Business context and reporting period
Alpha Pro Tech, Ltd. filed this unaudited Form 10-Q for the quarter ended September 30, 2013. It develops and sells building weatherization products, disposable protective apparel, and infection-control products, primarily in the United States. Comparisons below are with the three and nine months ended September 30, 2012, or with December 31, 2012 for balance-sheet figures.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $12.692m | $10.740m | $33.298m | $31.210m |
| Gross profit (margin) | $4.579m (36.1%) | $3.798m (35.4%) | $12.299m (36.9%) | $11.075m (35.5%) |
| Operating income (margin) | $1.211m (9.5%) | $0.556m (5.2%) | $1.880m (5.6%) | $0.934m (3.0%) |
| Net income (margin) | $0.905m (7.1%) | $0.414m (3.9%) | $1.395m (4.2%) | $0.859m (2.8%) |
| Diluted EPS | $0.05 | $0.02 | $0.07 | $0.04 |
Q3 sales rose 18.2% and nine-month sales rose 6.7%. Building Supply drove growth: sales increased 41.0% in Q3 and 14.4% year to date. Disposable Protective Apparel sales declined 11.7% and 5.6%, respectively; Infection Control sales were essentially flat in Q3 and up 2.5% year to date. Operating income more than doubled in both comparison periods, supported chiefly by higher gross profit and improved gross margins. SG&A rose 3.7% in Q3 and 3.5% year to date, but fell as a percentage of sales. Nine-month equity income from Harmony, the unconsolidated affiliate, declined to $172,000 from $402,000.
Cash, liquidity and capital
At September 30, 2013, cash and cash equivalents were $7.709m, marketable securities $0.867m, working capital $29.845m, and the current ratio 25:1. Cash increased $3.155m from year-end. Nine-month operating cash flow was $5.349m, versus cash used of $0.767m in the prior-year period; the 2013 inflow included a $3.523m reduction in inventory and a $0.415m reduction in receivables. Investing activities used $0.285m and financing activities used $1.909m, including $2.422m of share repurchases partly offset by $0.514m of option-exercise proceeds.
Total liabilities were $2.266m, including $1.231m of current liabilities; the filing reports no borrowings under the $3.5m Wells Fargo credit facility. The facility bears interest at prime plus 0.5%, was available in full at quarter-end, and was scheduled to expire in May 2014. The company repurchased 1,543,250 shares for $2.422m during the first nine months; $2.306m remained available under the repurchase program at quarter-end. Outstanding shares were 18,921,209 at September 30, down from 20,044,457 at December 31, 2012.
Management commentary, outlook and risks
- Management described the Building Supply outlook as promising, citing housing-market recovery and growth opportunities. Roof-underlayment sales benefited from pent-up demand after a severe winter delayed construction activity. The company highlighted growth in its TECHNOply underlayment and REX Wrap Fortis housewrap products.
- Protective Apparel weakness was attributed principally to lower sales to a major international supply-chain partner. Management said it was pursuing broader distribution for its Critical Cover line.
- Management believed cash and the undrawn credit facility would cover projected working capital and planned capital expenditures for the foreseeable future. The filing gives no quantified earnings or revenue guidance and cautions that interim results are not necessarily indicative of full-year results.
- Harmony is a 41.66%-owned unconsolidated affiliate and a significant supplier: the company purchased $9.132m of inventory from it in the first nine months of 2013, versus $13.669m in 2012. Management reported no impairment of the investment. The filing also describes the risks inherent in forward-looking statements and estimates, including possible inventory write-downs and receivable credit losses.
- Available-for-sale securities had fair value of $0.867m against a $0.255m cost basis. Nine-month unrealized gains of $0.358m, net of tax, were recorded in other comprehensive income, not net income. The nine-month effective tax rate was 32.1%, down from 36.0%, primarily due to changed U.S. tax treatment of Harmony income.
- Disclosure controls and procedures were judged effective as of September 30, 2013; no material change in internal control over financial reporting was reported during the quarter.
Important facts for investors to verify
- Whether Building Supply growth and improved margins persist after the rebound in construction demand, and how much depended on weather-related pent-up demand.
- Whether declining sales to the major international apparel supply-chain partner continue and whether distribution diversification offsets the decline.
- Inventory levels, cash conversion, and the sustainability of operating cash flow, given that inventory reductions contributed materially to nine-month cash generation.
- Harmony’s operating results, supply relationship, and the effect of its lower year-to-date contribution to equity income.
- Marketable-securities valuation and exposure to future unrealized gains or losses; the filing does not identify the securities in the provided text.
- Progress and funding of share repurchases, and the status or renewal of the credit facility scheduled to expire in May 2014.