Alpha Pro Tech, Ltd. — Q3 2012 Form 10-Q
Business context and period. This unaudited quarterly report covers the three and nine months ended September 30, 2012, compared with the corresponding 2011 periods. Alpha Pro Tech sells building weatherization products, disposable protective apparel, and infection-control products, primarily in the United States.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $10.740 million | $10.120 million | $31.210 million | $29.342 million |
| Gross profit | $3.798 million | $3.671 million | $11.075 million | $10.814 million |
| Gross margin | 35.4% | 36.3% | 35.5% | 36.9% |
| Operating income | $556,000 | $487,000 | $934,000 | $504,000 |
| Net income | $414,000 | $386,000 | $859,000 | $578,000 |
| Basic and diluted EPS | $0.02 | $0.02 | $0.04 | $0.03 |
Q3 sales rose 6.1% and net income rose 7.3% year over year. For the first nine months, sales increased 6.4% and net income increased 48.6%. Nine-month operating margin was 3.0%, versus 1.7%; net margin was 2.8%, versus 2.0%. Gross margin declined in both comparisons, which management attributed mainly to higher raw-material costs and competitive pricing pressure in Building Supply.
Segment sales for the first nine months were Building Supply $17.877 million (up 6.2%), Disposable Protective Apparel $10.185 million (up 12.7%), and Infection Control $3.148 million (down 9.3%). Q3 apparel sales increased 15.8%, while infection-control sales were nearly flat. Apparel growth was primarily attributed to higher sales to a major international supply-chain partner. Infection Control’s year-to-date decline reflected lower industrial mask sales after a major distributor introduced its own mask line, as well as the prior sale of bed-pad and pet-bed product lines.
Cash, liquidity and capital
- At September 30, 2012, cash was $5.891 million, working capital was $30.151 million, and the current ratio was 27:1. Cash declined $1.612 million from year-end 2011.
- Nine-month operating cash flow was negative $767,000, versus positive $2.760 million in 2011. The change was driven largely by inventory: inventory increased $1.125 million in 2012, compared with a $2.931 million decrease in 2011. Accounts receivable also rose $1.382 million; days sales outstanding increased to 46 from 41.
- Investing cash flow was negative $67,000, including $481,000 of property and equipment purchases, partly offset by a $417,000 repayment from the unconsolidated affiliate. Financing cash flow was negative $778,000, all from share repurchases.
- The company reported no borrowings under its $3.5 million Wells Fargo credit facility, renewed through May 2014. Management stated cash and available credit should cover projected working capital and planned capital expenditures for the foreseeable future. The filing reports no outstanding debt.
- During the first nine months, the company repurchased 557,650 shares for $778,000. After quarter-end, the board authorized a further $1 million expansion of the buyback program; approximately $1.4 million was then available for repurchases.
Outlook, risks and notable items
Management described the Building Supply outlook as promising, citing potential to benefit as the housing market recovers. The company introduced TECHNOply, an economy roof-underlayment product, and said it represented approximately 5% of synthetic-underlayment sales and was expected to be a growth product. REX Wrap Fortis housewrap sales remained below expectations. No quantified revenue or earnings guidance was provided.
Key operating considerations include Building Supply margin pressure from materials costs and competition; reliance on a major international partner for apparel sales growth; and weaker industrial mask sales after a distributor launched a competing product. Harmony Plastics, the company’s 41.66%-owned unconsolidated Indian affiliate, supplied $13.669 million of inventory during the first nine months. The company recorded $402,000 of affiliate income in that period. Harmony repaid the remaining $417,000 of its material advance in Q3; the company stated Harmony’s facilities were not guaranteed by Alpha Pro Tech.
Management cautioned that forward-looking statements are subject to risks and actual results may differ. The filing does not provide a quantified outlook or a specific list of contingencies. Disclosure controls were concluded effective as of September 30, 2012, with no material change in internal control reported. The company stated that its adoption of the updated goodwill impairment guidance had no significant financial impact.
Important facts for investors to verify
- Whether the inventory build and higher receivables convert into operating cash flow, and whether inventory levels remain appropriate.
- Whether Building Supply margins stabilize despite input-cost and pricing pressures, and whether housing-market recovery supports the segment outlook.
- The durability and concentration of apparel sales growth tied to the major international supply-chain partner.
- Whether Infection Control can offset the loss of industrial-mask business to a distributor’s competing line.
- Harmony’s ongoing operating performance, supply relationship, and contribution to reported affiliate income.
- Future share repurchases, given the program expansion, cash decline, and negative nine-month operating cash flow.