Alpha Pro Tech, Ltd. — Q2 2014 Form 10-Q
Business context and period: The company develops and sells building weatherization products, disposable protective apparel, and infection-control products, primarily in the United States. This unaudited report covers the three and six months ended June 30, 2014, compared with the corresponding 2013 periods.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $12.252 million | $11.156 million | $22.208 million | $20.606 million |
| Gross profit / margin | $4.508 million / 36.8% | $4.057 million / 36.4% | $8.118 million / 36.6% | $7.720 million / 37.5% |
| Operating income | $1.034 million | $0.699 million | $1.084 million | $0.669 million |
| Net income | $0.895 million | $0.474 million | $1.164 million | $0.490 million |
| Diluted EPS | $0.05 | $0.02 | $0.06 | $0.03 |
- Revenue by segment: Q2 Building Supply sales were $7.414 million (+5.1%), Disposable Protective Apparel $3.792 million (+24.2%), and Infection Control $1.046 million (+0.1%). Six-month sales were $12.935 million (+5.8%), $7.156 million (+14.1%), and $2.117 million (+0.3%), respectively.
- Profitability: Q2 net income margin rose to 7.3% from 4.2%; six-month margin rose to 5.2% from 2.4%. Six-month gross margin declined year over year despite higher gross profit. Selling, general and administrative expense was 26.9% of Q2 sales and 30.0% of six-month sales, down from 28.5% and 32.5%.
- Cash flow: Six-month operating cash use was $834,000 versus $3.222 million provided in 2013. Investing used $516,000; financing used $1.594 million, principally for stock repurchases. Cash fell $2.944 million to $5.271 million.
- Liquidity and debt: Working capital was $30.995 million; the current ratio was 27:1. Current assets were $32.177 million and current liabilities $1.182 million. No borrowings were outstanding on the $3.5 million credit facility, renewed through May 2016; the company reported the full $3.5 million available at quarter-end. Management said cash and available credit should fund foreseeable working capital and planned capital expenditures.
- Balance sheet and investments: Total assets were $38.753 million and shareholders’ equity $35.927 million. Investments were $2.856 million, all available-for-sale marketable securities. The company reported $2.148 million of unrealized gains in accumulated other comprehensive income.
Material changes and management commentary
- Q2 sales increased 9.8% and six-month sales 7.8%. Apparel drove the largest segment growth; Building Supply also grew, while Infection Control was nearly flat.
- Management attributed Building Supply trends partly to increased synthetic underlayment sales, especially the lower-priced TECHNOply product, offset by declines in premium REX SynFelt. Harsher-than-normal winter weather affected first-half construction activity and housewrap sales.
- Management cited competitive pricing pressure as a drag on Building Supply and Apparel segment margins and expected 2014 gross margin of 35%–37%. It described the Building Supply outlook as encouraging as the housing market recovers; REX Wrap Fortis sales had been slower than anticipated, with improvement expected next year.
- Six-month other income included $379,000 gain on sale of marketable securities, $30,000 warrant gain, and $195,000 equity income from Harmony, the unconsolidated affiliate. These items boosted reported earnings. The company’s Harmony inventory purchases were $8.468 million for the six months, versus $4.992 million a year earlier.
- The company repurchased 815,200 shares for $1.745 million in the first half, reducing outstanding shares; $1.850 million remained available under the repurchase program at June 30. Capital expenditures were $822,000.
Outlook, risks and other items
- The company cautioned that interim results are not necessarily indicative of full-year results. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ.
- Reported operating cash use reflected a $1.842 million increase in accounts receivable and a $543,000 decrease in accounts payable and accrued liabilities, despite net income. Accounts receivable were $6.913 million; days sales outstanding were 45, compared with 47 at year-end.
- Management identified inventory obsolescence, customer credit losses, marketable-security valuation, competitive pricing, and construction-market demand as relevant estimates or exposures. An uncertain tax position of $194,000 was included in accrued liabilities.
- ASU 2014-09 on revenue recognition was scheduled for adoption in fiscal 2017; management had not determined its impact. The filing reported no subsequent events requiring disclosure, effective disclosure controls, and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether revenue growth, particularly in Apparel and economy-priced underlayment, is sustainable and offsets declines in premium products and sluggish Infection Control sales.
- Whether gross margin remains within management’s 35%–37% 2014 expectation amid competitive pricing pressure.
- Whether receivables convert to cash and operating cash flow improves after the first-half cash use.
- The sustainability and cash-versus-noncash contribution of investment gains to earnings; six-month unrealized security gains were also recorded in comprehensive income.
- The effect of continuing share repurchases and capital spending on cash balances, alongside the company’s reliance on its available but unused credit facility.