Alpha Pro Tech, Ltd. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. The company develops and sells building weatherization products and disposable protective apparel, including masks and shields. Beginning in Q1 2019, masks and shields were included in the Disposable Protective Apparel segment; comparative segment figures are presented on the revised basis.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $11.415M | $12.109M | $23.718M | $23.551M |
| Gross profit / margin | $4.106M / 36.0% | $4.719M / 39.0% | $8.909M / 37.6% | $9.174M / 39.0% |
| Operating income / margin | $0.704M / 6.2% | $1.107M / 9.1% | $1.705M / 7.2% | $1.535M / 6.5% |
| Net income | $1.010M | $0.959M | $2.228M | $1.467M |
| Diluted EPS | $0.08 | $0.07 | $0.17 | $0.10 |
Q2 sales fell 5.7%, primarily from a 15.0% decline in Disposable Protective Apparel, partly offset by 2.1% growth in Building Supply. First-half sales rose 0.7%. Q2 net income increased despite lower operating income, helped by $439,000 of marketable-securities gains; first-half gains were $609,000. These investment gains were a significant contributor to the increase in pretax income.
For the first half, operating cash flow was $193,000, versus $132,000 a year earlier. Cash decreased $1.505M to $5.502M, mainly reflecting $1.636M of stock repurchases. Capital expenditures were $254,000. At June 30, working capital was $25.152M and the current ratio was 13:1. The company had $735,000 in investments and no borrowings on its $3.5M credit line, which expires May 2020. Lease liabilities totaled $3.128M; these arose from operating leases, with no finance leases reported.
Changes, outlook and risks
- Gross margin declined year over year in both periods. Management attributed Q2 pressure to product mix, including growth in lower-margin economy roof underlayment, and increased rebates. The company also reported that the end of U.S. GSP duty-free treatment for certain products effective June 4, 2019, together with mix changes, was expected to keep gross margin in the mid-30% range going forward.
- Building Supply Q2 growth came from synthetic roof underlayment, including the new TECHNO SB 25 product; housewrap was affected by softer U.S. housing starts. Management expected weaker orders for other woven material to continue for the remainder of 2019, citing a major customer’s excess inventory and slower customer orders.
- Disposable Protective Apparel Q2 sales were affected by lower orders from a major international supply-chain partner, inventory rebalancing, and a customer’s exit from the market. For the first half, segment sales increased 1.9%; management said protective-clothing sales to the partner had increased, while mask sales were affected by a less severe flu season.
- No formal revenue or earnings guidance was provided. Management said cash and available credit were expected to meet working-capital needs and planned capital expenditures for the foreseeable future.
- Harmony, the 41.66%-owned unconsolidated affiliate and a supplier, contributed $361,000 of equity income in the first half. Purchases from Harmony were $10.451M in that period. The company reported no impairment of the investment.
- ASC 842 adoption increased recognized assets and liabilities by approximately $3.455M on January 1, 2019. Management said disclosure controls were effective as of June 30, 2019 and reported no material change in internal control during the quarter. No subsequent events requiring disclosure were identified.
Important facts for investors to verify
- Whether the expected mid-30% gross margin and the GSP-related cost impact materialize.
- Sales and inventory trends at the major apparel supply-chain partner and the large woven-material customer.
- Cash conversion and working-capital movements, particularly receivables and inventory; receivable days outstanding were 56 at June 30 versus 40 at year-end.
- The sustainability of earnings excluding marketable-securities gains, and the performance and related-party purchasing relationship with Harmony.
- Lease obligations and the May 2020 credit-line renewal; the filing states the company was in covenant compliance and did not anticipate using the line in the near term.