Alpha Pro Tech, Ltd. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. Alpha Pro Tech develops and sells building weatherization products, disposable protective apparel, and infection-control products, primarily in the United States.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Net sales | $9.956 million | $9.450 million | +5.4% |
| Gross profit / margin | $3.610 million / 36.3% | $3.663 million / 38.8% | Profit down $53,000; margin down 2.5 percentage points |
| Operating income (loss) / margin | $51,000 / 0.5% | ($30,000) / (0.3%) | Improved $81,000 |
| Net income / margin | $269,000 / 2.7% | $15,000 / 0.2% | Up $254,000 |
| Basic and diluted EPS | $0.01 | $0.00 | — |
| Operating cash flow | ($2.667 million) | ($322,000) | Greater cash use |
Sales rose in all three segments: Building Supply $5.521 million (+6.9%), Disposable Protective Apparel $3.364 million (+4.5%), and Infection Control $1.071 million (+0.5%). Segment income was $750,000, $240,000, and $321,000, respectively; apparel segment income declined from $364,000.
Lower SG&A—$3.371 million, down 4.0%—helped lift operating results despite lower gross profit. Other income was $304,000 versus $34,000, including $110,000 of affiliate income and investment gains of $191,000. The investment gains included a $161,000 gain on common stock and a $30,000 gain on warrants. Net income therefore benefited materially from non-operating items.
Financial position and liquidity
- At March 31, cash and cash equivalents were $4.864 million, investments were $2.231 million, and working capital was $31.181 million. Current assets were $32.611 million against current liabilities of $1.430 million; the reported current ratio was 23:1.
- Cash decreased $3.351 million during the quarter. Operating activities used $2.667 million, investing activities used $155,000, and financing activities used $529,000.
- Operating cash use reflected, principally, a $2.064 million increase in receivables, a $342,000 increase in inventory, and a $295,000 decrease in accounts payable and accrued liabilities. Receivables rose 40.7% from year-end; days sales outstanding increased to 55 from 47.
- Total liabilities were $2.842 million. The company reported no borrowings under its $3.5 million Wells Fargo credit facility; borrowing capacity was $3.5 million. The facility expired in May 2014 and management expected renewal.
- The company repurchased 269,200 shares for $577,000 during the quarter, leaving $1.018 million available under its repurchase program. It reported 18,638,909 shares outstanding at March 31.
Changes, outlook, and risks
- Building Supply sales benefited from growth in synthetic roof underlayment and other woven material, partly offset by an 8.7% decline in housewrap. Management attributed pressure on construction-related sales to an unusually harsh, extended winter, and expected pent-up demand to support housewrap in Q2.
- Management expected 2014 gross margin in the 35%–36% range. It described the Building Supply outlook as encouraging, citing the housing-market recovery and expected growth in REX Fortis and TECHNOply. These are management expectations, not guarantees.
- Apparel gross margin faced competitive pricing pressure. Apparel sales growth came mainly from national and regional distributors and partly offset lower sales to a major international supply-chain partner; management was pursuing broader distribution for Critical Cover products.
- Management said most of the elevated Building Supply receivables were expected to be collected in Q2, which should improve cash. The timing of collection is a liquidity consideration.
- The company stated that cash and available credit should fund foreseeable working-capital needs and planned capital expenditures. Forward-looking statements remain subject to risks and actual results may differ.
- Available-for-sale securities had $1.493 million of unrealized gains included in accumulated other comprehensive income at March 31, exposing reported equity to market-value changes. The company also had an unconsolidated 41.66% affiliate investment in Harmony, from which it purchased $4.258 million of inventory during the quarter.
Management reported effective disclosure controls as of March 31, 2014 and no material change in internal control over financial reporting during the quarter. No subsequent events requiring disclosure were identified.
Important facts for investors to verify
- Whether the credit facility was renewed after its May 2014 expiration and on what terms.
- Whether the increased receivables were collected as expected in Q2 and operating cash flow recovered.
- Whether gross margins stayed within management’s 35%–36% 2014 expectation amid apparel pricing pressure.
- How much future earnings depend on investment gains, marketable-security values, and Harmony’s results versus core operating performance.
- Whether winter-related demand recovery and projected growth in Building Supply products materialized, and whether apparel distribution diversified.