Business context and reporting period
Alpha Pro Tech, Ltd. filed this Form 10-K for the fiscal year ended December 31, 2014. The company develops and sells building weatherization products, disposable protective apparel, and infection-control products, primarily in the United States. The filing reports annual results; it does not provide a clear set of standalone fourth-quarter financial statements.
Financial performance and liquidity
| Metric | 2014 | 2013 |
|---|---|---|
| Net sales | $47.649 million | $43.806 million |
| Gross profit / margin | $17.452 million / 36.6% | $16.232 million / 37.1% |
| Operating income / margin | $3.218 million / 6.8% | $2.395 million / 5.5% |
| Income before taxes | $3.943 million | $2.964 million |
| Net income / margin | $2.742 million / 5.8% | $2.079 million / 4.7% |
| Basic and diluted EPS | $0.15 | $0.11 |
| Cash from operating activities | $(879,000) | $6.093 million |
Sales increased 8.8%; net income rose 31.9%. Gross margin declined 0.5 percentage points, which management attributed to pricing pressure. SG&A rose 3.0% but declined as a share of sales, to 28.4% from 29.9%.
At year-end, cash was $5.495 million, working capital was $33.209 million, and the current ratio was reported as 15:1. The company had no debt or borrowings under its $3.5 million revolving credit facility, which expires in May 2016. Management said cash and available credit were sufficient for projected working capital and planned capital expenditures for the foreseeable future.
Operating cash flow turned negative, principally reflecting increases in inventory ($2.404 million) and prepaid expenses ($1.504 million). Investing cash outflow was $641,000, including $947,000 of capital expenditures; financing cash outflow was $1.2 million, largely due to share repurchases. The company repurchased 1,019,553 shares for $2.206 million during 2014.
Material changes and segment results
- Building Supply: Sales increased 4.5% to $27.549 million, led by 8.6% growth in synthetic roof underlayment; housewrap sales declined 1.5%. TECHNOply sales were more than 3.5 times 2013 sales.
- Disposable Protective Apparel: Sales increased 11.2% to $14.670 million, primarily from higher sales to regional and national distributors; sales to a major international supply-chain partner decreased.
- Infection Control: Sales increased 28.0% to $5.430 million. Shield sales rose 73.4% and mask sales 8.6%; management attributed the segment’s fourth-quarter increase primarily to the Ebola outbreak.
- U.S. sales increased to $45.714 million from $41.644 million; international sales decreased to $1.935 million from $2.162 million.
Other income was $725,000, including $300,000 of equity income from the Indian joint venture and $409,000 of gains on marketable securities and warrants. The company also reported $750,000 of other comprehensive income, primarily from unrealized investment gains. Results therefore included investment-related gains in addition to operating performance.
Outlook, risks and unusual items
Management expected the newer REX Wrap Fortis product to improve in 2015 after slower-than-anticipated sales. It also described continued product innovation and broader distribution as growth strategies. The company gave no specific revenue or earnings guidance; it expected an effective tax rate in the low-to-mid-30% range.
Key disclosed risks include dependence on a limited number of suppliers and contractors, Asian subcontract manufacturing and the Harmony joint venture in India; customer concentration and the absence of minimum-purchase commitments; intense competition and pricing pressure; inventory and receivables risks; and volatility in the company’s investment in a publicly traded entity. One customer represented 15% of 2014 sales, and two customers each represented 17% of year-end receivables. The company purchased $19.040 million of inventory from Harmony during 2014.
The company reported no legal proceedings. Management concluded internal control over financial reporting and disclosure controls were effective as of December 31, 2014; the auditor did not provide an ICFR attestation. Adoption of the new revenue-recognition standard was planned for the first quarter of 2017, with its impact still under evaluation.
Important facts for investors to verify
- Whether the higher inventory and prepaid balances convert into sales and operating cash flow, particularly given the 2014 operating cash outflow.
- How much future earnings depend on the Ebola-related fourth-quarter demand increase, investment gains, and equity income from Harmony.
- Whether gross-margin pressure persists and whether Fortis and TECHNOply growth meets management’s expectations.
- The sustainability of supplier, joint-venture and customer relationships, including the concentration disclosures and Harmony purchases.
- The filing reports a fourth-quarter 2014 share-price range of $2.42 to $10.73; verify the circumstances behind this volatility and the company’s investment exposure.
- The effect of the 2017 revenue-recognition standard once management completes its assessment.