Alpha Pro Tech, Ltd. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; filed May 7, 2015. Unaudited interim results. The company develops and sells building weatherization products, disposable protective apparel, and infection-control products, principally in the United States.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net sales | $10.654 million | $9.956 million | +7.0% |
| Gross profit / margin | $3.825 million / 35.9% | $3.610 million / 36.3% | Profit +6.0%; margin -0.4 percentage points |
| Operating income / margin | $77,000 / 0.7% | $51,000 / 0.5% | +51.0% |
| Income before tax | $176,000 | $355,000 | -50.4% |
| Net income / net margin | $148,000 / 1.4% | $269,000 / 2.7% | -45.0% |
| Diluted EPS | $0.01 | $0.01 | Unchanged as reported |
| Operating cash flow | $(4.021) million | $(2.667) million | Cash use increased |
Sales increased in all three segments: Building Supply to $5.811 million (+5.3%), Disposable Protective Apparel to $3.648 million (+8.4%), and Infection Control to $1.195 million (+11.6%). Segment income was $653,000, $331,000, and $387,000, respectively; Building Supply income declined from $750,000, while the other two segments improved.
Balance sheet, cash flow, and liquidity
- At March 31, cash was $1.105 million and marketable securities were $2.307 million, compared with cash of $5.495 million and securities of $2.840 million at December 31, 2014.
- Working capital was $32.533 million, down $676,000 (2.0%) from year-end; the current ratio was 11:1 versus 15:1.
- Operating cash use reflected increases in accounts receivable of $2.543 million and inventory of $2.573 million, partly offset by a $925,000 increase in accounts payable and accrued liabilities. Investing activities used $58,000; financing activities used $311,000, principally for share repurchases.
- Total liabilities were $4.765 million. The company reported no borrowings on its $3.5 million Wells Fargo credit facility, which expires in May 2016; the full $3.5 million borrowing capacity was available at quarter-end.
- Inventory was $19.117 million, up 15.6% from year-end. Total accounts receivable, including related-party receivables, was $8.209 million, up 44.9%; sales outstanding averaged 59 days versus 40 days at year-end.
Material changes, outlook, and risks
- Net income fell despite higher sales and operating income, primarily because Q1 2014 included $191,000 of investment gains that did not recur. Q1 2015 other income was $99,000, chiefly $98,000 of equity income from unconsolidated affiliate Harmony Plastics.
- Gross margin edged lower, primarily due to competitive pricing pressure in Building Supply. Management said severe weather constrained construction activity and made Building Supply sales weaker than anticipated; it expected pent-up demand to support growth in coming quarters.
- Management reported strong growth in TECHNOply synthetic roof underlayment and planned to introduce another synthetic roof underlayment product later in 2015. It also expected growth in protective apparel distribution channels. These statements are forward-looking, not guaranteed results.
- Management attributed higher receivables to extended payment terms offered on most Building Supply sales through Q1; most were expected to be collected in Q2, which management said should improve cash. Higher inventory was intended to reduce supply-chain interruption risk and support expected demand; management expected inventory to decline over the next two quarters.
- The company said cash and available credit should cover projected working capital and planned capital expenditures for the foreseeable future. Key near-term execution risks include collecting receivables as expected, converting elevated inventory to sales, construction-market conditions, and pricing pressure.
- Management expected an effective tax rate in the mid-30% range excluding equity income from the affiliate. The company planned to adopt revenue-recognition standard ASU 2014-09 in Q1 2017 and had not determined its impact.
- The company repurchased 129,100 shares for $311,000 during the quarter, with $1.078 million remaining under the repurchase program. Unrealized losses on marketable securities reduced other comprehensive income by $328,000; no securities were sold in the quarter.
Investor verification priorities
- Track subsequent collection of the extended-term receivables and whether receivable days return toward prior levels.
- Check whether elevated inventory declines as management anticipated, without causing supply shortages or write-downs.
- Compare actual Building Supply demand and margins with management’s expectations, including the effects of weather, competition, and the planned product launch.
- Monitor operating cash flow and cash levels, as Q1 operating cash use exceeded net income substantially.
- Review marketable-security valuation changes, the affiliate’s performance and related-party transactions, and progress under the share-repurchase program.
Disclosure controls and procedures were reported effective as of March 31, 2015, with no material change in internal control over financial reporting during the quarter. The filing reported no subsequent events requiring accounting or disclosure.