Alpha Pro Tech, Ltd. — FY2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; comparisons are with FY2015. Alpha Pro Tech develops and sells building weatherization products, disposable protective apparel, and infection-control products. Sales are predominantly in the United States.
Financial performance and position
| Metric | FY2016 | FY2015 |
|---|---|---|
| Net sales | $46.176 million | $44.955 million |
| Gross profit / margin | $16.984 million / 36.8% | $15.972 million / 35.5% |
| Operating income / margin | $3.672 million / 8.0% | $1.475 million / 3.3% |
| Net income / margin | $3.168 million / 6.9% | $1.041 million / 2.3% |
| Basic and diluted EPS | $0.19 | $0.06 |
| Cash from operating activities | $6.833 million | $5.971 million |
- Sales rose 2.7%. Building Supply sales increased 6.0% to $27.343 million; Disposable Protective Apparel declined 3.0% to $14.219 million; Infection Control increased 2.7% to $4.614 million.
- Gross margin expanded 1.3 percentage points. Operating income rose 148.9%; net income rose 204.3%.
- Year-end cash was $9.456 million, working capital $27.198 million, and the current ratio 12:1. Total assets were $35.936 million and shareholders’ equity $32.664 million.
- No debt was outstanding. The company had a $3.5 million revolving credit facility, expiring May 2018, with full borrowing capacity available at year-end.
- Investing cash outflow was $0.308 million, including $0.267 million of capital expenditures. Financing cash outflow was $6.750 million, principally from $6.773 million of share repurchases.
Material changes and unusual items
- SG&A fell 7.4% to $12.768 million, partly because FY2015 included a $601,000 former-CEO retirement accrual and $335,000 more legal expense than FY2016. Depreciation and amortization also declined.
- Other income increased to $503,000, including $498,000 of equity income from the Indian joint venture, compared with $46,000 of total other income in FY2015.
- The FY2016 effective tax rate was 24.1%, versus 31.6% in FY2015. A $194,000 tax benefit resulted from reversing an uncertain tax position after the statute of limitations expired; excluding that benefit, the 2016 rate was 28.8%.
- The company repurchased and retired 2,453,900 shares for $6.773 million in FY2016. At December 31, $2.505 million remained authorized for repurchases. The company reported no history of dividends and no foreseeable plan to pay them.
- FY2015 gross margin had benefited from a retroactive U.S. customs duty refund. Management expected gross margin to remain in a similar range in 2017.
Outlook, risks, and contingencies
- Management stated that cash and available credit should cover projected working capital and planned capital expenditures for the foreseeable future; no earnings or sales guidance was provided.
- Inventory fell 33.0% to $10.994 million after a strategic decision to carry fewer days of inventory. Receivables increased, partly due to extended payment terms offered on some Building Supply sales; reported year-end days sales outstanding were 30 days, versus 34.
- Key risks include intense competition, customer concentration and the lack of fixed purchase commitments, reliance on a limited number of Asian subcontractors and the Harmony joint venture in India, and possible supply-chain disruption. Two customers each represented at least 10% of FY2016 sales; the largest represented 17%.
- The company disclosed ordinary-course pending and threatened litigation, but management did not expect the ultimate liability, if any, to materially affect financial condition or results. It also flagged economic, product-acceptance, intellectual-property, information-security, regulatory, and investment-price risks.
- Future accounting standards include revenue recognition (planned adoption in 2018), lease accounting, inventory measurement, and other updates; management expected limited or no impact from some standards but had not determined the impact of others.
- Management reported effective disclosure controls and internal control over financial reporting as of year-end. The auditor issued an unqualified opinion on the financial statements; it did not attest to internal controls.
Important facts for investors to verify
- Whether Building Supply growth and the improvement in operating margin persist, given weaker apparel sales and competitive pricing.
- Whether the reduced inventory level supports service and sales without creating stockouts, and whether extended customer payment terms affect collections.
- The sustainability and cash implications of Harmony’s contribution to earnings; Alpha Pro Tech owns 41.66% and purchased $12.761 million of inventory from it in FY2016.
- Repurchase-program authorization and execution: the filing reports $2.505 million remaining at year-end and substantial FY2016 cash use for buybacks.
- Customer and supplier concentration, the status of litigation and commitments, and the effects of forthcoming accounting standards.