Alpha Pro Tech Ltd. - 10-Q Summary (Period Ended June 30, 2009)
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2009. Alpha Pro Tech Ltd. manufactures and markets disposable protective apparel, building supply products (weatherization), and infection control products. The company operates through three segments: Disposable Protective Apparel, Building Supply, and Infection Control. The filing notes a subsequent event on July 21, 2009, where the company dismissed PricewaterhouseCoopers LLP and engaged Mayer Hoffman McCann P.C. as its new independent auditor.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2009 |
Six Months Ended June 30, 2009 |
|---|---|---|
| Net Sales | $14,547,000 | $23,874,000 |
| Gross Margin | $6,871,000 (47.2%) | $10,990,000 (46.0%) |
| Income from Operations | $3,310,000 (22.8%) | $4,029,000 (16.9%) |
| Net Income | $2,168,000 | $2,683,000 |
| Diluted EPS | $0.10 | $0.12 |
| Cash and Equivalents | $6,455,000 (as of June 30, 2009) | |
| Working Capital | $22,693,000 (as of June 30, 2009) | |
| Debt | None outstanding; $3.5M credit facility available |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 63.2% for the quarter and 45.2% year-to-date compared to 2008.
- Infection Control: Sales surged 184.5% (quarter) driven by H1N1 pandemic demand for N-95 masks and eye shields.
- Building Supply: Sales rose 95.3% (quarter) due to strong performance of synthetic roof underlayment.
- Protective Apparel: Sales grew 14.0% (quarter) due to increased volume from key distributors.
- Profitability: Net income increased 463.4% for the quarter and 412.0% year-to-date. Operating margins expanded significantly as SG&A expenses decreased as a percentage of sales (23.4% vs. 35.8% in Q2 2008).
- Balance Sheet: Cash increased by $1.88M to $6.46M. Inventory decreased by 22.4% to $9.36M, aligning better with demand. Accounts receivable increased 59.7% to $8.13M, though days sales outstanding improved to 45 days.
- Capital Allocation: The company repurchased 1,447,600 shares of common stock for $1.795M during the six-month period.
Outlook, Risks, and Unusual Items
- Outlook: Management expects the effective tax rate to remain in the 36%-37% range for 2009. Respiratory N-95 mask sales are expected to remain strong due to H1N1 concerns. The company believes it is well-positioned to gain market share in synthetic roof underlayment as the market shifts from felt paper.
- Unusual Items: SG&A expenses included a $225,000 severance payment for a former Senior Vice President and increased executive bonuses ($376,000 accrued in Q2) tied to pre-tax profits.
- Risks: The company faces foreign currency exchange risks due to manufacturing in China, Mexico, and a joint venture in India. It does not hedge these risks. There are no material legal proceedings.
- Subsequent Event: The change in independent auditors (PwC to MHM) was approved by the Audit Committee on July 21, 2009.
Investor Verification Checklist
- Verify the sustainability of the H1N1-driven sales spike in the Infection Control segment post-pandemic.
- Confirm the details and rationale behind the dismissal of PricewaterhouseCoopers LLP and the appointment of Mayer Hoffman McCann P.C.
- Monitor the execution of the remaining $1.175M authorized for the stock repurchase program.
- Assess the impact of the $225,000 severance cost and variable executive bonuses on future operating margins.
- Review the aging of accounts receivable given the 59.7% increase in the balance.