Alpha Pro Tech, Ltd. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; financial statements are unaudited. The company develops and sells building weatherization, disposable protective apparel, and infection-control products, primarily in the U.S.
Financial performance
- Net sales: $9.45 million, down 1.8% from $9.62 million in Q1 2012. Gross profit rose 6.9% to $3.66 million; gross margin improved to 38.8% from 35.6%, helped by lower Building Supply material costs.
- Operating results: SG&A increased 8.1% to $3.51 million, or 37.2% of sales versus 33.8%. Operating loss narrowed to $30,000 from $41,000.
- Profit: Income before tax was $4,000 versus $112,000. An $11,000 income-tax benefit compared with a $42,000 provision in Q1 2012; net income declined to $15,000 from $70,000. Reported basic and diluted EPS was $0.00 in both periods.
- Cash flow: Operating cash use was $322,000, improved from $1.47 million used in Q1 2012. Investing used $71,000; financing used $830,000, mainly for share repurchases. Cash fell $1.22 million during the quarter to $3.33 million.
- Liquidity and debt: Working capital was $28.95 million and the current ratio was 19:1. The company had no borrowings on its $3.5 million Wells Fargo credit facility; the facility expires in May 2014. Total liabilities were $2.45 million and total assets were $36.57 million.
Changes and operating drivers
- Building Supply sales fell 7.6% to $5.16 million, principally as synthetic roof underlayment sales declined 23.3% amid a harsh winter; housewrap sales increased 22.5%. Management reported strong early growth for TECHNOply and REX Wrap Fortis.
- Disposable Protective Apparel sales rose 10.5% to $3.22 million, attributed to higher sales through regional and national distributors. Infection Control sales declined 5.2% to $1.07 million, mainly due to lower shield sales.
- Equity income from the unconsolidated Indian affiliate, Harmony, fell to $33,000 from $147,000. The company purchased $2.71 million of inventory from Harmony in the quarter, versus $3.62 million a year earlier.
- Receivables rose 18.1% from year-end to $7.50 million. Management attributed this to extended payment terms on most Building Supply sales through February; most related balances were expected to be collected in April and May. Days sales outstanding increased to 66 from 49 at year-end.
- The company repurchased 553,600 shares for $872,000 and had $1.858 million remaining under its repurchase program at March 31.
Outlook, risks, and notable items
- Management described the Building Supply outlook as promising, citing expected housing-market recovery and anticipated growth in TECHNOply and REX Wrap Fortis. It also expected continued market-share growth from a broader Critical Cover distribution strategy. No numerical revenue or earnings guidance was provided.
- Management believed cash and available credit would cover projected working capital and planned capital expenditures for the foreseeable future. This outlook depends in part on collection of elevated receivables.
- Other considerations include weather-related demand volatility, inventory valuation estimates, customer credit risk, and the company’s investment and transactions with Harmony. Management reported no impairment of the Harmony investment.
- Corporate expenses included an accrual for severance associated with restructuring manufacturing job functions. The tax benefit reflected a change in U.S. tax reporting for Harmony, under which the company no longer accrued tax on its equity income.
- Management concluded disclosure controls were effective as of March 31, 2013 and reported no material change in internal control over financial reporting during the quarter.
Investor verification points
- Whether the extended Building Supply payment terms resulted in the expected April–May 2013 collections and improved cash flow.
- Whether Building Supply demand recovered after the harsh winter, and whether the new products’ early sales translated into sustained growth.
- Whether SG&A growth, reduced Harmony earnings, and the revised tax treatment materially affected subsequent-period profitability.
- Whether share repurchases and operating cash flows preserved adequate liquidity while funding planned expenditures.
- The terms and ongoing economics of the Harmony relationship, including inventory purchases, equity earnings, and the carrying value of the investment.