’ unrealized gains increased accumulated other comprehensive income; the warrant’s fair-value gain was recorded in income.
Outlook, risks, contingencies, and unusual items
- No quantified revenue or earnings guidance was provided. Management described Building Supply prospects as promising amid a housing-market recovery, expected TECHNOply and REX Wrap Fortis to grow, and anticipated higher sales to a major apparel distribution partner. These are expectations, not formal guidance.
- Material risks include dependence on a limited number of customers and overseas suppliers, intense competition, customer order variability, economic and construction-market conditions, and product acceptance. Two customers each represented at least 10% of 2013 sales; together they accounted for 32% of sales and 32% of year-end receivables.
- Management disclosed a material weakness in internal control over financial reporting involving failure to mark an unexercised warrant to market. The error understated third-quarter other income and current assets by $201,000 and net income and equity by $133,000; it was corrected in the annual statements. Management reported the weakness had subsequently been rectified, but concluded controls were ineffective at December 31, 2013. Disclosure controls were also deemed ineffective. The external auditor provided no internal-control opinion.
- The warrant valuation depends on a pricing model and the warrant expires in September 2014. The company also disclosed an uncertain-tax-position liability of $194,000 at year-end and operating-lease commitments totaling $3.665 million.
- The filing reports no legal proceedings. The company stated it does not expect significant effects from inflation, interest rates, or currency movements and does not hedge those exposures.
Most important facts for investors to verify
- Whether the material weakness was fully remediated and controls operated effectively after year-end; review subsequent filings for updates.
- Renewal or replacement of the $3.5 million credit facility, which was due to expire in May 2014.
- Whether Building Supply growth and management’s expectations for TECHNOply, REX Wrap Fortis, and housing-market demand were realized.
- Customer concentration, ongoing dependence on Harmony and Asian subcontractors, and the terms and availability of alternate supply.
- The value and disposition of the concentrated securities and warrants, including the warrant’s September 2014 expiration and the related valuation controls.
- The filing gives different executive-bonus figures in separate sections: $329,000 accrued in the MD&A versus $294,000 in the notes. Reconcile this disclosure, along with the $194,000 uncertain-tax liability and remaining repurchase authorization.