APT

Business Context and Reporting Period

Company: Alpha Pro Tech, Ltd.
Filing Type: Form 10-Q (Unaudited)
Period Ended: March 31, 2010
Business Overview: The Company develops, manufactures, and markets disposable protective apparel, building supply products, and infection control products. Operations are divided into three segments: Disposable Protective Apparel, Building Supply, and Infection Control. The Company is a smaller reporting company incorporated in Delaware with principal executive offices in Canada.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 24.7% to $11.6 million, driven primarily by a 109.4% surge in the Building Supply segment ($4.7M vs $2.3M) and a 5.2% increase in Disposable Protective Apparel. This was partially offset by an 18.5% decline in Infection Control sales.
• Profitability: Net income rose 33.7% to $687,000. Operating income increased 38.9% to $997,000. However, gross margin percentage decreased from 44.2% to 42.9% due to a shift in product mix toward lower-margin Building Supply products.
• Cash Flow: Operating cash flow turned negative, with a net use of $4.0 million compared to $428,000 provided in the prior year. This was primarily due to a $2.9 million increase in inventory (stockpiling N-95 masks) and a $3.9 million decrease in accounts payable and accrued liabilities (payment of year-end bonuses).
• Liquidity: Cash balances decreased 44.3% from the prior quarter end ($9.8M to $5.4M) due to operating cash outflows and capital expenditures of $367,000. The Company maintains a $3.5 million credit facility with no outstanding borrowings.

Guidance, Outlook, and Risks

• Segment Outlook: Management expects Building Supply sales to continue growing as a percentage of total sales. The Disposable Protective Apparel segment margin is expected to soften for the remainder of 2010. Infection Control N-95 respirator sales are expected to return to pre-H1N1 levels unless pandemic concerns resume.
• Strategic Shifts: The Company is transitioning away from reliance on its largest distributor for the Critical Cover brand to a diversified global distribution strategy. This may adversely affect short-term sales but is viewed as beneficial long-term.
• Capital Expenditures: The Company expects to purchase approximately $1.5 million to $2.0 million of equipment in 2010.
• Risks: Risks include supply chain delays from Asia (expected to resolve in Q2 2010), the transition of distribution channels, and the impact of the weak building market on the Building Supply segment. The filing states there are no material changes to risk factors disclosed in the 2009 10-K.
• Stock Repurchase: The Company has $2.86 million remaining under its stock repurchase plan but did not repurchase any shares in Q1 2010.

Investor Verification Checklist

• Inventory Build-up: Verify the necessity and marketability of the $2.9 million increase in inventory, specifically the stockpiling of N-95 masks, to ensure no future write-downs are required.
• Distributor Transition: Monitor the impact of the strategic shift away from the largest distributor on the Disposable Protective Apparel segment's revenue stability.
• Cash Burn Rate: Assess the sustainability of the negative operating cash flow ($4.0M outflow) given the current cash balance of $5.4M and planned capital expenditures.
• Building Supply Growth: Confirm the sustainability of the 109% sales growth in the Building Supply segment amidst a weak construction market.
• Joint Venture Performance: Review the performance of the Harmony joint venture in India, which contributed $73,000 in equity income and supplied $2.7M in inventory.