Alpha Pro Tech, Ltd. — FY2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012; comparisons are with FY2011. The company develops and sells building weatherization products, disposable protective apparel, and infection-control products. Its sales are predominantly in the United States.
Financial performance
| Metric | FY2012 | FY2011 |
|---|---|---|
| Net sales | $41.058 million | $38.502 million |
| Gross profit / margin | $14.460 million / 35.2% | $14.046 million / 36.5% |
| Operating income / margin | $817,000 / 2.0% | $905,000 / 2.4% |
| Income before taxes | $1.307 million | $1.481 million |
| Net income / margin | $977,000 / 2.4% | $933,000 / 2.4% |
| Basic and diluted EPS | $0.05 | $0.04 |
| Cash from operating activities | $(1.014) million | $3.766 million |
Revenue increased 6.6%. Building Supply sales rose 10.0% to $23.749 million; Disposable Protective Apparel sales rose 5.0% to $13.188 million; Infection Control sales fell 5.2% to $4.121 million. Building Supply segment income was $3.031 million, Apparel $1.624 million, and Infection Control $1.118 million. Segment income excludes corporate costs and taxes.
Gross margin declined 1.3 percentage points, which management attributed mainly to higher Building Supply raw-material costs and competitive pricing. Operating income fell 9.7%, while net income rose 4.7%, primarily because the effective tax rate declined to 25.2% from 37.0%; the company cited changes in U.S. tax treatment of its Indian joint venture.
Liquidity, cash flow and capital
- Year-end cash and cash equivalents were $4.554 million, down $2.949 million; working capital was $29.588 million. The reported current ratio was 19:1.
- Operating cash use of $1.014 million reflected higher accounts receivable and inventory. Receivables increased 34.4% to $6.350 million, and days sales outstanding rose to 49 from 41. Inventory increased 10.3% to $17.164 million.
- Investing activities used $363,000, including $519,000 of property and equipment purchases; financing activities used $1.572 million, principally for share repurchases.
- The company reported no debt and no borrowings on its $3.5 million Wells Fargo line of credit, which expires in May 2014. Management said cash and available credit should cover foreseeable working capital and planned capital expenditures.
- During 2012, the company repurchased and retired 1,085,050 shares for $1.581 million. On February 1, 2013, the board authorized a $2 million expansion of the repurchase program.
Outlook, risks and notable items
- Management described Building Supply prospects as promising as the housing market recovers. TECHNOply, introduced in 2012, represented about 6% of annual synthetic underlayment sales and about 14% in the most recent quarter. Management also expected REX Wrap Fortis sales and distribution to improve in 2013. These are forward-looking expectations, not formal quantified guidance.
- Apparel growth plans include broader distribution of the Critical Cover product line. Infection Control faced weaker industrial mask demand after a former major distributor launched its own mask line; medical mask sales partly offset the decline.
- Key risks include dependence on major customers and a limited number of suppliers and contractors, international manufacturing exposure, intense competition and pricing pressure, uncertain demand and product acceptance, inventory obsolescence, customer credit risk, intellectual-property protection, IT security, and legal or regulatory proceedings. Two customers each represented at least 10% of FY2012 sales; the largest accounted for 21%.
- A $342,000 uncertain income-tax-position liability was recorded at year-end. The filing reports no legal proceedings. The company had $4.348 million of future minimum operating lease payments.
- The independent auditor issued an unqualified opinion on the financial statements. Management concluded internal control over financial reporting and disclosure controls were effective; no auditor attestation on internal controls was included because the company qualified as a smaller reporting company.
Important facts for investors to verify
- Whether growth in Building Supply can offset margin pressure from raw materials and competitive pricing.
- Whether the decline in operating cash flow reverses as receivables and inventory are converted to cash, including whether the higher inventory levels sell as expected.
- Whether customer concentration, extended payment terms, and reliance on key suppliers and Harmony create material sales or continuity risk.
- The resolution and potential cash impact of the $342,000 uncertain tax position, and the company’s ability to fund repurchases while preserving operating liquidity.
- The assumptions underlying management’s 2013 product and housing-market expectations; the filing provides no specific revenue or earnings guidance.