Alpha Pro Tech, Ltd. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. The company develops and sells building weatherization products, disposable protective apparel, and infection-control products, primarily in the United States. Financial statements are unaudited.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $10.851 million | $10.278 million | $20.470 million | $19.223 million |
| Gross profit | $3.852 million | $3.871 million | $7.277 million | $7.144 million |
| Gross margin | 35.5% | 37.7% | 35.5% | 37.2% |
| Operating income | $419,000 | $369,000 | $378,000 | $17,000 |
| Net income | $374,000 | $304,000 | $444,000 | $192,000 |
| Basic and diluted EPS | $0.02 | $0.01 | $0.02 | $0.01 |
Q2 sales increased 5.6% year over year; six-month sales increased 6.5%. Q2 net income rose 23.0%, and six-month net income rose 131.3%. Gross margin weakened in both periods, which management attributed mainly to higher raw-material costs and competitive pricing pressure in Building Supply. SG&A declined year over year, helping lift operating income.
Segments and material changes
- Building Supply: Sales were $6.442 million in Q2 (+1.4%) and $12.033 million for six months (+8.4%). Six-month growth reflected higher housewrap and synthetic underlayment sales. Q2 segment income was $945,000, down from $1.095 million.
- Disposable Protective Apparel: Sales were $3.492 million in Q2 (+21.6%) and $6.406 million for six months (+10.9%), primarily due to sales to a major international supply-chain partner. Segment income increased to $553,000 in Q2 and $921,000 year to date.
- Infection Control: Sales were $917,000 in Q2 (-12.7%) and $2.031 million for six months (-13.3%). Management cited a former major industrial distributor launching its own masks, lower medical mask sales, and the prior-year sale of the bed-pad and pet-bed product lines. Six-month segment income fell to $552,000 from $691,000.
Cash, liquidity, and capital
- Cash and cash equivalents were $7.228 million at June 30, down $275,000 from year-end. Six-month operating cash flow was $668,000, compared with $1.105 million a year earlier; investing used $415,000 and financing used $528,000.
- Working capital was $29.461 million and the current ratio was 35:1. Current assets totaled $30.325 million against current liabilities of $864,000.
- Total liabilities were $1.688 million; the company reported no borrowings on its $3.5 million Wells Fargo line of credit, renewed through May 2014. Available borrowing capacity was $3.5 million at quarter-end.
- Accounts receivable increased 29.6% from year-end to $6.122 million; days sales outstanding rose to 45 from 41. Inventory declined 8.6% to $14.225 million.
- The company repurchased 381,950 shares for $528,000 during the first half and had $782,000 remaining under its repurchase authorization. Shares outstanding were 20,740,890 at June 30.
Outlook, risks, and unusual items
- Management expressed optimism about Building Supply as housing recovers, and described the newly launched TECHNOply economy underlayment as a prospective growth product. It noted that REX Wrap Fortis sales remained slower than anticipated. No quantified revenue or earnings guidance was provided.
- Management said cash and the available credit facility should cover projected working capital and planned capital expenditures for the foreseeable future.
- Risks highlighted by the filing include a weak building market, input-cost inflation and pricing pressure, competition in infection-control masks, and dependence on a major international apparel supply-chain partner.
- The company holds a 41.66% interest in unconsolidated affiliate Harmony, which supplies inventory. It purchased $7.826 million of inventory from Harmony in the first half and recorded $318,000 of equity income. The investment and advances totaled $2.753 million at June 30.
- The first half of 2011 included a $41,000 gain on sales of medical bed-pad and pet-bed assets; there was no comparable gain in 2012. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- The six-month income-tax provision is inconsistent within the filing: the income statement shows $115,000 for 2011, while MD&A states $150,000. The reported net income and pretax income reconcile to $115,000; confirm the correct comparative disclosure.
- Assess whether lower gross margins persist, given raw-material costs and competitive pricing pressure.
- Monitor receivables growth and collection days, and whether the apparel segment’s growth can be sustained beyond its major supply-chain partner.
- Review Harmony’s operating performance, supply relationship, and the recoverability of the company’s investment and advances.
- Track the housing-market recovery, TECHNOply adoption, mask-market competition, and use of the remaining share-repurchase authorization.