Business Context and Reporting Period
Alpha Pro Tech, Ltd. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2011. The company sells disposable protective apparel, building weatherization products, and infection-control products, primarily in the U.S. During the first quarter, it sold its medical bed-pad and pet-bed product lines.
Financial Results and Position
| Metric | Three months ended June 30, 2011 | Six months ended June 30, 2011 |
|---|---|---|
| Net sales | $10.278 million | $19.223 million |
| Gross profit / margin | $3.871 million / 37.7% | $7.144 million / 37.2% |
| Operating income | $369,000 | $17,000 |
| Net income | $304,000 | $192,000 |
| Diluted earnings per share | $0.01 | $0.01 |
- Year-over-year: Quarterly sales fell 8.4% and net income fell 18.3%. Six-month sales fell 15.9% and net income fell 81.9%.
- Cash flow: Six-month operating cash flow was $1.105 million, versus cash used of $6.326 million in the prior-year period. Investing activities provided $123,000 and financing activities used $113,000. Cash increased $1.115 million to $6.431 million.
- Liquidity and debt: Working capital was $30.170 million; the current ratio was 29:1. The company had no borrowings under its $3.5 million Wells Fargo credit facility, renewed through May 2012. Total liabilities were $1.728 million.
- Balance-sheet movements: Accounts receivable rose $1.890 million to $5.706 million, and days sales outstanding rose to 51 from 33 at year-end. Inventory declined $2.198 million to $15.120 million.
Material Changes and Segment Trends
- Six-month sales declines in Protective Apparel ($4.151 million) and Infection Control ($994,000) were partly offset by Building Supply growth of $1.518 million. Building Supply sales increased 30.7% in the quarter and 15.8% in the half year.
- Protective Apparel sales fell 40.7% for the quarter, chiefly because a former major distributor introduced competing private-label products. Infection Control sales fell 30.5% for the quarter, reflecting weaker mask sales and the product-line divestiture.
- Building Supply reached quarterly-record sales of $6.356 million. Six-month gross margin declined to 37.2% from 40.3%, primarily because lower-margin Building Supply products made up a larger share of sales, with additional pricing pressure in apparel.
- Operating income for the six months was nearly breakeven, versus $1.482 million in 2010. Lower gross profit more than offset reduced selling, general and administrative expenses.
Outlook, Risks, and Unusual Items
- Management expected Building Supply gross margin to improve beginning in the third quarter following a price increase effective in early July. It said the REX Wrap Fortis launch was slower than anticipated but expected a more significant sales contribution beginning in 2012.
- Management cited continued opportunity in synthetic roofing underlayment and housewrap, while noting the weak construction market and competitive pressures. Sales to the former largest apparel distributor were expected to remain insignificant.
- The company expects an effective tax rate around 37% and stated that cash and available credit should cover foreseeable working-capital needs and planned capital expenditures.
- The divestitures generated $235,000 in proceeds, including inventory sold at cost, and a $41,000 net gain. The company also repurchased 109,763 shares for $129,000 during the half year; $2.734 million remained authorized for repurchases.
- Management reported effective disclosure controls as of June 30, 2011 and no material change in internal control over financial reporting during the quarter. The filing cautions that forward-looking statements are subject to risks and actual results may differ.
Important Facts for Investors to Verify
- Whether Building Supply growth and the July price increase translate into sustained sales and improved margins.
- Whether apparel and infection-control sales stabilize amid distributor competition and the loss of former product lines.
- Accounts-receivable collection trends, given the increase in receivables and days sales outstanding.
- Cash generation and profitability after the one-time divestiture gain, and the company’s use of its credit facility and remaining repurchase authorization.