Alpha Pro Tech, Ltd. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Unaudited results; comparisons are to the corresponding 2012 periods. The company develops and sells building weatherization products, disposable protective apparel, and infection-control products, primarily in the United States.
Financial results and position
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $11.156 million | $10.851 million | $20.606 million | $20.470 million |
| Gross profit / margin | $4.057 million / 36.4% | $3.852 million / 35.5% | $7.720 million / 37.5% | $7.277 million / 35.6% |
| Operating income | $699,000 | $419,000 | $669,000 | $378,000 |
| Net income | $474,000 | $374,000 | $490,000 | $444,000 |
| Diluted EPS | $0.02 | $0.02 | $0.03 | $0.02 |
| Operating cash flow | Not separately provided for the quarter | $3.222 million | $668,000 |
- Q2 sales rose 2.9%, operating income rose 66.9%, and net income rose 26.7%. For the first half, sales rose 0.7%, operating income rose 77.0%, and net income rose 10.4%.
- At June 30, cash and cash equivalents were $6.129 million and marketable securities were $404,000. Working capital was $28.907 million; the current ratio was 21:1. Total liabilities were $2.331 million. The company reported no borrowings on its $3.5 million credit line, which was available in full and scheduled to expire in May 2014.
- First-half operating cash flow benefited from a $2.881 million inventory reduction and a $501,000 decrease in receivables; prepaid expenses increased $866,000. Investing cash outflow was $150,000. Financing cash outflow was $1.497 million, chiefly reflecting stock repurchases.
Material changes and operating drivers
- Building Supply: Q2 sales increased 9.6% to $7.057 million; first-half sales rose 1.6% to $12.221 million. Housewrap growth was partly offset in the first half by lower synthetic roof underlayment sales, which management attributed to a harsher, extended winter.
- Disposable Protective Apparel: Q2 sales fell 12.6% to $3.054 million; first-half sales declined 2.1% to $6.274 million. Lower sales to a major international supply-chain partner were partly offset by distributor growth in the first half.
- Infection Control: Q2 sales increased 14.0% to $1.045 million, and first-half sales increased 4.0% to $2.111 million. Mask sales increased while shield sales declined.
- Gross margin improved in both comparison periods, with management citing improved Building Supply segment margins. Q2 SG&A decreased 1.3%; first-half SG&A increased 3.5%, including higher unallocated corporate costs from a severance accrual for manufacturing personnel.
- Equity income from unconsolidated affiliate Harmony Plastics fell to $38,000 in Q2 from $171,000 and to $71,000 for the first half from $318,000. The company purchased $4.992 million of inventory from Harmony in the first half, down from $7.826 million.
Outlook, risks, and unusual items
- Management described the Building Supply outlook as promising, expected stronger underlayment sales in the coming quarter as construction recovered from winter disruption, and identified TECHNOply and REX Wrap Fortis as growth products. These are expectations, not quantified earnings or revenue guidance.
- Management said its cash and available credit were expected to cover foreseeable working-capital needs and planned capital expenditures. It also expected future repurchases to be funded by cash on hand and operating cash flow.
- Key execution and demand risks include construction-market recovery and weather effects, continued reliance on a major apparel supply-chain partner, and inventory estimates that may require write-downs if market conditions deteriorate. The company also sourced substantial inventory from Harmony, an unconsolidated affiliate.
- The balance sheet included a $342,000 accrued uncertain tax position. The filing says the company changed its U.S. tax reporting for Harmony and no longer accrues tax on equity income from the affiliate.
- The company repurchased 980,200 shares for $1.553 million during the first half and had $1.176 million remaining under its repurchase program at June 30. Marketable securities had a $149,000 unrealized gain before tax, recorded in other comprehensive income.
- Management concluded disclosure controls were effective as of June 30, 2013; it reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Building Supply growth and the anticipated recovery in roof-underlayment demand materialized after the unusually harsh winter.
- How apparel sales and customer diversification developed given the decline in sales to the major international partner.
- Harmony’s operating performance, the company’s ongoing purchases from the affiliate, and the reason for the sharp decline in equity income.
- Inventory quality and the rise in prepaid expenses, along with the sustainability of cash flow that benefited from inventory and receivables reductions.
- The status of the $342,000 uncertain tax position, the May 2014 credit-facility renewal, and subsequent share repurchases.