Alpha Pro Tech, Ltd. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017; compared with the corresponding 2016 periods. The company develops and sells building weatherization products, disposable protective apparel, and infection-control products, primarily in the United States.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $11.282 million | $12.708 million | $22.032 million | $24.555 million |
| Gross profit / margin | $4.487 million / 39.8% | $4.540 million / 35.7% | $8.780 million / 39.9% | $8.785 million / 35.8% |
| Operating income | $1.016 million | $1.089 million | $1.682 million | $1.723 million |
| Net income / diluted EPS | $804,000 / $0.05 | $797,000 / $0.05 | $1.354 million / $0.09 | $1.304 million / $0.07 |
| Operating cash flow | — | — | $1.677 million | $2.862 million |
- Q2 sales fell 11.2%; six-month sales fell 10.3%. Building Supply drove the declines, led by lower synthetic roof underlayment sales. Q2 segment sales: Building Supply $6.283 million (down 20.7%), Disposable Protective Apparel $3.774 million (up 4.1%), Infection Control $1.225 million (up 5.6%).
- For the first half, Building Supply sales fell 16.7% to $12.222 million and Apparel sales fell 5.1% to $7.068 million; Infection Control rose 12.9% to $2.742 million.
- Gross profit dollars were nearly flat, while gross margin improved to about 40%, reflecting lower product costs and sales mix. SG&A rose slightly in dollars but increased as a share of sales: 29.7% in Q2 and 31.0% year to date.
- Q2 operating income declined 6.7%, but net income increased 0.9%, helped by lower income taxes. First-half net income increased 3.8% despite lower sales.
Liquidity, debt, and capital allocation
- At June 30, cash was $8.836 million, investments $564,000, working capital $25.982 million, and the current ratio 15:1. Cash decreased $620,000 from year-end 2016. Total liabilities were $2.277 million; the filing reports no borrowings under the credit facility.
- Six-month cash flow: $1.677 million provided by operations, $734,000 used for capital expenditures, and $1.563 million used in financing. Operating cash flow was lower than the prior-year period.
- The company had a $3.5 million asset-based revolving credit facility, expiring May 2018, with no amount drawn and full borrowing capacity reported as available at quarter-end.
- It repurchased 525,300 shares for $1.624 million in the first half and had $2.881 million remaining under its repurchase authorization at June 30. The Board announced a $2 million expansion of the program in June.
Outlook, commentary, and notable items
- Management expected Building Supply growth in the second half of 2017, citing a planned new housewrap product and anticipated opportunity in premium synthetic underlayment. It expected gross margin around 39% and an effective tax rate in the high-20% range for the remainder of 2017.
- Management attributed weaker underlayment sales to a soft roofing market, lower sales to a major private-label distributor, and competition in the economy product line. It noted shingle shipments were down significantly and said the premium product category offered better margins.
- The company adopted stock-compensation guidance in Q1, recording a one-time $866,000 reclassification from additional paid-in capital to retained earnings. This affected equity presentation, not reported net income. Adoption also increased dilutive shares; future excess tax benefits may reduce the tax rate.
- Management said available cash and the credit facility should cover foreseeable working-capital needs and planned capital expenditures. It disclosed ordinary-course litigation but did not expect a material financial effect. No subsequent events requiring disclosure were reported.
- Disclosure controls and procedures were concluded to be effective as of June 30, 2017.
Important facts for investors to verify
- Whether the expected second-half Building Supply rebound and new housewrap product translated into sales growth.
- Whether underlayment demand, private-label customer volumes, and the shift toward premium products improved as management anticipated.
- Gross-margin durability near 39% and the effect of continued lower sales on operating leverage and cash generation.
- Accounts receivable days rose to 44 from 30 at year-end; monitor collections alongside the increase in receivables.
- The extent and pace of further share repurchases, capital spending, and any future use or renewal of the credit facility.
- Potential effects of pending litigation and adoption of the remaining accounting standards; management had not determined the impact of certain standards.