Alpha Pro Tech, Ltd. — FY 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011; comparisons are with FY 2010. This is an annual report, not a standalone fourth-quarter filing.
Business context
The company develops, manufactures and markets building weatherization products, disposable protective apparel, and infection-control products. FY 2011 sales were primarily in the United States. During the first quarter, it sold its medical bed-pad and pet-bed product lines.
Financial results and liquidity
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Net sales | $38.502 million | $41.890 million |
| Gross profit / margin | $14.046 million / 36.5% | $16.422 million / 39.2% |
| Operating income / margin | $0.905 million / 2.4% | $1.739 million / 4.2% |
| Net income / margin | $0.933 million / 2.4% | $1.301 million / 3.1% |
| Basic and diluted EPS | $0.04 | $0.06 |
| Cash provided by (used in) operations | $3.766 million | $(3.441) million |
- Sales fell 8.1%. Building Supply sales rose 11.5% to $21.598 million; Disposable Protective Apparel sales fell 23.7% to $12.558 million; Infection Control sales fell 28.2% to $4.346 million.
- Gross margin declined 2.7 percentage points, reflecting a larger share of lower-margin Building Supply sales and competitive pricing pressure in apparel. SG&A decreased 11.0% to $12.323 million.
- Cash and cash equivalents were $7.503 million at year-end, up 41.1%. Working capital was $29.738 million; the reported current ratio was 35:1.
- Total liabilities were $1.694 million, including $0.823 million of deferred income taxes. The company had no debt outstanding and no borrowings on its $3.5 million Wells Fargo line, which was scheduled to expire in May 2012.
- Operating cash flow included favorable working-capital movements, notably lower inventory and prepaid expenses; accounts receivable increased. Investing cash use was $0.042 million and financing cash use was $1.537 million, mainly for share repurchases.
Material changes, outlook and risks
- Management expected overall gross margin of approximately 36% and an effective tax rate of approximately 37% going forward. No quantified revenue or earnings guidance was provided.
- For 2012, management expected the REX Wrap Fortis housewrap launch to contribute more significantly after a slower-than-anticipated start, and planned to launch an economy synthetic roof underlayment in the first quarter. The company saw growth opportunity as the roofing market shifts toward synthetic underlayment and if housing activity recovers.
- Apparel sales were hurt by reduced orders from a former largest distributor as the company shifted toward broader distribution. Industrial mask sales also declined after a former major distributor introduced its own mask line.
- The company repurchased and retired 1,314,778 shares for $1.553 million in 2011; $1.310 million remained available under the program at year-end. It has never paid dividends and reported no current intention to do so.
- Key risks include economic weakness and construction-market conditions, intense competition and pricing, dependence on major customers and a limited supplier base, and reliance on Asian subcontractors and the Harmony joint venture in India. Two customers each represented at least 10% of FY 2011 revenue; the filing identifies them only as Customers A and B.
- The company reported no pending legal proceedings. Management assessed disclosure controls and internal control over financial reporting as effective; the smaller-reporting-company filer did not include an auditor attestation on internal control. The independent auditor change in October 2011 was reported without disagreements or reportable events.
Important facts for investors to verify
- Whether apparel and infection-control sales stabilize after distributor changes, and whether Building Supply growth offsets weakness elsewhere.
- Whether the expected 2012 product launches gain market traction and the approximately 36% gross-margin expectation is achieved.
- Renewal or replacement terms for the $3.5 million credit facility due to expire in May 2012.
- Customer and supplier concentration, including the company’s exposure to Harmony and Asian manufacturing contractors.
- Cash conversion and receivable collection: FY 2011 operating cash flow improved substantially, while year-end receivables rose and extended payment terms were offered to many Building Supply customers.