Alpha Pro Tech, Ltd. — 2017 Form 10-K
Business context and reporting period. Annual report for the fiscal year ended December 31, 2017, compared with 2016. Alpha Pro Tech develops and sells building weatherization products, disposable protective apparel, and infection-control products. Most sales are in the United States. The company reported as a smaller reporting company.
Financial performance and position
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Net sales | $44.025 million | $46.176 million | Down 4.7% |
| Gross profit / margin | $17.452 million / 39.6% | $16.984 million / 36.8% | Profit up 2.8%; margin +2.8 percentage points |
| Operating income / margin | $2.926 million / 6.6% | $3.672 million / 8.0% | Down 20.3% |
| Income before tax | $3.670 million | $4.175 million | Down 12.1% |
| Net income / margin | $2.633 million / 6.0% | $3.168 million / 6.9% | Down 16.9% |
| Basic and diluted EPS | $0.18 | $0.19 | Down $0.01 |
| Cash from operating activities | $4.008 million | $6.833 million | Down $2.825 million |
| Cash and working capital at year-end | $8.763 million; $24.177 million | $9.456 million; $27.198 million | Cash down $0.693 million; working capital down 11.1% |
Liquidity and debt. Current ratio was 10:1, versus 12:1 in 2016. The company had no borrowings or other debt at year-end and had $3.5 million available under its asset-based credit facility, which was scheduled to expire in May 2018. Management said cash and available credit were sufficient for foreseeable working-capital needs and planned capital expenditures. Capital expenditures were $1.222 million; repurchases used $4.226 million of cash. The filing does not present a separately identified free-cash-flow measure.
Material changes and operating drivers
- Building Supply: Sales fell 9.9% to $24.641 million, driven by a 23.4% decline in synthetic roof underlayment; housewrap rose 8.2% and other woven material rose 38.7%. Management cited reduced private-label orders and pricing pressure, with two distributors responsible for about 75% of the segment’s decline.
- Disposable Protective Apparel: Sales were nearly flat, up 0.2% to $14.250 million.
- Infection Control: Sales rose 11.3% to $5.134 million; mask sales increased 10.8% and eye-shield sales 12.3%.
- Gross margin improved despite lower sales. SG&A rose 9.3% to $13.955 million, including a $619,000 death-benefit accrual following the December 2017 death of former President and Chairman Alexander Millar, plus $399,000 of higher sales and marketing costs. Management’s non-GAAP comparison excluding the death benefit showed operating income down 3.5% and net income up 4.9% after specified one-time items.
- 2017 net income included a net $36,000 tax expense related to U.S. tax reform; 2016 included a $194,000 tax benefit from reversal of an uncertain tax position. Management expected the loss of duty-free treatment for certain apparel products in 2018 to reduce gross margin, while still forecasting a margin in the high-30% range.
Outlook, risks, contingencies, and unusual items
- Management identified the new REX Wrap Fortis housewrap line and synthetic underlayment as potential growth drivers, but gave no quantified sales or earnings guidance. The expected growth opportunities are forward-looking statements, not firm forecasts.
- The company faces strong competition, exposure to large customers and a limited supplier/subcontractor base, and dependence on Asian manufacturing and its 41.66%-owned Indian joint venture. Two customers represented 19% and 10% of 2017 sales, respectively.
- In litigation with VWR International, the court ruled against the company on its claims and granted VWR’s request for more than $2 million in attorneys’ fees and costs. Alpha Pro Tech sought reconsideration and was pursuing mediation; management expected a significant reduction. The amount accrued is not clearly stated in the filing text, and any potential recovery from former counsel could not be estimated.
- The company repurchased 1,232,476 shares for $4.226 million in 2017 and had $2.279 million remaining under the program at year-end. It reported no history of cash dividends and no current plan to pay them.
- Adoption of the new financial-instruments standard in 2018 was expected to move a $458,000 after-tax unrealized investment loss into beginning retained earnings; future fair-value changes would flow through net income. Management expected limited impact from the new revenue standard. The company’s investment in one publicly traded entity exposes it to share-price volatility.
- Management concluded disclosure controls and internal control over financial reporting were effective at year-end. The independent auditor issued an unqualified opinion on the financial statements; it did not audit internal control.
Important facts for investors to verify
- Whether 2018 demand and pricing recover in synthetic roof underlayment, and whether the REX Wrap Fortis launch generates material sales.
- The final amount and timing of the VWR fee award or settlement, compared with the recorded accrual.
- The actual effect of the lapsed U.S. duty-free program on apparel costs and gross margin.
- Renewal or replacement terms for the $3.5 million credit facility due to expire in May 2018.
- Customer concentration, collection trends (receivable days rose to 41 from 30), and ongoing dependence on Asian suppliers and Harmony.