Alpha Pro Tech, Ltd. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. Alpha Pro Tech develops and sells building weatherization products, disposable protective apparel, and infection-control products, primarily in the United States.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $11.442 million | $10.751 million | +6.4% |
| Gross profit / margin | $4.455 million / 38.9% | $4.294 million / 39.9% | Profit +3.7%; margin down 1.0 percentage point |
| Operating income / margin | $428,000 / 3.7% | $666,000 / 6.2% | -35.7% |
| Net income | $508,000 | $550,000 | -7.6% |
| EPS, basic and diluted | $0.04 | $0.04 | Unchanged |
| Operating cash flow | $(2.496) million | $162,000 | Declined |
Sales growth was led by Building Supply, up 12.3% to $6.669 million; Infection Control rose 1.6% to $1.541 million; Disposable Protective Apparel declined 1.9% to $3.232 million. Building Supply segment income was $994,000, Apparel $290,000, and Infection Control $733,000. U.S. sales were $11.198 million; international sales were $244,000.
SG&A increased 11.7% to $3.881 million, principally due to a litigation-settlement accrual. Management stated that excluding this expense, SG&A would have been relatively flat and operating income and pretax income would have increased significantly; the filing does not provide a quantified adjusted result. Other income included $139,000 of equity income from Harmony Plastics and a $32,000 unrealized gain on marketable securities. The effective tax rate was 15.3%, versus 28.8%, primarily reflecting U.S. tax reform.
Liquidity, capital, and cash flow
At March 31, cash was $5.666 million, working capital was $24.169 million, and the current ratio was 10:1. Current assets were $26.975 million and current liabilities $2.806 million. The company reported no borrowings under its $3.5 million revolving credit facility, which expires in March 2019; available borrowing capacity was $3.5 million. No other debt balance is reported in the supplied filing text.
Cash fell $3.097 million during the quarter. Operating cash use reflected higher receivables (up $1.866 million), prepaid expenses (up $790,000), and inventory (up $386,000). Investing cash use was $102,000, primarily property and equipment purchases. Financing cash use was $499,000, including $576,000 of share repurchases, partly offset by $77,000 from option exercises. The company repurchased 153,000 shares for $576,000 and had $1.703 million remaining under its repurchase program.
Receivables rose 38.0% to $6.844 million, primarily because of extended payment terms on most Building Supply sales; management said most of these balances were due for collection in Q2 2018. Inventory was $10.635 million. Management believed cash on hand and the credit facility would cover foreseeable working-capital needs and planned capital expenditures.
Outlook, changes, and risks
- Management expected gross margin to be lower in 2018 but remain in the high-30% range. It cited a mix shift from premium REX underlayment to lower-priced TECHNO products and increased Apparel rebates.
- Building Supply sales rose despite challenging first-quarter weather. Housewrap sales increased 19%; underlayment roll volume increased, but revenue declined 1.4% amid product-mix changes. Management reported nine consecutive comparative quarters of housewrap growth.
- The company had an adverse court ruling in its VWR litigation and a fee award originally sought at more than $2 million. Following April 2018 mediation, the parties reached an agreement in principle on settlement terms. The company accrued the agreed settlement amount, but the filing text does not provide a clear value. It was exploring recovery from former litigation counsel, with no assurance of recovery.
- Alpha Pro Tech owns 41.66% of unconsolidated affiliate Harmony Plastics, purchased $3.974 million of inventory from it during the quarter, and recorded $139,000 of equity income. The company reported no impairment of the investment.
- Effective January 1, 2018, new financial-instrument guidance moved unrealized equity-security gains and losses into net income; the company reclassified a $458,000 accumulated loss to retained earnings. Adoption of revenue-recognition guidance had no significant impact. Lease-accounting adoption was still being evaluated.
- A subsequent-event disclosure noted that GSP duty-free treatment was renewed effective April 22, retroactive to January 1, 2018, and applies through December 31, 2020 to certain goods.
The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. Results for the quarter are not necessarily indicative of full-year results; no specific full-year revenue or earnings guidance was provided.
Investor facts to verify
- Whether the increased receivables were collected as expected in Q2 and whether extended payment terms continue.
- The final documented litigation settlement amount, payment timing, and any recovery from former counsel.
- Whether gross margins remain in the high-30% range and how Building Supply product mix and Apparel rebates develop.
- Harmony-related supply, investment, and earnings exposure, including the company’s reliance on this unconsolidated affiliate.
- Credit-facility renewal before its March 2019 expiration and the cash impact of continued share repurchases.